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2 Recent Decisions Apply Common Law Test for Successor Liability to FLSA Claims and Hold Successor Companies Liable
As previously discussed here, the law regarding successor liability in the context of FLSA claims continues to develop. In two recent decisions, the Seventh Circuit and a District Court from within the Sixth Circuit joined the growing majority of courts on the issue and held that the common law test, applicable to other types of employment law claims, also applies to determine whether a successor corporation is liable for the FLSA violations of its predecessor. Although the cases are fact-specific, they provide some insight into what factors courts will examine to decide whether it is equitable to hold a successor company liable.
M.D.Tenn.: DirecTV Has “Successor Liability” Where Sham Foreclosure Sale
Thompson v. Bruister and Associates, Inc.
In the first case, the court held that DirecTV was liable for the FLSA violations of its predecessor, a company exclusively engaged in the business of performing installations for DirecTV pursuant to sub-contracts with DirecTV, due to the circumstances under which DirecTV “purchased” the prior company. Significantly, following its default on its loan agreement with its bank, BAI had no place to turn for funding. As a result, DirecTV agreed to advance BAI funds to cover payroll and other operating expenses, because it was in DirecTV’s interest to keep its installer running. Shortly thereafter, the companies began discussing a deal whereby DirecTV would purchase BAI outright. However, after performing due diligence of the company via an extensive document review, DirecTV decided not to purchase BAI because it was “so far under water,” and had a “whole book of litigation.” Instead, DirecTV began reviewing other alternatives to acquiring the assets of BAI. Ultimately, representatives of BAI, DirecTV, and BAI’s bank met and tentatively arrived at a preliminary three-way agreement. Under the agreement, BAI would pay MB Financial $4 million; DirecTV would purchase the remaining loan obligations from MB Financial for $4.7 million, and, in exchange, MB Financial would assign DirecTV all of its rights as a secured creditor under the loan agreement. By this time, DirectTV had already advanced $5.5 million to BAI for payroll and other expenses. Ultimately the parties executed a formal agreement and DirecTV acquired BAI’s loan obligations. Thereafter, DirecTV scheduled a foreclosure sale for August 11, 2008. The purpose of the sale was to extinguish claims to BAI’s collateral. A $1 million figure was set as the minimum price for the collateral. No HSPs were invited to the sale, and no other parties bid at the sale. DirecTV purchased the collateral and, while no money exchanged hands, one million dollars was credited against the money BAI owed DirecTV. As of the time of the foreclosure sale, BAI was insolvent, and it remaned insolvent.
Following the foreclosure sale, DirecTV, Inc. conducted business out of BAI’s locations. Further, the team working on the BAI transition post-foreclosure included personnel from DirectTV and its subsidiary. Additionally DirecTV took over BAI’s facilities, including its warehouses, corporate offices, call centers, and storage units, and DirectTV operated out of those facilities. BAI provided DirecTV with the names and addresses of all its employees (as provided for under the HSPs), and the companies worked together to ensure a “smooth” and “seamless” transition for employees who were terminated by BAI and subsequently hired by DirecTV. Before the foreclosure sale, DirecTV sent notices of the impending change to all BAI employees (except those at Gadsden), including: (1) a new hire packet with employment application and payroll forms; (2) frequently asked questions about the transition; (3) an offer letter; and (4) retention bonus information. Additionally, DirectTV set up a live hotline to field BAI employees’ questions, and, during the first week of August 2008, sent human resources employees to each of the 15 primary BAI sites to conduct orientation sessions, respond to questions, help individuals complete forms, conduct new hire orientations, and oversee drug and background testing. Similarly, of the former 1,100 or so employees of BAI, 180 Connect hired 1,005 of them, including a number of management and upper level management employees, and more than 80 of the Plaintiffs in this action. BAI’s principle was hired as a consultant by DirectTV and paid $861,516.16 to serve as a consultant to help with the transition for the first year, working out the same office that he had used while serving as President of BAI. Most of BAI’s installers that were hired by DirecTV continued doing substantially the same jobs. DirecTV did not make any broad changes to jobs and functions, job titles, job responsibilities, or the technicians’ supervisors, and BAI’s hourly scale and current pay status and rates for the employees remained in place. DirecTV also honored vacation time and other benefits employees had accrued during their employment with BAI, and used former BAI employees’ hire dates with BAI as their effective hire date with DirecTV for tenure and benefits purposes.
