ProView Standard: Misclassifying Employees, Franken Amendment, Immigration Enforcement

Employer Beware: Misclassifying Employees under the FLSA’s Administrative Exemption Can Be Costly
Franken Amendment
The ICE Man Cometh: Immigration Enforcement on the Rise
USDOL Targets NYS Healthcare Industry for FLSA Compliance
Eating for Health: Functional Foods

March 2010

Employer Beware: Misclassifying Employees under the FLSA’s Administrative Exemption Can Be Costly

Two recent decisions by the U.S. Court of Appeals for the Second Circuit provide employers with helpful guidance on the proper application of the Administrative exemption to the overtime pay requirements under the Fair Labor Standards Act (“FLSA”). SeeWhalen v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009); Reiseck v. Universal Commc’ns of Miami Inc., 591 F.3d 106 (2d Cir.), aff’d in part, No. 09-1632 (CV), 2010 WL 75343 (2d Cir. Jan. 11, 2010). In each case, the Appeals Court overturned the lower court’s grant of summary judgment in favor of the employer on the issue of whether the employee was exempt from overtime under the FLSA’s Administrative exemption, reasoning, that neither employee performed work “directly related to the management or general business operations” of the employer, one of the two key substantive elements necessary for satisfying the Administrative exemption from overtime.

The decisions serve as an important reminder that both substantive prongs of the exemption test must be satisfied for an employee to qualify as a bona fide Administrative employee, meaning that the employee’s primary duty must include: (1) the performance of office or non-manual work directly related to the management or general business operations of the employer or its customers; and (2) the exercise of discretion and independent judgment concerning matters of significance. All too often, employers inadvertently misclassify employees by focusing on the latter prong exclusively, or fail to appreciate that the performance of exempt Administrative duties must be in functional areas of management, running or servicing the employer’s business operation itself, and not simply be administrative work supporting the employer’s service or production functions. By misclassifying employees, employers open themselves to enforcement actions by the U.S. Department of Labor, private civil suits by misclassified employees, actions by state agencies, and a host of monetary penalties and litigation costs that can result in significant expense.

The FLSA Exemption Analysis for Administrative Employees

Under the FLSA, employers must pay non-exempt employees overtime compensation for time worked in excess of 40 hours per week; however, a few categories of employees are exempted from the overtime pay requirements. These include individuals employed in a bona fide Administrative capacity, as well as those who are Executives, Professional, Computer Professional, or Outside Sales employees – all terms of art under the FLSA and its regulations. A position falls within the “Administrative” exemption if all three of the following criteria are met:

The employee is compensated on a salary or fee basis at a rate of not less than $455 per week
The employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers
The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance

29 C.F.R. § 541.200(a).

Significantly, employers bear the burden of establishing entitlement to the FLSA exemptions that, the U.S. Supreme Court has ruled, are narrowly-construed and only apply to those employees who fit squarely within the terms of the exemption. Thus, to classify employees within the Administrative exemption, employers must demonstrate that an employee’s duties satisfy both its substantive prongs.

Yet, too often, employers fail to pay adequate attention to the individual components of each of the substantive prongs of the Administrative exemption, resulting in the misclassification of personnel they deem important to their operations. Employers have often concluded that the performance of any administrative-type duty constituted exempt work, failing to appreciate the primary duty requirement that it be “the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.” See 29 C.F.R. § 541.200 and § 541.205(a)(3). Alternatively, employers simply concluded that an individual’s exercise of “discretion and independent judgment” was enough to place the worker within the Administrative exemption.

In the recent Whalen and Reiseck decisions, the U.S. Court of Appeals for the Second Circuit re-emphasized that to qualify as an exempt Administrative employee, the employee must both perform work “directly related to management policies or general business operations[,]” and “customarily and regularly exercise discretion and independent judgment” (in addition to satisfying the salary-basis test). To perform work “directly related to management policies or general business operations,” the Second Circuit clarified that two independent components must be established: First, the employee must be performing work that is “administrative” in nature, as distinguished from “production” work. Second, the work must be shown by the employer to be of “substantial importance” to the management or operation of its business or that of its customer’s. In both cases, the Appeals Court observed, the analysis revealed that neither employee performed work directly related to management policies or general business operations.

Administrative vs. Production/Sales Work

In Whalen, the Second Circuit ruled that a former loan underwriter for J.P. Morgan Chase & Co. (“Chase”) was not exempt from overtime pay as an Administrative employee because his primary duty – selling loan products under detailed directions provided by Chase and at Chase’s offices – involved production, not administrative work. The loan underwriter, therefore, “did not perform work directly related to management policies or general business operations” so as to qualify for the FLSA’s Administrative exemption from overtime.

