Top Wage and Hour Developments US Employers Need to Know

1.  9th Circuit Follows Supreme Court Ruling on Pharmaceutical Sales Representatives

As reported last quarter, in June, 2012, the U.S. Supreme Court ruled in Christopher v. SmithKline Beecham that pharmaceutical sales representatives qualify as exempt from federal overtime laws under the FLSA's outside salesperson exemption. In the aftermath of this ruling, in D’Este v. Bayer Corp., the Ninth Circuit likewise found that pharmaceutical sales representatives qualified for California’s administrative exemption.

By way of background, in 2009 the Ninth Circuit certified questions to the California Supreme Court in D'Este, seeking its opinion on whether pharmaceutical sales representatives are exempt from California state law overtime requirements under either the outside salesperson exemption or the administrative exemption. The California Supreme Court denied the request. On July 23, 2012, the Ninth Circuit issued an unpublished opinion in D'Este and two consolidated cases, Barnick v. Wyeth and Menes v. Roche, granting summary judgment to the employers on the grounds that the employees qualified for California's administrative exemption. The court held that the position was both "qualitatively" and "quantitatively" administrative insofar as the sales reps were involved in representing their companies and promoting sales of prescription drugs within their assigned territories, and that such duties were more than mere routine clerical duties. Additionally, the court found that the sales reps customarily and regularly exercised discretion and independent judgment as part of their job duties by applying the training they received and tailoring their messages to individual doctors. The Ninth Circuit did not address whether the employees also qualified for California's outside salesperson exemption.

Planning Tip:     Courts continue to address exemption issues, especially with respect to administrative and sales employees. Exemption challenges in this area are anticipated to be the next wave of exemption class actions. Employers should conduct privileged audits of the exempt classifications of their sales force under both federal and state law. 

2.  Third Circuit Sets New Standard for Review of FLSA Collective Actions

On August 9, 2012, in Zavala v. Walmart Stores, Inc., the Third Circuit Court of Appeals addressed the level of proof a plaintiff must show before being permitted to take an FLSA case to trial as a collective action on behalf of other "similarly situated" employees. The court's decision may make it more difficult for plaintiffs to obtain final collective action certification under the FLSA.

In Zavala, workers - illegal immigrants who took jobs with contractors and subcontractors Wal-Mart engaged to clean its stores - filed a lawsuit seeking compensation for unpaid overtime and certification of a collective action under the FLSA, civil damages under RICO, and damages for false imprisonment. Over the course of eight years and several opinions, the district court rejected final certification of an FLSA class, rejected the RICO claim, and rejected the false imprisonment claim on the merits. On appeal, the Third Circuit addressed, among other things, the appropriateness of the district court's decision to deny collective-action status.

The Third Circuit first considered the various standards applied by courts on final certification to determine whether proposed collective plaintiffs are "similarly situated." 29 U.S.C. § 216(b). The court recognized that it has approved the use of the "ad hoc approach" that "considers all the relevant factors and makes a factual determination on a case-by-case basis." According to the court, relevant factors include: whether the plaintiffs are employed in the same corporate department, division, and location; whether they advance similar claims; whether they seek substantially the same form of relief; and whether they have similar salaries and circumstances of employment. Significantly, the court noted that the burden is on the plaintiffs to establish the similarly situated requirement.

The court then considered the level of proof plaintiffs must satisfy to clear the second-stage hurdle. According to the Third Circuit, plaintiffs must establish the factors by a preponderance of the evidence. In this regard, the court noted that "[b]eing similarly situated does not mean simply sharing a common status, like being an illegal immigrant. Rather, it means that one is subjected to some common employer practice that, if proved, would help demonstrate a violation of the FLSA." Applying this standard, the Third Circuit held that the district court properly denied collective-action certification. While plaintiffs' allegation of a common scheme to hire and underpay illegal immigrant workers provided some common link among the proposed class, the Third Circuit determined that these links were "of minimal utility in streamlining resolution of these cases. Liability and damages still need to be individually proven."

The Third Circuit agreed with the district court that the differences among the plaintiffs were too many ? the putative class members worked in 180 different stores in 33 states throughout the country and for 70 different contractors and subcontractors; the individuals worked varying hours and for different wages depending on the contractor; and different defenses might be available to Wal-Mart with respect to each proposed plaintiff.

