Tag Archives: Salaried Misclassified

D.Ariz.: Where Construction Inspector Was Salaried Misclassified, Damages to Calculated Using Default Time and a Half Methodology, Not FWW

Blotzer v. L-3 Communications Corp.

This case was before the court on the parties’ cross motions for summary judgment. Both plaintiff and defendant contended that they were entitled to judgment as a matter of law regarding the exempt status of plaintiff, a construction inspector. The parties further disputed whether the fluctuating workweek methodology or the FLSA’s default time and a half methodology was applicable to calculate plaintiff’s damages, assuming he had been misclassified. After finding plaintiff to be non-exempt, the court held that plaintiff’s damages had to be calculated using the FLSA’s default methodology, because: (1) it is contrary to the rationale of the FLSA to apply the FWW method in misclassification cases; (2) application of the FWW in misclassification cases runs counter to the intent of the FLSA; and (3) even if the FWW method were applied, the defendant had failed to prove the elements of the FWW method were present in the case.

The court explained:

The FWW method set forth in 29 C.F.R. § 778.114 is not intended to apply retroactively in a misclassification case. See Urnikis–Negro, 616 F.3d at 666 (stating that 29 C.F.R. § 778.114 is not a remedial measure that specifies how damages are to be calculated when a court finds that an employer has breached its statutory obligations). It was drafted by the Department of Labor as “forward-looking” and only describes how employers and employees should structure an agreement for future compensation. Id. at 677. Moreover, because the regulation was adopted without formal rule-making, it is entitled to less deference. See Hasan v. GPM Investments, LLC, 2012 WL 3725693, *2 (D.Conn.2012) (citing Christensen v. Harris Co., 529 U.S. 576, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000)). The Court concludes that the FWW should not be applied in the present case because: (1) it is contrary to the rationale of the FLSA to apply the FWW method in misclassification cases; (2) application of the FWW in misclassification cases runs counter to the intent of the FLSA; and (3) even if the FWW method were applied, Defendant has failed to prove the elements of the FWW method are present in this case.

Application of the FWW method in a misclassification case is contrary to FLSA’s rationale. The FWW method requires proof of a “clear mutual understanding” that: (1) the fixed salary is compensation for the hours worked each work week, whatever their number; and (2) overtime pay will be provided contemporaneously such that it fluctuates depending on hours worked per week. See 29 C.F.R. §§ 778.114(a) & (c). In a misclassification case, at least one of the parties initiated employment with the belief that the employee was exempt from the FLSA, paid on a salary basis, and therefore not entitled to overtime. When an employee is erroneously classified as exempt and illegally being deprived of overtime pay, neither the fourth nor fifth legal prerequisites for use of the FWW method is satisfied. The parties do not have a “clear, mutual understanding” that a fixed salary will be paid for “fluctuating hours, apart from overtime premiums” because the parties have not contemplated overtime pay. In addition, because the employees were erroneously classified as exempt, overtime compensation was not provided contemporaneously. See Russell v. Wells Fargo and Co., 672 F.Supp.2d 1008 (N.D.Cal.2009); Hasan, 2012 WL 3725693 at * 4 (collecting cases which hold that, in a misclassification case, the parties never agreed to an essential term of a fluctuating work week arrangement, ie. that overtime would be paid at different rates depending on the number of hours worked per week). As the court stated in Ransom v. M. Patel Enters., Inc., 825 F.Supp.2d 799, 810 n. 11 (W.D.Tex.2011):

The significance of the employee’s lack of knowledge of nonexempt status cannot be overstated. The fundamental assumption underpinning the FWW is that it is fair to use it to calculate overtime pay because the employee consented to the payment scheme. But in the context of an FLSA misclassification suit when consent is inferred from the employee’s conduct, that conduct will always, by definition, have been based on the false assumption that he was not entitled to overtime compensation. The job will have been advertised as a salaried position. The employee, if he raised the issue, will have been told that the salary is all he will receive, regardless of how many hours he works. That is the very nature of a salaried, exempt position. When it turns out that the employer is wrong, and it is learned that the FLSA required the employer to pay the employee an overtime premium, the notion that the employees conduct before he knew this is evidence that the employee somehow consented to a calculation method for the overtime pay that no one even knew was due, is perverse. If the FWW requires consent in some fashion, the employee’s actions before he knew he was due overtime pay just cannot logically be the basis of that consent.

Furthermore, 29 C.F.R. § 778.114(c) provides that the FWW method cannot be used “where all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for non-overtime hours.” In a misclassification case, because employees have not been paid overtime premiums, they are compensated for those hours worked more than forty at a rate not greater than the regular rate. Russell, 672 F.Supp.2d at 1014. Thus, attempting to retroactively apply the FWW method to a miscalculation case is akin to “the old ‘square peg in a round hole’ problem [because it requires] apply[ing] § 778.114 to a situation it was not intended to address.” EZPawn, 633 F.Supp.2d at 402.

“In making its decision here, the Court is ‘mindful of the directive that the [FLSA] is to be liberally construed to apply to the furthest reaches consistent with Congressional direction.’ ” Russell, 672 F.Supp.2d at 1014 (citing Klem, 208 F.3d at 1089). Application of the FWW in a misclassification case gives rise to a “perverse incentive” for employers, because the employee’s hourly “regular rate” decreases with each additional hour worked. In fact, the difference between the FWW method and the traditional time-anda-half method can result in an employee being paid seventy-one percent less for overtime over a given year, and under the FWW method, the effective overtime hourly rate of an employee working sixty-one hours or more is less than the non-overtime hourly rate of an employee who worked no more than forty hours per week. See Russell, 672 F.Supp.2d at 1012;
see also
Hasan, 2012 WL 3725693 at *2 (calculating the pay difference for a misclassified employer under both methods). This result is contrary to the FLSA’s purpose: encouraging employers to spread employment among more workers, rather than employing fewer workers who are then required to work longer hours. See Robertson v. Alaska Juneau Gold Min. Co. ., 157 F.2d 876, 879 (9th Cir.1946)

The court further explained that even if it had reached the opposite conclusion of law (i.e. that the FWW could be applicable in some misclassification cases), the facts of the case would still preclude its application here:

Finally, even if the Court concluded that the FWW method does apply in some miscalculation cases, it would not apply in the present case because Defendant has failed to demonstrate a “fluctuating” work week or a “clear mutual understanding” of straight pay and a contemporaneous overtime arrangement as required by the regulation. The FWW was intended to apply to “fluctuating” work schedules, ie. schedules in which an employee endures long hours some weeks but enjoys the benefit of short hours in other weeks, all at the same rate of pay. See Hasan, 2012 WL 3725693 at *4. In the present case, it is undisputed that Plaintiffs consistently worked more than 40 hours per week. Thus, Plaintiffs’ “variance, between weeks with a moderate amount of overtime hours, and weeks where a majority of hours worked exceeded the 40 hour threshold, is not the same as the up and down fluctuation contemplated by the DOL and by the Court in Missel.Id. In addition, by its plain terms, the FWW method applies only when the employee clearly understands that he will receive straight-time pay for all hours worked and extra compensation of at least half his regular rate of pay, in addition to the fixed salary, for overtime hours during the weeks when he works overtime. Hunter v. Sprint Corp., 453 F.Supp.2d 44, 59 (D.D.C.2006); Russell, 672 F.Supp.2d at 1013–14. No such clear, mutual understanding is present in this case. Defendant contends that Plaintiffs agreed to work for a set salary regardless of whether they worked “35 hours or 55 hours.” (Doc. 74, pg.13.) Defendant misquotes Plaintiffs’ testimony regarding the number of hours they anticipated working. Although Defendant describes the Plaintiffs’ testimony regarding their salary as their “sole source of income regardless of whether they worked 35 or 55 hours,” neither Plaintiff testified to any expectation of ever working less than 40 hours. (Doc. 71, pg. 10; Doc. 71–1, pgs. 35 & 52.) The undisputed evidence is that Plaintiffs expected to work 50 hours a week. Furthermore, even if Defendant could prove that Plaintiffs and Defendant had a clear, mutual understanding that Plaintiffs would work 50 hours a week without overtime pay, such an arrangement amounts to an agreement “not to receive their FLSA entitlement to overtime pay. This would be illegal. Employees cannot agree to waive their right to overtime pay.” Russell, 672 F.Supp.2d at 1014. The parties’ lack of “mutual understanding” regarding Plaintiffs’ salary is further supported by the fact that Plaintiffs, upon realizing that they were being required to work far more than 50 hours per week, complained about their hours and were eventually paid some overtime.

In sum, the Court agrees with its sister district court in Northern California which held that “If Defendants’ position were adopted, an employer, after being held liable for FLSA violations, would be able unilaterally to choose to pay employees their unpaid overtime premium under the more employer-friendly of the two calculation methods. Given the remedial purpose of the FLSA, it would be incongruous to allow employees, who have been illegally deprived of overtime pay, to be shortchanged further by an employer who opts for the discount accommodation intended for a different situation.” Russell, 672 F.Supp.2d at 1014. Accordingly, the Court concludes that the FWW method to damages calculation is not applicable in the instant case.

Click Blotzer v. L-3 Communications Corp. to read the entire Order.

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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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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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M.D.Fla.: In “Salary Misclassification” Case, Time And A Half Damages Due, Because FWW Calculation Would Result In Sub-Minimum Wages For Overtime Hours In Many Weeks

West v. Verizon Services Corp.

This case was before the court on the Defendants’ motions for summary judgment on a variety of issues.  Defendants’ motions were denied.  As discussed here, the case of interest, because the court weighed in on the hot-button issue of how to calculate damages for an employee who was “salaried misclassified” by his or her employer.  Here, the court held that the damages for the plaintiff, if any, were to be calculated using the FLSA’s default time and a half methodology, largely because a calculation under the fluctuating workweek methodology (FWW) would result in sub-minimum wages for overtime hours in many weeks.

Pertinent to the issue discussed here, Plaintiffs pay was $400.00 per week in salary and, in some instances they could earn a $200.00 bonus in addition, if certain conditions were met.  The testimony in the record also indicated that the Plaintiffs worked varying hours each week, sometimes working in excess of 60 hours per week.