As a result of the foreclosure sale, DirecTV acquired an interest in the collateral listed in Section 6.1 of the Loan and Security Agreement, including all of BAI’s property, such as accounts, inventory, goods (furniture and fixtures), software, securities, chattel paper, and insurance policies and proceeds. DirecTV was provided access to historical information on personal computers and servers used in BAI’s business, and migrated former BAI computers into its network. DirecTV also assumed BAI’s data and voice circuits and internet domains, and continued to use all circuit that were in place and working. After DirecTV formed a new internet domain for DirecTV Homes services, DTVHS.com, the former BAI locations were transferred to that new domain name.
By separate contract effective August 11, 2008, DirecTV assumed the leases for all field service personnel fleet vehicles, and continued to use the same installation equipment, including the tools and equipment stored on the trucks, set-top boxes, satellite dishes, and other equipment, as well as vehicles acquired from BAI following the foreclosure. BAI also assigned DirecTV various service contracts, including a contract with Total Design Solutions for inventory and personnel services, a contract with ONTOP Systems, Inc. for a Summit financial application, and a contract with Prime Alert for security monitoring. BAI also assigned to DirecTV its rights under all insurance policies for which DirecTV was named as an additional insured in accordance with the terms of the Home Service Provider Agreements.
Significantly, following the foreclosure sale, there was no interruption of the installation and repair services to DirecTV customers. As before, work was assigned to the technicians through the Siebel system, which DirecTV used to process customer accounts and assign work. DirecTV was also provided with access to BAI’s historical customer information.
After discussing the history and reasoning for successor liability in employment law cases, the court laid out the factors:
“[T]he appropriateness of successor liability depends on whether the imposition of such liability would be equitable.” Cobb v. Contract Transp., Inc., 452 F.3d 543, 553–54 (6th Cir.2006). “Courts that have considered the successorship question in a labor context have found a multiplicity of factors to be relevant. These include: 1) whether the successor company had notice of the charge, 2) the ability of the predecessor to provide relief, 3) whether there has been a substantial continuity of business operations, 4) whether the new employer uses the same plant, 5) whether he uses the same or substantially the same work force, 6) whether he uses the same or substantially the same supervisory personnel, 7) whether the same jobs exist under substantially the same working conditions, 8) whether he uses the same machinery, equipment and methods of production and 9) whether he produces the same product.” MacMillan, 503 F.2d at 1094.
Applying these factors, the court concluded, “[c]onsidering those factors, as well as the overall equities, the Court is persuaded by the evidence which has been presented that DirectTV, as a matter of law, is liable as a successor employer to BAI.”
Click Thompson v. Bruister and Associates, Inc. to read the entire Memorandum opinion on the parties’ cross-motions for summary judgment.
7th Cir.: Common Law Successor Liability Test Applicable; Successor Company Liable
Teed v. Thomas & Betts Power Solutions, L.L.C.
Perhaps of more significance, the 7th Circuit, only the second circuit court to take up the issue recently held the common law test for successor liability to FLSA claims as well. In this case, the court summarized the salient facts as follows:
Packard provided, and continues under its new ownership by Thomas & Betts to provide, maintenance and emergency technical services for equipment designed to protect computers and other electrical devices from being damaged by power outages. All of Packard’s stock was acquired in 2006 by Bray, though Packard retained its name and corporate identity and continued operating as a stand-alone entity. The workers’ FLSA suit was filed two years later.