Bottom Line:      The Third Circuit's decision articulating the legal standard to be applied for final certification of an FLSA case as a collective action has significant implications in that circuit. First, defendant employers will have a defensive advantage now that the burden of proof is squarely on the plaintiffs. Second, with the appellate standard of review of the "similarly situated" determination now set as "clearly erroneous" - a difficult standard to meet on appeal - the focus of the battle between plaintiffs and defendants on collective action certification will be on marshalling appropriate factual evidence to convince the district court judge (the "finder of fact" on this particular issue) that the opt-in plaintiffs are, or are not, similarly situated to the named plaintiff(s).

3.  Restaurant Associations Seek to Overturn DOL Tip Pooling Rule

On July 12, 2012, several restaurant associations filed suit in Oregon federal court (Oregon Rest. & Lodging Ass'n v. Solis) in an attempt to overturn the DOL's regulation interpreting the FLSA to prohibit back-of-the-house employees from sharing in tips when the employer does not take a tip credit against minimum wage. The National Restaurant Association, along with restaurant associations in Oregon, Washington, and Alaska, allege that the agency's interpretation is inconsistent with the plain language of the FLSA and the Ninth Circuit's 2010 decision in Cumbie v. Woody Woo, Inc. In Woody Woo, the Ninth Circuit upheld an Oregon restaurant's tip pool arrangement that required servers to share tips with back-of-the-house employees. The court reasoned that this arrangement was valid because all employees earned the statutory minimum wage in addition to their share of tips. According to the court, "nothing in the text of the FLSA … restricts … tip pooling arrangements when no tip credit is taken."

In a 2011 final rule, the DOL noted its disagreement with Woody Woo and stated that tips are the employee's property regardless of whether the employer takes a tip credit. The rule made clear that tip pools are valid only if they include employees who customarily and regularly receive tips, which would typically exclude "back-of-the-house" kitchen workers.

Planning Tip:     We will continue to monitor this challenge to the DOL's rule. In the meantime, employers, including those in the Ninth Circuit, can minimize FLSA risk by adhering to the DOL regulations and excluding back-of-the-house employees from any tip pooling arrangement.

4.  Fifth Circuit Upholds Private Settlement of FLSA Claim

For decades, federal courts consistently have held that FLSA wage and hour disputes may not be settled privately without approval from either the DOL or a federal district court. However, on July 24, 2012, in Martin v. Spring Break '83 Prods., LLC, the Fifth Circuit held that parties may privately settle an FLSA claim involving a bona fide dispute as to liability without such approval. In Martin, several film technicians, represented by a union for the filming of Spring Break '83, claimed that they were not paid for all work performed. The union entered into negotiations and a settlement on behalf of those technicians without obtaining approval from the DOL or a court.

The Fifth Circuit held that "the payment offered to and accepted by the [technicians], pursuant to the Settlement Agreement, is an enforceable resolution of those FLSA claims predicated on a bona fide dispute about time worked and not as a compromise of guaranteed FLSA substantive rights themselves." In reaching its decision, the court distinguished the only other circuit court decision on this issue, the Eleventh Circuit's decision in Lynn's Food Stores, Inc. v. United States. There, the plaintiffs had little knowledge of their rights or the defendant's liability, were not represented by counsel, and some could not speak or read English. In contrast, the Fifth Circuit noted that the Martin plaintiffs were represented by counsel who had filed a lawsuit specifically seeking overtime pay for the plaintiffs before the settlement agreement was executed, and thus, the settlement constituted a valid release.

The Supreme Court denied a petition for certionari review on December 10, 2012.

Planning Tip:     The Fifth Circuit is the only appellate court to hold that a private settlement unapproved by either the DOL or federal district court can be enforceable under certain circumstances. While the decision is welcome news for employers in the Fifth Circuit, employers should proceed cautiously. It still is advisable for employers in other jurisdictions to seek DOL or court approval for FLSA settlements to ensure a valid release. We will continue to monitor Martin and bring you news of other developments that may impact the ability of employers to enter into private FLSA settlements.

5.  No Private Right of Action under FLSA for Failure to Provide Area to Express Breast Milk

On July 19, 2012, in Salz v. Casey's Mktg. Co., a federal district court in Iowa held that while the Patient Protection and Affordable Care Act amended the FLSA to require employers to provide reasonable break time and a secure and private space for employees to express breast milk, it did not create a private right of action against an employer who violates these requirements. According to the court, the lactation rights added to the FLSA do not require an employer to pay for an employee's time spent expressing milk, so there are no "unpaid wages" at issue and FLSA Section 216(b) does not provide a remedy. Significantly, however, the court refused to dismiss plaintiff's claim that she was constructively discharged for complaining about the employer's failure to accommodate her request. The court held that the FLSA prohibits employer retaliation against an employee who files a complaint under the wage and hour law and that this protection extends to complaints concerning the new lactation rights.

