Monthly Archives: February 2011

10th Cir.: FLSA Defendant Who Simultaneously Relied Upon and Rejected Advice of Counsel Committed Willful Violation of FLSA; 3 Year SOL Applied

Mumby v. Pure Energy Services (USA), Inc.

Following an award of summary judgment to the plaintiffs, which held that defendant’s violation of the Fair Labor Standards Act (FLSA) was willful, for both liquidated damages and statute of limitations purposes, the defendant appealed.  The crux of defendant’s argument on appeal was that, due to partial reliance on attorney advice, it was entitled to reject portions of the attorney’s advice that were not relevant to its inquiry of the attorney, without a finding that its FLSA violations were willful.  The lower court disagreed and granted plaintiffs summary judgment, holding that a three (3), rather than two (2) year statute of limitations was applicable, due to defendant’s willful violation of the FLSA.  The Tenth Circuit agreed and affirmed.

Explaining the issue the Tenth Circuit stated: “[t]he thrust of Pure Energy’s argument is that it should be allowed to both rely on and disregard advice of counsel in order to avoid a three-year statute of limitations and liquidated damages.”

Laying out the general law regarding attorney consults as a defense to willfulness in cases brought under the FLSA, the court stated:

“Although consultation with an attorney may help prove that an employer lacked willfulness, such a consultation is, by itself, insufficient to require a finding in favor of the employer. The court’s operative inquiry focuses on the employer’s diligence in the face of a statutory obligation, not on the employer’s mere knowledge of relevant law. See McGlaughlin, 486 U.S. at 134-35; see also Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 129-30 (1985) (airline did not recklessly disregard the Age Discrimination in Employment Act where it sought legal advice, negotiated with union representatives, and then finally implemented a new retirement policy). We have also stated the inverse in our unpublished decisions: that failure to consult with a lawyer is equally insufficient to prove recklessness. See Fowler v. Incor, 279 F. App’x 590, 602 (10th Cir.2008). These principles are consistent with similar “advice-of-counsel” rules in other contexts. See, e.g., United States v. Wenger, 427 F.3d 840, 853 (10th Cir.2005) (in the securities fraud context, “[g]ood faith reliance on counsel … is merely one factor a jury may consider when determining whether a defendant acted willfully”); Takecare Corp. v. Takecare of Oklahoma, Inc., 889 F.2d 955, 957 (10th Cir.1989) (in a trademark infringement action, absent a showing of other factors, “counsel’s advice alone will not shield the actor from the consequences of his act”) (internal quotation marks omitted).”

Rejecting the defendant’s argument, the court explained:

“In 2005, after one year of U.S. operations, Pure Energy began transferring management of its U.S. operations from Canada to the United States. When it transferred payroll functions to its new domestic management team, it hired a new manager, Cindy Rucker, to run payroll operations in compliance with U.S. labor standards. At the time of her hiring, Ms. Rucker was aware of the FLSA, but she was unfamiliar with day rates. When she expressed concerns about the company’s compensation policy, Pure Energy’s management referred Ms. Rucker to a Colorado attorney, Paul Hurcomb.

In January 2006, after speaking with Ms. Rucker and reviewing some of Pure Energy’s employment offer letters, Mr. Hurcomb advised Ms. Rucker that Pure Energy’s day rate policy complied with the FLSA so long as the company itemized regular and overtime rates and did not have its field employees work more than twelve hours per day. Mr. Hurcomb also discussed with Ms. Rucker that any weekly hours over forty had to be paid as overtime, regardless of the day rate. Mr. Hurcomb did not perform any legal research regarding day rates or the FLSA. Although he essentially stated the forty-hour overtime requirement correctly, his other advice was incorrect.

After receiving Mr. Hurcomb’s advice, Ms. Rucker confirmed with management that Pure Energy was paying its employees correctly so long as it broke down the day rate into regular and overtime hourly rates and did not exceed twelve-hour shifts. However, until it changed its compensation policies in late 2007 to finally comply with the FLSA, Pure Energy continued to underpay its field employees for overtime. Field employees also continued to occasionally work more than twelve hours per day without additional compensation, in violation of Mr. Hurcomb’s advice…

In sum, Mr. Hurcomb and Ms. Rucker discussed day rates, but they also discussed the weekly overtime requirement for employees working more than forty hours per week. Mr. Hurcomb further advised-and Ms. Rucker communicated to her counterparts within the company-that employees must not work more than twelve hours per day. Yet, Pure Energy made no real changes to its compensation policy, nor did it investigate whether its employees were working shifts longer than twelve hours. Indeed, without tracking the number of hours worked by each field employee, it was virtually impossible for Pure Energy to determine whether it was complying with Mr. Hurcomb’s advice, let alone the requirements imposed under the FLSA. It is of no consequence that Mr. Hurcomb’s advice proved incorrect. Pure Energy did not rely in good faith on its counsel’s advice, and thus cannot raise an advice-of-counsel defense.

Pure Energy argues that its purpose in seeking Mr. Hurcomb’s advice was to determine the legality of its day rate policy, and with respect to this narrow issue it acted in good faith on Mr. Hurcomb’s advice. However, an employer may not selectively listen to and then, in good faith, rely upon only one of many issues discussed simply because it sought discrete legal advice on one potential FLSA violation and viewed all other advice as irrelevant to its original, limited inquiry.

