lightning.jpgCo-authored by Jeremy W. Stewart and Ariel Cudkowicz

Hotel and restaurant operators in the State of Hawaii have recently found their service charge practices subject to waves of challenges brought pursuant to H.R.S. § 481B-14 (the “Tip Statute”). The Hawaii Tip Statute is, in essence, a consumer protection statute that requires an employer to pay employee the entire service charge collected from customers as “tip income,” if the employer fails to notify customers that a portion of the service charge will be retained by the employer for administrative and other costs. The Tip Statute challenges have sought to recover this allegedly owed “tip income” by, among other things, alleging that it constitutes unpaid wages under H.R.S. §§ 388-6, 388-10, and 388-11 (“Hawaii’s Wage Laws”).

A recent decision by United States District Court for the District of Hawaii against Four Seasons, discussed in a September 9, 2011 blog entry, found that a Tip Statute action could be enforced via Hawaii’s Wage Laws. The Four Seasons decision was considered a significant blow to hotel and restaurant operators on this issue. However, another judge in Hawaii’s District Court recently issued an opinion that may breathe new life back into the defense that the legislature did not intend the Tip Statute to be enforced through Hawaii’s Wage Laws.

District Court Judge Leslie E. Kobayashi presides over a Tip Statute case involving the Wailea Marriott Resort (“Marriott”), one of a dozen resorts facing Tip Statute challenges. In the Marriott case, Judge Kobayashi elected not to issue a final determination on Plaintiffs Motion for Partial Summary Judgment or on Marriott’s Motion to Dismiss Plaintiffs’ Amended Complaint. Instead, Judge Kobayashi issued a lengthy opinion explaining the many reasons why she does not believe the Tip Statute can be enforced through Hawaii’s Wage Laws. Judge Kobayashi expressly acknowledged that her opinion was in direct disagreement with the decisions of her colleagues on the federal bench, including the Four Seasons decision, and a decision by a state court judge on this issue, each of whom have found that the Tip Statute can be enforced through Hawaii’s Wage Laws. Rather than issue her decision in the Marriott case, Judge Kobayashi elected to defer final ruling and seek guidance from Hawaii’s Supreme Court.

In her opinion, Judge Kobayashi’s conducts a thorough analysis of the Tip Statute, a review of the Legislative history of the statute, and explains that the Tip Statute, a consumer protection law, and Hawaii’s wage laws, have completely different purposes. Consequently, enforcing the Tip Statute through Hawaii’s Wage Laws, rather than through the mechanisms provided for violations of consumer protection laws, would be contrary to legislative intent. Judge Kobayashi also discusses ambiguities in the law that necessitate a need to look past the plain language of the statutes, to the legislative history. For instance, the phrase “tip income” is found only in the Tip Statute, and while “tips” are considered wages under H.R.S. § 388-6 (prohibits employers from retaining “compensation earned”), “tips” are not considered wages under the enforcement provisions of Hawaii’s Wage Laws – H.R.S. § 388-10 (penalties for violating wage laws) or § 388-11 (independent action to recover unpaid wages). In essence, the enforcement mechanisms under Hawaii’s Wage Laws cannot be used to seek what is not considered wages under those provisions. Judge Kobayashi acknowledged that she was sympathetic to employees because a claim under Hawaii’s consumer protection laws may be “virtually impossible” to prove, however, despite her sympathy, she stated quite clearly that “it is not the Court’s place to create a remedy that the Legislature did not provide for.”