Holding that Plaintiffs’ damages, if any, were due to be calculated at the FLSA’s default time and a half rate, the court reasoned:

“D. Rate of Overtime Compensation

As noted above, Defendants argue that West is not entitled to any overtime compensation. However, in the alternative to Defendants’ aforementioned arguments, Defendants submit that if West is entitled to overtime compensation, she is not entitled to overtime compensation at the rate of time and one-half for hours worked over 40. Rather, Defendants contend that, if West is entitled to overtime compensation, her damages should be calculated using the “half-time” method. West disagrees, and seeks time and one-half for all overtime hours worked.

The FLSA mandates overtime payment for non-exempt employees for hours worked over 40 in a workweek at a rate of one and one-half times the regular rate at which the employee is paid. 29 U.S.C. § 207(a)(1). As correctly noted by Defendants, “calculation of the ‘regular rate’ is thus the starting point for determining the amount of overtime an employee is owed.” (Doc. # 214 at 12).

In Overnight Motor Transportation Company v. Missel, 316 U.S. 572, 580, 62 S.Ct. 1216, 86 L.Ed. 1682 (1942), the Court held that the employee’s “regular rate” may be determined by dividing the number of hours actually worked by the weekly wage. Id. As a result, a non-exempt employee who receives a weekly salary for all hours worked (even hours over 40) has, by definition, already been paid his “regular rate” for all hours worked in the workweek. Using this method, a salaried employee is only owed half-time for any hours worked in excess of 40 per week.

There can be no doubt that under certain circumstances, overtime payment using the half-time approach is entirely appropriate. “Virtually every court that has considered the question has upheld the remedial use of half-time in failed exemption cases.” Torres v. Bacardi Global Brands Promotions, Inc., 482 F.Supp.2d 1379, 1381, n. 2 (S.D.Fla.2007) (internal citation omitted). However, West asserts that compensation for overtime using the half-time approach, rather than the time and one-half approach, is improper here because Defendants have not satisfied the requirements of the “Fluctuating Work Week” Regulation.

Under 29 C.F.R. § 778.114, the fluctuating workweek method of calculating compensation is used only if the following requirements are met: (1) the employee’s hours fluctuate from week to week; (2) the employee receives a fixed weekly salary which remains the same regardless of the number of hours worked during the week; (3) the fixed amount is sufficient to provide compensation at a regular rate not less than the legal minimum wage; (4) the employer and the employee have a clear and mutual understanding that the employer will pay the employee a fixed salary regardless of the number of hours worked; and (5) the employee receives a fifty percent overtime premium in addition to the fixed weekly salary for all hours worked in excess of 40 during the week. See also Davis v. Friendly Express, Inc., 61 Fed. App’x 671 (11th Cir.2003); O’Brien v. Town of Agawam, 350 F.3d 279, 288 (1st Cir.2003); Griffin v. Wake County, 142 F.3d 712, 716 (4th Cir.1998).

It is evident that the arrangement between West and Defendants does not comport with the fluctuating workweek requirements above. Most importantly, if West worked 72 hours a week, her hourly rate using the fluctuating workweek method would be $5.56, which is less than the applicable minimum wage during the time of her employment ($6.79). As calculated by West, “any week in which West worked at least 59 hours, her hourly rate would fall below the guaranteed minimum wage.” (Doc. # 224).

In addition, West testified that her hours did not fluctuate in that she worked 72 hours per week, every week. There can be no understanding that an employee’s salary is intended to compensate for fluctuating hours-the hallmark of a fluctuating work week case-when the worker understands her hours to be set at 72 hours per week. Furthermore, West’s salary was not “fixed” because she received various bonus payments and commissions.

On the present record, the Court declines to determine that West’s overtime compensation, if any, should be limited to half-time, rather than time and one-half. In the instance that a jury determines that West is entitled to overtime compensation, West’s rate of overtime compensation will be time and one-half.”

Click West v. Verizon Services Corp. to read the entire order.

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4th Cir.: When Salaried Employees Were Misclassified, Damages Properly Calculated At “Half-Time” Rather Than Time And A Half

Desmond v. PNGI Charles Town Gaming, L.L.C.

As discussed here previously, this was the second time this case ended up at the 4th Circuit.  Previously, the 4th Circuit had vacated the trial court’s Order determining the plaintiff’s to be administratively exempt and remanded the case for further findings.  On this appeal the plaintiffs challenged the lower court’s ruling as to how their damages in this so-called “salary misclassified” case should be determined.  Additionally, the defendant cross-appealed the lower court’s determination, on summary judgment, that it’s violations were willful.  Joining other Circuits who have ruled on the calculation issue, the 4th Circuit held that the lower court properly applied a so-called “half-time” calculation in determining the plaintiffs damages.

In making its ruling, the 4th Circuit discussed, at length case law from other circuits:

“The former employees worked as racing officials with Charles Town Gaming. J.A. 50. Charles Town Gaming prepared the job descriptions for racing officials in 1999. Id. at 55-56. In doing so, Charles Town Gaming’s human resources director used a computer program to help determine whether to designate the position as exempt or non-exempt from overtime under the FLSA. Id. Charles Town Gaming paid the racing officials a per diem rate and treated them as exempt. See Aff. Karen Raffo, Nov. 20, 2007. Over the ensuing years, Charles Town Gaming changed the pay from per diem to a fixed weekly salary that the parties intended to cover all hours worked. See J.A. 56, 146-52; Aff. Karen Raffo, Nov. 20, 2007. Charles Town Gaming believed (erroneously) that the former employees were subject to the FLSA administrative exemption; therefore, Charles Town Gaming did not pay them overtime. J.A. 49. All three appellants often worked more than 40 hours in a week. Id. at 50. After the appellants unanimously declared the wrong horse to have won a race, Charles Town Gaming dismissed them from their employment. Id.

The former employees contend the district court erred in calculating their unpaid overtime compensation under 29 U.S.C. § 216(b). Charles Town Gaming contends the district court erred by concluding that their FLSA violation was willful. We review a grant of summary judgment de novo. See, e.g., United States v. Bergbauer, 602 F.3d 569, 574 (4th Cir.2010). When cross-motions for summary judgment are before a court, the court examines each motion separately, employing the familiar standard under Rule 56 of the Federal Rules of Civil Procedure. See, e.g., Ga. Pac. Consumer Prods., L.P. v. Von Drehle Corp., 618 F.3d 441, 445 (4th Cir.2010).

The former employees challenge how the district court calculated their unpaid overtime compensation under 29 U.S.C. § 216(b). The Supreme Court addressed how to calculate such unpaid overtime compensation under 29 U.S.C. § 216(b) in Overnight Motor. 316 U .S. at 580. The Court held that when calculating the “regular rate” of pay for an employee who agreed to receive a fixed weekly salary as payment for all hours worked, a court should divide the employees fixed weekly salary by the total hours worked in the particular workweek.   Id. at 579-80 (analyzing section 7 of the FLSA, now codified at 29 U.S.C. § 207(a)(1)). This calculation should be completed for each workweek at issue and results in a regular rate for a given workweek. Id. Of course, the Court recognized that the regular rate could vary depending on the total hours worked. The Court then determined that the employee should receive overtime compensation for all hours worked beyond 40 in a given workweek at a rate not less than one-half of the employee’s regular rate of pay. Id.

Although the parties agree that Overnight Motor applies in calculating the regular rate, they disagree about how to calculate the overtime premium. Specifically, the parties disagree over whether the former employees should receive 150% of the regular rate for all hours worked over 40 in a given workweek or 50% of the regular rate for all hours worked over 40 in a given workweek.

In analyzing how to calculate unpaid overtime compensation under 29 U.S.C. § 216(b) in this mistaken exemption classification case, we note that four sister circuits have addressed this issue. The First, Fifth, Seventh, and Tenth Circuits all have determined that a 50% overtime premium was appropriate in calculating unpaid overtime compensation under 29 U.S.C. § 216(b) in mistaken exemption classification cases, so long as the employer and employee had a mutual understanding that the fixed weekly salary was compensation for all hours worked each workweek and the salary provided compensation at a rate not less than the minimum wage for every hour worked. See Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir.2010); Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir.2008); Valerio v. Putnam Assocs., Inc., 173 F.3d 35 (1st Cir .1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135 (5th Cir.1988).

In Blackmon, the Fifth Circuit applied 29 C.F.R. § 778.114 to calculate unpaid overtime compensation in a mistaken exemption classification case. 835 F.2d at 1138. The employees in Blackmon were meat-market managers who were wrongly classified as exempt. Id. at 1137-38. The district court calculated their unpaid overtime compensation by dividing the weekly salary by 40 hours to determine their regular rate, multiplying that rate by 150%, and then multiplying that result by the number of overtime hours. Id. at 1138. The Fifth Circuit rejected this method, instead applying 29 C.F.R. § 778.114 to determine the regular rate, and only using a 50% multiplier. Id. The Fifth Circuit did not cite, much less discuss, Overnight Motor.

In Valerio, the First Circuit upheld an award of summary judgment in a mistaken exemption classification case. 173 F.3d at 39-40. Valerio was wrongly classified as an exempt employee. Id. at 37. Upon dismissing Valerio from employment, her employer gave her a lump-sum payment intended to cover any overtime owed to her. Id. at 38. In calculating the unpaid overtime compensation, the employer paid her a 50% overtime premium and relied on 29 C.F.R. § 778.114. The First Circuit affirmed the district court’s finding that the amount paid was more than was owed to Valerio under the FLSA. Id. In Valerio, the First Circuit cited, but did not discuss, Overnight Motor. Id. at 39-40.

In Clements, the Tenth Circuit affirmed a district court’s application of 29 C.F.R. § 778.114 to calculate unpaid overtime compensation in a mistaken exemption classification case. 530 F.3d at 1225. The employees in Clements provided recruiting services to the Army on behalf of their employer, Serco. Id. Serco had erroneously classified these employees as exempt under the “outside salesmen” exemption. Id. at 1227; cf. 29 U.S.C. § 213(a)(1). The employees claimed a 150% multiplier applied because the employer and employees had not agreed on whether overtime compensation was owed. Clements, 530 F.3d at 1230. In affirming the use of a 50% multiplier in calculating the unpaid overtime compensation, the Tenth Circuit cited 29 C.F.R. § 778.114, the First Circuit’s decision in Valerio, and our decision in Bailey v. County of Georgetown, 94 F.3d 152, 155-57 (4th Cir.1996).   Clements, 530 F.3d at 1230. The Tenth Circuit found the lack of a clear and mutual understanding on the overtime premium to be “irrelevant as to whether the Employees understood they were being paid on a salaried … basis.” Id. at 1231. In Clements, the Tenth Circuit did not cite, much less discuss, Overnight Motor.

