Tag Archives: Misclassification

2 Recent Decisions Hold That an Employer-Defendant Cannot Avoid Liquidated Damages By Relying on Involuntary Administrative Governmental Audits

As FLSA cases have proliferated in recent years, among the formally sleepy areas of jurisprudence that has seen a dramatic rise in litigation is the so-called “good faith” defense. Although in its earliest years the FLSA provided for mandatory liquidated damages, a subsequent amendment to the FLSA, through the Portal-to-Portal Act, now allows for a defendant to avoid the imposition of liquidated damages (in addition to the underlying unpaid wages damages) if it can demonstrate that it took affirmative steps to attempt compliance with the FLSA, but violated the FLSA nonetheless. Two recent cases reiterate that a defendant’s burden is not met solely by demonstrating that it had a subjective belief that it was complying.

McLean v. Garage Management Corp.

In the first case, the defendant sought to avoid liquidated damages by relying on a series of involuntary misinformed DOL audits, which it claimed it reasonably relied upon in establishing their belief that its illegal pay methodology, whereby it treated hourly employees as executive exempt from the FLSA’s overtime provisions. While the DOL has in fact found the defendant’s classification to be proper, the court noted that the DOL’s finding was based on its examination of the employees’ duties alone, because the defendant had misrepresented to the DOL that the employees were paid on a salary basis, at the required rate under the applicable regulations in the initial audit. Subsequent audits simply compounded this initial incomplete investigation, based on the information the defendant provided to the DOL in the initial audit.

Significantly, the court rejected the defendants’ claimed reliance on the DOL audits for 3 separate reasons. First, it found that any informal conversations do not constitute “active steps” to ascertain the dictates of the law. Second, the court noted that the audits were involuntary and defendant had not requested same and thus, giving government investigators access to records and employees did not relieve defendant of its own obligation to determine what the labor laws require. Third, the court noted that defendant had not shown that any government investigator focused with care on its time and payroll records for the employees in question, and thus the DOL had not undertaken a review to see whether the defendant indeed paid a predetermined amount that did not vary, as required to meet the “salary basis” prong of the executive exemption. “Without such full disclosure, [the defendant] cannot reasonably rely on the existence of the investigations and their failure to find any inadequacies in the compensation system for [the employees].”

Finally, the court held that the defendant was not entitled to rely on the fact that it periodically consulted with outside counsel, because it had invoked its attorney-client privilege. The court explained that absent a waiver of the privilege, the defendant could not sustain a defense based on good faith reliance on the advice of counsel.

Click McLean v. Garage Management Corp. to read the entire Opinion and Order.

Solis v. R.M. Intern., Inc.

In the second case- concerning an alleged misclassification of drivers under the Motor Carrier Act (MCA) exemption- the defendant sought to avoid the imposition of liquidated damages, by relying on a prior involuntary Department of Transportation (DOT) audit/citations and the advise of counsel it received as part of the audit process. As in McLean above, the court rejected this evidence of “good faith” as insufficient to meet the defendant’s heavy burden.

The court noted:

Defendants maintain they have demonstrated both their subjective good faith and objectively reasonable belief that their failure to pay overtime wages to their drivers did not violate FLSA. To meet their burden, Defendants rely almost exclusively on their compliance with DOT rules and the DOT’s citation of “some” of their intrastate-only drivers. The DOT’s citation of “some” of Defendants’ intrastate-only drivers, however, does not provide a sufficiently reasonable basis for concluding all such drivers were under the DOT’s jurisdiction and, therefore, exempt from FLSA. The objective reasonableness of Defendants’ failure is undermined by the fact that the determination as to whether the Department of Labor or the DOT has jurisdiction is resolved on a driver-by-driver basis, as the Court explained at length on summary judgment, and, in any event, DOT jurisdiction for a driver who only occasionally drives in interstate commerce lasts only 4 months from the last such trip. See Reich v. Am. Driver Serv., Inc., 33 F.3d 1153, 1155–56 (9th Cir.1994). Furthermore, exemptions to FLSA, such as the Motor Carrier Exemption relied on by Defendants, are to be construed narrowly and only apply to employees who “plainly and unmistakably” fall within their terms. See Solis v. Washington, 656 F.3d 1079, 1083 (9th Cir.2011). Thus, the Court concludes Defendants’ generalizations about entire classes of their drivers on the basis of DOT citations of some of its drivers are insufficient to establish the objective reasonableness of Defendants’ failure to comply with FLSA. Similarly and in light of the lack of testimony in this regard, the fact that Defendants required both their interstate and intrastate drivers comply with DOT regulations neither establishes Defendant’s subjective belief nor its objective reasonableness.

