Hunton Employment & Labor Law Perspectives : Employment Lawyers & Attorneys : Hunton & Williams Law Firm : Labor Law Legislative Updates

Various states have enacted wage and hour laws that are very similar to the FLSA, yet allow for class—as opposed to collective—treatment.  The FLSA limits class members to those who “opt in” to the class, while under Rule 23 all eligible class members are part of the suit unless they “opt out” of the class.  If a plaintiff initiates suit alleging minimum wage violations, for example, under both the FLSA and a state law allowing for class treatment, the non-plaintiff employees potentially could receive two seemingly conflicting notices, one requiring them to opt in to pursue claims and the other requiring them to opt out.  The mechanics of such an arrangement also can be tricky for courts and employers.

In both Parker and Ervin, the district courts found an incompatibility between the two types of actions, with the result that no class was certified to pursue the state law claims.  However, there is a split of authority on this issue, and it is hotly contested.  The Secretary of Labor and others have filed amicus briefs in each case.  The Secretary of Labor’s position is that the two types of actions are compatible. 

Employers should be aware that, even though the FLSA allows only for collective actions, they may nonetheless face class challenges to their wage and hour practices under operable state law.  The difference is more than technical.  Because a class action automatically encompasses claims of all members unless they affirmatively opt out, a class action typically brings about much greater exposure.  The outcomes of the Parker and Ervin cases, therefore, could have a substantial impact for employers.

In affirming summary judgment for Johnson & Johnson, the Court relied heavily on the deposition testimony of the plaintiff that she worked unsupervised 95% of the time, that it was up to her to run her territory as she wished and that she was the expert on her own territory for the development of a strategic plan for higher sales.  Her attorney tried to disavow all such testimony at oral argument as “mere puffery.”

As the court observed, certain facts weighed against the finding of exempt status, including the fact that plaintiff worked from a list of “target doctors” the company provided.  She also  was expected to complete an average of ten visits per day and to  visit every doctor on her target list at least once a quarter.  She was directed to “extol the benefit of the pharmaceutical drug she promoted using materials pre-approved by the company and she was prohibited from using other materials that were not approved.”

Nevertheless, the Third Circuit relied on Smith’s deposition testimony to find that her primary duty in this “non manual position” required her to form a strategic plan to maximize sales, and a description of her duties that demonstrated  a “high level of planning and foresight.”   Her testimony also supported a finding that she engaged in the development of a strategic plan” that guided the execution of her remaining duties.  29 CFR § 541.203(e).  Based on that testimony, the court found she was an exempt administrative employee. Turning to the question of plaintiff’s “exercise of discretion and independent judgment with respect to matters of significance,” the next element of the administrative exemption, the court found that her testimony showed she executed “nearly all of her duties without direct oversight.”  She developed her own schedule, was free to apply the budget for expenses the company gave her at her discretion and was “the expert” on her territory.

The court declined to address Johnson & Johnson’s cross-appeal of the district court’s holding that the FLSA’s  outside sales exemption was not applicable to pharmaceutical sales representatives.  As the court observed, that issue is pending in the Second and Ninth Circuits in cases involving Novartis, AstraZeneca, and Orth-McNeil, among others. In some of those cases, the lower courts found the outside sales exemption applied, while in others, the district courts found the exemption did not apply.  The Ninth Circuit appeals also involve the scope of the outside sales exemption under California’s wage and hour statute.

In addition to the significance that the Third Circuit’s decision has for pharmaceutical companies currently facing FLSA lawsuits, the court’s central reliance on the deposition testimony of this plaintiff provides an important subtext for this decision.  The court disapproved of the plaintiff’s counsel’s attempt to disavow her testimony as puffery.  The court cited to the “sham affidavit” doctrine under which a court will not consider an affidavit of a deponent who tries to change testimony previously given in a deposition by submitting a “clarifying” affidavit or declaration.  While the plaintiff had not submitted such an actual affidavit, the Third Circuit applied the principle behind that doctrine and refused to allow plaintiff to retreat from  testimony of  which she surely “understood the significance” in the context of her case.

