Employment Law Matters : Employment Lawyer & Attorney : Ogletree Deakins Law Firm : Labor Law, Human Resources

The 8th U.S. Circuit Court of Appeal has determined that an employer’s permanent modification of employees’ “workweeks” in a way that reduced the number of overtime hours did not violate the Fair Labor Standards Act (FLSA). Abshire v. Redland Energy Services, IIC, 8th Cir., No. 11-3380, October 10, 2012.

The FLSA states that workers who are not exempt from its provisions and who work for more than 40 hours during a workweek must be compensated at a rate “not less than one and one-half times the regular rate.” In 2011, a district court in Arkansas granted summary judgment to Redland Energy Services, a company which had changed the designation of its workweek in a way so that fewer work hours qualified as overtime. While the employees argued that the company’s modification of the work schedules violated the FLSA, both the Department of Labor investigator and the district court determined that Redland did not, in fact, violate any provision of the FLSA. On appeal, the Eighth Circuit agreed.

Redland drills and services gas wells in Arkansas, and used a Tuesday-to-Monday workweek to calculate pay and overtime owed to the drill rig employees. Each drill rig crew worked 12-hour shifts for 7 consecutive days, followed by 7 consecutive days off, and had one weekend off every two weeks under that schedule. Other non-drill rig employees used a Sunday-to-Saturday workweek, and most of those employees worked regular Monday through Friday jobs, with weekends off.

In May 2009, Redland announced a permanent change to pay the drill rig employees on a Sunday-to-Saturday workweek calculation, which meant that although they still would work Tuesday-to-Monday for 7 days, with the next Tuesday-to-Monday week off, their workweeks would now be split into 2 payroll periods, reducing the amount of overtime. On the original schedule, they would work at least 84 hours in every other payroll week, with the following payroll week off; on the revised schedule, they would alternate between a 5-day, 60-hour week, and a 2-day, 24-hour week, decreasing their overtime from 44 hours in every other work week to 20 hours in every other work week. (Take my word for it – I drew it all out on a calendar just to confirm this!)  A group of employees brought a lawsuit, alleging that the FLSA prohibits employers from changing an existing workweek for the purpose of reducing overtime hours.

In support of its motion for summary judgment, Redland stated that in addition to reducing overtime pay, the payroll schedule modification increased efficiency by reducing payroll calculation time and payroll expense. The Eighth Circuit agreed that the FLSA does not prescribe how an employer must establish its “workweek,” and that that Act does not require that the workweek begin on any particular day. The issue in this case is whether the FLSA prohibits an employer from changing a workweek designation in a way that is more favorable to the employer. The Court determined that the FLSA was not designed to “maximize the payment of overtime,” and that, therefore, an employer’s effort to reduce its payroll expense is not contrary to the purpose of the FLSA.

The moral of this story is that as long as the modification made to a workweek is permanent, and as long as the change is implemented in accordance with the FLSA (which would require that overtime worked during the change-over must be paid appropriately), an employer’s reasons for adopting the change are irrelevant. However, before moving forward with any such revision of workweek designations, employers should review their circumstances with counsel to assure compliance during the transition period, and ensure that the change is one that will not be reversed in the short-term, which may invalidate the transition entirely.
 

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The Department of Labor has entered the digital age with a splash, and has announced the launch of its first application for smartphones. That app is a timesheet to help employees independently track regular work hours, break time and any overtime hours for one or more employers. Individuals also can access a glossary, contact information and materials about wage laws through links to the Web pages of the DOL's Wage and Hour Division. According to the DOL’s news release, users will be able to add comments on any information related to their work hours; view a summary of work hours in a daily, weekly and monthly format; and email the summary of work hours and gross pay as an attachment.

The app is free and currently is compatible with the iPhone and iPod Touch. The DOL has said that it will explore updates that could enable similar versions for other smartphone platforms (Android and BlackBerry), and other pay features currently not provided for, such as tips, commissions, and bonuses.

It remains to be seen how this information could be used during a Wage and Hour Division investigation when an employee claims that his or her employer has failed to maintain accurate employment records, although the DOL has said that the app information could be “invaluable” in such situations, which indicates that the app may be used as a tool in the government’s arsenal during such investigations. Secretary of Labor, Hilda Solis, states that she is “pleased that my department is able to leverage increasingly popular and available technology to ensure that workers receive the wages to which they are entitled. . . . .This app will help empower workers to understand and stand up for their rights when employers have denied their hard-earned pay." Both the app and a calendar can be downloaded from the Wage and Hour Division's site at http://www.dol.gov/whd.