Several months after it was filed, Bray defaulted on a $60 million secured loan that it had obtained from the Canadian Imperial Bank of Commerce and that Packard, Bray’s subsidiary, had guaranteed. To pay as much of the debt to the bank as it could, Bray assigned its assets—including its stock in Packard, which was its principal asset—to an affiliate of the bank. The assets were placed in a receivership under Wisconsin law and auctioned off, with the proceeds going to the bank. Thomas & Betts was the high bidder at the auction, paying approximately $22 million for Packard’s assets. One condition specified in the transfer of the assets to Thomas & Betts pursuant to the auction was that the transfer be “free and clear of all Liabilities” that the buyer had not assumed, and a related but more specific condition was that Thomas & Betts would not assume any of the liabilities that Packard might incur in the FLSA litigation. After the transfer, Thomas & Betts continued to operate Packard much as Bray had done (and under the same name, as we noted), and indeed offered employment to most of Packard’s employees.
Noting that Wisconsin state law, if applicable, would serve to bar successor liability in the case, the court examined the equity of applying successor liability under federal common law instead. Holding the federal common law test applicable, the court reasoned:
The idea behind having a distinct federal standard applicable to federal labor and employment statutes is that these statutes are intended either to foster labor peace, as in the National Labor Relations Act, or to protect workers’ rights, as in Title VII, and that in either type of case the imposition of successor liability will often be necessary to achieve the statutory goals because the workers will often be unable to head off a corporate sale by their employer aimed at extinguishing the employer’s liability to them. This logic extends to suits to enforce the Fair Labor Standards Act. “The FLSA was passed to protect workers’ standards of living through the regulation of working conditions. 29 U.S.C. § 202. That fundamental purpose is as fully deserving of protection as the labor peace, anti-discrimination, and worker security policies underlying the NLRA, Title VII, 42 U.S.C. § 1981, ERISA, and MPPAA.” Steinbach v. Hubbard, 51 F.3d 843, 845 (9th Cir.1995). In the absence of successor liability, a violator of the Act could escape liability, or at least make relief much more difficult to obtain, by selling its assets without an assumption of liabilities by the buyer (for such an assumption would reduce the purchase price by imposing a cost on the buyer) and then dissolving. And although it can be argued that imposing successor liability in such a case impedes the operation of the market in companies by increasing the cost to the buyer of a company that may have violated the FLSA, it’s not a strong argument. The successor will have been compensated for bearing the liabilities by paying less for the assets it’s buying; it will have paid less *767 because the net value of the assets will have been diminished by the associated liabilities.
There are better arguments against having a federal standard for labor and employment cases, besides the general objections to multifactor tests that we noted earlier: applying a judge-made standard amounts to judicial amendment of the statutes to which it’s applied by adding a remedy that Congress has not authorized; implied remedies (that is, remedies added by judges to the remedies specified in statutes) have become disfavored; and borrowing state common law, especially a common law principle uniform across the states, to fill gaps in federal statutes is an attractive alternative to creating federal common law, an alternative the Supreme Court adopted for example in United States v. Bestfoods, 524 U.S. 51, 62–64, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998), in regard to the liability of a corporation under the Superfund law for a subsidiary’s violations. But Thomas & Betts does not ask us to jettison the federal standard; it just asks us not to “extend” it to the Fair Labor Standards Act. Yet none of the concerns that we’ve just listed regarding the filling of holes in a federal statute with federal rather than state common law looms larger with respect to the Fair Labor Standards Act than with respect to any other federal labor or employment statute. The issue is not extension but exclusion.
Addressing and rejecting the defendants’ suggestion that enforcing successor liability against the purchaser of an insolvent company would discourage the insolvent company from selling itself (or the successor from making such a purchase), the court explained:
there is no good reason to reject successor liability in this case—the default rule in suits to enforce federal labor or employment laws. (For remember that the successor’s disclaimer of liability is not a good reason in such a case.) Packard was a profitable company. It went on the auction block not because it was insolvent but because it was the guarantor of its parent’s bank loan and the parent defaulted. Had Packard been sold before Bray got into trouble, imposition of successor liability would have been unexceptionable; Bray could have found a buyer for Packard willing to pay a good price even if the buyer had to assume the company’s FLSA liabilities. Those liabilities were modest, after all. Remember that the parties have agreed to settle the workers’ suit (should we affirm the district court) for only about $500,000, though doubtless there was initial uncertainty as to what the amount of a judgment or settlement would be; in addition, Thomas & Betts incurred attorneys’ fees to defend against the suit. Nevertheless had Packard been sold before Bray got into trouble, imposition of successor liability would have been unexceptionable, and we have not been given an adequate reason why its having been sold afterward should change the result.