Under California law, one of the requirements for exempt status is the payment of a fixed, predetermined salary to employees for any day in which the employees perform any work.  In short, unlike non-exempt employees, there cannot be an hour-for-hour reduction in pay because the exempt employee works less than his/her typical hours on a particular day.  The Opinion Letter states that while an employer cannot reduce an employee’s pay for working a partial day, the employer can implement policies permitting the employer to reduce vacation or sick leave hours an employee had accrued to correspond with the amount of hours the employee took off during the partial day, without endangering the employee’s exempt status. 

This Opinion Letter potentially has financial significance for California employers since employers who decide to provide vacation to employees must comply with certain requirements.  California law generally treats accrued vacation as deferred wages.  Accordingly, employers cannot have a use-it-or-lose-it vacation policy and must pay out any accrued, unused vacation at the termination of an employment relationship.  If an employer is permitted to reduce an employee’s vacation hours for partial-day absences, then this could potentially affect how much the employer needs to pay the employee at termination.

While DLSE Opinion Letters are not binding precedent for California courts, and courts do not give deference to DLSE Opinion Letters, the courts do recognize their persuasive value.  We will have to wait and see if the California courts adopt the DLSE’s latest position.

Solis said the DOL will be working with "advocacy groups and other stakeholders" to develop and distribute campaign materials to workers.  She noted that this initiative signifies her intent to increase both employee outreach efforts and enforcement efforts against employers who are accused of violating the law.  Solis had a strong rebuke for employers who are not in compliance with minimum wage and overtime standards: "There is no excuse for employers who disregard federal labor standards - especially those that are designed to protect the most vulnerable in the workplace."
 
To help support this effort, Solis has hired 250 new wage and hour investigators, who she says will ensure that the DOL can properly respond to complaints and "undertake more targeted enforcement."  Solis vows that the DOL "will not rest until the law is followed by every employer."
 
We have commented previously that the federal agencies charged with enforcing workplace protection laws, such as EEOC, OSHA, and NLRB, all have indicated that they will be pursuing employee complaints more aggressively.  Solis' recent announcement is yet another example that the Obama administration is taking a more employee friendly approach to federal enforcement.  Employers should be taking steps now to ensure that their pay practices comply with the FLSA and applicable state wage and hour laws, which may include a privileged pay practices audit by experienced legal counsel.
 

Civil litigation over employment status is becoming increasingly common, perhaps because more employers are relying on contingent arrangements, economic conditions make it more difficult to find traditional full time employment, and more individuals and attorneys are aware of the issue following high profile verdicts, settlements, and fines.

Although enforcement of various laws by state and federal agencies has been spotty in the past, there are signs that enforcement efforts will increase.  With the economy in decline, there has been a heightened focus on capturing more revenue through employment taxes, which often is a reason why companies seek independent contractor arrangements.  A recent study by the U.S. Government Accountability Office, commissioned by several Congressional committees, called upon the U.S. Department of Labor and the Internal Revenue Service to step up their efforts to police classification of workers as independent contractors.

Some cases come to the attention of government agencies through routine audits, some come through complaints, and some come through other action on the part of the individual, such as filing a claim for unemployment benefits.  Increasingly, state and federal agencies are sharing information and coordinating their enforcement efforts.  In light of the discussion above, companies that utilize independent contractor arrangements can expect to encounter more challenges, and more intensive scrutiny, than they have in the past. 

More federal laws related to classification of contractors are likely on the way.  There is a bill in Congress (H.R. 3408: “The Taxpayer Responsibility, Accountability and Consistency Act of 2009”) that would increase penalties for misclassification and eliminate or sharply curtail the “safe harbor” provisions of Section 530 of the Revenue Code, which currently allows businesses to avoid tax penalties if they have a good faith reason to believe that a worker is an independent contractor, even if ultimately found to be an employee as a matter of law.  Within the past two years, there have been several other bills introduced in the House and Senate that would amend the Revenue Code and the Fair Labor Standards Act to make it more difficult to properly classify workers as independent contractors and to increase penalties for doing so incorrectly. 