According to Jay Glunt, a shareholder in Ogletree’s Pittsburgh office, “the DOL app raises two litigation issues: first, it becomes a potential source of discoverable ESI maintained by plaintiffs and, therefore, defense counsel should be asking plaintiffs about it; second, it would seem fair to expect employees making use of the DOL app to be equally diligent about utilizing their employer's time keeping protocols.” Glunt says that many wage/hour cases revolve around employees who unreasonably failed to make use of the employer's protocols. If an employee is using the DOL app to record hours because they think they are inaccurately classified as exempt from overtime pay, they should be reporting their belief to their manager; and if they are classified as nonexempt, they should be making full use of the employer's timekeeping protocols, rather than ignoring the employer's process and relying instead on the DOL app.

The broad availability of this tool makes it critical that employers remain aware of the parameters of the FLSA, and assure that recordkeeping mechanisms are in place, says Al Robinson, former acting Administrator of the Wage and Hour Division of the DOL. In a typical wage and hour case, the number of hours worked by an employee is the primary issue. When an employee has been misclassified as exempt, employers who have not tracked the employees' time effectively cannot refute the claim made by that employee regarding how many hours actually have been worked. In addition, Robinson points out that the new app may have an adverse effect on the “de minimus standard,” which allows employers to exclude, from total hours worked, small increments of time that typically can’t be effectively tracked or recorded by the company’s time keeping methods. Employees now most certainly will be keeping track of those periods.
 

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In July 2008, the Department of Labor’s Wage and Hour Division (WHD) published proposed rules that would change several regulations issued under the Fair Labor Standards Act (FLSA) and the Portal-to-Portal Act, including tip credit, fluctuating workweek, compensatory time, commuting, and other provisions. The proposed rules were not finalized during the previous Administration; however, a final rule was published in the Federal Register on April 5, 2011, and will take effect in 30 days.

One of the primary changes is an update to the regulations regarding “tip credit” to reflect increases in the minimum wage. Tip credit means that an employer can pay to a tipped employee an hourly wage less than the legal minimum, so long as a combination of that less-than-minimum wage and the person’s tips equals at least the legal minimum wage. The final rule raised the maximum federal tip credit from $4.42 an hour to $5.12.

Other changes made include clarification of certain overtime exemptions for employees engaged in firefighting activities (allowing such employee to engage in a certain amount of non-exempt work), as well as an adoption of the youth opportunity wage provision, which allows an employer to pay a less-than-minimum wage to an employee under the age of 20 for the first 90 calendar days of employment.

While the DOL implemented some changes in the new rules, the Department’s unwillingness to make certain other expected changes is what seems to be getting the attention of employers and employees. Notably, the DOL declined to adopt changes on several existing regulations including those on compensatory time, fluctuating workweek, and meal credits. It also refused to exempt a service manager, service writer, service advisor or service salesman from overtime.

According to Al Robinson, formerly the acting Administrator of the Wage and Hour Division (WHD) of the DOL (prior to joining the Washington DC office of Ogletree Deakins), “to say that the final rule is ‘narrower’ than the rule proposed in July 2008 is an understatement because it is a missed opportunity to add some clarity, especially on the topic of the fluctuating workweek.” In the fluctuating workweek, a salaried non-exempt employee’s hours vary from week to week. The esoteric issue of concern was whether a bonus or other premium payment should invalidate the fluctuating workweek method by being included in the calculation of the employee’s “regular rate” of pay. While the proposed regulation would have provided that a bonus or premium payment does not invalidate the fluctuating workweek method of compensation, the final rule restores the current situation in which a fixed salary amount is paid as straight time for hours worked, and a bonus or premium payment is calculated and paid separately. Unfortunately, however, the final rule does nothing to illuminate generally or further explain the fluctuating workweek, a concept in dire need of explication.
 

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Title 29 of the U.S. Code provides direction, regulation, and information regarding issues affecting labor, and includes the Fair Labor Standards Act, which addresses both federal minimum wage issues and the laws regulating overtime pay. The issues addressed under Title 29 are administered, in large part, by the Wage and Hour Division (WHD) of the Department of Labor (DOL).