Following her order in Marriott, Judge Kobayashi turned her attention to a nearly identical Tip Statute case involving Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”). The Starwood case was reassigned to Judge Kobayahsi after her predecessor issued an opinion holding that plaintiffs could not enforce the Tip Statute through the mechanisms of the consumer protection laws, but could proceed with their claim under Hawaii’s Wage Laws. Although the previous order was the “law of the case,” Judge Kobayashi held that her Marriott decision constituted changed circumstances, which necessitate deviating from the court’s previous order. In her opinion, it would be “manifestly unjust” to allow the plaintiffs in Starwood to proceed with their Tip Statute claims under Hawaii’s Wage Laws, when the court has issued a simultaneous opinion that it believes such a claim is not viable. The Court administratively closed the Starwood case and granted Starwood’s motion to certify the question of “whether food and beverage service employees can enforce alleged violations of § 481B-14 through §§388-6, 388-10, and 388-11.”

The parties to the Marriott and Starwood cases have been invited to comment on precise language of the questions to be certified to the Hawaii Supreme Court.

2d Cir.pngAuthored by Robert Whitman

“Hybrids” are not just popular with Prius owners.  Plaintiffs’ wage-and-hour lawyers frequently bring collective and class action lawsuits that assert violations of the Fair Labor Standards Act and state wage laws in the same case based on the same basic set of facts – so-called “hybrid” actions.  While the tactic has been prevalent for years, its legal viability has not been definitively resolved.

The Second Circuit has now weighed in, holding that both kinds of claims can proceed together in the same lawsuit, notwithstanding the differences between the FLSA’s “opt-in” mechanism for collective actions and the “opt-out” procedure used for class actions under the New York Labor Law.  In Shahriar v. Smith & Wollensky Restaurant Group (2d Cir. Sept. 26, 2011), the court joined three other Circuits (the Seventh, Ninth and D.C.) in ruling that a District Court hearing an FLSA claim may exercise supplemental jurisdiction over a state law wage claim where the facts underlying both claims “form part of the same case or controversy.”  The Third Circuit has ruled to the contrary.

Shahriar involved tipping practices at the Park Avenue Restaurant in Manhattan.  The plaintiffs are current and former waiters or captains who allege that the restaurant unlawfully required them to share tips with managers and/or employees who do not regularly interact with customers.  They claimed that this practice precluded the restaurant from taking a “tip credit” (i.e., paying an hourly rate less than minimum wage) and violated applicable provisions of both the FLSA and the NYLL.  They also alleged that the restaurant violated the “spread of hours” requirement of the NYLL, which generally requires payment of an extra hour at minimum wage to any employee whose work days exceed 10 hours.

After discovery, the plaintiffs moved for class certification of their NYLL claims.  The District Court granted the motion and retained supplemental jurisdiction over those claims.  The restaurant appealed under Rule 23(f) of the Federal Rules of Civil Procedure.  The appeal attracted amicus curiae participation by the U.S. Department of Labor and the National Employment Lawyers Association, both on behalf of the plaintiffs.  There were no amici on the management side.

Holding that the lower court’s retention of jurisdiction was appropriate, the Second Circuit closely parsed the language of the supplemental jurisdiction statute, 28 U.S.C. § 1367, and concluded, based on the facts presented as reviewed under an abuse-of-discretion standard, that the “conflict” between an FLSA opt-in case and a NYLL opt-out case was not so compelling as to warrant that they be asserted in separate lawsuits.

After resolving the jurisdictional issues, the 2d Circuit went on to affirm the District Court’s class certification ruling under Federal Rules 23(a) and 23(b)(3).  Its decision on that score was unremarkable, save for one notable omission:  no discussion of the Supreme Court’s June 2011 decision in Wal-Mart Stores v. Dukes.  While it is unclear why the court did not discuss the case, we have noted previously that Dukes could have a transformative effect on certification issues in wage-and-hour cases, both at the “conditional” certification stage under FLSA § 216(b) and on class certification, or decertification, at a later stage.

To the extent the legal status of hybrid actions in the Second Circuit was open to question, Shahriar goes a long way toward removing the doubt.  In practice, defendants, for any number of strategic and practical reasons, often choose not to raise any jurisdictional objection to the prosecution of federal and state claims in the same lawsuit.  For those defendants that do seek to assert such a defense, the court’s decision clarifies the legal grounds for doing so.  Going forward, defendants will need to demonstrate significant tension between the pursuit of federal and state wage claims in the same lawsuit in order to limit plaintiffs to FLSA claims in federal court.

