Wage Hour Laws: Avoiding the Quicksand and Land Mines

Wage Hour Laws: Avoiding the Quicksand and Land Mines

This article appeared in the ALI-ABA Business Law Course Materials Journal, Vol. 26, No. 4, p. 31, August 2002

Peter M. Panken and Lauri F. Rasnick

"EMTs" refers to Emergency Medical Technicians; and "FLSA," to the Fair Labor Standards Act, 29 U.S.C. §201 et seq.

A.   Introduction

1.  The FLSA requires employers to pay minimum wage (presently $5.15 an hour) and one and a half times their regular rate for hours worked over 40 in a workweek to nonexempt employees.

2.  The FLSA exempts from its overtime requirements, certain white-collar employees, including employees employed in bona fide executive, administrative, professional, outside sales, or computer professional capacities.

3.  The FLSA does not preempt state wage hour laws which may impose higher or additional requirements. Accordingly, it is vital to check both Federal and state laws when assessing potential liability for wage and hour violations.

B.   Traps, Pitfalls, and Ways To Recover

1.  Pitfall #1: Failure to Pay Minimum Wage. Employers must pay minimum wage. Federal law now requires a minimum wage of $5.15 an hour, and some states and localities (e.g., Massachusetts and Rhode Island) impose even higher minimums. Certain states may also require supplemental wages for split shifts and, if uniforms are required, employers may have to provide a uniform allowance or clean the uniform. Employers may, however, deduct, up to certain amounts, from cash wages for items such as tip allowance for certain restaurant service employees, meal allowances for meals furnished; and lodging allowances for rooms. Some states, however, do not allow tip credits. It is also possible that if a house or apartment and utilities are provided, employers may deduct a fair and reasonable amount, not to exceed the value of prevailing rentals in the vicinity, for comparable facilities. The Wage Hour Division takes the position that there can be a credit of the amount of the value or the cost of lodgings whichever is less.

2.  Pitfall #2: Failure to Pay Time and One-half for Overtime to Non-exempt Employees. Mischaracterizing employee duties is a common mistake which defeats the exemption. However, perhaps even more prevalent is the mistake of improper pay docking practices. Making deductions from an exempt employee's salary for partial day absences, disciplinary suspensions (other than for certain safety-related reasons) or jury duty or military leave may destroy the employee's exempt status and may even destroy the exemption of any employee whose salary is subject to that deduction. As a result, the employer may owe backpay under Federal law for overtime for all hours worked over 40 in a workweek for two to three years to the employee.

3.  Pitfall #3: Retaliating Against an Employee Who Complains About Perceived Wage Violations. Under the FLSA it is unlawful to:

"discharge or in any other manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to this chapter, or has testified or is about to testify in any such proceeding...." 29 U.S.C.A. §215(a)(3).
  1. To establish a prima facie claim for FLSA retaliation, a plaintiff must demonstrate that:

    i.  He engaged in protected activity;
    ii.  He subsequently suffered adverse action by the employer; and
    iii.  A casual connection existed between the employee's activity and the adverse action. See Richmond v. ONEOK, Inc., 120 F.3d 205, 208-209 (10th Cir. 1997) (three-month period between protected activity and termination, standing alone, does not establish a casual connection).
  2. In Valerio v. Putnam Associates Inc., 173 F.3d 35 (1st Cir. 1999) and Lambert v. Ackerly, 156 F.3d 1018 (9th Cir. 1998), modified, 180 F.3d 997 (9th Cir. 1999), and cert. denied, 528 U.S. 1116 (2000), the plaintiff sent notes to her employer indicating she planned to complain to the Wage Hour Division but had not yet consulted them. On appeal, the courts held that the internal memos triggered the anti-retaliation protections of the FLSA.
  3. Punitive damages are available for retaliation claims under the FLSA. 29 U.S.C.. §216(b). See Shea v. Galaxie Lumber & Constr. Co., 152 F.3d 729 (7th Cir. 1998) (finding punitive damages may be awarded on an FLSA retaliation claim in the absence of a separate compensatory damages award).

4.  Pitfall #4: Assuming That an Employee Is an Independent Contractor. Independent contractors are not employees. Therefore, they are not subject to minimum wage and overtime requirements under the FLSA. In addition, employers do not have to withhold taxes nor pay payroll taxes such as FICA, FUTA, Unemployment Insurance taxes or even Workers' Compensation Insurance premiums for independent contractors. It is often difficult to determine whether a person working for an employer is an independent contractor. The test can include up to 50 different criteria and the tests under each of the applicable laws may well be different. The key factors involve the right to control the means and manner in which the work is performed by the persons who are to do the work and, in some cases, the nature of the work (i.e., whether these tasks are normally performed by employees). The designation of the person as an independent contractor in a contractual document is not necessarily dispositive. Indeed, the mere reservation of elements of control in a contract may be a factor indicating the "right" of control (although not exercised) and therefore "employee" status.

  1. In Herman v. Express Sixty-Minutes Delivery Service, Inc., 161 F.3d 299 (5th Cir. 1998), the court held that drivers who made deliveries for the Express Sixty-Minutes Delivery Service were independent contractors based on the following factors:

    i.  They signed independent contractors' agreements;
    ii.  They received a commission for each delivery;
    iii.  They provided their own vehicles;
    iv.  They paid for their own gas, and vehicle maintenance; and
    v.  They provided their own uniforms, pages, ice, and biomedical hazard bags.
  2. Because Express, the employer, exercised little control over the drivers, the drivers had an investment in the tools of their trade, and the drivers could control when they worked and for how long, the court found that they were independent contractors.

5.  Pitfall #5: Failure To Pay Wages or Overtime to "On Call" Employees. The test for the requirement of payment for "on call" hours under Federal law is whether the employee is "waiting to be engaged" or "engaged to wait." An employee "standing by" who is required to work when called may be on the clock. Likewise, employees required to have pagers and report when paged may be on the clock. However, employers do not have to pay employees who can do significant other things while on call or can choose not to respond. In Dinges v. Sacred Heart St. Mary's Hospitals, Inc., 164 F.3d 1056 (7th Cir. 1999), on call EMTs had to report to the hospital within seven minutes of being called. The EMTs complained they could not go beyond seven minutes so they could not travel outside Tomahawk (the immediate area) to attend weddings, special events, and the like. when they were on call. The Seventh Circuit disagreed and held that the EMTs could do lots of things like cooking, eating, sleeping, housework, and going to the movies. As a result, the Second Circuit found that the time EMTs were on call was not compensable.

6.  Pitfall #6: Failure to Pay Wages to Employees. Employers must pay employees their wages. Wages include commissions, benefits, and amounts necessary to provide fringe benefits. In New York it is a crime for an employer (and for the officers and agents of a corporation to knowingly permit the corporation to fail to pay wages). See N.Y. Labor Law §198-a. There may also be personal liability for shareholders of a non-publicly traded corporation if wages are not paid. See N.Y. Bus. Corp. Law §630. As each state has different statutes and laws regarding wage permits, each state's laws must be carefully researched before failing to pay wages.