Since 1947, Title 29 has included a provision (Section 259) that allows employers to request from the Administrator of the WHD a written opinion in which the Administrator would review a submitted fact-specific situation, and provide guidance, approval, or interpretation regarding whether and how the facts fit within the scope of the FLSA. Once an employer received such a written opinion, Section 259 would protect the employer from any action, including a legal action alleging failure to pay minimum wages or overtime compensation, if the employer could prove that its actions were in good faith conformity with and in reliance upon the written response from the Administrator. Such defense, if sufficiently established, would act as a bar to any lawsuit or other proceeding.

Recently, the DOL sent a letter to each attorney and/or employer whose request for such an Opinion Letter is pending with the WHD Administrator. The letter announces a “revised policy” concerning requests for such letters, and states that in the future, such fact-specific letters will be replaced by “Administrator Interpretations,” which will be issued at the Administrator’s discretion. These Interpretations will, according to the form letter, “set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision in issue.” From now on, requests for Opinion Letters will be responded to generally, with references to relevant statutes and regulations, but without any analysis of the facts presented. Individuals and legal representatives will now be forced to rely heavily on the information contained on the DOL’s Compliance Assistance page at http://www.dol.gov/whd/flsa/.

While the DOL believes that this method will be “a much more efficient and productive use of resources than attempting to provide definitive opinion letters in response to fact-specific requests submitted by individuals and organizations,” this new method may actually nullify Section 259 by making it more difficult for employers to prove that they relied on a specific opinion from the Administrator. In the absence of a “general interpretation” on the issue, employers may be forced to rely on website information, DOL publications (some of which are grossly outdated), or on opinions from DOL District Offices, which may vary from office to office, typically are not in writing, and do not have the authority of the Administrator’s opinions under Section 259.

Employers who in the past have relied on these Opinion Letters should be aware that the Section 259 defense may no longer be available to them, or may be much more difficult to assert. While an employer may still attempt to affirmatively defend itself by citing Section 259, and by providing testimony or other evidence that it acted in conformance with an administrative practice or enforcement policy of the WHD, it must now do so without the written opinion of the Administrator to assist in that proof. Clearly, employers have lost a valuable tool.
 

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With campaigns for the upcoming elections capturing voter interest, time-off for voting - and how that time-off affects attendance on the job - are issues that are being raised in many workplaces.  In 31 states, Puerto Rico, and the Virgin Islands, employers must allow employees time off to get to polling places and cast votes and, in certain states, face fines for not doing so. See CCH’s annual list of such states. The remaining 19 states, including Pennsylvania, afford no specific rights or protections to an employee who takes time off to vote during work hours.   

State wage and hour laws typically address the rights of an employer to take disciplinary action against employees or to withhold wages for time not worked.  For the most part, states in which time-off for voting is mandated require that employees who are registered voters be given time off to visit the polls, and usually require employers to allow two or three hours within which to do that.  Some of the state laws include provisions that require employers to allow time-off to vote only in circumstances in which there is not a two or three hour period during non-working hours in which polls are open, creating a level of administrative complexity normally dreaded by HR personnel. 

In some states – specifically Kansas and Missouri – an employer can be fined for up to $2500 and/or up to a year in jail for attempting to circumvent the state law; in California, the fine can be up to $5000. In Arizona, it’s worse: the fine can be as high as $10,000 for an “enterprise” that violates the state’s law.  Unlawful coercion related to voting is an expensive proposition for employers foolish enough to try it.  California, Maryland, and Nebraska include jail time for that offense – in Nebraska, the penalty is a fine of up to $10,000 and/or jail for up to five years.

In most states with time-off laws for voting, employees must be paid for time spent voting: employers are prohibited from penalizing an employee or making deductions from wages for at least part of the time the employee is authorized to be absent from work to cast a vote.  The majority of those states also require employees to give some type of advance notice of their intention to take time-off from work to vote (some require the notice to be in writing), and most allow employers to specify the time within which the time-off hours can be taken. 

Although these state laws regarding voting rights do not come into play very often, it is wise for employers to be familiar with them, to assure consistent compliance for all employees in states within which such laws apply. Failure to do so could lead to unnecessary fines and penalties.  