Click Teed v. Thomas & Betts Power Solutions, L.L.C. to read the court’s entire Decision.
7th Cir.: Named-Plaintiffs Who Settled Their Individual Claims Following Decertification Retained Standing to Appeal Decertification Based on Possibility of Incentive Awards
Espenscheid v. DirectSat USA, LLC
This case presented the relatively novel issue of whether the named-plaintiffs in a decertified class/collective action retain standing to appeal decertification once they have settled their individual claims. Noting that it was a case of first impression, the Seventh Circuit held that individual employees had sufficient interest for standing to appeal decertification, in large part because they retained a financial stake inasmuch as the stood to receive incentive awards if the class/collective action was ultimately successful.
Briefly discussing the relevant procedural history and facts the court explained:
The district judge certified several classes but later decertified all of them, leaving the case to proceed as individual lawsuits by the three plaintiffs, who then settled, and the suits were dismissed. The settlement reserved the plaintiffs’ right to appeal the decertification, however, and they appealed. The defendants then moved to dismiss the appeal on the ground that the plaintiffs had suffered no injury as a result of the denial of certification and so the federal judiciary has lost jurisdiction of the case.
The court distinguished the case from one in which the defendant seeks to moot or “pick off” a class/collective by making an offer of judgment that exceeds the named-plaintiff’s damages and reasoned that the named-plaintiffs retained standing by virtue of prospective incentive awards, if the case were to proceed as a class/collective rather than individual basis:
One might think that because the plaintiffs settled, the only possible injury from denial of certification would be to the unnamed members of the proposed classes; and if therefore the plaintiffs have no stake in the continuation of the suit, they indeed lack standing to appeal from the denial of certification. Premium Plus Partners, L.P. v. Goldman, Sachs & Co., 648 F.3d 533, 534–38 (7th Cir.2011); Pettrey v. Enterprise Title Agency, Inc., 584 F.3d 701, 705–07 (6th Cir.2009). This is not a case in which a defendant manufactures mootness in order to prevent a class action from going forward, as by making an offer of judgment that exceeds any plausible estimate of the harm to the named plaintiffs and so extinguishes their stake in the litigation. As we explained in Primax Recoveries, Inc. v. Sevilla, 324 F.3d 544, 546–47 (7th Cir.2003) (citations omitted), “the mooting of the named plaintiff’s claim in a class action by the defendant’s satisfying the claim does not moot the action so long as the case has been certified as a class action, or … so long as a motion for class certification has been made and not ruled on, unless … the movant has been dilatory. Otherwise the defendant could delay the action indefinitely by paying off each class representative in succession.”
But the plaintiffs point us to a provision of the settlement agreement which states that they’re seeking an incentive reward (also known as an “enhancement fee”) for their services as the class representatives. In re Synthroid Marketing Litigation, 264 F.3d 712, 722 (7th Cir.2001); In re Continental Illinois Securities Litigation, 962 F.2d 566, 571–72 (7th Cir.1992); In re United States Bancorp Litigation, 291 F.3d 1035, 1038 (8th Cir.2002); 2 Joseph M. McLaughlin, McLaughlin on Class Actions § 6:27, pp. 137–42 (6th ed.2010). The reward is contingent on certification of the class, and the plaintiffs argue that the prospect of such an award gives them a tangible financial stake in getting the denial of class certification revoked and so entitles them to appeal that denial.
After an extensive discussion of incentive payments to class representatives, the Seventh Circuit adopted the plaintiffs reasoning. Additionally the court noted that judicial economies could never be preserved if the named-plaintiffs forfeited standing when they settled their individual claims, because another named-plaintiff would simply come forward and start the entire process anew, the court held that the named-plaintiffs here retained their standing to pursue class/collective issues, notwithstanding the settlement of their individual claims. Thus, the court denied the defendants motion to dismiss.
Click Espenscheid v. DirectSat USA, LLC to read the entire Order denying Defendants’ Motion to Dismiss.