 

wall-clock-question-mark-1-small.jpgAuthored by Noah Finkel

The question of what is “work” in the modern economy, is not always easy to answer.  Those activities that qualify as “work” are compensable under the Fair Labor Standards Act and state law analogues.  Activities that are not “work” are not compensable.  While simple enough to express, making the distinction between these principles is often far from straightforward.  And, the stakes for getting the answer wrong may be enormous, especially when compounded by the “continuous workday” doctrine embraced by the Supreme Court in IBP, Inc. v. Alvarez.  Under that doctrine, employers may be obligated to pay not only for the first “integral and indispensable” activity of the day, but for all subsequent activities that are part of the continuous workday.

This topic is receiving an increased amount of attention.  As readers of this blog may recall from our July 14, 2011 post, the U.S. House of Representatives Committee on Education and the Workforce, Subcommittee on Workforce Protections held a hearing this past July to address the question, “Is the Fair Labor Standards Act meeting the needs of the twenty-first century workplace?”  Last week as reported in our September 22, 2011 post, the Congressional Research Service issued a report entitled, “The Fair Labor Standards Act, Overtime Compensation, and Personal Data Assistants,” which focuses on “[t]he increased use of personal data assistants (PDAs) and smartphones by employees outside of a traditional work schedule” and “questions about whether such use may be compensable under the FLSA.”

In this context, The ABA Journal of Labor and Employment Law has recently published an article tackling the meaning of “work” under the Fair Labor Standards Act.  The article, “Continuous Confusion: Defining the Workday in the Modern Economy,” which is authored by Seyfarth Shaw’s Richard Alfred and Jessica Schauer, argues that employers face a lack of guidance with respect to the concept of compensable time.  This confusion has resulted from the fact that the FLSA itself does not define “work,” the Supreme Court has largely neglected the issue since the 1940s, and regulatory interpretations have been subject to frequent shifts.  Moreover, because much of the authority that does exist is outdated–having changed little since the 1940s when the industrial workplace was the norm–the problem is exacerbated in the modern electronic economy.

The article focuses in particular on a 2010 “Administrator’s Interpretation” issued by the Department of Labor, which took the position that activities that may be excluded from compensable time under a particular statutory exception may nonetheless mark the beginning of the “continuous workday.”  If adopted by courts, this position could have adverse effects on another well-established carve-out from working time, the de minimis exception.  In the modern economy, where employees are able to use technology to perform work from anywhere, the erosion of that exemption could cause activities that employers have long rightly assumed to be non-compensable, such as commuting time, to become compensable under many circumstances.  The article calls for statutory and regulatory reform, as well as better guidance from the Supreme Court, as to what constitutes “work.”

In the meantime, employers should analyze carefully what activities may constitute compensable “work” and prepare themselves for the potential for uncertain and costly litigation over the compensability of various activities that could be regarded by some courts as compensable work.

NewYorkSeal.jpgAuthored by Aaron Warshaw

In the first reported decision to address the retroactivity of the New York Wage Theft Prevention Act (“Act”), a state trial judge has ruled that the Act’s provision increasing liquidated damages from 25% to 100% applies to Labor Law violations occurring prior to the Act’s April 9, 2011 effective date.  As we have previously reported, the Act substantially amends various aspects of New York’s wage and hour law.