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Under the Fair Labor Standards Act (FLSA), employees who work more than 40 hours a week are entitled to overtime pay unless they fall under one of the Act’s enumerated exemptions. The 3d U.S. Circuit Court of Appeal found that a Johnson & Johnson sales representative fell within the “administrative” exemption, based upon that person’s high level of planning and foresight, along with her “exercise of discretion and independent judgment with respect to matters of significance” and, therefore, was not entitled to overtime pay. Smith v. Johnson & Johnson, 3d Cir., No. 09-1223, February 2, 2010.

An administrative employee, as defined under the FLSA, is someone who is compensated at a salary or on a fee basis at a rate of not less than $455 each week, and whose primary duty is the “performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.” In addition, an administrative employee’s primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.”

Patty Lee Smith was employed by McNeill Pediatrics, a subsidiary of Johnson & Johnson (J&J), and held the position of Senior Professional Sales Representative from April 2006 until October 2006. Smith filed a legal action seeking overtime pay for that period, and attempted to certify her lawsuit as a class action. The district court granted J&J’s motion for summary judgment, finding that Smith fell within the “administrative” exemption of the FLSA, and Smith appealed.

On appeal, the Third Circuit analyzed Smith’s job responsibilities, which primarily involved visiting physicians in their offices or at hospitals and explaining and extolling the benefits of Concerta, a prescription drug used in the treatment of attention deficit disorders. Smith did not sell the drug, but visited about 10 physicians each day, attempting to maximize the number of prescriptions written for Concentra by doctors within her assigned territory. J&J allowed Smith to set her own itinerary and to schedule the visits as she saw fit. Smith was given a budget to cover her efforts, but was allowed to use her discretion on how it was spent. According to Smith’s job description, she was required to plan and prioritize her responsibilities in a manner that maximized business results. The documentation in the case indicated that Smith was to develop a strategic plan to achieve higher sales within her territory. Smith herself testified that her job was not “micromanaged.”

Smith’s “non-manual” work required her to formulate business strategy, which put her squarely within the FLSA’a requirement that an administrative employee conduct work that is “related to the management or general business operations of the employer.” Further, because Smith was allowed to and, in fact, encouraged to, run her territory as she saw fit, she was able to exercise “discretion and independent judgment” regarding her employer’s business – also a criterion of the administrative exemption under the FLSA. On those facts, the Third Circuit found Smith to be exempt from the overtime provisions of the FLSA. Further, in view of the Court’s decision on the FLSA exemption, Smith’s motion for class action certification became moot, and the Court upheld its dismissal.

This case was decided in accordance with the specific facts of Smith’s employment responsibilities. Here, the Third Circuit observed that the evidence portrayed Smith as the manager of her own business who could run her territory as she saw fit. Those facts supported Smith’s classification under the “administrative” exemption. However, the Court also pointed out that there presently are similar cases pending in various other Circuits and related to pharmaceutical sales persons, to which this decision may not apply. Employers must understand that such claims are decided on the specific facts involved, and must recognize that there is no blanket exemption for such sales personnel.
 

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Daylight Saving Time (DST) ends on Sunday, Nov. 1, 2009, at 2 a.m., so don’t forget to turn the clock back one hour before going to bed on Saturday, October 31. This affects employers and employees involved in “shift work,” because shift workers on duty the night of October 31, and who normally work an 8-hour shift, actually will work an extra hour, for a total of nine hours of work on that day. Non-exempt employees must be paid for all nine hours of work under the Fair Labor Standards Act. Those individuals also are entitled to overtime pay for all hours in excess of 40 worked during the week, including the extra hour worked during the week’s conversion back to standard time.
 

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Many companies affected by the current economic downturn are searching for ways to help weather that storm. Occasional reduction in work hours, implementing mandatory vacations, or instituting short-term furloughs can help an employer to retain experienced employees, while allowing the company to achieve cost savings in this time of economic crisis. The Department of Labor (DOL) recently released three opinion letters written in January of this year in response to employer inquiries about the effect of such short-term shut-downs on employees’ exempt status under the Fair Labor Standards Act (FLSA). Wage and Hour Opinion Letters, FLSA 2009-2, 1/14/09; FLSA 2009-14, 1/15/09; and FLSA 2009-18, 1/16/09; all released on 3/6/09.