In this case, it does not matter if Ms. Rucker’s intent was only to narrowly inquire about Pure Energy’s compliance with the FLSA’s day rate requirements and not to inquire about the FLSA’s weekly overtime requirement. The discussion between Mr. Hurcomb and Ms. Rucker essentially put Pure Energy on notice that it must pay weekly overtime for each hour over forty.

Pure Energy failed to compensate Plaintiffs for weekly overtime despite being put on notice. It applied its compensation policy in reckless disregard of FLSA requirements, and is therefore subject to the three-year statute of limitations for damages.”

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USSC: Plaintiff’s Petition for Certiorari Denied Regarding Calculation of Damages for “Salaried Misclassified” Workers

Urnikis-Negro v. American Family Property

In a case where the United States Supreme Court could have decided the oft-raised issue of how to calculate an employee’s damages, following a finding that they were “salaried misclassified,” the Supreme Court has denied Plaintiff’s Petition for Cert, and therefore the issue remains largely unresolved.  In a decision discussed here, the Seventh Circuit held that the proper calculation of damages in such a situation was the the “fluctuating workweek” methodology, rather than time and a half.  The Fourth Circuit held that only “half-time” damages are due when an employee is salaried misclassified recently too.  This decision was widely watched by Wage and Hour practitioners, because of the impact the calculation issue has on damages for such employees who are misclassified.   Under the fluctuating workweek calculation, an employee who was salaried and misclassified receives less than one third the damages he or she would receive if the award were made at time and a half.

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9th Cir.: Notwithstanding DOL’s Position Otherwise, Pharmaceutical Reps (PSRs) Are “Outside Sales” Exempt

Christopher v. SmithKline Beecham Corp.

This case was before the Ninth Circuit on the plaintiffs’ appeal from an order granting defendant’s motion for summary judgment, finding plaintiffs’, pharmaceutical reps (“PSRs”), to be exempt from the Fair Labor Standards Act (“FLSA”) under the “outside sales” exemption.  Although the DOL, filed an Amicus Brief, explaining that the type of work performed by the PSRs did not come within the “outside sales” exemption, because the PSR’s did not perform any sales, the Ninth Circuit disagreed.

Reasoning that the PSR employees came within the outside sales exemption, notwithstanding the fact that they did not complete sales, the court essentially held that their work was close enough to sales, that it should be deemed sales:

“Absent an agency-determined result, it is the province of the court to construe the relevant statutes and regulations. N. Cal. River Watch, 620 F.3d at 1088-89. As noted supra, Plaintiffs argue that by not transferring any product to physicians, they are not selling pharmaceuticals, but only “promoting” them. Plaintiffs say this distinction is warranted in light of the rule that the FLSA be “narrowly construed against … employers.” Webster, 247 F.3d at 914. For its part, Glaxo urges us to view “sale” in Section 3(k) in a commonsensical fashion, while contending that the meaning of “sale” is permissive. Glaxo urges us to adopt the rationale that the phrase “other disposition” in Section 3(k)’s definition of “sale” is a broad catch-all category. This view was cited with approval by the district court here, and is supported by the Secretary’s usage, dating back to 1940, of the language that an employee must “in some sense make a sale.” 69 Fed.Reg. at 22,162 (quoting “Executive, Administrative, Professional Outside Salesman” Redefined, Wage and Hour Division, U.S. Dept. of Labor, Report & Recommendations of the Presiding Officer (Harold Stein) at Hearings Preliminary to Redefinition, at 46 (Oct. 10, 1940)) (emphasis added).

Plaintiffs’ contention that they do not “sell” to doctors ignores the structure and realities of the heavily regulated pharmaceutical industry. It is undisputed that federal law prohibits pharmaceutical manufacturers from directly selling prescription medications to patients. Plaintiffs suggest that despite being hired for their sales experience, being trained in sales methods, encouraging physicians to prescribe their products, and receiving commission-based compensation tied to sales, their job cannot “in some sense” be called selling. This view ignores the reality of the nature of the work of detailers, as it has been carried out for decades. Plaintiffs’ argument also fails to account for the fact that the relevant “purchasers” in the pharmaceutical industry, and the appropriate foci of our inquiry, are not the end-users of the drug but, rather, the prescribing physicians whom they importune frequently. See, e.g., Baum v. AstraZeneca LP, 605 F.Supp.2d 669, 678-79 (W.D.Pa.2009) (discussing why the “professional paradigm” places the physician as the relevant decision maker in the health services industry), aff’d on other grounds, 372 Fed. App’x 246 (3d Cir.2010). Unlike conventional retail sales, the patient is not at liberty to choose personally which prescription pharmaceutical he desires. As such, he cannot be fairly characterized as the “buyer.” Instead, it is patient’s physician, who is vested with both a moral and legal duty to prescribe medication appropriately, who selects the medication and is the appropriate focus of our “sell/buy” inquiry. In this industry, the “sale” is the exchange of non-binding commitments between the PSR and physician at the end of a successful call. Through such commitments, the manufacturer will provide an effective product and the doctor will appropriately prescribe; for all practical purposes, this is a sale. Because pharmaceutical manufacturers appreciate who the “real” buyer is, they have structured their 90,000-person sales force and their marketing tactics to accommodate this unique environment.