Warning:           With retaliation claims still permissible, employers should carefully consider contemplated adverse employment actions against, and thoroughly investigate complaints of retaliation by, employees seeking to exercise these rights.

Other Federal Trends

Use of Unpaid Interns – New Wave of Cases

Unpaid interns are an emerging area of FLSA litigation. In a few notable cases, unpaid interns have achieved conditional class certification under the FLSA for unpaid minimum wage and overtime allegations. In Wang v. The Hearst Corp., filed in the Southern District of New York in February, 2012, a former unpaid intern for the fashion magazine Harper's Bazaar and another from Redbook claimed that the publisher violated state and federal wage and hour laws by requiring them to work up to 55 hours per week without pay. In July, 2012, the court granted conditional certification under the FLSA and allowed plaintiffs' counsel to issue opt-in notices to current and former interns. In a somewhat unprecedented ruling, the judge allowed the notice to be sent via mail, email, text message, press release and advertised online (see While the court has yet to resolve the merits, its rulings thus far have shown that it considers the lawsuit a potentially viable cause of action.

In Glatt v. Fox Searchlight Pictures, Inc. (filed by the same plaintiffs' firm in the Southern District of New York in September 2012), a pair of former unpaid interns who worked on the movie Black Swan alleged they were entitled to be paid. The case is currently in the midst of discovery, and plaintiffs have yet to seek conditional certification on the class claims. The same firm also filed a state law class claim in New York Supreme Court on behalf of current and former unpaid interns of the PBS series, The Charlie Rose Show. Certification has yet to be determined in that case.

Planning Tip:     Despite a lack of a definitive ruling in these cases, it is safe to say that the use of unpaid internships is under increased scrutiny. The DOL provides employers with detailed guidance in the form of a six-factor test as to whether interns must be paid. For an internship to be lawfully unpaid, all of the following must exist: (1) the internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment; (2) the internship experience is for the benefit of the intern; (3) the intern does not displace regular employees, but works under close supervision of existing staff; (4) the employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded; (5) the intern is not necessarily entitled to a job at the conclusion of the internship; and (6) the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

As with any new breed of class action lawsuit, this new wave of potentially costly litigation should prompt employers to undertake a thorough review of its practices. The DOL's guidance suggests that unpaid internships should be limited to a very select set of circumstances.

State News

New York

New Law Permits Additional Wage Deductions

Effective November 6, 2012, a new law amended New York Labor Law section 193 to allow employers to make additional wage deductions, with an employee's written consent, for:

  • Prepaid legal plans;
  • Purchases made at certain charitable events affiliated with the employer;
  • Discounted parking or passes, fare cards, vouchers, or other items that entitle the employee to use mass transit;
  • Fitness center, health club or gym membership dues;
  • Cafeteria, vending machines and pharmacy purchases at the employer's premises and purchases made at gift shops operated by the employer, where the employer is a hospital, college or university;
  • Tuition, room, board and fees related to certain education institutions; and
  • Day care, before-school and after-school care expenses.

Significantly, the new amendment also will allow employers to make deductions for both wage overpayments due to mathematical or clerical errors as well as repayments of salary or wage advances, provided that the employer complies with regulations to be issued by the NY DOL.

The amendment also imposes new requirements. For example, prior to making deductions, employers must give written notice of the terms and conditions or benefits of the deduction, as well as the manner in which the deduction will be made. Employers must also provide advance notice when there is a substantial change in the terms or conditions of the payment including, but not limited to, a change in the amount, a substantial change in the benefits, or a change in the manner in which the deduction is made. In addition, with respect to certain deduction-related expenses, employers must allow employees to access, from within the workplace, their current account information. Employers also must keep employees' written deduction authorizations for the duration of the employee's employment and for six years after the employment relationship ends.

Planning Tip:     New York's expanded deduction law may afford greater flexibility to New York employers to implement new policies or practices with respect to issues such as advances on vacation, tuition reimbursement plans, and other benefits since employers have a greater ability to recoup such advances and payments under the new law. Before moving forward, however, employers should wait until the NY DOL issues its guidance on matters such as: the size of the overpayment that may be deducted; the timing, frequency, duration, and method of deductions; notice to the employee; and procedures for disputing or seeking a delay of the deduction.