An “exempt” employee is one who is not subject to the overtime or minimum wage (or both) requirements of the FLSA. The "salary basis test" is one way the FLSA distinguishes exempt from non-exempt employees. Under the salary basis test, an employee is considered exempt from overtime compensation if he receives a predetermined amount of pay on a regular basis, and that amount is not subject to reduction based upon the quality or quantity of work. Importantly, an employee is not deemed to be paid on a salary basis if deductions from that individual’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business.

If an employee is classified as exempt but does not meet the necessary salary basis test, that exemption may be lost. Under the FLSA, the employer can be liable for back overtime pay of up to two years (three years for a willful violation) for any non-exempt employee who has been misclassified as exempt. In addition, a single misclassification can trigger a loss of exempt status for an entire group of employees if the whole group has been treated similarly under the organization’s policies and practices.

The three situations addressed by the DOL in its recent opinion letters involve similar circumstances, approached by employers in different ways. The first involves a plant shutdown lasting less than one workweek; the second is a “mandatory time off” policy occasioned by short-term business needs; and the third involves a reduction of work hours for exempt health care employees due to “periods of low patient census.” In all three circumstances, the employers proposed to allow exempt workers to use accrued vacation for the time off, but planned to “dock” pay for workers who had no accrued vacation or paid-time-off (PTO) available.

While the three opinion letters deal with varied factual circumstances, they include a number of important conclusions. First, employers may be able to make deductions from an employee’s accrued vacation or PTO leave bank during a short-term lay-off without affecting that person’s FLSA-exempt status, so long as the employee’s salary remains constant for the pay period. Therefore, in all three circumstances addressed, the employer could implement short-term lay-offs, so long as each affected employee received compensation for the time off. Second, however, the letters point out that problems will arise with respect to individuals who have no available vacation or PTO – in that case, the employer cannot dock the pay of the person for a day in which no work was done. Instead, the employer would have to pay the “regular” salary for the day missed in order for the person’s salary basis to remain the same, otherwise, that employee’s exempt status could be jeopardized. In other words, any salary deductions due to day-to-day or week-to-week operating requirements of the business are inconsistent with the guaranteed salary basis required by the DOL regulations, and could lead to re-classification of the employee.

In addition, the DOL opinion letters include three acceptable actions with respect to short-term layoffs: (1) because the regulations provide that exempt employees “need not be paid for any workweek in which they perform no work,” an employer can require employees to take mandatory time off for a week, and can withhold that week’s salary without jeopardizing the individuals’ exempt status; (2) an employer can refuse to pay for an employee’s completely voluntary decision to take time off (for personal reasons, or other reasons not occasioned by the company’s operating requirements) without affecting exempt status; and, importantly, (3) a permanent change in an exempt employee’s regular workweek schedule (permanently reducing five-day workweeks to four-day workweeks, for instance), with a corresponding change in salary, will not affect exempt status, so long as the exempt individual continues to receive at least the $455 salary minimum required by the regulations.

While a final determination regarding exempt status depends on the specific facts of an employer’s situation, these DOL opinion letters underscore the requirement that, subject to specific exclusions, an exempt employee must receive his or her full salary for any week in which that employee performs any work, without regard to the number of days or hours worked. To disregard this provision is to expose the company to the considerable expense and disruption of a DOL audit with probable attendant liability.
 

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The Fair Labor Standards Act provides that employers violating the Act’s overtime pay requirements are liable for the amount of unpaid overtime. In addition, such an employer may be held liable for an equal amount of liquidated damages, unless it can show that it acted in “good faith” and with “reasonable grounds for believing” that it was in compliance with the Act. Recently, the 8th U.S. Circuit Court of Appeals held that an employer’s argument that it was unaware that employees were working at more than one franchise location was insufficient to avoid the imposition of liquidated damages. Dept. of Labor v. Barbeque Ventures, LLC., No. 08-1284 (8th Cir., November 28, 2008).

Between May of 2004 and May of 2006, Barbeque Ventures and Old Market Ventures, the defendants in this case, operated five Famous Dave’s restaurants in the Omaha, Nebraska area. The individual owners of the defendants also owned other fast food restaurants in the Omaha area (Godfather’s Pizza and Popeyes Fried Chicken), a number of which had written policies prohibiting employees from working at multiple locations without prior approval. Employees of those restaurants who did work at multiple locations had work hours combined for purposes of calculating overtime pay. Famous Dave’s had no such policy during the period relevant to this case.