Schaefer-LaRose v. Eli Lilly & Co.
This case was before the Seventh Circuit on the consolidated appeals of two different summary judgment orders in two different cases. In one case, the trial court had granted the plaintiffs’ motion for summary judgment holding that, as a matter of law, pharmaceutical reps were not administratively exempt employees. In the other case, the trial court held that the pharmaceutical reps were subject to the administrative exemption, and granted the defendant’s motion for summary judgment. Resolving this issue, at least in the Seventh Circuit, the court agreed with the latter and held that pharma reps do in fact meet both of the duties prongs of the administrative exemption. In so doing, the court joined the Third Circuit and furthered the split with the Second Circuit which had previously held that pharma reps with virtually identical duties are not subject to the administrative exemption.
Initially, the court examined the first duties prong of the administrative exemption and held that the reps’ primary duty as pharmaceutical sales representatives was performance of office work directly related to their employers’ general business operations. In so doing, the Seventh Circuit seems to have taken a particularly broad view of the first prong, in line with other recent Seventh Circuit authority, but in contrast to other circuits such as the Second and Eleventh, which typically require that an administrative employee “run of service” the employer’s business or at least some aspect of it in order to fall under the exemption.
In holding that they exercised the requisite independent judgment and discretion, the court cited the arguments raised by the defendants that:
the pharmaceutical companies assert that the representatives had a host of core duties committed to their discretion, including determining how best to gain access to particular physicians and managing their limited discretionary budgets. Their primary argument, however, focuses on the discretion that an individual representative must employ in the course of an individual sales call with a physician to communicate effectively his employer’s core message to the specific audience and to address a physician’s particular concerns.
As in other recent cases regarding the administrative exemption, the Seventh Circuit seems to have lowered the bar for the level of discretion that an employee must exercise in order to qualify for the exemption. Whereas § 541.202(b) explains:
The phrase “discretion and independent judgment” must be applied in the light of all the facts involved in the particular employment situation in which the question arises. Factors to consider 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.
the court seemed to simply conclude that the plaintiffs’ duties were sufficient because they exercised some level of discretion, a fact that the parties did not dispute. Discussing the discretion exercised by the plaintiffs, the court reasoned:
Beyond these physician interactions, which we consider to be the critical function of the job and the place in which discretion is most evident, the representatives’ other duties related to the actual call on the physician also manifest a substantial measure of judgment. Although representatives are given specific call plans identifying the physicians to be visited and the degree of frequency or priority category for each physician, several representatives testified that they apply a measure of strategic analysis to their work, choosing to see physicians not on their call plans or non-physicians who may influence prescribing patterns. See supra note 14 (describing discretion applied to call plans). They work collaboratively with one another, proposing comprehensive visit plans for the territories and checking in regularly by phone to keep each other abreast of developments in particular visits with physicians. Representatives also spend the vast majority of their time entirely unsupervised. Although they keep extensive records, through which management can and does monitor their progress, neither the fact that management reviews their work nor that they are required to keep such records detracts from the discretion they exercise in the core of their workday.
The court also rejected the plaintiffs’ contention that the plaintiffs’ principal duties involved the application of skill, rather than the judgment required for application of the exemption:
Finally, the plaintiffs and the Secretary briefly contend that the work of the representatives principally involves the application of skill, rather than judgment. Although they are correct that the regulations draw this distinction and caution that skill is insufficient to warrant the exemption, skill and judgment are not mutually exclusive. The records clearly demonstrate that the representatives receive extensive skills training, particularly on sales techniques. They most certainly employ this skill, and, indeed, many others in the course of their daily duties. Nevertheless, applying these skills entails a great deal of judgment. The job requires far more than “applying well-established techniques, procedures or specific standards described in manuals.”
With the issue of whether pharmaceutical reps are subject to the outside sales exemption notwithstanding the fact that they technically do not make such sales currently before the Supreme Court, the conflict between the circuits may or may not continue to be significant in a few weeks time. Regardless of the effects of this decision on the ongoing pharma rep overtime battles, it is becoming more and more clear that the Seventh Circuit is the place employers want to be if they are arguing that any type of employee is administratively exempt.