When a PSR visits a doctor, he or she attempts to obtain the absolute maximum commitment from his or her “buyer”-a non-binding commitment from the physician to prescribe the PSR’s assigned product when medically appropriate. In most industries, there are no firm legal barriers that prohibit the actual physical exchange of the goods offered for sale. Because such barriers do exist in this industry, the fact that commitments are non-binding is irrelevant; the record reveals that binding or non-binding, a physician’s commitment to a PSR is nevertheless a meaningful exchange because pharmaceutical manufacturers value these commitments enough to reward a PSR with increased commissions when a physician increases his or her use of a drug in the PSR’s bag. See, e.g., Baum, 605 F.Supp.2d at 681 (“This Court believes that other courts, and perhaps regulatory agencies, underestimate the significance of this oral commitment from physicians. In part, this error emerges from a misunderstanding of the ways in which human beings are socially and informally motivated. Sometimes lawyers and judges forget that a person’s word means something; remarkably, many people do not actually need a 400-page contract to bind themselves to their word.”).

Moreover, the industry has agreed upon and abides by the PhRMA Code to regulate the marketing of medicine to healthcare professionals-just as any consumer-products maker might develop rules to limit the express warranties its sales force might offer to a customer. Such industry practice and prevailing customs should inform our disposition. Cf. Reiseck v. Universal Commc’ns of Miami, Inc., 591 F.3d 101, 106 (2d Cir.2010) (in resolving whether advertising sales director was an administrative or sales worker in the publishing industry “a careful consideration of [employer’s] business model provides some clarity”).

Under Plaintiffs’ view, PSRs are not salespeople, despite the fact that more than 90,000 pharmaceutical representatives make daily calls on physicians for the purpose of driving greater sales. See IMS Health, 616 F.3d at 14. We cannot square this view with Section 3(k)’s open-ended use of the word “sale,” which includes “other disposition[s].” While we recognize that the FLSA is to be narrowly construed in light of its remedial nature, that general principle does not mean that every word must be given a rigid, formalistic interpretation. For example, for over seventy years, the Secretary has emphasized a sensible application of the exemptions; in the Preamble to the 2004 Rule, the Secretary employs the openended concept that a salesman is someone who “in some sense” sells. 69 Fed.Reg. at 22,162-63 (emphasis added). In other words, while the Secretary asks us to narrowly interpret this exemption, she herself acknowledges that technical considerations alone and changes in the way sales are made should not be grounds for denying the exemption. See 69 Fed.Reg. at 22,162.

To further explain our common sense understanding of why PSRs make sales, we find the paradigm “outside salesman” case Jewel Tea Co. v. Williams-instructive. 118 F.2d 202 (10th Cir.1941). The importance of Jewel Tea is illustrated by the fact that both parties and the amicus offer it as favorable precedent for their conflicting positions.

Jewel Tea involved a FLSA overtime-wage suit brought by three employees of a tea, coffee, and sundry goods manufacturer and distributor. 118 F.2d at 203. The plaintiffs held the position of “route salesmen” to “sell and distribute” products to customers in their homes. Id. The area in which the company sold its goods was divided and “[e]ach salesman [was] assigned an exclusive territory which he cover[ed].” Id. The employees made no immediate deliveries but instead took orders for future delivery, although they might advance an item to a customer. Id. The company provided sales training and sent a supervisor with a new hire on early sales calls before permitting the employee to “go out on a route by himself.” Id. at 204. Further, employees were taught a “five-point sale” method to employ when speaking with customers. Id. A certain degree of knowledge about the products and potential customers was also required-“[t]he salesman must know recipes for the preparation of the Company’s products … [and] must learn the general requirements of each family, in order to avoid over-stocking his customer and in order to anticipate the family’s needs.” Id. After working in the field during the day, employees completed some clerical tasks at night. Id. at 205. Finally, employees were paid a base salary plus a commission if their collections were in excess of a sum certain. Id.

The Jewel Tea plaintiffs brought suit to collect unpaid overtime, asserting they did not fall within the “outside sales” exemption, primarily employing the argument that they were “delivery men.” Id. at 208. In its decision denying plaintiffs overtime pay, the Tenth Circuit penned the oft-quoted justification for the outside sales exemption:

The reasons for excluding an outside salesman are fairly apparent. Such salesman, to a great extent, works individually. There are no restrictions respecting the time he shall work and he can earn as much or as little, within the range of his ability, as his ambition dictates. In lieu of overtime, he ordinarily receives commissions as extra compensation. He works away from his employer’s place of business, is not subject to the personal supervision of his employer, and his employer has no way of knowing the number of hours he works per day. To apply hourly standards primarily devised for an employee on a fixed hourly wage is incompatible with the individual character of the work of an outside salesman.  Id. at 207-08.

Reviewing the undisputed facts here, we consider the rationale for applying the outside sales exemption to PSRs to be as “apparent” as it was in Jewel Tea. Of course, this case does not involve door-to-door consumer-product sales. But, the FLSA is not an industry-specific statute. As the Second Circuit recognized in Reiseck, not all FLSA claims will involve the “archetypal businesses envisaged by the FLSA,” 591 F.3d at 106. Even though there are differences, it is notable that the salesmen in Jewel Tea and Plaintiffs here each (1) worked in assigned territories, (2) did not make immediate deliveries, (3) were required to analyze client backgrounds, (4) received product training, (5) employed a pre-planned routine for client interaction, (6) were accompanied by supervisors for training, (7) were later subject to minimal supervisor oversight, (8) completed clerical activities at the end of the day, and (9) had a dual salary and commission-based compensation plan tied to their performance. Even though PSRs lack some hallmarks of the classic salesman, the great bulk of their activities are the same, as is the overarching purpose of obtaining a commitment to purchase (prescribe) something.