Justice Jane Solomon issued the decision addressing the retroactivity of the Act’s liquidated damages provision in Ji v. Belle World Beauty, Inc., No. 603228/2008 (N.Y. Sup. Ct., N.Y. Cnty., Sept. 22, 2011), in response to the plaintiffs’ motion to amend their complaint to “reflect recent amendments” under the Act.  In pertinent part, the plaintiffs sought to amend their complaint to seek “100%” rather than “25%” liquidated damages under their New York wage claims.  Although the case was filed well before the Act took effect, Justice Solomon granted the motion.  She first noted that the “general rule that a statute should be construed as prospective unless the language of the statute, either expressly or by direct implication, requires a retroactive constructive.”  However, the judge also noted that “remedial statutes are given retroactive construction to the extent that they do not impair vested rights or create new rights.”  The court then reasoned that the Act was remedial in nature, that the increase in liquidated damages does not affect any of the defendants’ vested rights, and that the provision does not create a new right of recovery.  As a result, Justice Solomon held that the increase in liquidated damages applies retroactively and permitted the plaintiffs to amend their complaint to reflect this change.

Although the 100% liquidated damages provision applicable to violations of the New York Labor Law is the same rate for liquidated damages under the Fair Labor Standards Act, the potential impact of the Act is considerably greater because New York’s statute of limitations for wage violations is six years, compared to two or three years under the FLSA.  This particular issue did not arise in Ji because the alleged wage underpayments occurred in 2007, only one year prior to the date the action was filed.  Nonetheless, the decision raises the risk that retroactive 100% liquidated damages might apply not only to actions pending as of April 2011, but also to acts occurring well beyond the federal three-year statute of limitations.

The decision also reflects a broader willingness of New York courts to retroactively apply changes to labor and employment laws absent express statutory language to the contrary.  Another recent example can be found in Nelson v. HSBC Bank USA, No. 2009-04273 (N.Y. App. Div., 2nd Dep’t, Sept. 13, 2011), where an intermediate appellate court held that 2005 changes to New York City’s human rights law apply retroactively to an action brought in 2003.  However, as we recently reported, this approach stands in contrast to a recent decision in which Massachusetts’ highest court held that a statute mandating automatic treble damages for wage and hour violations applies only to conduct occurring after the new law’s effective date because the change was substantive rather than procedural or remedial.

IRS.jpgAuthored by Jeff Burns

On September 22, 2011 the IRS announced a new Voluntary Classification Settlement Program (VCSP) that allows companies (technically, any taxpayer) to voluntarily reclassify workers as employees for employment tax purposes in exchange for partial relief from federal employment taxes that would otherwise be owed for the period of time prior to the reclassification.   In describing the VCSP in Announcement 2011-64, the IRS acknowledged that “the determination of the proper worker classification status under the common law may not be clear.”  Because of this lack of clarity, the IRS determined that “it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers outside of the examination context and without need to go through normal administrative correction procedures applicable to employment taxes.”  A copy of IRS Announcement 2011-64 can be found here, and the IRS’ Frequently Asked Questions can be found here.  Companies that are accepted into the VCSP will only owe 10% of the payroll taxes that would have been owed for the previous year had the workers been classified as employees, will not owe any interest or penalties, and will not be audited by the IRS on payroll taxes related to these reclassified workers for prior years. 

Eligibility: There are three criteria for eligibility.  Applicants must: (1) consistently have treated the workers as non-employees; (2) have filed all required Forms 1099 for the workers in the previous three years; and (3) not currently be under audit by the IRS, Department of Labor or any state agency concerning the classification of its workers.  Additionally, companies must be in compliance with the results of previous IRS or DOL classification audits.  (Of course, if an IRS or DOL audit confirmed that workers were properly classified as independent contractors, the benefits of participating in the VCSP are less than clear.) 

Process: To apply, companies must submit Form 8952 at least 60 days before they intend to begin treating their workers as employees.  Companies that are accepted into the VCSP must enter into a closing agreement with the IRS, in which, among other things, they agree to prospectively treat the workers as employees.  Additionally, for the first three years of the program participating companies will be subject to a special six year statute of limitations, rather then the usual three years that generally applies to payroll taxes.  Along with the signed closing agreement, companies must make full and final payment of any amount due under the VCSP.