In Urnikis-Negro, the Seventh Circuit affirmed a district court’s award of a 50% overtime premium to calculate unpaid overtime compensation in a mistaken exemption classification case. 616 F.3d at 684. However, the court rejected the district court’s retroactive application of 29 C.F.R. § 778.114, finding it a “dubious source of authority for calculating a misclassified employee’s damages.” Id. at 679. Instead, the court relied on Overnight Motor. Id. at 680-84. The court held that when an employer and employee agree that a fixed salary will constitute payment at the regular rate for all hours worked and the rate is not lower than the minimum wage, a court should rely on Overnight Motor to calculate unpaid overtime compensation under 29 U.S.C. § 216(b). Id. Moreover, in such a situation, the court calculates the unpaid overtime compensation using a 50% multiplier rather than a 150% multiplier. See id.

In addition to these decisions from our sister circuits, the Department of Labor also has approved using a 50% overtime premium to calculate unpaid overtime compensation in a mistaken exemption classification case. See Retroactive Payment of Overtime and the Fluctuating Workweek Method of Payment, Wage and Hour Opinion Letter, FLSA 2009-3 (Dep’t of Labor Jan. 14, 2009). The DOL issued the opinion letter in response to an employer who asked how to compensate employees mistakenly classified as exempt. Id. at 1. In the opinion letter, the DOL states that “because the fixed salary covered whatever hours the employees were called upon to work in a workweek; the employees will be paid an additional one-half their actual regular rate for each overtime hour …; and the employees received and accepted the salary knowing that it covered whatever hours they worked,” a retroactive payment of overtime using the 50% multiplier conforms with FLSA requirements. Id. at 2.

Here, the district court did not apply 29 C.F.R. § 778.114 to this mistaken exemption classification case. Rather, the district court relied on the logical implications of Overnight Motor to calculate unpaid overtime compensation under 29 U.S.C. § 216(b). Desmond, 661 F.Supp.2d at 584. The district court found that there was an agreement that the fixed weekly salary covered all hours worked. Id. The district court then reasoned that Overnight Motor’s regular-rate determination implies the previously paid weekly salary covers the base compensation for all hours worked. Id. Thus, the district court concluded that it need only award 50% of the regular rate to provide the employees their “unpaid overtime compensation” under 29 U.S.C. § 216(b). Id.

Appellants disagree and insist that such a reliance on Overnight Motor improperly expands federal common law. They also (confusingly) argue that Chevron deference to 29 C.F.R. § 778.114 requires courts to use a 150% multiplier and that if employers are allowed to retroactively apply section 778.114 in mistaken exemption classification cases, employers have no motive to pay for overtime as it accrues, effectively treating nonexempt employees as if they were exempt. In appellants’ view, such a holding will create an incentive for employers to pay a fixed weekly salary, never to pay overtime, and then simply pay a 50% premium on the regular rate if caught misclassifying non-exempt employees as exempt employees. Cf. 29 U.S.C. § 213(a)(1); 29 C.F.R. pt. 541 (white-collar exemption regulations).

As the district court held, appellants’ argument ignores the teaching of Overnight Motor. After all, in Overnight Motor, the Court recognized that employees and employers are free to agree to a reduced hourly wage in exchange for a fixed weekly salary, provided the fixed weekly salary covers all hours worked and meets minimum wage requirements. 316 U.S. at 580. In our view, the district court correctly concluded that Overnight Motor provides the appropriate method for calculating the unpaid overtime compensation under 29 U.S.C. § 216(b) in this case. Tellingly, in Overnight Motor, the Court provided the formula to compute the overtime due an employee who was paid a fixed weekly salary intended to cover all hours worked. Overnight Motor, 316 U.S. at 580 n. 16. Although Overnight Motor concerned the more basic question of whether overtime compensation applies to those earning more than the minimum wage requirements in the FLSA, 316 U.S. at 575, it contains nothing to indicate why such a computation would not apply in determining unpaid overtime compensation under 29 U.S.C. § 216(b) in a mistaken exemption classification case. Indeed, in Overnight Motor, the Court interpreted 29 U.S.C. § 207(a) and explained the meaning of “the regular rate at which he is employed,” and interpreted 29 U.S.C. § 216(b) and explained how to calculate “unpaid overtime compensation.” See Overnight Motor, 316 U.S. at 574 n. 2, 579-80.

Traditional principles of compensatory damages bolster this conclusion. Compensatory damages are “[d]amages sufficient in amount to indemnify the injured person for the loss suffered.” Black’s Law Dictionary 445 (9th ed.2009). Here, the former employees agreed to receive straight time pay for all hours worked in a given workweek and have already received such pay. Thus, the “loss suffered” is the 50% premium for their overtime hours. Accordingly, we affirm the district court’s judgment about how to calculate unpaid overtime compensation under 29 U.S.C. § 216(b).”

Currently, the plaintiffs in the 7th Circuit case, Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir.2010), have filed a petition for cert in the Supreme Court, so the effect of the 4th Circuit’s holding may be should-lived.

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D.Minn.: “Insurance Investigators” Were Non-Exempt, Because Their Duties Lacked Independent Judgment and Discretion

Ahle v. Veracity Research Co.

Among other motions, the case was before the Court on the parties’ cross-motions for summary judgment.  Of note here, the parties asked the Court to determine whether Plaintiffs, who were “Insurance Investigators” qualified as Administrative Exempt or not.  Holding that their duties did not require the independent judgment and discretion necessary, the Court held that Plaintiffs were non-exempt under the FLSA.

Examining the Plaintiffs’ duties the Court explained:

“Veracity is a full-service investigative firm specializing in insurance defense investigations. Answer to Compl., Defenses and Am. Counterclaim (Counterclaim) [Docket No. 29] ¶ 5. Named Plaintiffs Ahle, Jordan, and Wiseman formerly worked as investigators for Veracity. Id. ¶¶ 6-8; Collective Action Compl. [Docket No. 1] ¶¶ 4-6. Approximately 150 other individuals have opted into this litigation. The plaintiff class members are current or former investigators for Veracity.

Veracity is hired by insurance companies, third-party administrators, and law firms to investigate suspect claims. Morgan Decl., May 13, 2010 [Docket No. 186], Ex. 1 (Foster Dep.) 45:22-46:8. Veracity categorizes its investigators by title and level; the titles and levels that are at issue in this litigation are surveillance investigators (levels 1-3), claims investigators (level 4), and senior field investigators (level 5). Morgan Decl., May 13, 2010, Ex. 2 (Doyle Dep.) 60:10-19. Surveillance investigators primarily work in the field conducting surveillance, undercover investigations, and background checks. Id. 50:15-21; Foster Aff ., July 7, 2009 [Docket No. 59], ¶ 7. Claims investigators generally perform the same duties as surveillance investigators, but they also interview witnesses, obtain statements, take photographs, and, occasionally, perform sales functions. Foster Aff., July 7, 2009, ¶¶ 8, 10-11. Senior field investigators supervise and manage surveillance and claims investigators in the field, train new investigators, and perform occasional promotion and sales duties. Id. ¶ 13. Thus, all of the titles and levels of investigators at issue have in common some surveillance duties, although the parties dispute whether the primary duty of investigators in each of these titles and levels is surveillance.

After receiving an assignment from Veracity but before driving to the surveillance site, the investigator typically completes several tasks including reviewing the assignment sheet, performing a background check on the subject, matching the name of the subject to an address, mapping out directions to the surveillance site, and ensuring that the investigator’s camera, laptop computer, and cellular phones are fully charged. Morgan Decl., May 13, 2010, Ex. 8 at VRC001063-64. According to Plaintiffs, investigators also are required to perform maintenance including cleaning the windows and filling the fuel tank on their vehicles before leaving for a surveillance site. Morgan Decl., May 13, 2010, Exs. 13, 14, ¶ 6. At the surveillance site, investigators monitor and video record the subject and take notes of their observations. Morgan Decl., May 13, 2010, Ex. 13, ¶ 5. Claims investigators may also interview witnesses, obtain statements, and collect documents. Foster Dep. 149:7-23.

Investigators record their activities in a daily investigative report (“DIR”). Morgan Decl., May 13, 2010, Exs. 13, 14 ¶ 7. An investigator’s DIR discloses when the investigator left home for the surveillance site, the drive time, the arrival time, observation notes, the departure time from the site, and the arrival time back at the investigator’s home. Id. Once completed, the investigator sends the DIR online to Veracity. Id. Investigators send any video recording taken during the day to their managers by depositing the tapes at a FedEx drop-off location. Id .

The dispute in this action centers on whether Plaintiffs, given their daily duties, were properly classified as FLSA “exempt” employees who are not required to be paid overtime for work in excess of forty hours per week. Based on Veracity’s founders’ view of the “industry standard,” Veracity classified its investigators as exempt when it began business in 1995. Doyle Dep. 15:10-17:6. Plaintiffs initiated this action on January 8, 2009, claiming that they were improperly classified as exempt and, therefore, were wrongfully denied compensation for overtime hours allegedly worked while employed by Veracity as investigators.”

After concluding that it lacked information sufficient to determine whether the second prong of the Administrative Exemption was met or not here, the Court held that Defendant could not, as a matter of law, establish that Plaintiffs’ activities required the independent judgment and discretion required for application of the exemption:

“Discretion and Independent Judgment

Although claims investigations is directly related to the management or general business operations of Veracity’s clients, such a primary duty must also involve the exercise of discretion and independent judgment with respect to matters of significance for claims investigators to meet the final element of the definition of administrative employees. DOL regulations explain that “the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.” 29 C.F.R. § 541.202(a).

Factors to be considered when determining whether an employee exercises discretion and independent judgment with respect to matters of significance include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; whether the employee has authority to negotiate and bind the company on significant matters; whether the employee provides consultation or expert advice to management; whether the employee is involved in planning long- or short-term business objectives; whether the employee investigates and resolves matters of significance on behalf of management; and whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances. Id. § 541.202(b). “The exercise of discretion and independent judgment implies that the employee has the authority to make an independent choice, free from immediate direction or supervision,” but “employees can exercise discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level,” and discretion and independent judgment can “consist of recommendations for action rather than the actual taking of action.” Id. § 541.202(c). However, “[t]he exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.” Id . § 541.202(e).