7.  Pitfall #7: Failure to Pay on Time. Certain states require particular times for wage payments. In New York, for example, manual workers must be paid once a week, within seven calendar days, and clerical and other workers must be paid not less than semi-monthly. See N.Y. Labor Law §191.

8.  Pitfall #8: Incorrectly Deducting from Employees' Wages. Employers must be careful when making deductions from employees' paychecks. Different states have different criteria.

  1. In New York, only the following deductions should be made from employees' wages:

    i.  Deductions required by law (tax withholding, FICA, New York State Disability);
    ii.  Deductions authorized in writing and for an employee's benefit (pension, insurance, payments for union dues, U.S. Bonds, charities), but loan repayments generally cannot be deducted from a paycheck, even when it is the last paycheck; and
    iii.  Garnishments and child support payments directed by law.
  2. The Wage Hour Division takes the position that an employer may not deduct business expenses incurred for an employee from their paycheck.

9.  Pitfall #9: Failure to Maintain Time Worked and Wage Records. The maintenance of certain wage and hour records is mandatory.

  1. The employer should keep the following records:

    i.  Vital statistics: name, address, job title, regular workweek;
    ii.  Earnings history: amounts paid, hours worked, regular rate, earnings, overtime premiums, wage deductions, taxes and other amounts withheld; and
    iii.  Hours worked: especially by those who are believed to be exempt from overtime premiums, but whose status may be questionable. All records should be kept at least three years. In litigation, the failure to maintain records leaves employers vulnerable to inflated claims. Therefore, if there is any question concerning the exempt status of an employee, the safer path is to maintain accurate records of the employee's time worked.

10.  Pitfall #10: Improperly Computing Overtime. Overtime, when due, is based on the employee's regular rate, which may include the hourly rate plus other forms of remuneration. Some special rules apply.

  1. Bonuses and Gifts: Although an employee's regular rate includes all remuneration for employment, discretionary bonuses, gifts, and payments in the nature of gifts on special occasions are specifically excluded. See 29 C.F.R. §778.208. In addition, contributions by the employer to certain welfare plans and payments made by the employer under certain profit sharing and savings plan are excluded from the employee's "regular rate." See 29 C.F.R. §778.213—778.215.

    i.  To qualify as a "discretionary bonus" the employer must have sole discretion over whether a payment is to be made and the amount of the payment until, at, or near the end of the period. 29 C.F.R. §778.211(b). The bonus cannot be paid under a prior agreement or contract. Therefore, under the regulations, any promise to pay a bonus negates the employer's discretion. This would include bonuses that are based on sales, attendance, quality, seniority, and the like. Similarly, the Regulations provide that a "gift" may not be related to hours worked, production, or efficiency. 29 C.F.R. §778.212(b). In turn, a "gift" cannot be agreed to in a contract.
    ii.  A prize may also be excluded from the regular rate if it is not considered remuneration for employment. 29 C.F.R. §778.332.
    iii.  When a bonus payment is not excluded and therefore considered part of the "regular rate," it should be included in computing the employee's regular hourly rate of pay and overtime compensation. 29 C.F.R. §778.209(a). This calculation may be particularly cumbersome when the paid bonus covers a lengthy period of time. In such a case, the employer may exclude the bonus from overtime calculations until the time that the bonus is actually paid. When the amount of bonus can be determined, it must be apportioned back over the workweeks of the period during which it may be said to have been earned. 29 C.F.R. §778.209(a). To calculate the amount owed to the employee for each week the employee worked overtime during the period, take the number of overtime hours worked during the week and multiply one-half of the hourly rate of pay allocable to the bonus for the week. In the absence of being able to allocate bonus payments to particular workweeks, the regulations suggest that "some other reasonable and equitable method of allocation must be adopted." 29 C.F.R. §778.209(b).
    iv.  Vacation, holiday, and sick pay: When determining the "regular rate" for overtime calculations, employers need not include vacation, holiday, sick, or other leave pay. 29 U.S.C. §207(e)(2); 29 C.F.R. §778.219(a). Employers are not required to include time used for vacation, holiday, or sick leave for purposes of calculating overtime. For example, if an hourly employee works four 10 hour days and then takes one vacation day (equal to eight hours of pay), the employee is not entitled to overtime under the FLSA because she only worked 40 hours in the workweek.
    v.  Tips: Employers of employees who receive tips are entitled to credit tips against minimum wage requirements. 29 U.S.C. §203(m). Employers may take credit for tips up to 50 percent of the minimum wages. Thus, if the minimum wage is $5.25, employees who receive tips totaling $2.67 or more can be paid $2.68 per hour. In Kilgore v. Outback Steakhouse of Florida, inc., 160 F.3d 294 (6th cir. 1998), the Sixth Circuit held to obtain a credit for pooled tips: (a) The employee has to have notice of the tip credit; and (b) Tips from a tipped pool paid to employees (dining room, host, and hostess) makes them tipped employees.
  2. Computing Overtime: An employee who has a rate of $10 per hour, who works 50 hours, is entitled to 1 ½ x $10 per hour x 10 hours ($15 per hour x 10 hours) or an additional $150 for a total of $550 in the week in which 50 hours were worked. If you want to pay salary to a possibly non-exempt employee consider establishing a fluctuating workweek agreement.