The primary duty of a PSR is not promoting Glaxo’s products in general or schooling physicians in drug development. These are but preliminary steps toward the end goal of causing a particular doctor to commit to prescribing more of the particular drugs in the PSR’s drug bag. Without this commitment and the concomitant increase in prescriptions, or drug volume, or market share-i.e. without more sales-the PSR would not receive his or her commission salary and could soon find himself or herself unemployed. While not all steps in the PSR’s daily activities constitute “selling,” that fact does not render the totality of those activities non-exempt promotion; “work performed incidental to and in conjunction with the employee’s own outside sales or solicitations … shall be regarded as exempt outside sales work … [and] … other work that furthers the employee’s sales efforts also shall be regarded as exempt work.” 29 C.F.R. § 541.500(b).

The Secretary’s distinction between selling and promoting is only meaningful if the employee does not engage in any activities that constitute “selling” under the Act. This much is seen from the plain language of the regulations, which gives the example of promotional work as “a company representative who visits chain stores, arranges the merchandise on shelves, replenishes stock by replacing old with new merchandise, sets up displays and consults with the store manager when inventory runs low, but does not obtain a commitment for additional purchases.29 C.F.R. § 541.503(c) (emphasis added). PSRs do far more than collect general data or provide consultations; indeed they ask for, and sometimes obtain, a commitment by the doctor to prescribe Glaxo drugs, and whether the doctor keeps that commitment is verified and traced using aggregated pharmacy data Glaxo collects. See IMS Health, 550 F.3d at 44-47 (“A valuable tool in this endeavor, available through the omnipresence of computerized technology, is knowledge of each individual physician’s prescribing history.”).

In Reisick, the Second Circuit highlighted an important distinction between selling and promoting, noting that the latter is directed to the public at large, as opposed to a particular client:

Consider a clothing store. The individual who assists customers in finding their size of clothing or who completes the transaction at the cash register is a salesperson under the FLSA, while the individual who designs advertisements for the store or decides when to reduce prices to attract customers is an administrative employee for the purposes of the FLSA. Reiseck, 591 F.3d at 107. At Glaxo, Plaintiffs had no interest in “generally” promoting sales by the company or improving sales across the board. Rather, Plaintiffs directed their sales efforts only towards certain products, only to a discrete group of physicians, and only within a defined geographic area. Targeting physicians is not based on mass appeals or general advertisements, but is the result of a personalized review of each physician’s prescribing habits and history. The process, like any sales process, is tailored to the customer’s preferences.

We also find that the Secretary’s acquiescence in the sales practices of the drug industry for over seventy years further buttresses our decision. The outside sales exemption has existed since 1938. Detail men have practiced their craft over that same period. Generally, they have been considered salespeople. Until the Secretary’s appearance in Novartis, the DOL did not challenge the conventional wisdom that detailing is the functional equivalent of selling pharmaceutical products. Indeed, the DOL has recognized as much in its Dictionary of Occupation Titles, which provides the following definition for pharmaceutical detailers:

Promotes use of and sells ethical drugs and other pharmaceutical products to physicians, [dentists], hospitals, and retail and wholesale drug establishments, utilizing knowledge of medical practices, drugs, and medicines: Calls on customers, informs customer of new drugs, and explains characteristics and clinical studies conducted with drug. Discusses dosage, use, and effect of new drugs and medicinal preparations. Gives samples of new drugs to customer. Promotes and sells other drugs and medicines manufactured by company. May sell and take orders for pharmaceutical supply items from persons contacted.

D.O.L. Dictionary of Occupational Titles § 262.157-010 (4th ed.1991) (emphases added). Likewise, although it emerged in a different context, we find Judge Posner’s observation in Yi v. Sterling Collison Centers, Inc., 480 F.3d 505, 510-11 (7th Cir.2007), informative-while it is “possible for an entire industry to be in violation of the [FSLA] for a long time without the Labor Department noticing[, the] more plausible hypothesis is that the … industry has been left alone” because DOL believed its practices were lawful.

In view of many similarities between PSRs and salespeople in other fields, pharmaceutical industry norms, and the acquiescence of the Secretary over the last seventy-plus years, we cannot accord even minimal Skidmore deference to the position expressed in the amicus brief. Under Skidmore, “[t]he fair measure of deference to an agency administering its own statute has been understood to vary with circumstances, and courts have looked to the degree of the agency’s care, its consistency, formality, and relative expertness, and to the persuasiveness of the agency’s position.” United States v. Mead Corp., 533 U.S. 218, 228 (2001) (internal citations omitted); see also League of Wilderness Defenders v. Forsgren, 309 F.3d 1181, 1189 (9th Cir.2002) (quoting Skidmore, 323 U.S. at 140) (internal quotation marks omitted). Many, if not all, of these hallmarks of “respectful” deference are absent here. The about-face regulation, expressed only in ad hoc amicus filings, is not enough to overcome decades of DOL nonfeasance and the consistent message to employers that a salesman is someone who “in some sense” sells. Moreover, we are unable to accept an argument that fails to account for industry customs and emphasizes formalism over practicality, in particular the argument that “obtaining a commitment to buy” is the sine qua non of the exemption. Under the Secretary’s view, “sale” means unequivocally the final execution of a legally binding contract for the exchange of a discrete good. In addition to the point that such stringent wording is not found in Section 3(k), or plausibly implied from phrases like “other disposition,” the Secretary’s approach transforms what since the time of Jewel Tea has been recognized as a multi-factor review of an employee’s functions into a single, stagnant inquiry.