Defendants also maintain their belief that their drivers were exempt from FLSA is reasonable in light of the fact that they hired counsel to assist with the November 2009 DOT compliance audit. Although there is not any direct evidence as to the purpose of counsel’s representation, the Court concludes it is fair to infer that counsel was hired to ensure Defendants’ compliance with DOT regulations rather than to ensure Defendants were compliant with FLSA. In any event, there is not any evidence on this record from which the Court can find that Defendants took “the steps necessary to ensure [its] practices complied with [FLSA].” Alvarez, 339 F .3d at 910 (“Mistaking ex post explanation and justification for the necessary affirmative ‘steps’ to ensure compliance, [the defendant] offers no evidence to show that it actively endeavored to ensure such compliance.”). Thus, the Court concludes on this record that Defendants did not satisfy their “difficult” burden to show their subjective good faith failure to comply with FLSA or the objective reasonableness of their actions, and, therefore, the Court concludes Plaintiff is entitled to liquidated damages in the amount equal to the unpaid overtime wages.

Click Solis v. R.M. Intern., Inc. to read the entire Supplemental Findings of Fact and Conclusions of Law and Verdict.

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Filed under Affirmative Defenses, Liquidated Damages

S.D.Fla.: Defendant May Not Seek SJ Against Individual Plaintiffs Where Case Remains Certified At Stage 2

Hernandez v. Starbucks Coffee Co.

In this case plaintiffs, “store managers” at Starbucks claimed they had been uniformly misclassified as exempt employees and wrongly denied overtime as a result.  The case was before the court on defendant’s motion for summary judgment regarding 4 individual plaintiffs in the (certified) class—on the ground that these Plaintiffs offered generally consistent testimony that compels the conclusion that they are exempt “executive” employees as a matter of law.  Significantly, prior to defendant filing its motion for summary judgment, the court had denied defendant’s motion to decertify the class.  The court denied defendant’s motion, largely on the ground that it is inappropriate for a defendant to attempt to target individual plaintiffs for summary judgment, where the class is proceeding as a whole and liability will therefore be determined on a classwide rather than individual basis.

The court explained:

“Before reaching the merits of this argument, the Court must first consider whether it is even proper for Defendant to move for summary judgment as to selected individual Plaintiffs when the Court is presented with a collective action. Relying upon Hogan v. Allstate Ins. Co., 361 F.3d 621, 623 (11th Cir.2004), Defendant argues that where a “FLSA collective action has been conditionally certified but no ruling has been made as to whether the case will proceed to trial as a collective action, the district court may entertain summary judgment motions as to individual plaintiffs.” [DE–241, pg. 12]; see also Lindsley v. Bellsouth Telecomm., Inc., Case No. 07–6569, 2009 WL 322144, at *2 (E.D.La. Feb.9, 2009) (denying motion to strike motion for summary judgment against an individual, named plaintiff, finding it “appropriate to choose [the individual plaintiff] as a test plaintiff to resolve the issue of employee versus independent-contractor status.”).