Click Schaefer-LaRose v. Eli Lilly & Co. to read the entire Order.
7th Cir.: Collective Action FLSA Claims May Proceed In A “Hybrid Action” With State Law Rule 23 Claims
Ervin v. OS Restaurant Services, Inc.
In this appeal the Seventh Circuit considered “whether employees who institute a collective action against their employer under the terms of the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. § 201 et seq. (“FLSA”), may at the same time litigate supplemental state-law claims as a class action certified according to Federal Rule of Civil Procedure 23(b)(3). The district court thought not; it rejected the plaintiffs’ effort to proceed as a class under Rule 23(b)(3) on the ground that there is a “clear incompatibility” between the FLSA proceeding and the proposed class action.” Answering this question in the affirmative (finding that so-called “hybrid actions” are permissible) the Seventh Circuit reversed the lower court’s decision holding otherwise and remanded the case for further findings in accordance with its opinion.
The court explained:
“The problem, as the court saw it, stems from the fact that the FLSA requires potential plaintiffs to opt in to participate in an action, while the plaintiffs in a Rule 23(b)(3) class action are included in the case unless they opt out. Trying to use both systems side-by-side would be rife with complications, it concluded; more formally, it held that one could never find the superiority requirement of Rule 23(b)(3) satisfied if the case also involved an FLSA collective action.
The question whether these two distinct types of aggregate litigation may co-exist within one case has divided the trial courts in this circuit and elsewhere. In the Northern District of Illinois alone, compare Barragan v. Evanger’s Dog and Cat Food Co., 259 F .R.D. 330 (N.D.Ill.2009), and Ladegaard v. Hard Rock Concrete Cutters, Inc., 2000 WL 1774091 (N.D.Ill.2000), with Riddle v. National Sec. Agency, Inc., 2007 WL 2746597 (N.D.Ill.2007), McClain v. Leona’s Pizzeria, Inc., 222 F.R.D. 574 (N.D.Ill.2004), and Rodriguez v. The Texan, Inc., 2001 WL 1829490 (N.D.Ill.2001). As far as we can tell, no court of appeals has yet had occasion to address it. But see Wang v. Chinese Daily News, Inc., 623 F.3d 743, 753-55, 760-62 (9th Cir.2010) (holding that a district court properly certified a Rule 23(b)(2) class along with an FLSA collective action and properly exercised supplemental jurisdiction over the state-law claim); Lindsay v. Government Employees Ins. Co., 448 F.3d 416, 420-25 (D.C.Cir.2006) (concluding, in the context of an appeal under Rule 23(f), that the FLSA does not necessarily preclude an exercise of supplemental jurisdiction over related state-law claims); De Asencio v. Tyson Foods, Inc., 342 F.3d 301, 307-12 (3d Cir.2003) (concluding that a district court presiding over an FLSA collective action should not have exercised supplemental jurisdiction over parallel state-law claims).
We conclude that there is no categorical rule against certifying a Rule 23(b)(3) state-law class action in a proceeding that also includes a collective action brought under the FLSA. (We refer to these as “combined” actions, rather than “hybrid” actions, to avoid confusion with other uses of the term “hybrid”-e.g., for cases certified under more than one subsection of Rule 23(b).) In combined actions, the question whether a class should be certified under Rule 23(b)(3) will turn-as it always does-on the application of the criteria set forth in the rule; there is no insurmountable tension between the FLSA and Rule 23(b)(3). Nothing in the text of the FLSA or the procedures established by the statute suggests either that the FLSA was intended generally to oust other ordinary procedures used in federal court or that class actions in particular could not be combined with an FLSA proceeding. We reverse the district court’s class-certification determination and remand for further consideration in accordance with this opinion.”
Click Ervin v. OS Restaurant Services, Inc. to read the entire opinion.
The DOL had submitted an Amicus Brief in support of the Plaintiffs in this case. Click DOL Amicus Brief to read the Amicus Brief the US DOL filed in support of the plaintiff’s in this case.
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.