Courts and government agencies use a variety of legal tests to determine whether a worker is properly classified.  These tests can vary according to what law is allegedly violated, and it is conceivable that a worker could be deemed an independent contractor for purposes of one statute but not for another.  Under any test, however, simply agreeing on a status such as “independent contractor” or “temporary worker” does not establish a non-employment relationship.  Instead, the proper classification is determined according to the specific facts of a particular case.  Depending on the test applied, factors considered can include:  who has the right to control the means and manner of performance; who provides the tools and equipment needed for the work; where the work is performed; whether the work is part of the recipient’s core business; whether the worker can bring in assistants or subcontract the work; and whether the worker is economically dependent on a single entity, or whether the worker is truly “independent” such that his or her work would continue for other clients if one relationship were discontinued.

The Labor and Employment Team at Hunton & Williams has ample experience litigating issues related to contingent workers, before state and federal agencies and in courts across the country.  We regularly take on difficult cases for clients in this area and provide preventive guidance to avoid litigation or enforcement where that is an option. 

Any company that is considering such an arrangement, however, should be advised of the costs and risks that can accompany a contingent worker or contractor, including:  significant transaction and administrative costs; reduced quality or efficiency; compromised security of intellectual and other property; liability for wage and hour violations; obligations for employee benefits; assessments of back taxes and penalties; and damages for various types of employment-related claims.  Incorrect classification can lead to significant adverse consequences, particularly if multiple workers are involved.  A number of large and sophisticated companies have been forced to pay staggering amounts to resolve cases alleging misclassification of workers.

What can you do to avoid an adverse outcome with respect to contingent workers?  Getting the right legal guidance is paramount.  Once your objectives and concerns have been properly identified, there are likely a number of ways to address them.  Properly structured contingent worker arrangements will account for all types of risk.  In some instances, it may become clear that hiring an employee on a part time or full time basis is more desirable than engaging a contingent worker, once all the costs and benefits are fully considered.

The Labor and Employment Team at Hunton & Williams has a task force focusing on issues related to contingent workforces and independent contractor relationships.  We would be glad to discuss with you how you can best accomplish your business objectives while minimizing your risks.  This may include proactive planning for future engagements of contractors, or perhaps an audit of current engagements to determine whether they can withstand challenge by a government agency or individual claimant.  The most important thing is to gain awareness of the risks and to seek ways to address them before they become liabilities.

The GAO conducted the study to examine: the extent of misclassification of workers as independent contractors; actions the DOL and IRS have taken to address the issue, including coordination of efforts; and options that could help address the issue.  Among the reasons noted for conducting the study were the need to ensure that workers “receive the protections and benefits to which they are entitled” and that employers pay all required taxes.

The report identified a number of options to address the issue, almost all of which would have a significant impact on companies who use outside contractors:  clarify the distinctions between employees and contractors under federal law; allow workers to challenge classifications in U.S. Tax Court; define misclassification as a violation of the Fair Labor Standards Act; narrow the “safe harbor” provisions in Section 530 of the Tax Code for misclassification; require service recipients to withhold taxes for contractors; improve compliance programs; and enhance coordination between agencies for enforcement and sharing of data.

The GAO report undoubtedly portends greater activity on the part of the DOL and IRS with respect to enforcement of existing laws, and possibly new legislation on the part of Congress.  Bills addressing this issue were introduced in the previous session of Congress but did not reach a vote.  They are likely to be re-introduced sometime in the near future.

This is a loud and clear wake up call for all businesses that use contract workers to review their arrangements with legal counsel and ensure:  (1) that workers classified and paid as independent contractors will not be deemed employees under applicable labor and tax laws; (2) that proper documentation is in place to maximize the likelihood of a favorable outcome in the event of an audit or other challenge; and (3) that potential exposure is addressed with respect to back pay for minimum wage, overtime, liquidated damages, unpaid taxes, and penalties in the event of a finding of misclassification.

The Labor and Employment Team at Hunton & Williams has a task force focusing on issues related to joint employment, contingent workforces, and independent contractor relationships.  We would be glad to provide a copy of the GAO report and to provide guidance on this important topic.