    i.  If the employer and employee agree to a fluctuating workweek salary basis, the overtime cost is lessened. To have a fluctuating workweek, the employer needs an agreement that states the employee is entitled to a salary for "all hours worked in a workweek." Under the fluctuating workweek method of pay, the employee is only entitled to the additional half time for hours worked in excess of 40.
    ii.  Using a $400 figure for the salary, when calculating overtime premium when the employee works 50 hours in a workweek, her regular rate is: $400 ÷ 50 or $8 per hour. Since the salary is for all 50 hours, the employee is only entitled to 10 hours at half time of the regular rate ($8 ÷ 2 = $4) or $40. So his total pay for 50 hours is $440 ($110 less than the employee whose regulate rate is $10 per hour). The savings from a fluctuating workweek methodology can be enormous.
  3. Overtime Exemption Categories. To be exempt, executive, administrative, and professional employees must satisfy both a "duties" test and a "salary basis" test. For such exemptions, the duties test generally requires that employees have exempt work as their primary duty. What types of work they perform depends on the particular exemption. In addition, an employee satisfying one of these exemptions must earn at least $250 per week on a "salary" basis. This amount may be higher under applicable state law. For example, in New York an employee satisfying one of these exemptions must earn a salary of at least $318.75 per week on a "salary" basis. See N.Y. Wage Order §142-2.16. There is a "long" test for employees whose salary is lower but few avail themselves of this exemption since the minimum wage for 40 hours is $206 (40 x $5.15) and under the long test, an employee may not perform non-exempt work more than 20 percent of the time. This set amount of salary must be paid at regular intervals and cannot be "subject to reduction because of variations in the quality or quantity of the work performed." 29 C.F.R. §541.118(a).
  4. The "Duties Test." An employee's "primary duty" is at the crux of each white-collar exemption. The amount of time spent in the performance of the required duties (e.g., management for executive employees) is a useful guide in determining one's primary duty. According to the Federal regulations, "[i]n the ordinary case it may be taken as a good rule of thumb that primary duty means the major part, or over 50 percent, of the employee's time." 29 C.F.R. §541.103. However, time alone is not determinative and other factors may be important, such as the relative importance of the managerial duties as compared with other types of duties, the frequency with which the employee exercises discretionary powers, the employee's relative freedom from supervision, and the relationship between the employee's salary and the wages paid to other employees for the kind of non-exempt work performed by the "exempt" employee. Courts have also held that "[a]t least [where employees make more than $250 per week] the employee's primary duty will usually be what [he] does that is of principal value to the employer, not the collateral tasks that [he] may also perform, even if they consume more than half [his] time." Bohn v. Park City Group, Inc., 94 F.3d 1457, 1461 (10th Cir. 1996) (citing Dalheim v. KDFW-TV, 918 F.2d 1220, 1227 (5th Cir. 1990)) (emphasis added). See Kastor v. Sam's Wholesale Club, 131 F. Supp. 2d 862 (N.D. Tex. 2001) (holding manager of store's bakery department who spent up to 90 percent of his time performing same work as hourly employees was an "executive employee" under the FLSA because his principal value to company was as a manager).
  5. Executive Employee Exemption. The term employee employed in a "bona fide executive" capacity means any employee:

    i.  Whose primary duty consists of the management of an enterprise, or department or subdivision thereof; and
    ii.  Who customarily and regularly directs the work of two or more other employees therein; and
    iii.  Who is compensated for services on a salary basis at a rate of no less than $250 per week. There is a longer test for salaried employees. See 29 C.F.R. §541.1. See, e.g., Baldwin v. Trailer Inns, Inc., 266 F.3d 1104 (9th Cir. 2001) (finding managers of recreational vehicle park exempt as "executives" even when they spent ninety percent of their time on non-exempt tasks).
  6. Professional Employee Exemption. Under the regulations, a "professional" employee is one whose primary duty consists of the performance of:

    i.  Work requiring knowledge of an advance type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual or physical processes; or
    ii.  Work that is original and creative in character in a recognized field of artistic endeavor; or
    iii.  Work that requires theoretical and practical application of highly-specialized knowledge in computer systems analysis, programming, and software engineering, and who is employed and engaged in these activities as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer software field, as provided in section 541.303; and
    iv.  Which includes work that requires the consistent exercise of discretion and judgment in its performance; and
    v.  Who is compensated for services on a salary basis at a rate of not less than $250.00 per week. See 29 C.F.R. §541.3. See, e.g., Truex v. Hearst Communications, Inc., 96 F. Supp. 2d 652, 663 (S.D. Tex. 2000) (finding issue of fact existed as to whether the primary duty of a newspaper sportswriter, on the baseball beat, consisted of "work requiring invention, imagination, or talent in a recognized field of artistic endeavor" to qualify him as exempt as an "artistic professional" under the FLSA.)
  7. Outside Salesman. Under the regulations, an "outside salesman" is exempt when the employee:

    i.  Is employed for the purpose of and who is customarily and regularly engaged away from his employer's place or places of business in:
    ii.  Making sales; or
    iii.  Obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
    iv.  Who spends no more than 20 percent of their time in a workweek on tasks other than those described in paragraphs i,ii, and iii above. Provided, that work performed incidental to and in conjunction with the employee's own outside sales or solicitations, including incidental deliveries and collections, shall not be regarded as non exempt work. The regulations explain that inside sales and incidental work, clerical warehouse work, meter-reading, and training of other salesman is not "exempt" work for purposes of the "outside salesman" exemption. See 29 C.F.R. §541.506; 29 C.F.R. §541.5.
    v.  In Ackerman v. Coca-Cola Enterprises, Inc., 179 F.3d 1260 (10th Cir. 1999), cert. denied, 528 U.S. 1145 (2000), the 10th Circuit applied the "outside salesperson" exemption to account managers who visited the customers to get orders but who spent more than 20 percent of their time merchandising the stores (i.e., stacking and stocking the Coke) because the work was deemed incidental to the sales job. According to the court:
    "[t]he plaintiffs consummated the sales of Coca-Cola products at the stores they visited, [therefore rendering] the work that they performed in promoting those sales is 'incidental to and in conjunction' with those sales?...."179 F.3d at 1266.
  8. Computer Professional Exemption. A Computer Systems Analyst, Computer Programmer, Software Engineer or another similarly skilled worker may be an exempt "computer professional" where that employee's primary duty consists of:

    i.  The application of systems, analysis techniques, and procedures, including consulting with users, to determine hardware, software, and system functional specifications; or
    ii.  The design, development, documentation, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user of system design specifications; or
    iii.  The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
    iv.  A combination of i,ii, and iii; and
    v.  Who are paid no less than $27.63 an hour.
    vi.  There is no "salary basis" requirement but at least $27.63 must be paid for every hour worked. For example, the employee must be paid $1,105.20 ($27.63 x 40 hours) for a 40 hour week; $1,243.35 for a 45 hour week ($27.63 x 45 hours); or $1,381.15 for a 50 hour week ($27.63 x 50 hours). See 29 C.F.R. §§541.3(a)(4); 29 C.F.R. §541.303.
  9. Administrative Employee Exemption. An "administrative" employee is one whose primary duty consists of:

    i.  The performance of office or non-manual work directly related to management-policies or general business operations of his employer or his employer's customers; and
    ii.  Which includes work that requires the exercise of discretion and independent judgment; and
    iii.  Who is compensated for his services on a salary or fee basis at a rate of not less than $250 ($318.75 per week in New York). See 29 C.F.R. §541.2(a).
    iv.  Discretion and the exercise of independent judgment are the hallmarks of this exemption. A mere clerical worker who performs routine work and only follows orders will not qualify for the "administrative" exemption. The Wage and Hour Division dwells on the distinction between line and staff work.
    v.  Since it is difficult to apply the test to specific employees, the regulations describe three types of exempt staff administrative employees.
  10. Those three types of exempt staff administrative employees are:

    (1)   Executive and administrative assistants. The first type is the assistant to a proprietor or to an executive or administrative employee. In modern industrial practice there has been a steady and increasing use of persons who assist an executive in the performance of his duties without themselves having executive authority. Typical titles of persons in this group are executive assistant to the president, confidential assistant, executive secretary, assistant to the general manager, administrative assistant and, in retail or service establishments, assistant manager and assistant buyer. [29 C.F.R. §541.201 (a)(1).] Generally speaking, such assistants are found in large establishments where the official assisted has duties of such scope and which require so much attention that the work of personal scrutiny, correspondence, and interviews must be delegated.
    (2)  Staff employees. Employees included in the second alternative in the definition are those who can be described as staff rather than line employees, or as functional rather than departmental heads. [29 C.F.R. §541.201(a)(2).] They include among others, employees who act as advisory specialists to the management. Typical examples of such advisory specialists are tax experts, insurance experts, sales research experts, wage-rate analysts, investment consultants, foreign exchange consultants, and statisticians. Also included are persons in charge of a so-called functional department, which may frequently be a one-man department. Typical examples of such employees are credit managers, purchasing agents, buyers, safety directors, personnel directors, and labor relations directors.
    (3)  Those who perform special assignments. The third group consists of persons who perform special assignments. Among them are a number of persons whose work is performed away from the employer's place of business. Typical titles of such persons are lease buyers, field representatives of utility companies, location managers of motion picture companies, and district gaugers for oil companies. [29 C.F.R. §541.201(a)(3).] Note that this is a field that is rife with honorific titles that do not adequately portray the nature of the employee's duties. The field representative of a utility company, for example, may be a glorified serviceperson. This classification also includes employees whose special assignments are performed entirely or partly inside their employer's place of business. Examples are special organization planners, customers' brokers in stock exchange firms, so-called account executives in advertising firms, and contact or promotion men of various types. [29 C.F.R. §541.201(a)(3)].
    i.  But in one recent case the fact that decisions had to be approved by a supervisor negated the employee's exempt status. Heidtman v. County of El Paso, 171 F.3d 1038 (5th Cir. 1999). But see Lott v. Howard Wilson Chrysler-Plymouth, Inc., 203 F.3d 326 (5th Cir. 2000) (former office manager of car dealership's primary duties directly related to and were important to the dealership's management policies and required the exercise of discretion and independent judgment thus satisfying the test for the administrative exemption.)
  11. The "Salary Basis" Test. Do not assume that placing someone on a high salary exempts that employee from overtime requirements. It may not! Employees still need to meet the elements contained in the FLSA definitions. Common mistakes involve newspaper reporters, personnel recruiters, and film or sound producers.

    i.  An employee who satisfies the "duties" test must also satisfy the "salary basis" test to be exempt from overtime premium requirements. To comply with the salary basis test, employees must be paid a set amount of compensation at regular intervals for all workweeks in which the employee works. This "salary" cannot be reduced (subject to certain exceptions) for variations in the quantity or quality of work or for absences of less than a week, but "an employee need not be paid for any workweek in which he performs no work." 29 C.F.R. §541.118(a). Under the FLSA Regulations a "workweek" is:
    "a fixed and regularly recurring period of 168 hours—seven consecutive 24-hour periods. It need not coincide with the calendar week but may begin on any day and at any hour of the day....Once the beginning time of an employee's workweek is established, it remains fixed regardless of the schedule of hours worked by him." See 29 C.F.R. §778.105.
    ii.  An employee will not be considered to be paid "on a salary basis" if deductions from his pay are made for absences occasioned by the employer or by the operating requirements of the business. 29 C.F.R. §541.118(a)(1). Accordingly, if the employee is ready, willing, and able to work, deductions may not be made within a workweek for time when work is not available.
    iii.   Deductions may be made, however, if the employee is absent from work for a day or more (not partial day increments) for personal reasons, other than for sickness or an accident. 29 C.F.R. §541.118(a)(2). Thus, if any employee is absent for a day or longer to handle personal affairs, an employer may make deductions from his salary for such absences without affecting his salaried status.
    l.  Deductions may also be made for absences of a day or more due to an employee's "sickness or disability (including industrial accidents) if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by both sickness and disability." 29 C.F.R. §541.118(a)(3). For example, an employee who receives five paid sick days per year may be docked for the sixth day of absence on account of sickness in the year, but the deduction of partial days will defeat the exemption.
    i.  Deductions may not be made for absences of an employee caused by jury duty, attendance as a witness, or temporary military leave. The employer may, however, offset any jury pay, witness fees or military pay for a particular week against the salary due for that particular week without loss of the exemption. 29 C.F.R. §541.118(a)(4).
    ii.  Suspensions without pay for disciplinary reasons may only be permitted under extremely limited circumstances under 29 C.F.R. §541.118(a)(5) which states:
    Penalties imposed in good faith for infractions of safety rules of major significance will not affect the employee's salaried status. Safety rules of major significance include only those relating to the prevention of serious danger to the plant, or other employees, such as rules prohibiting smoking in explosive plants, oil refineries, and coal mines.
    iii.  Employees whose salary is "subject to such deductions" can lose exempt status if there has been or is a substantial likelihood that their salary can be deducted. Auer v. Robbins, 519 U.S. 452, 456 (1997).
    iv.  If an improper deduction is made from an employee's salary, the "Window of Correction" may revive an employee's exempt status and occurs (1) if the deduction is inadvertent, (2) or for a reason other than lack of work, and (3) the employer promises not to do it again, and (4) repays those who suffered the deduction. See 29 C.F.R. §541.118(a)(6). There are, however, some cases which hold that an employer is not entitled to use the "Window of Correction" defense where the employer had policy of making pay deductions from claimed salaried employees on account of disciplinary infractions. See, e.g. Takacs v. Hahn Automotive Corp., 246 F.3d 776, 783 (6th Cir. 2001), cert. denied, 112 S. Ct. 202 (2001) (recognizing decisions of other circuits "which have held that an employer may assert the 'window of correction' defense by reimbursing improperly punished employees, who were penalized for reasons other than lack of work").

C.  Class Actions

1. Introduction. The typical scenario involves one or two employees who have been terminated who approach a plaintiff's employment lawyer to protest their termination on the basis of wrongful termination or violations of discrimination laws. The plaintiff's lawyer talks to the plaintiffs, asks them to describe their work, and discovers that there is a potential FLSA violation in a policy that is of general applicability. The plaintiff's lawyer then institutes a collective action against the employer, not only for the two individuals but also for everyone else who is "similarly situated."

  1. Some of the largest and most sophisticated employers have fallen prey to these class actions.

    i.  In one case, a large investment bank found that sales assistants to financial consultants worked nights, weekends, and holidays processing clerical work without receiving overtime. Several of the largest financial institutions in the country have been subject to this kind of class action.
    ii.  Other cases involve chain stores where assistant managers do not have supervision of the equivalent of two full-time employees. Still others involve arcane practices like payment of K-9 cops for the time they expend transporting or grooming their service animals.
  2. Many of the class actions are premised on the common mistakes employers make as outlined earlier in this article. Below is an overview of relevant issues relating to class actions for wage and hour violations, including, but not limited to, a discussion relating to settlement considerations.