Telephones, television, shopping malls, the Internet and general societal progress have largely relegated the professional pitchman embodied in Jewel Tea to the history books. But selling continues, and, as in prior eras, a salesperson learns the nuances of a product and those of his or her potential clientele, tailors a scripted message based on intuition about the customer, asks for the customer to consider her need for the product, and then receives a commission when the customer’s positive impression ultimately results in a purchase.

For the past seventy-plus years, selling in the pharmaceutical industry has followed this process. PSRs are driven by their own ambition and rewarded with commissions when their efforts generate new sales. They receive their commissions in lieu of overtime and enjoy a largely autonomous work-life outside of an office. The pharmaceutical industry’s representatives-detail men and women-share many more similarities than differences with their colleagues in other sales fields, and we hold that they are exempt from the FLSA overtime-pay requirement.

For the foregoing reasons, we AFFIRM the district court’s summary judgment for Defendant-Appellee SmithKline Beecham Corporation.”

Click Christopher v. SmithKline Beecham Corp. to read the entire decision.

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D.Kan.: FLSA Plaintiffs’ Motion to Compel Entry Into Defendant’s Facility To Conduct A Time & Motion Study Related To “Walk Time” Claims Granted

McDonald v. Kellogg Co.

In this Fair Labor Standards Act (“FLSA”) wage and hour case, plaintiffs, current and former hourly production employees at defendant’s bakery facility, claimed that defendant violated the overtime provisions of the FLSA, 29 U.S.C. § 201 et seq., by, among other things, failing to compensate them for time spent walking to and from workstations.  Following a ruling on the parties’ cross motions for summary judgment– which in part held that plaintiffs’ time spent walking to their workstations was compensable– plaintiffs’ moved to compel defendant to allow entry into its facility for the purpose of conducting a time and motion study related to plaintiffs’ walk time.

Describing the plaintiffs’ proposed study the court explained:

“Plaintiffs have served a request, pursuant to Fed.R.Civ.P. 34, seeking access to defendant’s bakery facility for their expert, Dr. Kenneth S. Mericle, to gather data on the time employees spend walking to and from their workstations (see doc. 195). Dr. Mericle proposes to use Radio Frequency Identification technology (“RFID”) to gather this data.  To conduct an RFID study, Dr. Mericle would first place electronic readers at the employees’ locker rooms and at the time clocks outside their workstations. Next, Dr. Mericle would issue credit-card-sized cards to employees to carry with them during the study. When the cards pass in the proximity of the readers, a time stamp in the reader would record the time that the employee passed through the area. Thus, the readers would record the time that card-carrying employees leave the locker room and the time that they arrive at the workstations (and vice versa). In addition, Dr. Mericle would place small sensors at various locations in the factory, such as bathrooms, to register detours in the employees’ paths to and from their workstations. Plaintiffs suggest that only Dr. Mericle and, perhaps, one other individual would need to be on-site during the study to ensure that there are no problems with the RFID equipment.

Plaintiffs request that Dr. Mericle enter defendant’s facility on two occasions. On the first entry, Dr. Mericle would simply observe plant conditions and employee habits in order to plan placement locations for the RFID readers and sensors. On the second entry, Dr. Mericle would set up the readers and sensors, and issue cards to the employees. Plaintiffs propose that the study then be conducted over a period of several days.

Defendant objects to the RFID study as overreaching discovery. Defendant asserts that nothing in the Federal Rules of Civil Procedure requires it to alter its factory by attaching readers and sensors to its property, or to mandate that its employees carry reader cards. According to defendant, the proposed RFID study is overly broad and burdensome.”

Granting plaintiffs’ motion, the court reasoned:

“In objecting to plaintiffs’ proposed RFID study, defendant broadly asserts that “[c]onducting such a study during working hours will consume considerable time at [defendant’s] expense, will interfere with operations, potentially jeopardize the safety of individuals conducting the study, and expose [defendant’s] proprietary production processes to disclosure to third parties.”  Defendant suggests that plaintiffs can estimate employee walking time much more simply by measuring the distances between employee locker rooms and workstations, and then using expert information concerning reasonable walk times.

The court rejects defendant’s objections and grants plaintiffs’ motion to compel. Pursuant to Rules 34(a)(2) and 26(b)(1), the court clearly has the authority to order access to defendant’s facility for the purpose of conducting the RFID study and gathering relevant walk-time data. While there may be, as defendant suggests, alternate means to gather data regarding employee walking time, such is not the test for determining whether the discovery requested should be compelled. Defendant is not at liberty to dictate how plaintiffs should gather information to support their case.  Rather, the rules permit plaintiffs to enter defendant’s property for the purpose of gathering relevant information unless defendant makes a “particularized showing” that the discovery plaintiffs propose would create an undue burden or danger. Defendant has made no attempt to meet this burden-defendant has not submitted an affidavit discussing the burdens or dangers that would accompany the proposed RFID study, nor has defendant even “provide[d] a detailed explanation as to the nature and extent of the claimed burden.”  Although during the hearing defense counsel requested an opportunity to supplement the record in this regard, the undersigned denied defendant’s tardy request for a second bite at the apple.