During that period, a number of individuals working at Famous Dave’s applied to work at locations other than the one by which they currently were employed. Some of the applications actually included Famous Dave’s as the current employer, and two of them even listed the name and contact information of the employee’s current Famous Dave’s supervisor. The Area Manager who oversaw all five restaurants testified that he visited each of the five restaurants regularly, and recognized some employees working at more than one location.

The defendant companies also engaged a third-party payroll management company to process its payrolls. Neither the employers nor the payroll company tracked whether an individual employee worked at more than one Famous Dave’s location. As a result, work hours from multiple locations were never combined for overtime purposes.

In October 2006, the Department of Labor filed a complaint on behalf of 25 Famous Dave’s employees, seeking over $90,000 in unpaid overtime, as well as liquidated damages, post-judgment interest, and injunctive relief. The court granted the DOL’s motion for summary judgment with respect to the monetary damages. Defendants appealed only the imposition of liquidated damages, arguing that they established a good faith defense, and had provided reasonable grounds for believing that they had not violated the FLSA.

The Eighth Circuit upheld the award of liquidated damages, finding that the defendants had not established the required “honest intention to ascertain and follow the dictates of the FLSA.” It went further and, in response to the defendants’ argument that they were unaware that employees worked at multiple locations, specifically stated that “lack of knowledge is not sufficient to establish good faith.” In addition, the court held that delegating the payroll function to a third-party does not rid the employer of the duty to comply with the FLSA. Because the defendants failed to show an affirmative good faith effort to comply with the FLSA, the court did not have to address the issue of whether the companies had provided reasonable grounds for believing they had not violated the Act, and upheld the imposition of liquidated damages.

This case is a clear example of the importance of an employer’s compliance with the overtime regulations of the FLSA. Misunderstanding of the law’s provisions, or an absence of willful violation is not sufficient to avoid liability. To avoid liability, an employer must affirmatively establish that he acted in good faith by attempting to ascertain the Act’s requirements, and that any subsequent violation was inadvertent. Complete documentation of work hours, well-constructed and consistently implemented pay policies, and recognition of the full reach of the FLSA’s provisions can assist in establishing such good faith.

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The Fair Labor Standards Act requires that overtime compensation be paid at a rate of not less than one-and-a-half times the regular rate of pay of all hours worked in excess of 40 during a particular workweek. Recently, the Department of Labor’s Wage and Hour Division responded to a request for an opinion on whether compensation for “on-call” time in a specific week may be averaged over a two week pay period for purposes of computing the regular rate of pay on which employees’ overtime wages were based during the entire pay period. In response, the DOL informed the employer that an employee’s regular rate of pay must be computed on a workweek basis, and that payment for on-call time must be attributed to the specific workweek that included the on-call assignment. Wage and Hour Opinion Letter, FLSA 2008-6, 9/22/08 (released 11/14/08).

DOL regulations generally require that overtime pay be based upon the average hourly wage earned during a single workweek. The calculation is done by first determining the “regular rate of pay” for the employee. That is done by determining the total wages earned during a workweek, and dividing that number by the hours actually worked. The resulting figure is the regular rate of pay earned by the individual during that workweek. Overtime pay is then calculated by multiplying that number by 1.5 (to determine overtime rate of pay), and then multiplying that figure by the actual number of overtime hours worked.

In this case, employees at a city’s water treatment plant are asked to be on call during one week each month. In addition to an hourly wage for hours worked, they are paid $2.50 for each on-call hour. During that on-call time, they are required to wear a pager and to respond within 30 minutes to any work-related emergency. However, according to the city, employees rarely are called back to work and often go months without having to report for duty during an on-call period. The city recognizes that on-call pay must be included in computing the regular rate of pay for employees’ overtime calculations, but wants to spread the on-call pay across the two-week pay period within which the on-call compensation is received. The DOL states that such calculation would not be consistent with its regulations and that instead, the on-call compensation must be attributed to the specific workweek in which the on-call hours occurred.

An employee who is not required to remain on the employer’s premises, and is simply required to be available during a certain time period is not “working” while on call. Therefore, those hours generally are not calculated in the number of hours worked to reach the 40-hour threshold for overtime. The payment received for that period of time, however, is paid as compensation. Therefore, that amount must be calculated as part of an individual’s “regular rate of pay” for purposes of overtime calculations.