In response, Plaintiffs argue that the Court should reject Defendant’s attempt to have its motion treated as one directed to only certain individuals, as opposed to the class as a whole, pointing to Judge Marra’s conclusion in Pendlebury v. Starbucks Coffee Company, Case No. 04–80521–CIV–KAM, DE–495 (S.D. Fla. filed Jan. 8, 2008). Plaintiffs point out that unlike Hogan, 361 F.3d at 623, neither this Court nor Plaintiffs have consented to a “test plaintiff” procedure, and Defendant cannot randomly select certain individual Plaintiffs and at the same time seek to prohibit Plaintiffs from using testimony from other Plaintiffs in order to oppose the entry of summary judgment. Defendant attempts to refute this argument by contending that Rule 56(a) permits it to seek summary judgment as to a claim or defense, or part of a claim or defense, and reiterates the holding in Hogan. Defendant also argues that Plaintiffs have not cited to any authority prohibiting the Court from considering such a motion where as here the Court has not yet conducted a stringent review of the propriety of collective treatment.

Importantly, subsequent to Defendant filing the instant motion for summary judgment, on June 28, 2011, this Court denied Defendant’s motion for decertification [DE–300], concluding that Plaintiffs are similarly situated and can proceed as a class. As such, the Court has now conducted a stringent review of the propriety of collective treatment and found collective treatment to be appropriate. Defendant’s reliance on Hogan as its basis for moving for summary judgment as to only four (4) individual Plaintiffs is misplaced. Defendant similarly attempted to raise this argument and rely on Hogan in filing its motion for partial summary judgment in Pendlebury. The Pendlebury court rejected Defendant’s argument, pointing out that in Hogan the court had specifically authorized the selection of test plaintiffs for purposes of discovery and motions for summary judgment. Case No. 04–80521–CIV–KAM, DE–495 at pg. 3. The court concluded that “allowing Defendant to move for summary judgment against particular individuals who are indistinguishable from other members of the class defeats the entire purpose of a collective action.” Id. at 5. Instead, the court held that since the action was certified as a collective action, the court would “only address dispositive motions that resolve common issues of law or fact as to the entire class or an identifiable subclass.” Id.

Similarly here, the Court has already concluded that collective treatment is appropriate and has not authorized the use of “test” plaintiffs. Instead it appears that Defendant unilaterally selected individuals as its “test” plaintiffs. Notably, Defendant does not argue that these Plaintiffs somehow represent a “subclass” or otherwise address the Pendlebury court’s ruling on this issue in any manner. Consequently, the Court finds that it is not proper for Defendant to move for summary judgment as to individual Plaintiffs given the Court’s recent conclusion that Plaintiffs shall proceed as a class.”

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Filed under Class Certification, Collective Actions

M.D.La.: Defendant Not Entitled to FWW in Salary Misclassification Case, Where Failed to Pay Plaintiff “Fixed Salary” as Required by 778.114

McCumber v. Eye Care Center of America, Inc.

This case was before the court on the parties cross-motions seeking summary judgment.  As discussed here, the court held that Plaintiff’s unpaid overtime damages, if any, were to be calculated using the FLSA’s default time and a half methodology, rather than the fluctuating workweek (“FWW”) methodology.  Although the Defendant claimed it was entitled to use the FWW to calculate Plaintiff’s damages, due to the fact that Plaintiff was salaried misclassified, the court disagreed.  The court held that Defendant had failed to pay Plaintiff a “fixed salary” as required for application of 29 C.F.R. § 778.114, because  the evidence showed that Defendant docked Plaintiff’s pay on at least 2 occasions when Plaintiff worked fewer than 40 hours in a workweek.

Reviewing the parties’ respective arguments and holding that any damages ultimately found due were to be calculated at time and a half, the court reasoned:

“Defendants’ motion for partial summary judgment seeks judgment in its favor declaring that any wages found to be due plaintiff in this case shall be calculated using the fluctuating workweek method (“FWW method”) pursuant to 29 C.F.R. § 778.114.  Subsection (a) of the provision at issue instructs that

‘[a]n employee employed on a salary basis may have hours of work which fluctuate from week to week and the salary may be paid him pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many.’