2.  "Collective" Actions. Section 216(b) of the FLSA allows individuals to become parties to a collective action under the FLSA by filing consents.

  1. Specifically, the FLSA provides that "[n]o employee shall be a party plaintiff to [an action brought under the FLSA] unless he gives his consent in writing to become such a party and such consent is filed in the court in which such action is brought." 29 U.S.C. 216(b).
  2. This opt-in requirement thus restricts the right of recovery under the Federal law to those who affirmatively file consents to participate in the suit. The Federal action thus is a collective action under section 216(b) of the FLSA, not a class action brought under Fed.R.Civ.P. 23. See 29 U.S.C. §216(b) ("collective actions," rather than class actions, "may be maintained against any employer?...by any one or more employees for and in behalf of?...themselves and other employees similarly situated").

3.  The "Similarly Situated" Requirement. A collective action under the FLSA may only be maintained on behalf of "similarly situated" employees. However, Section 216(b) does not define "similarly situated." Courts use a variety of approaches to define similarly situated including: (a) the commonality and typicality requirement of Rule 23; (b) all the requirements of Rule 23 that do not conflict with the requirements of section 216(b); and (c) a plain meaning definition of the term "similarly situated." Bayles v. American Medical Response of Colorado, Inc., 950 F. Supp. 1053 (D. Colo. 1996) (court surveyed the approaches used to define "similarly situated" under section 216(b)).

  1. For representative plaintiffs to determine which other employees are "similarly situated," upon filing a complaint, or shortly thereafter, a plaintiff may seek discovery of the names and addresses of other "potential" class members. Depending on the size of the employer, this request may prove to be a massive one. Because collective actions do not operate under the guidelines of Rule 23, which requires the authorization of the district court to give notice to potential class members, an unrestrained fishing expedition for information may follow.
  2. To protect against massive, unfocused discovery requests, employers have been successful in securing the intervention of the courts. Some courts have required satisfaction of the Rule 23 elements before permitting discovery to go forward. See Shushan v. University of Colorado, 132 F.R.D. 263, 265 (D. Colo. 1990) (denying broad discovery requests based solely on the conclusory pleadings of two plaintiff professors who filed an ADEA complaint and requiring, prior to granting the request, that the plaintiffs provide evidence that would satisfy the provisions of Rule 23 "insofar as those requirements are consistent with 29 U.S.C.A. §216(b).") But see Schwed v. General Elec. Co., 159 F.R.D. 373 (N.D.N.Y. 1995) (rejecting use of Rule 23 requirements but requiring plaintiffs to provide affidavits stating that decisions were made based upon an allegedly discriminatory ranking system before granting the discovery).

4.  The "Opt-In" Requirement. Section 216(b) of the FLSA further provides that:

  1. No employee shall be a party plaintiff to any such action unless he gives his consent in writing to become such a party and such consent is filed in the court in which such action is brought. 26 U.S.C. §216(b);
  2. The primary difference between an FLSA collective action and a typical Rule 23 class action is the manner in which the class is formed. Under Section 216 of the FLSA an employee must "opt-in" to the class and thus proactively and affirmatively notify the court of his or her intention to be party to the suit. See Brooks v. BellSouth Telecomms., Inc., 164 F.R.D. 561, 566 (N.D. Ala. 1995) (a plaintiff must opt into the class by giving written, filed consent), aff'd mem., 114 F.3d 1202 (11th Cir. 1997). Only if an individual files a written consent to opt-in as a member of the suit will he or she be considered a member of the collective action. If the individual does not "opt-in," he or she will not be bound by or benefit from a resolution of the lawsuit. LaChapelle v. Owens-Illinois, Inc., 513 F.2d 286, 288 (5th Cir. 1975). However, those who have not opted in are free to start a new action or collective action.
  3. This "opt-in" requirement distinguishes section 216(b) collective actions from Rule 23 class actions. Under a Rule 23 class action, all class members are bound by the court's decision, including a settlement approved by the court, unless a class member notifies the court prior to resolution of the case that he or she desires to opt-out of the class.

5.  State Laws. Unlike their Federal counterpart, state wage and hour laws may not have "opt-in" requirements. For example, the New York Minimum Wage FLSA, N.Y. Labor Law 650 et. seq., has no analogous "opt-in" procedure. Therefore, plaintiffs suing under both Federal and state laws may have to seek class certification under Rule 23 with respect to their state law claims. See, e.g., Ansoumana v. Gristede's Operating Corp., June 5, 2001 N.Y.L.J. 26, col. 5 (S.D.N.Y.) (group of unskilled workers who were delivering products sued under the FLSA for overtime and minimum wage and were certified as a class under Rule 23 for their claims under the New York Minimum Wage FLSA). Under Rule 23(b)(3), the claims of all members of the class are adjudicated except for those individuals who "opt-out" of the class. Hoffman-La Roche Inc. v. Sperling, 493 U.S. 165 (1989) (all members of the class must, however, be "similarly situated").

6.  The Opening Gambit. Typically, the plaintiff's counsel representing one or more representative plaintiffs files the lawsuit, then seeks discovery of the names and addresses of defendant's employees who are or were "similarly situated" to invite them to opt in to the class action. The employer objects but the court orders some discovery to the end that plaintiff's counsel may communicate with potential class members to solicit their opting in. Notice under the FLSA is important to the plaintiffs and is generally effected at an early stage of the proceedings so that sufficient information is available to determine if there are others "similarly situated." See Schwed, 159 F.R.D. 373. The plaintiff must seek judicial authorization to send out opt-in consent forms. See Hoffman v. Sbarro, Inc., 982 F. Supp. 249, 260 (S.D.N.Y. 1997). The notice may be narrowly confined to the work site or sites relevant to the action. Whether parties to the collective action are "similarly situated" requires a demonstration of a factual nexus that supports a finding that potential plaintiffs were subjected to a common discriminatory scheme. See Rehwaldt v. Electronic Data Sys. Corp., No. 95-876, 1996 WL 947568, at *4 (W.D.N.Y. Mar. 28, 1996). At this point, the defendant should seek judicial intervention to review the communication.

  1. This is the time to negotiate the exact language of the communication subject to judicial scrutiny for fairness. The defendant will want the notice to indicate that the employer denies the allegations and does not believe that there is a valid cause of action. The defendant will further want the notice to say that the judge has not decided whether there is a valid cause of action.
  2. The defendant will also want the notice to advise of the potential burdens of opting in:

    i.  The possibility of being deposed and being required to provide information;
    ii.  The possibility of having to testify; and
    iii.  The consequences of being bound by a settlement of the case, and that the representative plaintiffs may receive more in a settlement than those opting in.
  3. Discovery. Discovery may be a significant tool in class actions and nothing should be overlooked. Indeed, employers may obtain initial questionnaires completed by potential FLSA class members because they may not be protected by the attorney-client privilege. See Morisky v. Public Serv, Elec. And Gas Co., 191 F.R.D. 419 (D.N.J. 2000) (holding in putative class action alleging denial of overtime pay, questionnaires prepared by plaintiffs' counsel were not protected by the attorney-client privilege because the majority of those who returned them were not clients or seeking to become clients at the time); see also Dobbs v. Lamonts Apparel, Inc., 155 F.R.D 650 (D. Alaska 1994) (requiring production of questionnaires submitted by potential class). Propounding interrogatories requiring the computation of hours at work and time spent in other activities may be helpful as well.