Worth it? As the IRS acknowledged, whether workers should be classified as independent contractors or employees requires a detailed factual and legal analysis.  While the VCSP does provide some protections to companies that desire to reclassify their workforce, it has no effect on any back taxes or penalties that might be assessed by any state or local taxing authority, and participation in the VCSP could result in wage and hour lawsuits from reclassified workers, including claims for overtime.  Companies are strongly advised to consult with legal counsel before applying for the VCSP.

blackberryAuthored by Alex Passantino

For years, questions have been swirling around the intersection of 21st Century technology and the Depression-era law that governs whether and how an employee should be paid for the time spent using that technology.  Regular readers of this blog may recall that this summer, the House Committee on Education and Workforce’s Subcommittee on Workforce Protections held a hearing on this very issue.  The hearing was titled “The Fair Labor Standards Act: Is It Meeting the Needs of the Twenty-First Century Workplace?” and Seyfarth Shaw’s Richard Alfred testified about the explosion of wage and hour litigation.

In a possible foreshadowing of continued legislative activity, the Congressional Research Service (CRS)* recently issued a report entitled “The Fair Labor Standards Act, Overtime Compensation, and Personal Data Assistants”.  The report focuses on “[t]he increased use of personal data assistants (PDAs) and smartphones by employees outside of a traditional work schedule” and “questions about whether such use may be compensable under the Fair Labor Standards Act (FLSA).”  It goes on to identify the critical issue:  “As PDAs and smartphones provide employees with mobile access to work email, clients, and co-workers, as well as the ability to create and edit documents outside of the workplace, it may be possible to argue that non-exempt employees who perform work-related activities with these devices should receive overtime if such activities occur beyond the 40-hour workweek.”

The report describes the difficulty in applying the FLSA’s definition of “employ” – “to suffer or permit to work” – in the absence of a definition of “work.”  It discusses a number of Supreme Court decisions addressing the concepts of work, de minimis, and compensable time, but notes that no Supreme Court – indeed, few courts at all – have addressed these issues in the context of PDAs and smartphones.  Ultimately, the report concludes that the determination of compensability for PDA or smartphone use by non-exempt employees will be based on the same factors courts consider in other “work” cases:  “First, does use of a PDA or smartphone require physical or mental exertion? Second, is the use of a PDA or smartphone controlled or required by the employer? Finally, is the use of a PDA or smartphone necessarily and primarily for the benefit of the employer and his business?”

The politics of the FLSA – particularly as an election year approaches – make it difficult to know how (or even whether) Congress will address this issue.  In the meantime, however, employers should exercise great care when providing non-exempt employees with PDAs, smartphones, or other methods of remote e-mail access.  In a wide variety of circumstances, an employee’s use of this technology may be compensable work time under the FLSA.  Although the long-anticipated landslide of “smartphone cases” has not yet materialized, an employer is merely a plaintiff away from learning about these issues on a first-hand basis.  Review your policies, practices, and procedures related to the use of technology by non-exempt employees.

We will continue to keep you advised of developments on this issue.

* The CRS works for the United States Congress, providing policy and legal analysis to committees and Members of both the House and Senate, regardless of party affiliation.

 

 

personnel_recordsAuthored by C.J. Eaton

On September 15, 2011, C.J. Eaton testified before the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development in support of House Bill 1397, An Act Related to Personnel Records.  The bill, sponsored by Representative Jonathan Hecht (D‑Watertown), would amend the Massachusetts personnel records statute, Mass. Gen. Laws ch. 149, § 52C, to eliminate confusion caused by a 2010 amendment to the statute.  The 2010 amendment, buried within the text of an economic development bill signed into law by Governor Patrick on August 5, 2010, imposed on employers the requirement that they notify employees within ten days of placing information into the employee’s personnel record that “may” negatively affect the employee’s employment or could “possibly” lead to disciplinary action.  The statute does specify what information meets these requirements.