In support of their argument that the duties of the claims investigators do not involve the exercise of discretion and independent judgment regarding matters of significance, Plaintiffs again cite Gusdonovich, as well as Fenton v. Farmers Insurance Exchange, 663 F.Supp.2d 718 (D.Minn.2009), a case from this district. In Gusdonovich, the court concluded that the insurance “investigators were merely applying their knowledge and skill in determining what procedure to follow, which … is not the exercise of discretion and independent judgment contemplated by the [DOL] regulation[s].” 705 F.Supp. at 265.

The plaintiffs in Fenton were insurance investigators employed by a company to investigate potentially fraudulent insurance claims. 663 F.Supp.2d at 721. The court held that the job duties of such “special investigators” did not involve a sufficient exercise of discretion and independent judgment to qualify for the administrative exemption. Id. at 726. Instead, the special investigators’ job duties were “sufficiently aligned with the employment circumstances” of (1) the insurance investigators who were the plaintiffs in Gusdonovich, (2) the employees performing background investigations discussed in the 2005 DOL Opinion Letter, and (3) the police investigations addressed in DOL regulation 29 C.F.R. § 541.3(b)(1). Id. at 726. In reaching that conclusion, the court noted that the employer’s written guidelines explained in great detail how the investigators should approach issues that often arise in conducting and documenting an investigation, there was “nothing in the residual discretion available to investigators that [was] sufficient to justify exemption,” and there was no dispute that the investigator’s subjective opinions and conclusions were excluded from their written reports. Id. at 726-27. In addition, written guidelines instructed the investigators to include, with equal detail and emphasis, all inculpating and exculpating information in their reports, and investigators had no authority to determine whether a claim should be denied or whether the insurance company should seek to negotiate a settlement. Id. at 727.

Like in Gusdonovich and Fenton, Plaintiffs’ duties as claims investigators for Veracity do not involve a sufficient degree of discretion and independent judgement with respect to matters of significance. Claims investigators do not have the discretion to decide when to conduct an investigation, where to conduct it, or the length of time to spend on it. Morgan Decl., May 13, 2010, Ex. 13, ¶ 6. In addition, Veracity does not allow claims investigators to (1) make any recommendations or give their opinions as to whether fraud occurred when submitting their DIRs or (2) recommend or participate in the decision whether to deny or pay a claim or whether to conduct further investigation. Id. ¶ 8. Furthermore, Plaintiffs’ declarations state that they received guidelines and manuals describing how claims investigations are conducted and that they are “expected to follow such guidelines and manuals when conducting day-to-day investigations.” Id. ¶ 11. For example, a Veracity document entitled “Introduction to Claims Investigation and Responsibilities” informs claims investigators as follows:

Your job will be to obtain facts that relate to a specific claim. This will include, but is not limited to, taking recorded statements from the person making the claim …, witnesses to the specific incident, [and] persons that may have direct knowledge about the incident…. Your responsibility is to get the facts of the case by means of questioning or research. At times you will be called upon to obtain needed documentation to include medical records, receipts …, employment information, and police reports. You will have to develop comprehensive investigative and communication skills, and you must be able to decide which leads must be followed, and which ones should be reported but need no further effort.

One of the most challenging areas of [your job as a claims investigator] will be your ability to transfer the information that you gather into a coherent and informative report…. [I]n most cases you will not have the opportunity to speak directly with the client and therefore your report must be accurate, concise, easily understood, and complete.  Morgan Decl., May 13, 2010, Ex. 9 at VRC001154.

The manual includes outlines to follow when taking a recorded statement in all investigations and in particular types of investigations (e.g., employment injuries, motor vehicle accidents resulting in deaths, products liability, property loss or theft, vehicle or property damage). Id. at VRC001167, 1176, 1216, 1230, 1233, 1240. Although claims investigators are not required to follow the outlines verbatim, the outlines do command, in several instances, that some specific information is not optional, employing language such as, “must be on every recorded statement,” “must be covered,” or “must be asked.” Id. at VRC001167, 1176, 1216, 1230, 1233, 1240. Furthermore, the outlines instruct investigators to “obtain all of the facts,” and remind the claims investigators that it is Veractiy’s responsibility to “obtain the information and then let the [client] and their legal department make the determination.” Id. at VRC001230.

The record establishes that (1) Veracity’s written guidelines explain in great detail how claims investigators should conduct an investigation, (2) the claims investigators are required to obtain all the facts regardless of their impact, and (3) the claims investigators do not include their own opinions, conclusions, or recommendations regarding the decision whether to pay or deny the claim. Because the claims investigators do not provide opinions and conclusions about their investigative observations, they are significantly different than the insurance investigators in Foster v. Nationwide Mutual Insurance Co. See 695 F.Supp.2d 748, 761 (S .D.Ohio 2010) (concluding that genuine issues of material fact exist as to whether the plaintiffs, insurance investigators, exercised discretion and independent judgment because “[m]ost significantly, there is a factual dispute as to whether Special Investigators’ primary duty encompasses providing their opinions and conclusions regarding their investigative findings”). Admittedly, claims investigators do make decisions regarding the precise manner in which they conduct an investigation-creating action plans, deciding who to interview, what documents to review, what leads to follow, and whether to recommend hiring an expert-however, such decisions are more appropriately viewed as choices among “established techniques, procedures or specific standards described in manuals or other sources,” which do not amount to the exercise of discretion and independent judgment with respect to matters of significance. 29 C.F.R. § 541.202(a), (e); see also 2005 Opinion Letter at 4-5 (advising that “prioritizing the pursuit of particular leads, assessing whether the leads … have provided information that requires further investigation, determining which potential witnesses to see and which documents to review, and making similar decisions that promote effective and efficient use of … work time in performing assigned investigative activities” do not involve the exercise of discretion and independent judgment with respect to matters of significance); Auer v. Robbins, 519 U.S. 452, 461 (1997) (stating that the DOL’s interpretation of its own regulations are “controlling unless plainly erroneous or inconsistent with the regulation”).

The cases cited by Veracity are unavailing. In Stout v. Smolar, the court viewed evidence that a private investigator had the authority to make decisions as to how to “investigate the scene of an accident, including determining what materials to be preserved and whether expert witnesses would be required” as showing that the investigator exercised discretion and independent judgment. No. 1:05-CV-1202, 2007 WL 2765519, at *6 n. 2 (N.D.Ga. Sept. 18, 2007). The court also commented that treating insurance investigators as not qualifying for the administrative exemption “would appear contrary to the insurance claims adjuster example of administrative exemption cited by the [DOL].” Id. This Court finds more persuasive the reasoning in DOL regulations, cases such as Fenton, and the 2005 Opinion Letter, which suggest that having discretion over the types of matters discussed in Stout does not equate to having discretion and independent judgment with respect to matters of significance. See Foster, 695 F.Supp.2d at 761 (recognizing, in light of the 2005 Opinion Letter, that deciding who to interview, what documents to review, what leads to pursue, and “similar tactical matters” were “fact-finding logistics [that] do not necessarily rise to the level of discretion and independent judgment contemplated by DOL regulations, for they do not amount to matters of significance”).

Equating Veracity’s claims investigators to claims adjusters is not a fair comparison or particularly helpful. The core function of a claims adjuster is to decide whether and to what extent an insurance claim should be paid, a task that requires considerable exercise of discretion on a matter of significance. Inclusion of the term “adjuster” in the title of the job strongly suggests that conclusion. All employees exercise some discretion in deciding how to perform their jobs, and the way in which they exercise that discretion likely will affect matters of significance. In the case of claims investigators, how they exercise their discretion in conducting an investigation will impact or affect how a claims adjuster working for one of Veracity’s clients decides the significant matter of the value of the claim. But an exercise of discretion that impacts or affects a matter of significance is not exercising discretion with respect to a matter of significance. If the rule were otherwise, all employees would arguably meet the third element of the definition of administrative employees. Because the analogy to claims adjusters is not persuasive, Veracity’s reliance on cases such as Roe-Midgett, 512 F.3d at 874, where the Seventh Circuit held that claims adjusters routinely used their discretion and independent judgment to make choices that impact damage estimates, settlement, and other matters of significance, does not alter the result here.

The Court concludes that Veracity has failed to demonstrate a triable issue as to whether the duties of claims investigators include the exercise of discretion and independent judgment with respect to matters of significance. Because claims investigators do not meet the third element of the definition in 29 C.F.R. § 541.200(a), they do not qualify for the administrative exemption.”

Not discussed here, the Court also held that the Plaintiffs lacked the requisite duties to be deemed outside sales exempt.  Further, the Court held that certain time claimed as compensable by the Plaintiffs was not and that the appropriate method for determining Plaintiffs damages–as “salaried misclassified” employees was the Fluctuating Workweek (“FWW”), adopting the reasoning in the recent Seventh Circuit decision discussed here.  Lastly, the Court denied Defendant’s motion for decertification of the collective action.

To read the entire decision, click here.

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7th Cir.: FWW Is Appropriate Method To Determine Unpaid Overtime Where Plaintiff Was Salaried Misclassified

Urnikis-Negro v. American Family Property Services

Although plaintiff Brenda Urnikis-Negro prevailed in her suit for overtime pay, she contended on appeal that the district court improperly calculated the amount of pay she was owed.  After a bench trial, the district court found that the Defendants, violated the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. §§ 201, et seq. (“FLSA”), when they treated Urnikis-Negro as an administrative employee who was exempt from the overtime provisions of the statute. Urnikis-Negro v. Am. Family Prop. Servs., Inc., No. 06 C 6014, 2008 WL 5539823, at *5-*9 (N.D.Ill. Jul. 21, 2008); see 29 U.S.C. §§ 207, 216(b).  As a result of Defendants’ misclassification, Urnikis-Negro was never paid anything above her fixed salary for her overtime hours.

However, in calculating Urnikis-Negro’s regular rate of pay and thence the overtime to which she was entitled, the court used the fluctuating workweek (“FWW”) method set forth in 29 C.F.R. § 778.114(a), an interpretive rule promulgated by the Department of Labor. 2008 WL 5539823, at *11-*12.