Judge Gerard E. Lynch, writing for the Court of Appeals, acknowledged that the line between administrative and production jobs was not a clear one, particularly where the item being “produced” was an intangible service rather than a material good. But Judge Lynch clarified that the line between the two types of jobs “does not track the level of responsibility, importance, or skill needed to perform a particular job.” Whalen, 587 F.3d at 532-533. The Court noted that factors such as the large monetary value of the loans approved by the underwriter, the employee’s salary, and the fact that the loan underwriter worked in a cubicle were irrelevant to the analysis of whether she could be classified as an Administrative employee. Instead, “[w]hat determines whether an underwriter performed production or administrative functions is the nature of her duties[.]” Id. at 533.

Analyzing the primary duty of the loan underwriter, the Appeals Court found that she was directly engaged in the “production” of loans. The underwriter’s “primary duty was to sell loan products under the detailed directions of the Credit Guide [provided by Chase]” rather than to advise customers about loan products. Id. Accordingly, the Second Circuit concluded, Chase’s underwriter job duties fell into the category of production, not administrative work, explaining:

Underwriters at Chase performed work that was primarily functional rather than conceptual. They were not at the heart of the company’s business operations. They had no involvement in determining the future strategy or direction of the business, nor did they perform any other function that in any way related to the business’s overall efficiency or mode of operation. It is undisputed that the underwriters played no role in the establishment of Chase’s credit policy. Rather, they were trained only to apply the credit policy as they found it, as it was articulated to them through the Credit Guide.

Whalen, 587 F.3d at 534-535. As such, the loan underwriters’ duties were not related either to setting Chase’s “management policies” or to running Chase’s “general business operations[,]” evidence that employers must establish to satisfy the Administrative exemption.

Since the Appeals Court found that the loan underwriter did not perform any work directly related to management policies or general business operations, Judge Lynch found it unnecessary to determine whether the loan underwriter customarily and regularly exercised discretion and independent judgment with respect to matters of significance, the second substantive element an employer must demonstrate to bring employees within the Administrative exemption from overtime.

In Reiseck,the Court of Appeals similarly held that the Administrative exemption did not apply to an advertising salesperson where her duties were not directly related to the management policies or general business operations of her employer, a complimentary travel magazine. The Court, analyzing the case under the then-relevant 2002 FLSA regulations, ruled that where the primary duty of the salesperson is to sell advertising to individual customers (and not to promote sales generally), that individual does not fall within the FLSA’s Administrative exemption.

To reach its conclusion, the Court looked first to the Company’s business model. Because the travel magazine for which Reiseck worked was free, the Court determined that “advertising sales [were] a critical source of revenue,” and that advertising space was Universal’s “product.” Since Reiseck’s “primary duty was the sale of that product,” the Court determined that she could reasonably be considered a sales production employee, but not an Administrative employee.
The Court of Appeals next examined the employer’s claim that selling advertising could be considered “promoting sales.” The Company argued that by selling advertising, Reiseck “promoted sales” generally, and therefore her duties involved the performance administrative functions. Judge Jose A. Cabranes, writing for the Court, disagreed: “[U]nder that theory, any sales clerk in a retail store would ‘promote sales’ when assisting potential customers.” Reiseck, 591 F. 3d at106-107.Adopting the logic of the Third Circuit in Martin v. Cooper Elec. Supply Co., 940 F.2d 896 (3d Cir. 1991), Judge Cabranes stated that an Administrative employee for the purposes of the FLSA is “an employee encouraging an increase in sales generally[,]” not one who is doing the production work of selling. Id.

The Second Circuit concluded that Reiseck was “plainly a salesperson” since her primary duty was to “sell specific advertising space to clients.” Although the decision that Reiseck did not qualify as an exempt Administrative employee was based on the application of the 2002 FLSA regulations, the Court noted that the same result would be reached under the amended 2004 regulations. Indeed, in the Preamble commentary to the 2004 regulations, the Department of Labor expressly reiterated its long-held view that sales work is non-exempt, overtime-eligible work. Thus, the Court drew an analogy between Reiseck and “an employee whose primary duty is selling financial products” directly to clients, who also would not qualify for the Administrative exemption, citing the regulations at 29 C.F.R. § 541.203(b) (2004). Id. at 107.
The Court then vacated the lower court’s grant of summary judgment in favor of Universal, finding that Reiseck was misclassified because her sales duties related to the production, not administrative, functions of the Company. As with Whalen, the Court of Appeals deemed it unnecessary to reach the second question whether the employee’s work required “the exercise of discretion and independent judgment.” The case was remanded to the lower court to consider whether the employee might qualify for the Outside Sales exemption.