Considering the record as it stands, the court finds that defendant has offered no support for its conclusory assertion that the proposed RFID study would consume a considerable amount of defendant’s time and would interfere with defendant’s operations. As plaintiffs explained at the hearing, the readers and sensors can be placed unobtrusively and without having to make permanent modifications to defendant’s property. They will record no data other than the time that the cards pass in their vicinity. Indeed, this proposed methodology appears to be less intrusive than other methods of conducting time and motion studies (e.g., videotaping employees or having experts follow employees as they walk the designated paths). With regard to defendant’s concern that its proprietary information is at risk, the Stipulated Protective Order already entered in this case (doc. 56) is sufficient to protect defendant’s trade secrets.

Nor has defendant demonstrated or explained what legitimate safety concerns would be faced by persons conducting the study. Nonetheless, the court will permit defendant to conduct safety-training, limited to one hour, as a prerequisite for access to the facility. In addition, as discussed below, defendant’s safety manager may accompany Dr. Mericle while he is in the facility.

Finally, as to defendant’s complaint that its employees should not be required to carry the small reader cards, the court agrees that no employee should be compelled to carry the card against his or her will. However, as noted by plaintiffs, the vast majority of hourly production workers whose walk time the RFID study would measure are opt-in plaintiffs in this case. The court finds it likely that these employees will voluntarily carry the card. The court permits plaintiffs’ counsel and expert to supply cards to employees who voluntarily consent to carry them during the study.”

Click McDonald v. Kellogg Co. to read the entire order.

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S.D.N.Y.: Because FLSA Collective Action Is Not A Class Action, FLSA Collective Action Subject To Arbitration Despite FINRA Rule Prohibiting Class Actions

Velez v. Perrin Holden & Davenport Capital Corp.

Plaintiff brought this action alleging violations of the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”) on behalf of himself and other similarly situated stock brokers employed or formerly employed by defendant Perrin Holden & Davenport Capital Corp. (“PHD Capital”) and its officers and owners. Plaintiff sought designation of the case as as a collective action pursuant to FLSA section 216 for his FLSA claims and as a class action pursuant to Fed.R.Civ.P. 23 for his state law claims.

Defendants moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) or, in the alternative, to compel arbitration pursuant to the Federal Arbitration Act (“FAA”), 9 U.S .C. §§ 3, 4, on the ground that Plaintiff had agreed to arbitrate his FLSA claims at the time he was hired.   In line with other courts that have decided the issue, the court held that a “collective action” is not encompassed within the term “class action” as that term is used in FINRA’s rules, and thus compelled arbitration of Velez’s FLSA claims, allowing for a collective action in FINRA arbitration.

After finding  that the Plaintiff’s claims were subject to arbitration, the court then discussed whether, under FINRA rules banning class actions, Plaintiff could proceed with an FLSA collective action.  Reasoning he could the court explained:

“FINRA Rule 13200 mandates arbitration of disputes between the parties “except as otherwise provided.” (FINRA Rule 13200, Ex. B to Declaration of Matthew D. Kadushin dated Aug. 27, 2010 (“Kadushin Decl.”).) Notably, FINRA Rule 13204 prohibits arbitration of “class action claims.” (FINRA Rule 13204, Ex. A to Kadushin Decl.) It is thus uncontested that Velez’s state law claims-which plaintiff has asserted as a class action pursuant to Fed.R.Civ.P. 23-are ineligible for arbitration. The parties dispute, however, whether that exemption of class action claims from arbitration also applies to plaintiff’s FLSA collective action claims. While defendants contend that collective actions are distinct from class actions and therefore subject to FINRA arbitration, Velez argues that the phrase “class action” in FINRA Rule 13204 encompasses a collective action and therefore collective action claims are not arbitrable. Velez looks to the interpretation by FINRA staff members of FINRA’s rules to support his position.

Every court to address whether an FLSA collective action is arbitrable pursuant to FINRA’s rules has found in favor of arbitrability.  See Gomez v. Brill Securities, Inc., No. 10 Civ. 3503, 2010 WL 4455827 (S.D.N.Y. Nov. 2, 2010); Suschil v. Ameriprise Financial Servs., Inc., No. 07 Civ. 2655, 2008 WL 974045, at *5 (N.D.Ohio Apr. 7, 2008); Chapman v. Lehman Bros., Inc., 279 F.Supp.2d 1286, 1290 (S.D.Fla.2003). This Court agrees with its sister district courts.

FINRA Rule 13204 clearly states that “[c]lass action claims may not be arbitrated” under FINRA’s Code of Arbitration Procedure. However, that rule says nothing about collective action claims. Although collective and class actions have much in common, there is a critically important difference: collective actions are opt-in actions, i.e., each member of the class must take steps to opt in to the action in order to participate in it, whereas class actions are opt-out actions, i.e., class members automatically participate in a class action unless they take affirmative steps to opt out of the class action. Collective actions bind only similarly situated plaintiffs who have affirmatively consented to join the action.