Recognizing that section 778.114(a) itself does not provide the authority for applying the FWW method in a misclassification case, it applied the FWW anyway.  In a troubling opinion, the Court specifically stated that the FWW “is not a remedial measure that specifies how damages are to be calculated when a court finds that an employer has breached its statutory obligations.”

Nonetheless, the Court held that irrespective of the rule, it was appropriate for the district court to apply the FWW method in this case, citing the authority found in the Supreme Court’s decision in Overnight Motor Transp. Co. v. Missel, 316 U.S. 572, 62 S.Ct. 1216 (1942), superseded on other grounds by statute as stated in Trans World Air Lines, Inc. v. Thurston, 469 U.S. 111, 128 n. 22, 105 S.Ct. 613, 625 n. 22 (1985), “which approved this very method of calculating of an employee’s regular rate of pay and corresponding overtime premium. We therefore affirm the district court’s judgment.”

To read the entire decision, click here.

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W.D.Wash.: Notwithstanding Prior DOL Consent Judgment, Plaintiffs May Pursue Full Damages Under State Law, Because Appropriate Damages For Salary Misclassification Are Time And A Half Not FWW, And Damages Under Consent Judgment Represented Only Partial Relief

Monahan v. Emerald Performance Materials, LLC

This case was before the Court on the parties cross-motions for summary judgment.  The issue was whether a prior consent judgment entered into by the DOL and the Defendant employer precluded this subsequent case, based solely on Washington state law, despite the fact that Plaintiffs were not on notice of the prior proceedings, did not participate in the prior proceedings, and Plaintiffs did not receive full damages due them under the prior consent judgment.  Because the damages awarded previously–based on FWW, rather than time and a half–were insufficient, and Plaintiffs were not parties to the prior litigation, the Court found that they were not precluded from pursuing their full time and a half damages due them.  Further, the Court held that although the consent judgment barred a subsequent FLSA action, it did not preempt or preclude a claim for the additional damages due, solely under the relevant Washington state law.

Discussing the relevant procedural background, the Court stated:

“Immediately after discovering the potential violation in overtime pay for twelve-hour shift employees, Emerald, through counsel, reported the potential overtime pay violation to the U.S. Department of Labor, Wage and Hour Division, in Ohio (where Emerald is headquartered). After investigation, the Department of Labor determined that a violation occurred. On May 27, 2008, the Department filed a complaint in U.S. District Court for the Northern District of Ohio seeking to enjoin Emerald from continuing to violate the Fair Labor Standards Act (“FLSA”) and from continuing to withhold overtime compensation due to eighty-eight (88) employees, including all ten plaintiffs in this matter, who worked twelve-hour scheduled shifts and were paid according to Section 17A of the CBA.

The Department of Labor reviewed Emerald’s time and payroll records to calculate the amount of overtime back wages due. The Department of Labor determined that Article 17A of the CBA provided for payments of a fixed weekly amount of compensation regardless of the number of hours worked in any particular work week. The Department of Labor and Emerald entered into a Consent Judgment that enjoined Emerald from violating the overtime provisions of the FLSA and further required Emerald to tender payment to each of the subject employees in an individual amount listed in the Consent Judgment. The total amount tendered was $241,308. On July 29, 2008, U.S. District Judge Lioi entered the Consent Judgment, which set forth the specific amount of back wages due and owing to each employee.”

Plaintiffs and all other employees affected by the Secretary’s lawsuit in Ohio did not receive notice of the lawsuit, did not participate in any way in the lawsuit, did not have standing to appeal the Consent Judgment and did not have knowledge of the lawsuit until sometime after the defendant began distributing checks for unpaid overtime wages to them in August 2008.

Seventy-eight (78) employees listed in the Consent Judgment accepted the overtime back wages tendered to them. The ten plaintiffs in this case rejected the tendered amounts. On October 10, 2008, plaintiffs filed this lawsuit seeking overtime compensation under both the Federal FLSA and the Washington Minimum Wage Act (MWA). Plaintiffs are claiming back wages commencing in October 2005, before Emerald became the plaintiffs’ employer. Plaintiffs claim that Emerald has “successor liability.” Plaintiffs allege at paragraph 8 of their complaint that the Department of Labor in the Ohio action did not properly calculate the overtime back wages due.”

Discussing the proper time and a half calculation for overtime damages due in a salary misclassification case, the Court stated:

“Both the FLSA and MWA overtime provisions require an employer to pay time and one-half the regular rate of pay for all hours worked in a work week in excess of 40. 29 U.S.C. § 207 and RCW 49.46.130(1). Under the Washington Administrative Code, the term “regular rate” is determined “by dividing the amount of compensation received per week by the total number of hours worked during that week.” WAC 296-128-550. Similarly, under the United States Department of Labor Wage and Hour regulations at 29 C.F.R. § 778.109, an employee’s regular hourly rate of pay is determined “by dividing his total remuneration for employment (except statutory exclusions) in any work week by the total number of hours actually worked by him in that work week for which such compensation was paid .” Therefore, “regular rate of pay” is the same under both the FLSA and the MWA. Plaintiffs’ claims for overtime compensation under the FLSA and the Washington MWA are identical.

The Ohio District Court entered a judgment ordering payment of overtime using the flexible work week method. That judgment disposed of all claims under federal law but left open the question whether identical language under Washington law should be interpreted in the same manner as the Ohio Court interpreted federal law. There is no clear guidance from the Supreme Court on the subject and cases from different circuits seem to be split in cases with comparable or analogous circumstances. The Ninth Circuit has not weighed in on the issue.

First, the Court resolves the issue of preemption by determining that the CBA provision in question is clear and unambiguous. The parties intended to segment the wages earned by 12-hour shift employees using the flexible work week methodology. No further interpretation of the provision is necessary or possible. Because the interpretation of a CBA is not required, the state claims are not preempted in this case. Lividas v. Bradshaw, 512 U.S. 107, 125 (1994); Cramer v. Consolidated Freightways, Inc., 225 F.3d 683, 691 (9th Cir.2001). Defendant’s Motion for Summary Judgment on the issue of preemption [Dkt. # 39] is DENIED.

Next the Court must review the applicable regulation and the interpretive case law to determine whether Emerald is entitled to the employer-friendly flexible work week method of calculating overtime pay under Washington state law.

Plaintiffs allege that the overtime compensation due to plaintiffs in the Ohio Consent Judgment was incorrectly calculated. The Department of Labor calculated the regular rate of pay as set forth in 29 C.F.R. § 778.109, determining that the overtime compensation due to plaintiffs was one-half the regular rate times the number of hours in excess of 40 in a work week. The federal court in Ohio, in calculating back wages, used the “fluctuating work week” method set forth in 29 C.F.R. § 778.114. This regulation allows overtime to be calculated at only half of the regular rate, rather than time and one-half the regular rate of pay under the FLSA and the MWA:

An 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 work week whether few or many. Where the clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each work week, whatever the number, rather than for working 40 hours or some other fixed weekly work, such a salary arrangement is permitted by the act if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those work weeks in which the number of hours he works is greatest, and if he receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half his regular rate of pay. Since the salary in such a situation is intended to compensate the employee as straight time rates for whatever hours are worked in the work week, the regular rate of the employee will vary from week to week and is determined by dividing the number of hours worked in the work week into the amount of the salary to obtain the applicable hourly rate a week. Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirements because such hours have already been compensated at the straight time regular rate, under the salary arrangement.  29 C.F.R. § 778.114(a) (emphasis added).

It is undisputed that using this method would not result in a hourly rate below the statutory minimum wage, nor is there any dispute that the number of hours plaintiffs worked each week fluctuated. The parties dispute whether the “clear mutual understanding” requirement extends only to being paid a fixed weekly salary regardless of the number of hours worked, or whether it also includes an understanding that plaintiffs will be paid overtime. Likewise, the parties disagree about whether the regulation also requires that the employee actually have been contemporaneously paid overtime.

There is no Ninth Circuit case law directly interpreting this aspect of the regulation. Plaintiffs direct the Court’s attention to the district court decision in Russell v. Wells Fargo & Co., 2009 WL 3861764 (N.D.Cal.2009), while the defendant cites to Tumulty v. FedEx Ground Package Sys., Inc., 2005 WL 1979104 (W.D.Wash). Plaintiffs argue that because Emerald was not paying its employees overtime contemporaneously throughout the period in dispute, it could have no clear understanding with the employees about overtime and the rate of overtime pay to be paid. Plaintiffs argue that because there is no “clear mutual understanding” and no contemporaneous overtime pay, the flexible work week methodology is not available to Emerald here.

Although the state law of Washington is identical to the FLSA regarding calculation of overtime using the flexible work week method, this Court must choose between two conflicting lines of federal decisions. One line of cases adopts a common sense approach that requires only that so long as the parties (employer and employee) reached a clear mutual understanding that while the employee’s hours may vary, his salary will not, then the calculation of overtime pay in a subsequent action brought under the wage laws would be half-pay for each hour over 40 in a week. These courts did not require that the employee know that he would receive overtime compensation or have actually received it contemporaneously. Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir.2008); Valerio v. Putnam Assoc. Inc., 173 F.3d 35, 39-40 (1st Cir.1999); Blackman v. Brookshire Grocery Co., 835 F.2d 1135, 1138 (5th Cir.1988). If the Court follows this line of cases, the Ohio judgment will represent full compensation owed the plaintiffs and this case is at an end without further payment to plaintiffs, beyond that which has already been tendered.

The second line of cases looks more closely at the language of the applicable regulation and requires both a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each work week and contemporaneous payment of overtime as earned.

Here, because Emerald did not pay plaintiffs any more for overtime hours (hours worked in excess of 40 hours each week) the flexible work week method of payment for overtime hours at half the regular rate would give way to the predominant rate of compensation at time-and-a-half. This approach has been adopted by District Courts around the country: Russell v. Wells Fargo & Co., 2009 WL 3861764 (N.D.Cal.); Scott v. OTS Inc., 2006 WL 870369, *12 (N.D.Ga.); Hunter v. Sprint Corp., 453 F.Supp.2d 44, 58-62 (D.D.C.2006); Cowen v. Treetop Enters., 163 F.Supp.2d 930, 941 (M.D.Tenn.2001); Rainey v. Am. Forest & Paper Assoc., 26 F.Supp.2d 82, 99-102 (D.D.C.1998). The Court’s review of these cases, to include Overnight Motor Transport Co. v. Missel, 316 U.S. 572 (1942), and its consideration of the background and policy of the FLSA, convinces it that the flexible work week method cannot be used to calculate overtime retroactively (where it has not been paid contemporaneously with the overtime work) for the purposes of determining damages under Washington State law. The plaintiffs are entitled to pay at the rate of time-and-a-half for every hour of overtime time worked during the period of time covered by plaintiffs’ claims.