7.  Settlements. Because FLSA class actions are "opt in" settlements between the employer and the "class" they do not foreclose the possibility of further suits. The potential plaintiffs who never opted in may still sue as long as the statute of limitations has not run. For this reason, a quick settlement is not always in the employer's best interest. In fact, quickly settling an FLSA class action may only hasten lawsuits by other individuals who have been waiting on the sidelines and watching how much money the first set of plaintiffs received. Another unique aspect of settling claims under the FLSA is that the FLSA prohibits employers and employees from agreeing to lower the rate of pay to an amount lower than minimum wage, or to less than time and one half for all hours worked over 40 in a workweek. 29 C.F.R. pts 24, 825. To ensure that employers do not seek to establish substandard minimum wages in another way, unsupervised private settlements of disputes are prohibited. See Walton v. United Consumers Club, Inc., 786 F.2d 303, 306 (7th Cir. 1986) ("[c]ourts...have refused to enforce wholly private settlements" of FLSA compensation and liquidated damages claims.) Therefore, to obtain a valid waiver of FLSA rights, employers need to have the Department of Labor supervise the settlement, or for claims made in court, have a judicially approved consent judgment.

8.  The Court's Supervisory Role in Settlements. Virtually any settlement agreement ultimately must be approved by the court in order to protect the interests of absent putative class members. In reviewing a settlement of the class action, the court is charged with the responsibility of protecting the interests of the putative class members. See Grant v. Bethlehem Steel Corp., 823 F.2d 20, 23 (2d Cir. 1987). The court must evaluate the agreement independently, and should never "rubber stamp" the transaction. See City of Detroit v. Grinnell Co., 495 F.2d 448, 462 (2d Cir. 1974), abrogated on other grounds by Goldberger v. Integrated Resources, Inc., 209 F.3d 43 (2d Cir. 2000).

  1. In the Grinnell litigation, the Second Circuit provided general guidelines for determining the fairness, adequacy, and reasonableness of a class action settlement. Under Grinnell, the reviewing court should consider:

    i. The complexity, expense and likely duration of the litigation;
    ii. The reaction of the class to the settlement;
    iii. The stage of the proceedings and the amount of discovery completed;
    iv. The risks of establishing liability;
    v. The risks of establishing damages;
    vi. The risks of maintaining the class action through the trial;
    vii. The ability of the defendant to withstand a greater judgment;
    viii. The range of reasonableness of the settlement fund in light of the best possible recovery;
    ix. The range of reasonableness of the settlement fund in light of all the attendant risks of litigation. Grinnell, 495 F.2d at 463 (citations omitted).
  2. Factors (viii) and (ix) are not mutually exclusive. The courts are asked to view the value of the settlement from two different perspectives. See In re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig, 55 F.3d 768, 806 (3d Cir. 1995), modified on other grounds by Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) and aff'd, 134 F.3d 133 (3d Cir. 1998) ("General Motors Corp."). Put another way, these two factors compare the proposed settlement to the present value of the damages plaintiffs likely would recover if successful, discounted for the risk of not prevailing at all. Id.

    i.  Other courts have relied on the Grinnell factors, in various forms, in determining the propriety of class action settlements. One court has combined six of the Grinnell factors and associated them with the degree of risk borne by both sides in proceeding toward a trial versus reaching a compromise. See Martens v. Smith Barney, Inc., 181 F.R.D. 243, 264 (S.D.N.Y. 1998) ("[s]ettlements sacrifice higher potential relief to avoid the uncertainty and cost of prolonging the case").
    ii.   In conducting its oversight function, a reviewing court will examine both the substantive terms of the settlement agreement as well as the procedural manner in which the settlement agreement was reached, being careful at all times to protect the rights of putative class members.

9.  Substantive Class Action Settlement Considerations. In determining whether the settlement agreement is "fair, reasonable and adequate," the court first will look at the substantive terms of the settlement agreement. See Isby v. Bayh, 75 F.3d 1191, 1199 (7th Cir. 1996). Courts will examine such things as the monetary or other value of the settlement agreement, the effect of the settlement on putative class members' other claims, the impact of an attorneys' fee award and any other substantive settlement terms.

10.  Value of the Settlement and Settlement Distributions. To ensure the fairness, adequacy and reasonableness of the settlement agreement, the court must be certain that the settlement is properly funded and provides for an adequate distribution to the class members. See General Motors Corp., 55 F.3d at 806-10. The court will review the settlement funds' sources to determine its overall value. If inadequately funded, the court can disapprove the agreement on the grounds that absent class members were not adequately represented.

11.  Representative Plaintiffs vs. Class Members. Most settlement agreements provide that the representative plaintiffs will be compensated to a greater extent than other class members. In theory, such a distinction rewards those who initiated the litigation, and assumed the associated risks and inconvenience of litigation, over those who benefited from the settlement without significant involvement. A court will approve such "incentive awards" for representative plaintiffs, depending upon the class representatives' involvement in the case and personal funds expended in pursuit of the action. Whether the circumstances warrant additional money to a class plaintiff is based on several considerations:

  1. The personal risks incurred in becoming and continuing as a litigant;
  2. The time and effort expended in assisting in the prosecution or in bringing to bear added value; and
  3. Any other burdens sustained by the plaintiff in lending himself or herself to the prosecution of the claim or the ultimate recovery. Roberts v. Texaco, Inc., 979 F. Supp. 185, 200 (S.D.N.Y. 1997).

12.  Waivers and Releases. Class action settlement agreements typically include provisions requiring the waiver, release, or final settlement of at least a portion of each class members' claims against the employer. Obviously, such provisions are key terms. Few employers would settle class action litigation if the settling class members could continue or initiate litigation in the same or other forum. To the extent that a settlement agreement may be found to have tolled or extended certain state and Federal statutes of limitations, a defendant seeking to settle a class action must consider the scope of any waiver or release, as well as the prospect that objecting class members might continue the litigation. The issues become more complex when one remembers that, under Rule 23 class actions, putative class members are generally bound by any settlement agreement absent their decision to "opt out" of the litigation, while in FLSA class actions a class member must affirmatively elect to join the case. If that decision to join or abstain from the action is presented to a class member before a settlement agreement has been negotiated, then arguably a class representative may not have any authority to settle a claim unrelated to the underlying litigation. If, however, the settlement agreement is presented to the court for approval before class certification, or before the deadline for electing to join the case, then it could be argued that class counsel may seek a broader waiver or release of claims than might otherwise be appropriate. If all else fails, in exchange for a broad release of claims, the settlement agreement could permit class members to decline the benefits of the settlement agreement, with the associated risk that a significant number of putative class members might avail themselves of the opportunity. In such circumstances, the agreement should include provisions rendering the agreement null and void if a significant number or percentage of class members "opt out."