Practice Pointer

The Second Circuit’s opinions in Whalen and Reiseck reveal that employers who fail to take a considered approach when making exemption determinations under the FLSA’s intricate regulations and evolving case law will do so at their peril. But these decisions tell only half the story. Employers who misclassify their employees face significant exposure – a lesson Apple Inc. recently learned the hard way. On January 22, 2010, Apple agreed to pay almost $1 million to settle a wage-hour class action lawsuit alleging that the company improperly classified its network engineers as exempt Administrative employees and failed to pay them proper overtime. The technology giant is only one in a long line of companies forced to pay huge sums to litigate or settle wage-hour lawsuits. On January 29, 2010, it was announced that Staples, Inc. agreed to a $42 million dollar global settlement of 13 wage-hour lawsuits seeking overtime pay for its current and former assistant store managers, many of whom had been classified as exempt from overtime. On February 10, 2009, a federal judge granted final approval to a whopping $43.5 million settlement, including $10.9 million in legal fees, resolving 11 class and collective actions accusing Merrill Lynch of failing to properly compensate its financial advisors, in part, based on the Company’s misclassification of thousands of financial advisors as exempt from overtime pay under the FLSA. These recent wage-hour settlements follow on the heels of Wal-Mart’s historic agreement in 2009 to pay as much as $640 million dollars to settle over 63 pending wage-hour lawsuits.

With so much on the line, employers can proactively take steps to avoid being engulfed in the wave of wage-hour litigation by conducting payroll practices and classification audit reviews of their exempt job titles, employees, and pay policies and practices to determine (1) whether certain job functions and employees are properly classified as exempt from overtime in light of the 2004 regulations and recent case law, and (2) whether their respective pay policies/practices comport with state law requirements, as well as whether local managers, inadvertently, have encouraged “off-the-clock” work, such as working through meal periods and failing to record all time worked.

Note : The information in this Alert was provided to Precept by Proskauer Rose LLP. Proskauer is an international full-service law firm with over 60 employee benefits attorneys located in offices across the United States. The information in this article is not intended as legal advice nor is it intended to provide a comprehensive review of the legal matters discussed. For more information about Proskauer, please contact Peter Marathas at (617) 526-9704 or pmarathas@proskauer.com. ©2010 Proskauer Rose LLP. All rights reserved. Used with permission.

Franken Amendment

On February 17, 2010, the anti-arbitration “Franken Amendment” went into effect, barring many defense contractors from utilizing pre-dispute arbitration agreements as a condition of employment. This provision of the Department of Defense Appropriations Act of 2010 prohibits employers from receiving contracts for over $1 million if they enter into or enforce certain arbitration agreements. Specifically, contractors cannot receive funds in 2010 if they enter into or enforce agreements that require, as a condition of employment, that employees or independent contractors arbitrate their claims under Title VII or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention. After June 17, 2010, a similar restriction on subcontractors will go into effect, barring defense appropriations funds from being spent on contractors unless they require each subcontractor to agree not to enter into such arbitration agreements with respect to any employee or independent contractor performing work related to the subcontract.

The amendment broadly applies to all contractor employees and independent contractors, not just those working on a defense contract. In contrast, the requirement for subcontractors only applies to those people performing work related to the defense subcontract. The ban on pre-dispute arbitration agreements does not apply to contracts for the acquisition of commercial items or commercially available off-the-shelf items. The provision also allows the Secretary of Defense to waive this bar for a particular contract or subcontract, if necessary to avoid harm to national security interests.

Contractors and subcontractors will not have to rewrite their existing employment agreements, but they are prohibited from enforcing the arbitration clause in an existing agreement. Federal defense contractors who have or are considering entering into arbitration agreements with their employees must carefully consider how to comply with this new provision. We will continue to monitor legal developments as the contours of this provision develop.

The ICE Man Cometh: Immigration Enforcement on the Rise

Over the past year, the Department of Homeland Security’s U.S. Immigration and Customs Enforcement (“ICE”) division has stepped up its scrutiny of employer I-9 compliance. Following on the heels of highly publicized I-9 inspections of 652 employers in July 2009, and 1,000 businesses and organizations last fall, ICE announced on March 2nd that it had issued Notices of Inspection to 180 businesses in the states of Louisiana, Mississippi, Alabama, Arkansas, and Tennessee.

This expanding enforcement effort reminds employers of the importance of the employment eligibility verification (“I-9”) process, since even inadvertent paperwork errors may expose a company to fines, and intentional or neglectful violations could subject an employer to criminal penalties. By developing and implementing a due diligence program that includes policies on completing and maintaining I-9s, training and self-audits, employers can take proactive steps to improve I-9 compliance and minimize the risk of sanctions.

We recommend that all employers systematically review their I-9 procedures and policies periodically, as well as perform regular audits of their I-9 forms to ensure compliance.