Washington courts recognize the “persuasive authority” of the federal Fair Labor Standards Act and regulations promulgated pursuant to it when construing MWA provisions that are similar to those of the FLSA. Inniss v. Tandy Corporation, 141 Wash.2d 517, 524-25, 7 P.3d 807 (2000). Both the FLSA and the MWA authorize the use of the Flexible work week methodology. 29 C.F.R. § 778.114; WAC 296-128-550.

The Washington Supreme Court has expressly found that 29 C.F.R. § 778.114 provides guidance when determining the applicability of the flexible work week method under the MWA. Inniss, 141 Wash.2d at 524-25.

29 C.F.R. § 778.114(a) sets out five prerequisites for application of the flexible work week method. Griffin v. Wake County, 142 F.3d 712, 715 (4th Cir.1998). The plain terms of 29 C.F.R. § 778.114(c) provide that unless “all the legal prerequisites” for applying the flexible work week method are present, an employer cannot avail itself of the flexible work week method for calculating overtime wages. In such cases where the flexible work week method cannot apply, the “statutory” method of multiplying the employee’s regular hourly rate by 1.5 and then by the number of hours worked over 40 in each work week is the applicable overtime pay computation method.

One of the prerequisites under 29 C.F.R. § 778.114(a) for applying the flexible work week method is payment of the mandatory 50% overtime premium contemporaneously with payment of the employee’s regular straight time pay.   Russell v. Wells Fargo & Co., 2009 Westlaw 3861764, at *3 (N.D.Cal.2009). Defendant paid plaintiffs no wages at all for the hours for which plaintiffs seek recovery of unpaid overtime wages. Defendant therefore did not satisfy the contemporaneous overtime pay prerequisite of 29 C.F.R. § 778.114(a).

Another prerequisite for the flexible work week method of overtime calculation to apply is that the employer and employee must have reached a “clear mutual understanding” at the outset of their employment relationship that the employee’s fixed salary would compensate the employee for all hours worked.   Griffin, 142 F.3d at 715. This understanding must include an understanding that the employee will be compensated for his overtime work at a rate of 50% of his regular hourly rate. Russell, 2009 Westlaw 3861764, at *5.

The parties lacked the clear mutual understanding required by 29 C.F.R. § 778.114(a) as evidenced by the fact that plaintiffs were paid nothing for the hours worked over 40 in various work weeks. If the employee receives no pay for overtime hours worked, the parties could not have understood that the employee was to be paid the requisite 50% overtime pay premium.

Defendant cannot avail itself of the flexible work week overtime pay computation method because two of the five prerequisites for application of that methodology were unsatisfied. The proper overtime pay computation method will be the statutory method described above.”

Thus, the Court concluded, since the Defendant was not entitled under the FLSA or Washington law to use the FWW to calculate the back-wages due for Plaintiffs, and the DOL consent judgment did not preempt the instant action, Plaintiffs were entitled to seek their proper time and a half damages under Washington law, notwithstanding the prior consent judgment.

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M.D.Ga.: Dollar General “Store Manager” May Have Been Misclassified As Executive Exempt; Defendant’s Motion For SJ Denied

Myrick v. Dolgencorp, LLC

Pending before the Court was Defendant Dolgencorp, LLC’s (Dollar General) Motion for Summary Judgment, seeking an Order holding that Plaintiff, a “Store Manager” was subject to the Executive Exemption to the FLSA, and not entitled to overtime compensation.  The Court denied Defendant’s Motion, reasoning that a reasonable jury could find that Plaintiff’s primary duty was not management, as required for application of the Executive Exemption.

Discussing the applicable burden and facts of the case, the Court said, “Dollar General bears the burden of proving the executive exemption affirmative defense. Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233, 1269 (11th Cir.2008). The Eleventh Circuit has recognized the “Supreme Court’s admonition that courts closely circumscribe the FLSA’s exceptions.” Nicholson v. World Bus. Network, Inc., 105 F.3d 1361, 1364 (11th Cir.1997). The exemption “is to be applied only to those clearly and unmistakably within the terms and spirit of the exemption.” Morgan, 551 F.3d at 1269 (quotation omitted). Thus, the Court is required to narrowly construe exemptions to the FLSA overtime requirement. Id .

The Eleventh Circuit does not use a “categorical approach” to decide whether an employee is an exempt executive. Id. “[W]e have noted the ‘necessarily fact-intensive nature of the primary duty inquiry,’ that ‘the answer is in the details,’ and that ‘where an issue turns on the particular facts and circumstances of a case, it is not unusual for there to be evidence on both sides of the question, with the result hanging in the balance.’ “ Id. (quotation and alteration omitted).

Department of Labor regulations interpret the executive exemption defense. Myrick’s claims span between 2001 and 2003. Accordingly, the “old regulations,” which were in effect prior to August 23, 2004, apply to this case. Id. at 1265-66. The regulations contain a short test that defines the phrase “employee employed in a bona fide executive … capacity.” 29 C.F.R. § 541.1 (2003). “This short test has three requirements: (1) an employee ‘is compensated on a salary basis at a rate of not less than $250 per week,’ (2) his ‘primary duty consists of the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof,’ and (3) his work ‘includes the customary and regular direction of the work of two or more other employees.’ “ Id. at 1266 (quoting 29 C.F.R. § 541.1 (2003)).

Myrick does not dispute Dollar General’s argument or evidence showing that she met the salary requirement of the short test, or that she regularly directed the work of two other employees. Thus, the first and last requirements of the short test are met. The parties do, however, dispute the second element-whether Myrick’s primary duty was management.

1. Primary duty is management

The regulations provide examples of managerial tasks:

Interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing their work; maintaining their production or sales records for use in supervision or control; appraising their productivity and efficiency for the purpose of recommending promotions or other changes in their status; handling their complaints and grievances and disciplining them when necessary; planning the work; determining the techniques to be used; apportioning the work among the workers; determining the type of materials, supplies, machinery or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety of the men and the property.  29 C.F.R. § 541.102.

The regulations do not, however, provide a definition of “primary duty.” “A determination of whether an employee has management as his primary duty must be based on all the facts in a particular case.” 29 C.F.R. § 541.103 (2003). The regulations provide a list of factors a court should consider when determining whether an employee’s primary duty is management. These factors are: (1) “[t]he amount of time spent in the performance of the managerial duties”; (2) “the relative importance of the managerial duties as compared with other types of duties”; (3) “the frequency with which the employee exercises discretionary powers”; (4) “his relative freedom from supervision”; and (5) “the relationship between [the employee's] salary and the wages paid other employees for the kind of nonexempt work performed by the supervisor.” Id.; Morgan, 551 F.3d at 1267.

a. The amount of time spent in the performance of managerial duties

Myrick testified during her deposition that she spent 20% of her time on managerial duties, and 80% of her time on non-managerial tasks.

Myrick also testified that she did managerial work. This included interviewing potential employees, reviewing the revenue reports, completing various paperwork, ordering merchandise, evaluating employees, preparing the work schedules, receiving mail, hiring some employees, investigating customer complaints, and reviewing store policies. (Myrick dep., pp. 33, 54, 70, 77, 94, 95-96, 99, 130-32, 166, 175, 227, 250).

Myrick was required to complete her paperwork at night after the store closed, and on occasion took the paperwork home with her. (Myrick dep., p. 281). It normally took her an hour every day to do the required paperwork. (Myrick dep., p. 131). Myrick had to perform this managerial task after store hours because “[w]hile I was at the store I was always busy doing something else. Didn’t have time to do paperwork.” (Myrick dep., p. 281).

The regulations state that “an employee who spends over 50 percent of his time in management would have management as his primary duty.” 29 C.F.R. § 541.103 (2003). Taking Myrick’s testimony as true, she does not meet the 50% threshold. However, “[t]ime alone … is not the sole test,” and “in situations where the employee does not spend over 50 percent of his time in managerial duties, he might nevertheless have management as his primary duty if the other pertinent factors support such a conclusion.” 29 C.F.R. § 541.103 (2003). Thus, the Court must consider the other four factors.

b. The relative importance of the managerial duties as compared with other types of duties

The Court must examine the importance of Myrick’s duties in light of their value to Dollar General. See Dalheim v. KDFW-TV, 918 F .2d 1220, 1227 (5th Cir.1990). Dollar General argues that Myrick’s managerial duties were most important, as she had more impact on store profitability than any other employee, and was responsible for ensuring profitability. Because of her efforts, the Quitman store “turned around.” (Myrick dep., p. 52). Myrick also testified that if the store manager leaves the store, “things don’t get done.” (Myrick dep., p. 173). Dollar General also argues that the importance of Myrick’s managerial tasks is evidenced by the Store Manager job description and the criteria on which she was evaluated as a Store Manager. Finally, Dollar General argues that the importance of Myrick’s managerial duties was reflected in the fact that Dollar General paid her a higher salary and she had bonus potential.

While Myrick did testify in her deposition that she thought the Store Manager had the most impact on store profitability (Myrick dep ., p. 173), when asked what she thought had more impact on the profitability of the stores, the managerial duties (scheduling, employee training, hiring, watching for inventory shrink, ensuring customer satisfaction) or the non-managerial duties (cleaning the bathroom, stocking the shelves, sweeping the floor), Myrick testified that “[i]t all goes together.” (Myrick dep., p. 174). Later, Myrick testified that some of the most important job duties she had as a Store Manager for Dollar General were “provid[ing] superior customer service, leadership.” (Myrick dep., p. 274). When asked what went into those tasks, Myrick identified making sure the store was stocked and clean, and making sure inventory got out on the floor. Id. These were all manual labor tasks that Myrick had to do herself because she did not have enough employees to do them. (Myrick dep., p. 276). And while Myrick did testify that she turned the Quitman store around through her efforts, when asked what she did differently than the previous store manager, Myrick stated that she “actually put the merchandise on the floor.” (Myrick dep., p. 52). When asked if she did anything else, Myrick testified, “No. That’s basically it.” Id.