Velez urges the Court to defer to the opinions of FINRA staff who have issued letters construing collective actions to come within the ambit of class actions for the purposes of FINRA arbitration. (See, e.g., Letter from Jean I. Feeney, NASD Assistant General Counsel, dated Sept. 21, 1999, Ex. C. to Kadushin Decl.; Letter from George H. Friedman, NASD Executive Vice President, Dispute Resolution, Director of Arbitration, dated Oct. 10, 2003, Ex. D to Kadushin Decl.) However, those letters do not contain any substantial analysis, and the Feeney letter itself includes the disclaimer that “the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of [the] NASD.” Moreover, FINRA’s website specifically states that “[s]taff-issued interpretive letters express staff views and opinions only and are not binding on FINRA and its Board.” (FINRA-Interpretive Letters, Ex. 1 to Affirmation of Emily A. Hayes dated Sept. 9, 2010). Such “staff opinion letters are not the sort of agency interpretation that is entitled to deference by this Court.” Gomez, 2010 WL 4455827 at *1; see also Auer v. Robbins, 519 U.S. 452, 461 (1997); Skidmore v. Swift & Co., 323 U.S. 134 (1944). If FINRA wanted to prohibit arbitration of collective action claims, FINRA is certainly able to amend its rules to do so. See FINRA Rulemaking Process, available at http://www.finra.org/In dustry/Regulation/FINRARules/RulemakingProcess (Feb. 2, 2010); see also Gomez, 2010 WL 4455827 at *2.

As noted above, the parties here have agreed in writing to arbitrate certain disputes as required by FINRA. In light of other district court opinions, this Court’s own interpretation of FINRA rules, and the federal policy favoring arbitration as an alternative forum in which to resolve disputes, this Court finds that FLSA collective actions are within the scope of the parties’ agreement to arbitrate. In addition, no congressional intent precludes arbitration of the federal FLSA claims. See, e.g., Gomez, 2010 WL 4455827 at *2; Coheleach v. Bear, Stearns & Co., 440 F.Supp.2d 338, 240 (S.D.N.Y.2006).”

Accordingly, defendants’ motion was granted to the extent that the court compelled arbitration of Plaintiff’s FLSA claims.

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3d Cir.: Enforceability Of Class/Collective Action Waiver In Agreement To Arbitrate Is Issue For Arbitrator Not The Court

Vilches v. Travelers Companies, Inc.

This appeal raised the issue of whether the District Court properly determined that the Plaintiff-Appellant (employee) assented to the insertion of a class arbitration waiver into an existing arbitration policy, and that the waiver was not unconscionable.  The District Court ordered the parties into arbitration to individually resolve the claims brought by Plaintiff under the Fair Labor Standards Act of 1938, 29 U.S.C. § 201, et seq. (“FLSA”), and New Jersey Wage and Hour Law, N.J.S.A. § 34:11-4.1, et seq. (“NJWHL”).  While it held that the class arbitration waiver was not unconscionable, the Third Circuit vacated the District Court’s order and referred the matter to arbitration to determine whether Vilches can proceed as a class based upon the parties’ agreements.

Discussing the relevant procedural and factual background the court stated:

“We briefly summarize the allegations pertinent to our decision. Appellants Vilches filed a class and collective action in the Superior Court of New Jersey to recover unpaid wages and overtime allegedly withheld in violation of the FLSA and the NJWHL, contending that Travelers consistently required its insurance appraisers to work beyond 40 hours per week but failed to properly compensate the appraisers for the additional labor. Travelers removed the matter to the United States District Court for the District of New Jersey, and filed a Motion for Summary Judgment seeking the dismissal of the complaint and an order compelling Vilches to arbitrate their individual wage and hour claims.

Upon commencing employment with Travelers, Vilches agreed to an employment provision making arbitration “the required, and exclusive, forum for the resolution of all employment disputes that may arise” pursuant to an enumerated list of federal statutes, and under “any other federal, state or local statute, regulation or common law doctrine, regarding employment discrimination, conditions of employment or termination of employment.” (App’x at 79.) The agreement did not expressly reference class or collective arbitration or any waiver of the same. The agreement reserved to Travelers the right to alter or amend the arbitration policy at its discretion with appropriate notice to employees.

In April 2005, Travelers electronically published a revised Arbitration Policy. In addition to restating the expansive scope of the Policy, the update also included an express statement prohibiting arbitration through class or collective action:

The Policy makes arbitration the required and exclusive forum for the resolution of all employment-related and compensation-related disputes based on legally protected rights (i.e ., statutory, contractual or common law rights) that may arise between an employee or former employee and the Company…. [T]here will be no right or authority for any dispute to be brought, heard or arbitrated under this Policy as a class or collective action, private attorney general, or in a representative capacity on behalf of any person. (App’x at 88) (emphasis added). Travelers communicated the revised Policy to Vilches in several electronic communications.

Before the District Court, Vilches initially alleged that they never agreed to arbitrate any claims against Travelers; their position changed, however, during the course of proceedings and they ultimately conceded that all employment disputes with Travelers must be arbitrated pursuant to the arbitration agreement they signed at commencement of employment. They nevertheless insisted that the revised Arbitration Policy introduced by Travelers in April 2005 prohibiting class arbitration, which Travelers attempted to enforce, did not bind them because they never assented to its terms. Vilches further argued that, even assuming that the updated Policy did bind them, the revision was unconscionable and unenforceable.

Notwithstanding the fact that the parties agreed to arbitrate all employment disputes, as we discuss below, the District Court addressed the question of whether Vilches agreed to waive the right to proceed by way of class arbitration. In an oral decision, the District Court granted Travelers’ motion for summary judgment, finding that the various forms of correspondence from Travelers provided sufficient notice to Vilches of the revised Policy, and that their electronic assent and continued employment constituted agreement to the update. As such, the Court held that Vilches waived the ability to proceed in a representative capacity through class arbitration. The Court’s opinion only briefly touched upon the unconscionability claims, stating that “there was no adhesion that was part of that process.” (App’x at 23.) The Court ordered the parties to individually arbitrate the employment disputes, and this appeal followed.”