USDOL Targets NYS Healthcare Industry for FLSA Compliance

The United States Department of Labor (“USDOL”) recently announced – as part of its new initiative to expose and remedy the misclassification of workers – that it is launching wage-hour investigations of employers in New York State’s healthcare industry. The aim is to promote compliance with the minimum wage, overtime, recordkeeping, and coverage (i.e., misuse of independent contractors) provisions found in the Fair Labor Standards Act (“FLSA”). Underlying this effort is a finding by the USDOL’s Albany district office that, during the last five years, almost two out of every three healthcare employers that it investigated were violating different FLSA requirements, negatively impacting wages paid to workers in this industry.

Hospitals, nursing homes, and home health agency providers need to take note that the USDOL is actively investigating wage-hour classification and payroll practices in the healthcare industry in many other states, and the plaintiffs’ class action bar has taken note that this is fertile territory. One prominent plaintiffs’ law firm even has a website devoted to hospital overtime and class action lawsuits! Wage and hour settlements in the healthcare industry have exceeded millions of dollars paid to class members. In December 2009, SSM Healthcare in Missouri entered into a $1.7 million settlement with the USDOL covering 4,000 nurses who suffered automatic timekeeping deductions for meal periods and rest breaks without regard to whether the nurses were relieved of duties or were working. Similarly in August 2009, Kaiser Permanente settled a class action lawsuit for $1.4 million for misclassifying project managers as exempt from overtime. This followed on the heels of a $2 million settlement for compensable travel time violations, in late November 2007, with Total Health Home Care Corp., a Pennsylvania Company that employs nearly 3,000 home healthcare workers. Further, there are numerous unreported settlements of wage-hour cases among New York State healthcare employers.

Leaving aside the healthcare industry, according to one reputable report, the monetary value of the top 10 private wage-hour settlements, in 2009, approached $360 million. This figure doesn’t include settlements reached with federal or state labor departments. So, as you can see, now is the time to take proactive steps before the USDOL or the plaintiffs’ bar starts contacting your employees.

Action Steps for Employers

Common wage-hour violations that beset many employers are also found in the healthcare industry and include the misclassification of workers (as exempt from overtime), “off-the-clock” work, failure to correctly calculate overtime pay (e.g., inadvertently excluding incentive pay, shift differentials, and bonuses), and improper wage deductions violative of federal or state law requirements. Simply because workers may have important titles or responsibilities (e.g., manager, coordinator, specialist) doesn’t necessarily make them exempt, (see article above: Employer Beware: Misclassifying Employees under the FLSA’s Administrative Exemption Can Be Costly). Periodically auditing your classification of employees for overtime purposes, as well as reviewing payroll practices, are action steps many employers are considering in the wake of heightened enforcement activity. In addition, healthcare employers should not presume that their workers are performing no duties during meal periods or rest breaks, and timekeeping systems and practices that automatically deduct such time from compensable hours worked need to be monitored and reviewed.

Doctor’s Orders: Eating for Health: Functional Foods

By Rebecca Roy, RD

The philosophy “Let food be thy medicine and medicine be thy food,” espoused by Hippocrates, has been receiving renewed interest over the past few years. In particular, consumer focus on the health-enhancing role of functional foods has increased. But, what are functional foods and which ones are the most beneficial?

Functional foods are foods that provide additional benefits beyond your basic nutritional needs; they contain vital nutrients, improve overall health, and play a significant role in reducing your risk for disease. Many functional foods are fruits and vegetables; however, there are still some everyday pleasures, such as tea, coffee, and chocolate, that are beneficial in moderation. The same also applies to red grapes and red wine, meaning a little luxury is compatible with living a long and healthful life. Below, you will find a list of the “Top Five Functional Foods” chosen by a wide variety of nutrition experts. For a more extensive list of functional foods, their active components, and recipes, please visit: www.mealsmatter.org.

Top Five Functional Foods

1. Salmon: Salmon is high in omega-3 fatty acid, which raises good HDL cholesterol and lowers bad LDL cholesterol. It may also lower the risk of heart attacks and strokes. The American Heart Association recommends eating fish twice a week.

2. Oats: Oats have a high fiber content. This powerhouse nutrient aids digestion and may lower risk for high cholesterol, heart disease, diabetes, and cancer. Aim to get 30 grams daily.

3. Blueberries: Blueberries are high in antioxidants, which may protect the body against the damaging effects of free radicals and chronic diseases.

4. Low-Fat Milk: Low-fat milk was chosen for its calcium and vitamin D content. These nutrients help lower blood pressure, build strong bones, and may prevent cancer, heart disease, and diabetes.

5. Low-Fat Yogurt with Probiotics: Probiotic, which literally means ‘’for life,’’ refers to living organisms that can aid in digestion and immune function when eaten in adequate amounts. Look for brands that say “live and active cultures” on the label.