Dollar General argues that Myrick has raised no issue of fact to dispute that Dollar General found her managerial duties to be of significant importance, and again points to the facts that Dollar General paid Myrick a higher salary and evaluated her on her managerial duties. Dollar General states that Myrick admitted to performing the duties outlined by the Store Manager job description, and that testimony further shows that Myrick performed managerial duties, rather than non-exempt duties. While a review of Myrick’s deposition confirms that she testified that she performed the job functions outlined in the job description, her testimony shows that her physical labor was required to meet these goals, including “facilitat[ing] the efficient staging, stocking and storage of merchandise by following defined company work processes,” “ensur [ing] that all merchandise is presented according to established practices, …” and “maintain[ing] a clean, well organized store, facilitat [ing] a safe and secure working and shopping environment.” (Doc. 26-3, p. 2).

Dollar General contends that what Myrick believed her most important duties to be is unimportant, as an employee’s primary duty is “what [the employee] does that is of principal value of the employer….” (Doc. 27, p. 6). Dollar General repeatedly states that the focus must be on what the employer values, not what the employee subjectively believes her employer values. Yet, the only evidence before the Court is Myrick’s subjective testimony about what she thought was and was not important. Dollar General makes the conclusory statement that it found Myrick’s managerial duties to be of significant importance, but provides no evidence to support that conclusion. It is not for the Court to guess or assume on summary judgment that a higher salary or a bonus means that Dollar General valued one set of duties over another. Dollar General wants to have it both ways. At one point, it states that “Plaintiff’s principal value to Dollar General was her management of her stores, as she herself testified.” (Doc. 25-2, p. 15). But when Myrick points to portions of her testimony which support her position that there is an issue of fact as to whether her managerial or nonmanagerial duties were more important, Dollar General replies that what Myrick believes to be more important is irrelevant and her opinions as to the duties she believes added the most value should be disregarded. (Doc. 27, pp. 6-7). The Court will not accept Myrick’s testimony when it is favorable to Dollar General’s position and ignore it when it is favorable to her own.

Dollar General has not presented sufficient evidence to meet its burden of showing that Myrick’s managerial duties were of principal value to Dollar General.  Thus, this factor does not favor Dollar General.

c. Frequency with which an employee may exercise discretionary powers

Dollar General next argues that Myrick exercised tremendous discretion on a daily basis. Specifically, Myrick exercised discretion with respect to scheduling her subordinates’ hours, apportioning payroll budgets, delegating, assigning, and prioritizing tasks, training employees, counseling employees, appraising employee performance, resolving customer service issues, determining who to hire or fire, and how to best implement company policies and procedures. Dollar General states that Myrick’s managerial discretion was not fettered by the company’s standard operating procedure manual because she testified that she did not know such a manual existed. Dollar General further notes that Myrick was the highest store-level supervisory personnel in her stores, and she “determined what was important and what needed to be done.” (Myrick dep., p. 231).

When asked during her deposition how much discretion she felt like she had to run her own store, Myrick replied, “Not a lot.” (Myrick dep., p. 276). Myrick points to this testimony to show that she did not frequently exercise discretionary powers. To rebut Dollar General’s allegation that she exercised discretion every day in the store, Myrick relies on her deposition testimony that she was severely restricted in the way in which employees were scheduled because of the labor budget she was assigned, that she would be asked questions if she exceeded the labor budget, that she had limited discretion over how to apportion the payroll budget as 40% of it had to be devoted to truck day, and that she could not exercise discretion over delegating and assigning tasks because there was usually only one other employee in the store with her at a time, which meant that she could not delegate non-managerial tasks, as she would end up having to do non-managerial work either in running the register or stocking shelves, for example. (Myrick dep., pp. 70-71, 112, 167, 275).

In Morgan, the Eleventh Circuit found that the evidence presented regarding the frequency with which the employee exercised discretionary power supported the jury’s verdict in favor of the employees. The plaintiffs presented evidence that store managers rarely exercised discretion because either the store’s manuals or the district managers controlled the store’s operations. “The manuals and other corporate directives micro-managed the days and hours of store operations, the number of key sets for each store, who may possess the key sets, entire store layouts, the selection, presentation, and pricing of merchandise, promotions, payroll budgets, and staffing levels.” 551 F.3d at 1270.

Myrick’s testimony shows that Dollar General decided who had keys to the stores and how many were issued, set the weekly payroll budget, decided what merchandise was ordered, set the store hours of operation, and set the store and merchandise layouts, other than in approximately 25% of the store, and even that discretion could be overridden by the district manager. (Myrick dep., pp. 69, 76-77, 128-29, 199-200, 277, 287-88). Furthermore, Myrick had no discretion to deviate from or change the company’s planogram. (Myrick dep., p. 277). She also testified that even if she ordered merchandise, that did not mean she would receive it, as Dollar General could decide not to send it to her. (Myrick dep., p. 77).

Looking at the evidence in the light most favorable to Myrick, the discretionary power factor does not favor Dollar General, or is at least neutral.

d. The employee’s relative freedom from supervision

Dollar General argues that Myrick operated autonomously for the most part, as she had limited contact with her district manager, had an office she kept locked that only the Assistant Store Manager had access to, was the only employee with a key to the back door of the stores, and was unaware of the company’s standard operating procedures. (Myrick dep., pp. 46, 49-50, 129, 161, 233).

A review of Myrick’s testimony shows that on at least one occasion, the district manager personally directed Myrick to stock merchandise. Before any repairs could be made at the stores, Myrick had to get approval from Dollar General’s home office. When Myrick took a set of keys from an employee whom she believed to be stealing from the store, the district manager made Myrick give the keys back to the employee. If employees got into a dispute, Myrick had to refer them to the corporate resolution office. Myrick did not have the authority to set rates of pay or recommend raises. When Myrick wanted to take a day off from work, she had to get approval from the district manager. Myrick could only discipline employees for serious infractions after receiving approval from the district manager. The district manager instructed Myrick to spray the parking lot with Round-Up and to make repairs to the eaves of the Quitman store. On at least one occasion, Myrick was required to lend her employees to another store. Myrick could not mark down damaged goods or make special orders without the district manager’s approval. The district manager at least once made Myrick relocated products she had put in a purported “flex” area of the store. Myrick had to have the district manager’s approval before hiring an Assistant Store Manager, though she never actually hired one. When Myrick asked for more hours for her store because she did not have enough manpower to get all of the required work done, the request was refused.  Myrick never terminated any employee without the district manager’s approval. The district manager was in charge when the stores did inventory, and also checked the paperwork completed by Myrick to make sure she did it right. (Myrick dep., pp. 46-49, 63-64, 100-102, 113-114, 175, 188, 197, 202, 220-21, 227, 256, 258, 276, 285, 287-88).

The evidence presented by Myrick could support a finding that she was not relatively free from direct supervision. Thus, this factor does not weigh in favor of Dollar General.

e. The relationship between the employee’s salary and the wages paid other employees for the kind of non-exempt work performed by the supervisor

When Myrick first became a store manager at Pavo, she was paid $500 weekly. She later received a raise to $510 weekly. After her move to the Quitman store, Myrick was paid $650 weekly. She was paid this flat rate for all hours worked. (Myrick dep., p. 39). Myrick testified that she worked an average of 66 hours per week. (Myrick dep., p. 122). She also earned annual bonuses as a Store Manager of $1,474.59 in 2002 and $1,500 in 2003. (Myrick dep., p. 140).

Using Myrick’s figure of 66 hours per week, she made $7.58 per hour when first made a store manager, then $7.73 per hour, and finally $9.85 per hour. According to documents produced by Dollar General, Assistant Store Managers earned $7 per hour and clerks generally earned $5.35 per hour.

The evidence in Morgan showed that assuming a 60-hour week, store managers earned approximately $2 to $3 more per hour than hourly-paid assistant store managers. The Eleventh Circuit found that “[g]iven the relatively small difference between the store managers’ and assistant managers’ hourly rates, it was within the jury’s province to conclude that this factor either did not weigh in Family Dollar’s favor or at least did not outweigh the other factors in Plaintiffs’ favor.” 551 F.3d at 1271. Similarly, Myrick made, at most, $2.85 more per hour than the Assistant Store Managers. As this difference in pay is similar to that in Morgan, this factor does not weigh in Dollar General’s favor, or at least, is neutral as to whether management was Myrick’s primary duty.”

Based on a review of all of the specific facts of this case, as applied to the factors necessary for the Executive Exemption to apply, the Court concluded, “[i]t is Dollar General’s burden to show that the executive exemption applies in this case. It has failed to establish each element of the exemption. As a question of fact exists as to whether Myrick’s primary duty was management, Dollar General’s Motion for Summary Judgment (Doc. 25) is denied.”

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N.D.Cal.: Damages In A Salary Misclassification Case Must Be Calculated At Time And A Half; Fluctuating Workweek Not Applicable Without “Clear Mutual Understanding” And/Or Contemporaneous Payments Of Overtime

Russell v. Wells Fargo and Co.

This case was before the Court on the parties’ partial Cross Motions for Summary Judgment, regarding the methodology to be applied to determine damages where, as here, an employee is misclassified and paid solely their weekly salary, despite the fact they work overtime hours.  The Plaintiffs asserted that they were due the default time and a half (1.5x) under the FLSA, but the Defendant argued that Plaintiffs’ damages should be calculated under the exception to the default rule, referred to as the Fluctuating Workweek (FWW), whereby they would receive so-called half-time in lieu of time and a half.  In a detailed well-reasoned decision, the Court agreed with the Plaintiffs, and determined that Plaintiffs were due time and a half for all overtime hours worked, because Defendant could not meet several of the elements required for the application of the FWW.

The Court framed the following 3 issues for resolution on the Motions:

“1. Whether it is possible to have the required “clear mutual understanding” necessary to compute damages by the fluctuating workweek method (FWW method) in an exempt/non-exempt misclassification case;

2. Whether the concurrent payment of overtime pay is a required element to compute unpaid overtime by the FWW method, such that the FWW method of overtime calculation cannot be used in an exempt/non-exempt misclassification case; and

3. Whether damages (if any) on the FLSA overtime claim of an opt-in plaintiff who resides in California or Connecticut can be computed by the FWW method.”