Eaton’s testimony focused on the substantial burden that the statute currently places on employers of all sizes and in all sectors, including government employers, small businesses, non-profits, and large corporations, and included a number of specific examples of the challenges faced by those employers.  She testified that the current version of the statute is beneficial to neither employers, who must track down every written communication and notify employees of its existence, nor employees, who may have every little mistake recorded in their files.  In addition, because the law is currently among the most burdensome of its type in the country, it discourages companies from doing business in Massachusetts.  Eaton also explained that the 2010 amendment was essentially a solution in search of a problem, as the statute was not “broken” and provided employees with adequate access to their employment records prior to the amendment. 

This bill is one of four competing proposals before the Committee.  Thus, there is a legitimate possibility that the statute will be amended to relieve the current burden on employers.

Co-Authored by Ariel Cudkowicz and Kevin Young 

As we reported earlier this summer, the hospitality industry has, in recent years, attracted the attention of various plaintiffs’ attorneys who have attacked, on behalf of service employees, practices related to levying service charges on food and beverage purchases.  While several recent decisions have stemmed the tide of such cases, threats remain in those states that statutorily proscribe certain service-charge practices.  This threat came to bear late last month, when Hawaii’s federal district court granted partial summary judgment to a group of hotel banquet servers who asserted that their employer violated Hawaii law by charging, and retaining some portion of, an 18-to-22 percent service charge on food and beverage purchases. 

The six named plaintiffs—who worked as banquet servers at the Four Seasons Resort Maui and the Four Seasons Resort Hualalai—brought the case as a Rule 23 class action in November 2008.  They asserted five causes of action against the defendant, Four Seasons Hotel Limited (“Four Seasons”), pertaining to the disputed charges, including an unfair competition claim, two contract-related claims, an unjust enrichment claim, and a claim under Hawaii’s wage-withholding statute, the violation of which entitles an employee to double the unpaid wages.

The plaintiffs moved for summary judgment with respect to their claim under the wage-withholding statute, Hawaii Revised Statute § 388-6.  Section 388-6 prohibits employers from deducting or retaining “any part or portion of any compensation earned by any employee except where required by [law].”  The plaintiffs argued that the Four Seasons’ service-charge practice violated this law, namely when read in conjunction with Hawaii Revised Statute § 481B-14.  Section 481B-14 is part of Hawaii’s Unfair and Deceptive Practices Act and requires hotels and restaurants to distribute food and beverage service charges “directly to . . . employees as tip income or clearly disclose to the [customer]” that the charge is not being used for wages and tips.

One of the Four Seasons’ primary objections was that Section 481B-14 was intended to protect consumers, not service employees.  Thus, the hotel argued, after pointing to various legislative history, the law does not, and was not meant to, create a claim for service employees under Section 388-6.  The Four Seasons further asserted that Section 388-6 only applied to tips, and that in the hotel industry tips are entirely distinct from service charges.   The court rejected these arguments, finding that the two statutes could and should be read in harmony, with Section 481B-14 requiring hotels and restaurants to pay service charges to employees as “tip income,” and Section 388-6 providing a cause of action for withholding wages, including “tip income.”

Over these and various other objections, the court agreed with the plaintiffs that there was no genuine issue of material fact for trial: the Four Seasons employed the plaintiffs as food and beverage servers, it retained portions of food and beverage service charges, and, primarily before August 2006, it did not clearly disclose, to at least some customers, that a portion of the charge was not distributed to the plaintiffs

This decision is consistent with a number of other decisions in Hawaii dealing with the hotel industry practice of charging and distributing service charges for banquet events.  The result is instructive for other hospitality-industry employers in Hawaii, and even for those outside the state.  In either setting, it remains critically important for employers in the industry to be cognizant of service-charge rules in the states in which they operate and, moreover, to communicate with their customers as clearly and consistently as possible about the purpose of mandatory charges, including, for instance, through language on event orders, menus, receipts, service agreements, posted policies, and any other written statements concerning such charges.