Under the FWW method, the amount of overtime owed to such an employee is paid at the rate of one-half-time pay, rather than one-and-a-half-time pay. The reason for this is that, according to the salary agreement among the parties, all the hours worked by the employee have already been compensated at straight-time pay and, thus, these hours are only shortchanged by half-time pay, rather than completely uncompensated.

In order to calculate the amount actually due under the FWW method, the fixed weekly salary is divided by the number of hours actually worked in a particular week. The resulting sum is the employee’s “regular rate of pay.” An employee found to be due overtime pay would be paid one half of the regular rate of pay for each hour of overtime worked in that particular week. While the regular rate of pay decreases as hours worked each week increase, the fixed salary must be sufficient such that the regular rate of pay never falls below the minimum wage requirement of 29 U.S.C. § 206(a)(1).

In addition to the requirement that the minimum wage requirement be sustained by the regular rate of pay calculation, the employer who has allegedly misclassified a position as exempt under the FLSA bears the burden of proving that there existed a “clear mutual understanding” among the employer and employee that the fixed weekly salary is compensation for the hours worked in any given workweek, no matter how few or many, in order to impose the FWW method for calculating overtime due.

Defendants argue that “it is undisputed that [p]laintiff was classified as exempt under the FLSA and was paid a fixed salary of $40,000 per year, regardless of the hours he worked.”  Defendants point to plaintiff’s testimony that he was “usually paid a set amount in each paycheck” and “often worked before and more often after the time set on the schedule” as evidence that plaintiff and defendants were parties to a “clear mutual understanding” that his salary was fixed, despite his varying hours .

The court has examined plaintiff’s written statement, as cited by defendants, and finds that the citation offered by defendants quotes only a portion of plaintiff’s statement. In its entirety, the passages cited by defendants reads

22. I was usually paid a set amount in each paycheck, plus production and other bonuses.

23. The weekly schedule made by the store manager was the minimum time I was expected to work. I often worked before and more often after the time set on the schedule when there were orders to fill or equipment to maintain or repair, or when I had to drive to one of the other labs in the district to repair or maintain equipment. I was also frequently called in to repair machinery on my days off.

Plaintiff asserts that he was not party to a “clear mutual understanding” as is required for application of the FWW method. Plaintiff points out that, on at least two occasions, his biweekly paycheck was reduced by 8 hours so that he was paid for only 72 hours, though he is usually paid for 80 hours.  Plaintiff argues that, pursuant to 29 C.F.R. 778.114(c), the FWW method is inapplicable in the instant case because subsection (c) clearly instructs that the employer must pay the salary agreed to by the parties even when the employee does not work the full number of hours scheduled.

Plaintiff further asserts that ECCA internal policies instruct general managers to assume a 40 hour workweek when scheduling various management personnel to work in their stores.  Plaintiff also points to the ECCA policy entitled “Work Schedules and Attendance,” which states that “[t]he normal workweek will consist of forty hours. The normal workday will consist of eight hours of work with an unpaid meal period.”  Plaintiff argues that these policies, as well as the documented deductions in his biweekly paychecks demonstrate that defendants expected plaintiff to work a minimum of 40 hours and, in the event he failed to do so and did not claim leave or other holiday to make up for the time, defendants expected not to pay him the full amount of his salary.

The court has reviewed the documentary evidence cited by plaintiff, as well as plaintiff’s statement, cited by defendants and finds that defendants have failed to demonstrate that no genuine dispute exists as to the applicability of the FWW method in this case. In light of the documentary evidence produced by plaintiff, the court finds that plaintiff has demonstrated that, pursuant to 29 C.F.R. 778.114(c), the FWW method is inapplicable to the case at bar. More specifically, the court finds that the check summary documents offered by plaintiff demonstrate that, on two occasions (9/25/2009 and 10/9/2009), plaintiff failed to work the required 80 hours in a designated two-week period and did not claim any holiday or vacation to make up for the shortage in his hours and, accordingly, eight hours worth of pay was deducted from his salary.  Thus, no sincere argument may be made by defendants that its intention was to pay plaintiff a set salary regardless of the hours he worked in a given week, as required for application of the FWW method. On the contrary, the evidence before the court demonstrates defendants’ expectation that plaintiff work a minimum of forty hours each week and that he would be compensated only for those hours he worked or for which he claimed holidays or vacation to which he was entitled. Defendants’ motion will be denied as to its request for application of the FWW method in this case and, accordingly, any overtime found by the jury to be owed to plaintiff shall be compensated at the rate of one and one-half times the amount of plaintiff’s regular hourly wage pursuant to 29 C.F.R. 541.207(a)(1).”