On Call Rest Breaks Are Not Breaks At All

In Augustus v. American Commercial Security Services, et al., a California Superior Court Judge in Los Angeles County awarded $89.7 million i to a class of approximately 15,000 security guards who were denied rest breaks. In Augustus, Defendant's policies made all rest breaks subject to interruption in case of an emergency or in case a guard was needed. Guards were required to keep their cell phones or pagers on so they could be available for these situations. Defendant argued that interruptions were so rare that the guards were effectively getting their breaks; however, the court disagreed. According to the court, an on-call break is actually not a break at all, even if it is uninterrupted. The Court noted that the employees were still under the control of the employer during their "down time" and that any such time counts towards hours worked regardless of whether an employee reads or engages in other personal activities during this time.

Employees May Voluntarily Waive Their Day of Rest Rights

In Mendoza v. Nordstrom Inc. et al., a California federal judge for the Central District found that Nordstrom did not violate California's day of rest statute where the plaintiffs voluntarily worked more then six days in a row. In Mendoza, the plaintiff, who was only scheduled to work five days a week, informed his supervisor that he wanted to work additional shifts and, when offered by his supervisor, he nearly always accepted the additional shifts. Plaintiff later sued, alleging that the additional shifts forced him to work more than six days in a row in violation of California's day of rest statute. The Court held that an employer must offer the day of rest and cannot force an employee to work more than six consecutive days, but that an employee can waive his or her day of rest. The court equated this rule to a plaintiff's right to waive his or her meal period – a right acknowledged by the California Supreme Court in Brinker Restaurant Corp. v. Superior Court.

Practical Tip:     While employers can give employees the option of working extra shifts, they should take steps to make it clear that employees can refuse the additional shifts. For example, the employer could approve a written request from the employee or otherwise document the employee’s willingness to waive his or her day of rest.

Vacation Payout Claims May Be Pre-empted by ERISA

On September 5, 2012, a California Court of Appeal held in Bell v. H.F. Cox, Inc., that vacation payout claims may be pre-empted by ERISA. In Bell, the plaintiff, along with his fellow truck drivers, sued his employer under California Labor Code section 227.3, which requires employers to pay terminating employees all vested vacation. Under the company’s ERISA-governed vacation benefit plan, eligible employees earned paid vacation annually; however, terminated employees were not entitled to any unused vacation pay.

The trial court granted partial judgment to the employer, holding that California's vacation laws and plaintiffs’ claims were preempted by ERISA. Relying on the U.S. Supreme Court’s decision in Massachusetts v. Morash (1989), the Court of Appeal held that ERISA preempts an action under state law for failure to pay vacation benefits where the employer maintains an employee benefit plan governed by ERISA. According to the court, whether the employer maintains a separate account for vacation benefit pay or whether the vacation benefits are paid out of general assets is a question of fact. The court concluded that a triable issue of fact existed insofar as the employer’s IRS forms showed that the vacation benefits plan was funded from general assets and corrected forms reporting that vacation benefits were really funded from a separate trust were only filed after Plaintiffs brought suit.

Practice Tip:      Employers with ERISA-governed vacation benefit plans should carefully scrutinize all forms which report sources of funding for vacation benefits plans to make sure that they accurately state the source of the funding (and meet all other ERISA requirements).

California Supreme Court to Review Use of Class Action Waivers in Arbitration Agreements

On September 19, 2012, the California Supreme Court granted review of Iskanian v. CLS Transp. Los Angeles, LLC, on three issues: (1) whether the Court's previous decision in Gentry v. Superior Court holding that contractual class action waivers are unenforceable with respect to non-waivable employment law rights was overruled by the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion; (2) whether the Supreme Court's decision permits arbitration agreements to override the statutory right to bring representative claims under the Labor Code Private Attorneys General Act of 2004 (PAGA); and (3) whether the defendant waived its right to compel arbitration. A determination by the California Supreme Court on the first two issues will put to rest a split of authority within the California courts on class action waivers in arbitration agreements, and bring California in line with federal decisions in this area. 

Commissioned Recruiters Denied Overtime under California Law

On August 29, 2012, a California appellate court held in Muldrow v. Surrex Solutions Corporation that recruiters were properly classified as exempt under California's "inside sales" exemption, which exempts from overtime "any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee's compensation represents commissions."