Massachusetts-State-Seal.jpgAuthored by Beth L. Gobeille

The Massachusetts Supreme Judicial Court altered the state’s wage and hour landscape with two critical decisions affecting businesses across the Commonwealth.

Rosnov v. Molloy:  In a decision that will benefit many defendants in wage and hour cases in Massachusetts, the Massachusetts Supreme Judicial Court has declared that a statute mandating automatic treble damages for most violations of the Commonwealth’s wage and hour laws only applies to conduct occurring after its effective date of July 12, 2008. 

Rosnov sued Molloy for nonpayment of wages, and the Superior Court held that Molloy was automatically liable for treble damages pursuant to the July 12, 2008 amendment even though his alleged conduct predated that amendment.  Molloy appealed this finding and successfully petitioned the SJC for direct appellate review. 

Molloy argued before the SJC that the statute could not apply retroactively because it affected substantive rights and was not mere procedural or remedial legislation.  He further argued that the legislative history bore no indication that the legislature intended the amendment to apply retroactively.  The SJC agreed, holding that treble damages affect substantive rights because they greatly increase a defendant’s liability, and further holding that the legislature history is “murky” at best and cannot support a finding of retroactivity.

Employers already defending wage and hour claims in Massachusetts that involve violations dating from before July 12, 2008, may rely on this ruling to reduce exposure.  However, this decision does not insulate defendants from treble damages before the statutory amendment became effective.  To obtain multiple damages prior to that time, plaintiffs must prove that the employer’s conduct was “outrageous, because of the defendant’s evil motive or his reckless indifference to the rights of others.”  Wiedmann v. Bradford Group, 444 Mass. 698, 710 (2005).  For violations after July 12, 2008, the statutory amendment mandating treble damages will apply, subject to possible constitutional challenge that the Court in Rosnov did not reach. 

Awuah v. Coverall North America, Inc: The SJC’s decision in Coverall places significant restraints on lawful deductions from wages and timely payment of wages.  The Coverall class action plaintiffs are individuals who entered into contracts with Coverall for the provision of commercial janitorial services to third-party customers.  In response to questions certified to the SJC by the U.S. District Court, the SJC held that employers may not use accounts receivable financing systems to pay an employee at the time the customer pays the employer for the employee’s work rather than when the work is performed, even with the employee’s consent.  Instead, the SJC held that wages are “earned” and due within a fixed period after the employee completes his or her labor, and not when the employer receives the customer’s payment. 

In addition, the SJC held in Coverall that employers violate the Wage Act when they deduct the costs of worker’s compensation and other work-related insurance coverage from an employee’s pay, even if the employee consents to the deduction and still receives at least the minimum wage.  The SJC held that the purpose of the Worker’s Compensation Act would not be fully realized unless the cost of workplace injuries falls squarely on the employer because the Act makes such injuries part of the employer’s “cost of business.” 

The SJC further determined that other insurance costs, such as those for comprehensive liability insurance, may not be passed on to employees.  While employees can sometimes be liable to employers for property damage, such liability must only be assigned after the employee has received a “procedurally fair” adjudication of responsibility.  “An employer may not deduct insurance costs from an employee’s wages where those costs are related to future damages that may never come to pass, and if they do, may not be the responsibility of the employee.”  Similarly, Coverall provides that employers may not lawfully deduct franchise fees from wages because such fees are “special contracts” in which employees purchase their jobs from employers and therefore violate public policy.

Rosnov v. Molloy strikes a blow to the plaintiffs’ bar that has been pushing courts and employers alike to presume that mandatory treble damages are available to plaintiffs regardless of the timing of their allegations.  However, employers should exercise caution in the aftermath of Coverall, as the scope of permissible deductions and the latitude on timely payment of wages are both significantly constrained by that decision.

pill clock.jpegAuthored 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.