The DOL’s opinion letter includes an example: if an employee earning $10 per hour works 40 hours in workweek one of a two-week pay period and works 45 hours at $10 per hour and in addition to his 40-hour wage earns $100 of on-call compensation in workweek two, the regular rate of pay would be calculated separately for workweeks one and two. The additional on-call pay would raise the employee’s regular rate of pay for workweek two. That higher regular rate would also form the basis of the overtime pay for the 5 overtime hours worked during that week, resulting in a higher overtime pay than if the employer had spread the on-call pay over the entire two week calculation of “regular rate of pay.”

As set forth in this opinion letter, an employee’s regular rate of pay must be computed on a workweek basis, and payment for on-call time must be attributed to the week in which the on-call time actually occurred. Any other method of calculation will violate DOL regulations that guide overtime pay.
 

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A group of insurance “sales leaders” who filed for overtime wages under the Fair Labor Standards Act (FLSA) have been deemed by the 5th U.S. Circuit Court of Appeals to be employees rather than independent contractors, and therefore eligible for overtime pay. Hopkins v. Cornerstone America, No. 07-10952 (5th Cir. October 13, 2008). The court based its decision on the economic realities of the situation, and determined that the managers were economically dependent upon the company for which they worked, instead of being in business for themselves.

Cornerstone America, the sales and marketing division of Mid-West National Life Insurance Company of Tennessee, uses a “pyramid” system of sales agents, all of whom agree to work as independent contractors, with payment on a commission basis. Certain of the agents have been promoted to “sales leaders,” a management-level designation. In that position, the opportunity for personal sales diminishes, and income is earned primarily from overwrite commissions on sales made by subordinate agents. In the model used by Cornerstone, there is no formal relationship between the sales leaders and the sales agents. Instead, each sales agent contracts directly with Cornerstone; the company controls the hiring and firing of each agent, along with the assignment and promotion of each, regardless of sales leader group.

Although the sales leaders have a certain amount of flexibility with regard to their own working hours and daily routine, and although they all are designated as independent contractors who receive no employment benefits and very little corporate oversight, a group of those managers filed suit against Cornerstone and its parent companies, alleging that they were “employees” entitled to overtime wages. Both the plaintiffs and the company filed summary judgment motions on the issue of whether the sales leaders were employees or independent contractors. The district court found in favor of plaintiffs, and that decision was appealed to the Fifth Circuit.

The FLSA’s definition of “employee” is extremely broad, and includes some individuals who may not qualify as employees under traditional agency law principles. The Fifth Circuit’s approach to the question of whether the sales leaders are independent contractors or actual employees was premised on a five-factor analysis. To determine whether the workers are economically dependent upon Cornerstone, the court reviewed (1) the degree of control exercised by the company; (2) the extent of the relative investments of the workers and the company; (3) the degree to which the workers’ opportunity for profit or loss is determined by the company; (4) the skill and initiative required for performing the job; and (5) the permanency of the relationship. Under that analysis, the Fifth Circuit upheld the lower court’s determination that the sales leaders were employees, rather than independent contractors.

The court’s decision focused largely on the fact that the company exercises a substantial amount of control over the plaintiffs’ ability to earn income. Such control includes hiring, firing, and assigning sales agents, on whom the sales leaders’ income depends; advertising for new recruits; controlling the number of sales leads the leaders could receive; and limiting the types and price of insurance products the leaders could sell. In addition, Cornerstone precludes sales leaders from being involved in or owning any other businesses while employed with Cornerstone. These facts, in addition to the fact that most of the sales leaders have been with Cornerstone for a substantial period of time, creating more of a long-term employment relationship than a transient independent contractor relationship, led the court to its determination.

The court's opinion is a guide to employers who want to understand what the courts look for when making the determination of whether an individual is an "employee" v. an "independent contractor." In order to establish a true independent contractor relationship, the economic realities of the situation should show that the worker possesses some unique skill, and that he or she is allowed to control the methods and means by which that skill is exercised. If instead, the individual’s duties involve only a standard set of skills (in this case, business sense, salesmanship, and basic management skills), and the company is controlling the individual’s wages by limiting the method by which the individual can earn that wage, the courts are more likely to find a traditional employer/employee relationship. In this case, that determination may lead to unanticipated liability for overtime pay under the FLSA.

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