  1. No matter what the scope of the waiver, release or settlement, the agreement itself should reference clearly the legal theories or claims encompassed by the waiver, release or settlement. The agreement also should note specifically the consideration exchanged for the release and waiver of rights. One must be mindful that the objective for entering into a settlement agreement is finality.
  2. A properly drafted waiver or release will have the desired res judicata effect under the principles of comity, the Full Faith and Credit Clause, FLSA, 28 U.S.C §1738, and other state or Federal statutory authority. Federal and state courts will recognize the preclusive effect of judicial or quasi-judicial actions so long as the jurisdiction that rendered the preclusive action recognizes it as such. See Abramson v. Pennwood Inv. Corp., 392 F.2d 759, 762 (2d Cir. 1968) (so long as the Federal claim was not adjudicated, a state court may approve a release of the Federal claim as a condition of a settlement).

13.  Attorneys' Fees Awards. No matter what the "value" of the settlement, a significant part of any class action settlement inevitably will involve the handling of class counsel's attorneys' fees. Although settlement agreements may sometimes provide that plaintiffs' counsel shall not be entitled to any attorneys' fee or costs (as in the case where counsel may be seeking to resolve the case to avoid a negative result), most settlement agreements call for the payment of attorneys' fees and costs. Settlement agreements may provide that the attorneys' fees issue will be resolved by the court, that the attorneys' fees will be paid directly by the defendant or that the attorneys' fees will be paid out of the settlement proceeds. Although the attorney may make the request for fees, he or she does so on behalf of the client. See Brown v. General Motors Corp., 722 F.2d 1009, 1011 (2d Cir. 1983).

  1. Class counsel may negotiate attorneys' fees as part of the settlement without committing any ethical violations. See Evans v. Jeff D., 475 U.S. 717 (1986); Malchman v. Davis, 761 F.2d 893, 904-05 (2d Cir. 1985), abrogated on other grounds by Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) (finding that settlement was not tainted because attorneys' fees were negotiated simultaneously with the issues on the merits).
  2. Although there are no bright-line rules governing the fairness of attorneys' fees in class action litigation, courts have used two methods to analyze whether the fee is fair: the "lodestar" method and the "percentage of award" method. Regardless of the methodology chosen, the relevant factors are the amount of work done, the risk incurred, the difficulty and complexity of the case, the benefit to the class, and the benefit to the public. See In re Nasdaq Market-Makers Antitrust Litig., 187 F.R.D. 465 (S.D.N.Y. 1998) (providing an analysis of the pros and cons of each method).
  3. One way to evaluate the fairness of the fee is to calculate the amount of hours reasonably worked, multiply those work hours by the reasonable rate in the region for the type of action involved, and then adjust the fee up or down by employing a multiplier. This method, known as the "lodestar" approach, has been the predominant practice in the Second Circuit. See In re Agent Orange Prod. Liab. Litig., 818 F.2d 226, 232 (2d Cir. 1987). The lodestar method is often used where the settlement is consistent with public policy considerations or includes non-cash benefits or relief. See In re Prudential Ins. Co. of America Sales Practices Litig., 148 F.3d 283, 333 (3d Cir. 1998), cert. denied, 525 U.S. 1114 (1999).
  4. The multiplier is designed to take into account various factors, such as the complexity of the litigation, the experience of counsel, the amount of time already expended by counsel, and the risk of litigation. The multiplier is determined on a case-by-case basis in accordance with the court's experience in class action matters.
  5. The other accepted method of setting attorneys' fees is to give counsel a percentage of the award. See Hallet v. Li & Fung, Ltd., No. 95 Civ. 8917, 1998 WL 698354 (S.D.N.Y. Oct. 6, 1998). This method is gaining in popularity in "common fund" cases. See In re Nasdaq, 187 F.R.D. 465. One criticism of the percentage method is that, when compared to the individual award to class members, it can result in a windfall to the attorneys. See General Motors Corp., 55 F.3d at 821. As such, courts may use the lodestar and percentage methods to support its finding that the award was fair. See id. at 821 n.40.
  6. To facilitate the fact-finding process, class counsel must submit evidence in support of his or her fee request. See, e.g., Strong v. Bell South Telecomms., 137 F.3d 844, 847 (5th Cir. 1998) (questioning the reasonableness of class counsel's claim of having worked 21,000 hours for a four-state litigation). Documentary evidence should be submitted detailing the hours actually worked by each person and that individual's rate scale. See Hanlon v. Chrysler Corp., 150 F.3d 1011, 1029 (9th Cir. 1998) (requiring class counsel to submit detailed evidence of work). It should be noted that the applicable rate is that of the locale where the action is pending, not the rate that a given attorney may command in another jurisdiction.

14.  Procedural Due Process. As discussed above, in determining whether to approve a class action settlement, the reviewing court will carefully examine the substantive terms of the agreement to insure that the interests of the class have been represented and that collusion has not tainted the process.

  1. In addition to the settlement agreement's substantive terms, however, a reviewing court will also work to insure that the settlement agreement was arrived at in a procedurally appropriate manner.
  2. The fairness of the procedure that resulted in the proposed agreement requires the court to consider whether the proposal was the product of a compromise reached after arm's-length negotiation. See Weinberger v. Kendrick, 698 F.2d 61, 74 (2d Cir. 1982). The stage at which the settlement was reached also may be considered. For example, a higher degree of judicial scrutiny may be required when a settlement agreement has been reached before class certification. See Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), cert. granted, 527 U.S. 1031 (1999); Weinberger, 698 F.2d at 73.

15.  Notice of Settlement Generally Required. The notice must be reasonably calculated to fairly apprise the class members of the terms of the proposed settlement and of the options that are available to them in connection with the proceeding. See Handschu v. Special Servs. Div., 787 F.2d 828, 832-33 (2d Cir. 1986) (citing Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)). It must express no opinion on the merits of the proposed settlement. See Handschu, 787 F.2d at 833 (citing In re Traffic Exec. Ass'n — Eastern R.R., 627 F.2d 631, 634 (2d Cir. 1980)).