Click McCumber v. Eye Care Center of America, Inc. to read the entire Memorandum Ruling.

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Filed under Damages, Fluctuating Workweek, Salary Basis

S.D.N.Y.: Although Elements of First-Filed Rule Satisfied, Court Declines to Transfer Second-Filed Case Due to Lack of Progress of First-Filed Case

Pippins v. KPMG LLP

This case was before the court on defendant’s motions to dismiss the case under the first-filed rule, or in the alternative to transfer the case to the site of the first-filed case, as well as defendant’s motion to stay the case, pending the outcome of a related appeal in the first-filed case.  Citing the lack of progress in the first-filed case, the court denied the motions, although acknowledging that the underlying elements necessary for application of the first-filed rule were present.

The court reasoned:

“KPMG has met its burden of showing that the first-filed rule applies in this case by demonstrating that the Present Action and the California Action are nearly identical; however, due to the extensive delay in the California Action, the application of the first-filed rule is diminished.

Since the actions include the same parties and claims, the first-filed rule applies. However, application of the first-filed rule is diminished where there has been little progress in the first-filed action. Am. S.S. Owners Mut. Prot. & Indem. Ass’n, Inc. v. Lafarge N. Am., Inc., 474 F.Supp.2d 474, 489 (S.D.N.Y.2007), aff’d sub nom, N.Y. Marine & Gen. Ins. Co. v. Lafarge N. Am ., Inc., 599 F.3d 102 (2d Cir.2010); see Raytheon Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 306 F.Supp.2d 346, 352–53 (S.D.N.Y.2004). This case was filed by the California Plaintiffs in 2007. Since that time there has been no significant movement in the case, (Swartz Decl. Ex. 2.) and there has been no movement since the case was stayed in 2009 pending the outcome of Campbell by the Ninth Circuit. Thus, the presumption afforded the California Action is diminished here. If Plaintiffs can show the balance of convenience tilts even slightly in their favor, there is no reason for this court to transfer the action.

Plaintiffs have not identified any “special circumstances” that warrant deviation from the first-filed rule.  However, the balance of convenience factors weigh in favor of maintaining this action in the Southern District of New York.”

The court also denied defendant’s motion for a stay, pending the outcome of a related appeal in the Ninth Circuit, noting:

“The first three factors are similar to those considered in the “first-filed” analysis, so those factors weigh in favor of proceeding with this action. The interests of the persons not parties to the civil litigation and the public interest also weigh in favor of denying Defendant’s motion to stay the action. As a collective action, the statute of limitations for opt-in plaintiffs continues to run until the plaintiffs opt-in to the action. 29 U.S.C. § 216(b); Hoffman v. Sbarro, Inc., 982 F.Supp. 249, 260 (S.D.N . Y.1997) (Sotomayor, J.). The FLSA has a statute of limitations of three years, two if “willfulness” is not found. Any further delay could prejudice the interests of potential opt-in plaintiffs, whose claims may stale. Public interest also favors the swift resolution of claims alleging violations of the FLSA.”

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Filed under Collective Actions, Multidistrict Litigation

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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W.D.Va.: Parties May File FLSA Settlement Agreement Under Seal For Limited Time; Good Cause Demonstrated By 800 Similar Cases Pending

Murphy v. Dolgencorp, Inc.