Denying Defendant’s Motion seeking to apply the FWW, and granting Plaintiffs’ Motion to apply the time and a half default standard, for calculating Plaintiffs’ damages, the Court explained:

“Defendants argue that the FWW method can be used to calculate overtime pay retroactively for the purposes of determining damages in an exempt misclassification case. They assert that the FWW method is available when the employer and employee have a clear mutual understanding that a fixed salary will compensate the employee for all hours worked in a week, including those in excess of the FLSA’s forty-hour maximum, even if the “understanding” is based on the employer’s erroneous premise that the employee is exempt and thus not entitled to overtime pay. Defendants’ argument is untenable. The FWW method cannot be used to calculate overtime pay retroactively in a misclassification case.

As noted above, section 778.114 contains legal prerequisites, which employers must first satisfy to use the discounted overtime rate available through the FWW method. These prerequisites include (1) a clear mutual understanding that a fixed salary will be paid for fluctuating hours, apart from overtime premiums; and (2) the contemporaneous payment of overtime premiums.

When an employee is not exempt and is paid a fixed salary for fluctuating hours, the employer can satisfy these prerequisites. The employer and employee must have a clear mutual understanding of the fixed salary which, by law, must include an understanding that an overtime premium will be paid for any hours worked over the forty-hour-per-week maximum. Because both parties understand that overtime hours will be compensated, overtime pay would be provided contemporaneously.

When an employee is treated as exempt from being paid for overtime work, there is neither a clear mutual understanding that overtime will be paid nor a contemporaneous payment of overtime. Thus, when an employee is erroneously classified as exempt and illegally not being paid overtime, neither of these legal prerequisites for use of the FWW method is satisfied.

First, an effective clear mutual understanding is absent in misclassification cases. Defendants assert that an employer could have a clear mutual understanding with its employees that the employees would be paid a flat weekly rate for fluctuating hours, including those hours worked in excess of forty, and would not receive overtime pay. Defendants essentially argue that misclassified employees have implicitly agreed not to receive their FLSA entitlement to overtime pay. This would be illegal. Employees cannot agree to waive their right to overtime pay. See Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739-40 (1981).

Second, because the employees were erroneously classified as exempt, overtime compensation was not provided contemporaneously. Employers cannot satisfy this requirement, after having been found to violate section 207, by claiming that they had intended to pay overtime; such an after-the-fact provision of overtime compensation was rejected by the Supreme Court in Overnight Motor. See 316 U .S. at 581 (rejecting the employer’s attempt to use FWW method where there was “no provision for additional pay in the event the hours worked required minimum compensation greater than the fixed wage”). As stated above, 29 C.F.R. § 778.114(c) requires contemporaneous overtime pay: the FWW method cannot be used “where all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for nonovertime hours.” 29 C.F.R. § 778.114(c). In a misclassification case, because employees have not been paid overtime premiums, they are compensated for those hours worked more than forty at a rate not greater than the regular rate.

If Defendants’ position were adopted, an employer, after being held liable for FLSA violations, would be able unilaterally to choose to pay employees their unpaid overtime premium under the more employer-friendly of the two calculation methods. Given the remedial purpose of the FLSA, it would be incongruous to allow employees, who have been illegally deprived of overtime pay, to be shortchanged further by an employer who opts for the discount accommodation intended for a different situation.

In making its decision here, the Court is “mindful of the directive that the [FLSA] is to be liberally construed to apply to the furthest reaches consistent with Congressional direction.” Klem v. County of Santa Clara, 208 F.3d 1085, 1089 (9th Cir.2000) (quoting Biggs v. Wilson, 1 F.3d 1537, 1539 (9th Cir.1993)) (quotation marks and alterations omitted).

The Ninth Circuit has not directly addressed the question of whether the FWW method may be used retroactively to compensate employees who have been misclassified as exempt.FN4 In Oliver v.. Mercy Medical Center, the court concluded that the FWW method could not be used to calculate liquidated damages pursuant to 29 U.S .C. § 216, in part because the plaintiff-employee and the defendant-employer did not agree to a fixed salary covering all hours worked in a week. See 695 F.2d 379, 381 (9th Cir.1982). Oliver confirms that an employer and employee must, at the least, agree to a fixed salary for fluctuating hours. But its holding does not address whether the FWW method can be applied retrospectively to calculate overtime pay in a misclassification case. To the extent the holding is silent on this point, there is no binding Ninth Circuit precedent.

In Bailey v. County of Georgetown, 94 F.3d 152 (4th Cir.1996), non-exempt employees challenged their employer’s use of the FWW method to calculate their overtime pay. Instead of compensating overtime at the time-and-a-half rate, the employer opted for the FWW method and paid a one-half time premium based on fluctuating hours. Id. at 153-54. The employees claimed that this was improper, arguing that the FWW method could only apply if it was shown that they “clearly understood the manner in which their overtime pay was being calculated under the plan.” Id. at 154. The court disagreed. The Fourth Circuit determined that neither the plain language of the FLSA nor section 778.114 required an understanding on how overtime would be calculated; according to the court, all that section 778.114 requires is a clear mutual understanding of a fixed salary for fluctuating hours. Id. at 156-57. The court provided no additional analysis. And because the case involved non-exempt employees who were paid overtime, the court had no occasion to address whether contemporaneous overtime pay was a requirement.

Thus, Bailey did not address remedial payment to misclassified employees. Nonetheless, the First and Tenth Circuits applied its rule to misclassification cases. See, e.g., Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir.2008); Valerio v. Putnam Associates, 173 F.3d 35 (1st Cir.1999). In Clements and Valerio, the courts held that the FWW method can be used to calculate overtime pay retroactively. But Clements and Valerio merely cite Bailey. Neither provides a substantive analysis or explains why Bailey should apply in the misclassification context. See Clements, 530 F.3d at 1230; Valerio, 173 F.3d at 40. The Fourth Circuit similarly applied Bailey’s interpretation of section 778.114 in the misclassification context without analysis. See Roy v. County of Lexington, South Carolina, 141 F.3d 533, 547 (4th Cir.1998). In Blackmon v. Brookshire Grocery Company, the Fifth Circuit applied the FWW method in a misclassification case. 835 F.2d 1135, 1138 (5th Cir.1988). Blackmon, like the other cases above, offers no explanation. See 835 F.2d at 1138-39.

District courts outside these circuits have held that the FWW method cannot be used in misclassification cases. In Rainey v. American Forest & Paper Association, the court analyzed section 778.114 and found that its requirements include a clear mutual understanding that the employee is entitled to overtime compensation and contemporaneous payment of overtime premiums. 26 F.Supp.2d 82, 99-102 (D.D.C.1998); see also Hunter v. Sprint Corp., 453 F.Supp.2d 44, 58-62 (D.D.C.2006) (discussing application of the FWW method in a misclassification case). Other courts have rejected the use of the FWW method in misclassification cases because there is no contemporaneous payment of overtime compensation in such cases. See, e.g., Cowan v. Treetop Enters., 163 F.Supp.2d 930, 941 (M.D.Tenn.2001) (citing Rainey ); Scott v. OTS Inc., 2006 WL 870369, *12 (N.D.Ga.) (citing Rainey ).

Defendants reject many of the other cases cited by Plaintiffs because “they are not in the exemption misclassification context.” Defs.’ Reply at 12. However, Bailey, the case relied upon by most of the cases cited by Defendants, was likewise not in the exemption misclassification context. Thus, Defendants’ argument undermines their reliance on Valerio, Clements and Roy. Accordingly, the Court does not follow Bailey and its progeny: Bailey is not on point, and the cases that rely on it are not persuasive.

The Court is similarly unpersuaded by the DOL’s January 14 letter. Generally, courts must defer to the expertise of an agency in interpreting statutes that Congress charged to administer. See Cent. Ariz. Water Conservation Dist. v. EPA, 990 F.2d 1531, 1539-40 (9th Cir.1993) (citing Chevron U.S.A., Inc. v. Nat’l Res. Def. Council, 467 U.S. 837 (1984)). However, opinion letters do not warrant such deference; under Skidmore v. Swift, 323 U.S. 134, 140 (1944), they are to be accorded respect, not deference. An opinion letter is entitled to respect to the extent that it has the “power to persuade.” See Christensen v. Harris County, 529 U.S. 576, 587 (2000).

The opinion letter does not explain why the FWW method should be applied retrospectively, despite the plain language of the DOL’s long-standing interpretation of the FLSA contained in § 778.114. The letter relies solely upon Clements and Valerio to explain the DOL’s new position, and it goes no further to detail why the DOL was departing from its forty-year-old interpretation. Given the DOL’s significant change in course, this explanation is insufficient. Further, the DOL’s prior abandoned effort to revise § 778.114(a) through notice-and-comment rulemaking, and the timing of the opinion letter’s release-less than one week before a change in the administration-detract from its persuasiveness. Deferring to the letter “would permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation.” Christensen, 529 U.S. at 588. The DOL cannot use the letter to make a substantive regulatory change that would have the force of law. See id. at 587. The letter lacks thoroughness in its explanation and consistency with the DOL’s earlier FLSA interpretation. The Court is not persuaded by it. See id. (citing Skidmore, 323 U.S. at 140).

Thus, the background and policy of the FLSA, the Supreme Court’s decision in Overnight Motor and the DOL’s 1968 interpretive rules demonstrate that the FWW method cannot be used to calculate overtime pay retroactively for the purposes of determining damages under the FLSA in a misclassification case. Section 778.114, which the DOL promulgated in light of Overnight Motor, provides legal prerequisites that cannot be satisfied in a misclassification case.

CONCLUSION

For the foregoing reasons, the Court interprets § 778.114 to restrict application of the FWW method to calculate overtime pay to situations where (1) there is a clear mutual understanding between an employer and employee that the employee will be paid a fixed salary for fluctuating weekly hours but nonetheless receive overtime premiums and (2) overtime is compensated contemporaneously. The Court therefore DENIES Defendants’ motion for partial summary judgment and GRANTS Plaintiffs’ cross-motion for partial summary judgment on the first and second stipulated legal issues. Based upon these holdings, the Court need not decide the third stipulated issue. Accordingly, the Court DENIES as moot Defendants’ and Plaintiffs’ motions for partial summary judgment on the third stipulated legal issue.”

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