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

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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