Holding that the Arbitrator and not the Court should decide the issue of enforceability of the class/collective action waiver, the Third Circuit reasoned:

“The parties agree that any and all disputes arising out of the employment relationship-including the claims asserted here-are to be resolved in binding arbitration. Accordingly, the role of the Court is limited to deciding whether the revised Arbitration Policy introduced in April 2005-and the class arbitration waiver included within that revision-governed this dispute. We conclude that the District Court should not have decided the issue presented as to the class action waiver, and, as we explain below, we will refer the resolution of this question to arbitration in accordance with governing jurisprudence. The District Court should have, however, ruled on the issue of unconscionability and we will address it.

We have repeatedly stated that courts play a limited role when a litigant moves to compel arbitration. Specifically, “whether the parties have submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.’ “ Puleo, 605 F.3d at 178 (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)). “[A] question of arbitrability arises only in two circumstances-first, when there is a threshold dispute over whether the parties have a valid arbitration agreement at all,’ and, second, when the parties are in dispute as to whether a concededly binding arbitration clause applies to a certain type of controversy.’ “ Id. (quoting Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003)). In contrast, the Supreme Court has distinguished “questions of arbitrability with disputes over arbitration procedure, which do not bear upon the validity of an agreement to arbitrate.” Id. at 179. We noted in Puleo that “procedural questions”-such as waiver or delay-“which grow out of the dispute and bear on its final disposition are presumptively not for the judge.” Id.

This matter satisfies neither of the Puleo arbitrability circumstances. As stated, neither party questions “whether the parties have a valid arbitration agreement at all.” Id.; (see also Appellants’ Br. at 15 (“Plaintiffs do not challenge the validity of the arbitration agreements they entered into when they first began their employment”); Appellees’ Br. at 6 (“At the outset of employment, Appellants agreed to the Travelers Employment Arbitration Policy”).) The original arbitration provision to which Vilches admittedly agreed provided that “the required, and exclusive, forum for the resolution of all employment disputes ” would be arbitration. (App’x at 79 (emphasis added).) Here, the issue of whether an employee is bound by a disputed amendment to existing employment provisions falls within the scope of this expansive agreement to arbitrate. Indeed, the language makes clear that the “concededly binding arbitration clause applies” to the particular employment claims at stake here, and the parties do not advance a cognizable argument to suggest otherwise. Puleo, 605 F.3d at 178. Accordingly, the second Puleo arbitrability element is also unfulfilled.

While the parties framed their arguments so as to invite the Court’s attention to the class action waiver issue-namely, whether the revised Arbitration Policy expressly prohibiting class arbitration governs the relationship between Travelers and Vilches-we conclude that “the relevant question here is what kind of arbitration proceeding the parties agreed to.”   Bazzle, 539 U.S. at 452 (emphasis in original). As stated, the addition of the disputed class arbitration waiver did not disturb the parties’ agreement to refer “all employment disputes” to arbitration, and, thus, “does not bear upon the validity of an agreement to arbitrate.” Puleo, 605 F.3d at 179. Assuming binding arbitration of all employment disputes, the contested waiver provision solely affects the type of procedural arbitration mechanism applicable to this dispute. “[T]he Supreme Court has made clear that questions of contract interpretation’ aimed at discerning whether a particular procedural mechanism is authorized by a given arbitration agreement are matters for the arbitrator to decide .” Id. (emphasis in original). Where contractual silence is implicated, “the arbitrator and not a court should decide whether a contract [ was] indeed silent’ on the issue of class arbitration,” and “whether a contract with an arbitration clause forbids class arbitration.” Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S.Ct. 1758, 1771-72 (2010).

The Policy originally in force made no mention of class action or class arbitration, and was entirely silent on whether the parties had a right to proceed through class or collective arbitration. In contrast, the amended Policy explicitly precludes class arbitration. Accordingly, we must “give effect to the contractual rights and expectations of the parties,” and refer the questions of whether class arbitration was agreed upon to the arbitrator. Stolt-Nielsen, 130 S.Ct. at 1774.

Although we offer no forecast as to the arbitrator’s potential resolution of these questions, assuming arguendo that the arbitrator finds the class action waiver binding, we will address Vilches’ alternative argument that the addition of the class action waiver was unconscionable for the sake of judicial efficiency, and because it does concern “arbitrabillity.” See Puleo, 605 F.3d at 179.”

The Third Circuit went on to hold that, in the event the class action waiver language was binding, it was not unconscionable.

Click Vilches v. Travelers Companies, Inc., to read the entire opinion.

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WHD Proposes Update To FLSA Recordkeeping Requirements With “Right To Know Under The Fair Labor Standards Act” Regulation

According to the DOL’s Fall 2010 Semi-Annual Agenda, the Wage and Hour Division of the Department of Labor (WHD), intends to issue updated FLSA recordkeeping requirements in the near future.

Several of the initiatives the department is considering could have major impacts on both employees and employers.

For example, the WHD is considering a proposed rule that would require covered employers to notify workers of their rights under the FLSA, and to provide information concerning hours worked and wage computation, similar to the Wage and Hour laws some states like New York and California already have on the books.

Under the proposed rule, employers would be required to perform a written classification analysis for every worker that is excluded from FLSA coverage. In addition, the employer would have to disclose the individual analysis to each worker, and retain the documents in the event of a WHD investigation.

Thanks to Valiant for alerting us to this significant development.

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Filed under Department of Labor, Exemptions, Recordkeeping