7th Cir.: District Court Erred In Dismissing FLSA Claims; Court Was Required To Consider Most Efficient Way To Adjudicate Claims and Subclaims; Plaintiffs Have Right To Pursue Claims Individually
Alvarez v. City of Chicago
In this case a collective action had previously been consolidated with a multiple-Plaintiff non-collective action. Each of the Plaintiffs presented a variety of claims and between the hundreds of plaintiffs there were 10 different types of claims. The Court below granted the Defendant’s motion for summary judgment against all plaintiffs, reasoning that the plaintiffs were not similarly situated because each plaintiff raised a different combination of the ten subclaims, such that the plaintiffs could not be readily divided into homogenous subgroups. The district court also noted that arbitration pursuant to the collective bargaining agreement, while not mandatory, might be a more efficient way to resolve the paramedics’ claims. The court did not reach the merits of the ten subclaims raised by the plaintiffs. Instead, it dismissed the claims of all plaintiffs, without prejudice, and directed them to pursue arbitration. The Seventh Circuit reversed however, noting that, the Court failed to consider the efficiency of adjudicating the claims as a collective action, and, that the named Plaintiffs in each of the consolidated cases had the right to proceed with their individual claims, regardless of whether they were similarly situated to the other class members.
The Court reasoned:
“The Fair Labor Standards Act gives employees the right to bring their FLSA claims through a “collective action” on behalf of themselves and other “similarly situated” employees. 29 U.S.C. § 216(b) (2006). A collective action is similar to, but distinct from, the typical class action brought pursuant to Fed.R.Civ.P. 23. The principle difference is that plaintiffs who wish to be included in a collective action must affirmatively opt-in to the suit by filing a written consent with the court, while the typical class action includes all potential plaintiffs that meet the class definition and do not opt-out.
The City-and the district court’s opinion-relies heavily on our decision in Jonites v. Exelon Corp., 522 F.3d 721 (7th Cir.2008). In Jonites, we affirmed the dismissal of a collective action brought on behalf of more than a thousand lineman and other hourly workers employed by Commonwealth Edison. The Jonites plaintiffs alleged that two types of purportedly off-duty time were really compensable work. The first involved Com Ed’s “call-out” policy, which required off-duty workers to respond to at least 35% of the calls from their employer for additional manpower on an emergency basis. The frequency of these call-outs varied widely among workers; some were called as often as once every five and a half days on average, and others no more than once a month. The employees took the position that they were entitled to be paid for “some of the time” during which they were subject to call, with the amount to be determined by the trier of fact. The second challenge was to the lunch policy, which required workers at job sites to remain awake and be alert for trespassing and the theft of tools. However, only part of the class worked the daytime shift, to which the lunch policy applied. We held that as to both of these claims, the purported class was “hopelessly heterogenous” because liability would require significant individual fact-finding and many of the workers had no conceivable claim at all. Id. at 725-26. We further held that the individual plaintiffs must either file individual suits, create homogenous classes, or ask the union to file grievance proceedings under the collective bargaining agreement. Id. at 726. Because the purported class here is made up of plaintiffs who each have a different combination of subclaims, defendants argue that it is similarly heterogenous and was properly dismissed in favor of arbitration.
Appellants argue that this case is different from Jonites because the plaintiffs here appear to be similarly situated with regard to individual subclaims, but are heterogenous only because there are several different combinations of those subclaims. For example, whether any given paramedic is entitled to recover on the uniform pay theory depends on the legal question of whether such pay should have been included in the base rate, and the simple factual question of whether the particular paramedic received uniform pay. Instead of dismissing their claims as heterogenous, plaintiffs argue, the district court should have allowed them to split their claims into homogenous subclasses. See, e.g., Fravel v. County of Lake, No. 2:07-cv-253, 2008 WL 2704744 (N.D.Ind. July 7, 2008) (allowing plaintiffs to proceed collectively and grouping the plaintiffs into four distinct subclasses depending on which theory of liability applied to them). Plaintiffs suggest that here, as in Fravel, “[r]esolving common questions as a class, even through the additional mechanism of sub-classes, remains inherently more efficient” than splitting the action into four separate collective actions or allowing individual claims by each plaintiff. Id. at *3.