This case is one of many such individual plaintiff cases pending against Dolgencorp (Dollar General), following the decertification of a nationwide collective action pertaining to its alleged misclassification of its “Store Manager” position.  The case was before the court on the parties second motion seeking approval of settlements of these related cases under the Fair Labor Standards Act (FLSA).  The court had previously denied approval because of the parties’ insistence on the confidentiality of the settlement terms without showing good cause. Murphy v. Dolgencorp, Inc., No. 1:09CV00007, 2010 WL 3766946 (W.D.Va. Sept. 21, 2010).

Permitting the parties to file the settlement under seal for a limited time, the court discussed its basis for doing so, under the limited and somewhat unique circumstances of the case:

“I continue to find that I cannot approve the settlements without knowing the terms thereof, although the parties continue to ask me to do so on that basis. As an alternative, they ask me to consider the written terms either secretly, in camera, or by having them stated orally in an open, but hopefully empty, courtroom.

As I earlier elaborated, these procedures preferred by the parties do not, in my opinion, conform to my responsibilities under the FLSA or under the law generally. See id., 2010 WL 3766946, at *1.  

The parties suggest another alterative, which I eluded to in my earlier opinion, which is to file and seal the settlement agreements for a limited period of time. As good cause for such a procedure, they represent that there are approximately 800 similar cases pending against the defendant in this and other federal courts around the nation, in which all of the plaintiffs are represented by the same counsel. They contend that keeping the terms of other settlements from each of these plaintiffs is beneficial in order to allow negotiations to concentrate on the specific merits of each individual case. They represent that plaintiffs’ counsel have agreed that they will not divulge the terms of another settlement to any of their individual clients.  

It is true, as the parties assert, that the individual facts of each case are significant. Indeed, I have so ruled in denying summary judgment for the defendant in Teresa Hale’s case. Hale v. Dolgencorp, Inc., No. 1:09CV00014, 2010 WL 2595313, at *2-3 (W.D.Va. June 23, 2010) (holding that to determine if an individual store employee is exempt from overtime under the FLSA’s executive exemption requires a fact-intensive inquiry, unique to each store’s situation). The issue in each of these cases is whether the employee’s primary duty is management, which requires an analysis of various factors, including the amount of time spent by the employee in managerial duties. Id. Among the many stores operated by the defendant, those factors vary based on the circumstances of each store, as well as the preferences and circumstances of the various district managers. Id. at 4.

Under these circumstances, I find that good cause has been shown to seal the settlement agreements for a limited period of time. While the parties suggest three years, I find that two years ought to allow the parties the opportunity to negotiate settlement in most cases, and adequately balances the needs of the parties with the presumptive right of the public to access court records.

Accordingly, it is ORDERED as follows:

1. In connection with the requested approval of the settlements of these two cases, the parties must file under seal copies of the settlement agreements, together with (a) the amount of the plaintiffs’ overtime and liquidated damages claims, and (b) the amount of attorneys’ fees and expenses paid from the settlements, together with the basis for the calculation of the attorneys’ fees; and

2. The materials described above will be filed under seal, not to be unsealed earlier than two years after filing.”

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White House Backs Bill To Close Independent Contractor Tax Loophole; RTT News Reports

RTTNews.com is reporting that:

“Sen. John Kerry, D-Mass., and Rep. Jim McDermott, D-Wash., released a statement Wednesday noting that the White House has endorsed their legislation to close a tax loophole currently allowing businesses to misclassify workers as “independent contractors.”

Kerry and McDermott said that the Fair Playing Field Act of 2010 would protect workers from losing benefits and protections as the result of the tax loophole.

Vice President Joe Biden said, “When employees are classified as independent contractors, whether by design or because the rules are unclear, they are denied access to critical benefits and protections, at significant cost to government at all levels.”

“For these reasons, stopping worker misclassification is a priority for the President’s Middle Class Task Force, which I chair, and I applaud Senator Kerry and Congressman McDermott for introducing this bill,” he added.

In addition to providing guidance about worker classification, the bill would also increase the penalties for the failure to deduct and withhold income taxes and the employee’s share of FICA taxes.”

To read the entire article, click here.

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Filed under Independent Contractor vs Employee, Wage and Hour News