Using a common business model, Surrex’s recruiters recruited applicants for placement with Surrex’s clients, and Surrex was paid only in the event of a successful placement. Recruiters were paid a percentage of the adjusted gross profit (net profit from full-time placements minus costs of consultant placements).  Relying on Keyes Motors, Inc. v. DLSE, the court determined that the Surrex recruiters were engaged principally in selling a service (placing recruiter candidates with employer clients), and their compensation was a percentage of the price of the service. According to the court, offering candidate services to a client in exchange for payment is clear sales activity within the "ordinary definition of the word sell." The court rejected the employees’ argument that Surrex’s compensation scheme was too complex to satisfy the commission requirement because employees received a percentage of the adjusted gross profit rather than a percentage based solely on revenue. Finding that such a definition of commission was "excessively narrow and wooden," the court held that cost factors could be considered in compensation schemes, and that in this case, the compensation scheme was a bona fide commission.

California Court of Appeal Narrows Administrative Exemption

In Harris v. Superior Court, a California appellate court narrowed California's administrative exemption. Last year, in the same case, the California Supreme Court ruled that claims administrators, who were arguably production workers, could still be exempt under the administrative exemption. According to the Court, the "administrative/production dichotomy" was not dispositive of the appropriateness of the exempt classification. This year, however, on remand, the California appellate court muddied the application of the administrative exemption. The Court of Appeal revisited Harris and analyzed the exemption issue under federal regulations, which provide that an employee’s work duties are "directly related to management policies or general business operations" if they “relat[e] to the administrative operations of a business as distinguished from ‘production.’” The Court of Appeal then stuck to its original conclusion that “only duties performed at the level of policy or general operations” satisfy the requirement of work that is “directly related to management policies or general business operations.” Under this interpretation, the Court of Appeal concluded that adjusters were engaging in duties that were part of the insurance company's day-to-day operations, and that such duties did not merit application of the administrative exemption.

The Court of Appeal also considered whether the adjuster’s duties involving advising, planning, negotiating, and representing the insurance agencies satisfied the administrative exemption. Again, the Court of Appeal found that claims adjusters as a whole generally cannot satisfy the exemption requirement because their primary duties involve adjusting individual claims, rather than formulating management policy or general operations. The Court of Appeal reasoned that the claims adjusters were production employees because Liberty Mutual’s product is risk transference, and claims adjusting is an essential part of risk transference. In doing so, the Court of Appeal dismissed a number of federal cases reaching a contrary result on the basis that it was not bound by the opinions and found them unpersuasive.

Planning tip:      This holding could dramatically reduce the scope of the administrative exemption in California by limiting it to those employees whose primary duties involve setting company policy or running general business operations. For now, employers should be cautious and conservative in their use of the administrative exemption.

Federal District Court Holds Broker-Dealers Properly Classified as Independent Contractors

Brokerage companies with independent contractors in California should be pleased with the district court's decision in Taylor & Young v. Waddell & Reed, et al., granting summary judgment in favor of the broker-dealer in a contractor misclassification suit. There, the district court found that the broker-dealer's financial advisers were properly classified as independent contractors and thus not subject to California's labor code provisions applicable to employees.

In Taylor, financial advisors brought suit challenging their classification as independent contractors of Waddel & Reed. Plaintiffs argued that the broker-dealer exercised control over their work, including setting their work schedules and requiring their attendance at meetings. Applying California's independent contractor classification requirements (referred to as the Borello factors), the district court found that the following facts, taken together, established that the advisors were correctly classified as independent contractors:

  • Plaintiffs believed at the time they entered into the relationship with broker-dealer that they were creating an independent contractor relationship;
  • Plaintiffs reported their earnings as financial advisers using a 1099 (and one plaintiff even deducted business expenses);
  • Plaintiffs' sales business was a distinct business that required both skill and licensing, and required plaintiffs to determine their own business strategies, make their own business decisions, and determine who to target as potential clients.
  • Plaintiffs paid their own business expenses, could hire assistants, chose their own work location and were paid solely on commission.
  • The broker-dealer defendant had no significant right to control the manner and means by which plaintiffs conducted their sales business.

Planning Tip:     The Taylor case comes as welcome news to companies with independent contractor financial advisors in California, particularly in the light of California's stiff new penalties for independent contractor misclassification and increased DLSE enforcement efforts. For broker-dealers, the case outlines some of the "best practices" that can be used to build a defensible independent contractor relationship with financial advisors and other sales-related agents.