The district court appeared to agree with the plaintiffs’ characterization of their subclaims, noting that the City’s liability to any particular plaintiff on any given subclaim turns only upon a single uniform policy and whether that policy impacted that particular plaintiff. However, the district court refused to adopt the Fravel approach, concluding that the number of subclaims made the plaintiffs “hopelessly heterogenous” and that arbitration would be more efficient.
A district court has wide discretion to manage collective actions. See Hoffmann-La Roche v. Sperling, 493 U.S. 165, 171 (1989). However, it appears that here the district court may have mistakenly read Jonites to forbid it from adopting a subclaim approach merely because the variety of subclaims renders the class “heterogenous.” The problem with the Jonites class, however, was not that the plaintiffs had different subclaims, but rather that determining whether any given plaintiff had a viable claim depended on a detailed, fact-specific inquiry, and many plaintiffs lacked any conceivably viable claim altogether. Jonites, 522 F.3d at 723, 725-26; see also Mooney v. Aramco Services Co., 54 F.3d 1207, 1214-15 (5th Cir.1995), overruled on other grounds by Desert Palace, Inc. v. Costa, 539 U.S. 90 (2003) (affirming decertification of collective action where employees who brought ADEA claim were subject to “vastly disparate employment situations” and defense was likely to center on purported reasonable factors other than age specific to each employee). If common questions predominate, the plaintiffs may be similarly situated even though the recovery of any given plaintiff may be determined by only a subset of those common questions.
Similarly, the district court mistakenly compared the efficiency of proceeding through subclaims only to the perceived efficiency of arbitration. Plaintiffs have the right to proceed individually and may be able to form more tailored classes. See Jonites, 522 F.3d at 725 (noting that a collective bargaining agreement cannot preempt or waive a worker’s right to a judicial remedy for FLSA violations). Thus, if it appears plaintiffs are prepared to proceed individually or through separate classes, the district court must consider whether these other mechanisms for judicial resolution of their claims are more or less efficient than a collective action comprised of various subclaims. Cf. Fravel, supra. In Jonites, the circumstances suggested that plaintiffs had “no stomach for proceeding case by case.” Id. at 726. Here, the twelve Caraballo plaintiffs filed their complaint as individuals and moved for summary judgment as individuals. Indeed, there is nothing apparent from the record to indicate that the fifty-four named plaintiffs in Alvarez were unwilling to proceed individually. Yet the district court dismissed their claims in favor of arbitration without considering whether it was better to address sixty-five individual claims or one collective action comprised of ten subclaims.
Finally, the district court erred when it dismissed the claims of the named plaintiffs. When a collective action is decertified, it reverts to one or more individual actions on behalf of the named plaintiffs. See Hipp v. Liberty Nat’l Life Ins. Co., 252 F.3d 1208, 1218 (11th Cir.2001) (citing Mooney, 54 F.3d at 1213-14); see also Fox v. Tyson Foods, Inc., 519 F.3d 1298, 1301 (11th Cir .2008) (affirming decertification of an FLSA collective action, dismissal of the opt-in plaintiffs, and severance of each of the named plaintiffs into separate individual actions). Defendants do not argue that arbitration under the collective bargaining agreement preempts litigating these issues in federal court. Plaintiffs are entitled, at minimum, to pursue their claims individually. Whether they are permitted to do so in one action or several is committed to the sound discretion of the district court, but misjoinder of parties is never a ground for dismissing an action. See Fed.R.Civ.P. 21. We therefore reverse the district court’s dismissal of the named plaintiffs’ claims in both the Alvarez and Caraballo actions.
Sifting through the subclaims of each of the myriad plaintiffs is an unenviable task. But plaintiffs are nonetheless entitled to their day in court. Moreover, it appears that here, common questions predominate with regard to each theory of liability. The parties have already filed cross-motions for summary judgment on the merits of these common questions. After the district court determines the validity of these subclaims, calculation of each plaintiff’s award (if any) will be largely mechanical. On remand, given that the claims of the named plaintiffs will still be before it, the district court should consider whether a collective action might be the most efficient judicial resolution of this matter after all.”
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