  1. Rule 23(c)(2) requires that the parties make a "reasonable effort" to notify known class members. See Eisen v. Carlisle and Jacquelin, 417 U.S. 156 (1974). Thus, a mailing to one's last known address may be sufficient, but notice to an intermediary's address, such as a bank may not be sufficient. See Weinberger, 698 F.2d at 71. Courts do not require that every class member actually be notified so long as reasonable means likely to apprise interested parties were taken. Weigner v. City of N.Y., 852 F.2d 646, 649 (2d Cir. 1988).
  2. The notice need not contain the entire text of the proposed settlement. See Weinberger, 698 F.2d at 70. In such a case, the notice should alert putative class members that the agreement and supporting papers are available for examination. See Prudential Ins. Co. Sales Practices Litig., 177 F.R.D. at 230.

16.  Structure of the Settlement.

  1. Lump-Sum Settlements. When a lump sum settlement has been negotiated, it may be distributed to class members who file claims or, alternatively, to those class members who do not exclude themselves on the basis of statistics or the defendant's records. 2 Herbert B. Newberg, Newberg on Class Actions, §11.17 (3d Ed. 1992).The distribution of lump sum proceeds proportionally among only those who file claims usually results in higher recoveries to each claimant (as many will neglect to file) and may improve the chances of court approval. Id. Distribution on the basis of statistics, or the defendant's records, to all class members not excluding themselves, following receipt of notice usually results in a faster consummation of settlement and distribution with fewer objections by class members because they will recover without any action on their part.
Advantages to Employers Disadvantages to Employers
(a) liability is capped (a) excess payment of actual damages is possible if the agreement does not provide for a reversion;
(b) distribution is expedited;
(b) difficult to negotiate if the number of class members and their damages are difficult to estimate accurately; and
(c) if permitted under the agreement, unclaimed proceeds revert to the employer after individual claims are filed and compensated (c) there is a problem of simultaneous discussion of the merits and attorneys' fees

17.  Formula Settlements. Plaintiffs' counsel generally considers implementation of a formula per unit settlement when class members are clearly identifiable or when individual claimants have relatively large claims. A formula per unit settlement will expedite relief when class members are easily identifiable and not too numerous to make individual notice practicable. A formula per unit settlement will result in a maximum overall recovery when there are large individual claims or when individual claimants are highly motivated to file claims. Full and adequate notice to class members is important to encourage class member participation in the settlement as well as to help the defendant assure less likelihood of later attack by class members on the settlement. Newberg, supra, § 11.19.

Advantages to Employers Disadvantages to Employers
(a) eliminate excess payment for actual damages; (a) There is no ceiling on liability; and
(b) discussion of fees and damages can be separated; and (b) takes a long time to distribute
(c) individual damage claims can be calculated accurately
  1. Determining the proper formula may prove to be a difficult task in FLSA actions. First, the rate must be determined. When employers are dealing with situations where "exempt" employees claim they were improperly classified, and thus owed overtime, those employees were generally paid on a salary basis. Therefore, to figure their hourly rate, employers need to determine how many hours they worked a week and divide this into the weekly salary. Where employees' weekly hours worked varied from week to week, the fluctuating workweek method should be used. To this end, the weekly salary should cover all hours worked in the week and overtime of half time should only be due for hours over 40 in the week.
  2. Figuring out the number of hours worked each week is another issue altogether. Most likely, the employees (who were classified as exempt) did not maintain time sheets or time cards. It is therefore left to the creativity of the plaintiffs to remember the number of hours worked each week. This number will most likely be reflected in the plaintiff's responses to interrogatories or his or her affidavit. If the defendant can refute exaggeration, it can raise the issue.

18.  Approval of Class Action Settlement: The approval of a class action settlement is a three-step process:

  1. Preliminary evaluation of fairness by the court;
  2. Notice to all class members; and
  3. A formal fairness hearing.

D.  Recent Developments

1.  States Are Immune from FLSA Liability. In Alden v. Maine, 527 U.S. 706 (1999), a case with far-reaching implications, the Court, in 1999, affirmed the decision of the Supreme Judicial Court of Maine dismissing FLSA claims against the state on the basis of state "sovereign immunity." The Court held that states are immune from FLSA suits brought by individuals in state court. The Alden court determined that immunity flowed from "the fundamental aspect[s] of sovereignty [the states] enjoyed before the Constitution's ratification." 527 U.S. at 713. The Alden court reasoned that the states retained the immunity as "residuary and inviolable sovereignty" after ratification. Id. at 714. Therefore, unless a state consents to a class of a suit, it is immune to that suit.

2.  The Agricultural Exemption Does Not Apply to Greenhouse Operators Operating As a Wholesaler and not a Grower. In Atkins v. Mid-American Growers, Inc., 167 F.3d 355 (7th Cir. 1999), the court held that the agricultural exemption does not apply to a plant nursery that mostly bought, showed, and sold plants rather than growing the plants.

  1. Who Is Liable for FLSA Violations? The courts find wide latitude within the circular definitions of the FLSA: An "employer" is defined as: "any person acting directly or indirectly in the interest of an employer in relation to an employee?....29 U.S.C. §203(a)(1). And "employ" is defined to include: "to suffer or permit to work." 29 U.S.C. §203(g). To draw necessary distinctions, the courts refer to the "totality of the circumstances" or "economic reality" tests with little explication. For example, in Herman v. RSR Security Services Ltd., 172 F.3d 132 (2d Cir., 1999), the Second Circuit held a Chairman of the Board personally liable for FLSA violations based upon evidence that he exercised control over the employees. The court also ruled that defendant did not have a right of contribution from joint employers.
  2. The standard applied by the court was:

    [T]he overarching concern is whether the alleged employer possessed the power to control the workers in question, with an eye to the "economic reality" presented by the facts of each case. Under the "economic reality" test, the relevant factors include "whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records."
  3. No one of the four factors standing alone is dispositive. See Superior Care, 840 F.2d at 1059. Instead, the "economic reality" test encompasses the totality of circumstances, no one of which is exclusive. 172 F.3d at 139 (citations omitted).
  4. In the RSR case, Portnoy had hired, and on occasion, supervised and controlled employees, and though he did not determine rates, he was responsible for changing employees from independent contractor to employee status.
  5. Finally, the court was impressed that Portnoy controlled company finances. Under the "economic reality" test, Portnoy was an employer under the FLSA. As the court said:

    The victor at Waterloo, when asked to undertake a task, reputedly responded: "The Duke of Wellington declines to interfere in circumstances over which he has no control." Appellant here interfered in business affairs where, the record reveals, he had considerable control over employees. Under the Fair Labor Standards Act, such control of employees is central to deciding whether appellant should be deemed an employer and therefore liable to his employees for unpaid wages. 172 F.3d at 135.
  6. Similarly, in Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d 668 (1st Cir. 1998), the court held that a temporary agency was a joint employer with the employer for whom the work was done and that the individuals running the operations could be personally liable for FLSA violations.

3.  Volunteers May Not Be Employees. In Roman v. Maietta Construction, Inc., 147 F.3d 71, 74 (1st Cir. 1998), the court found that an employee who served as a crew chief on weekend automobile racing conducted by the company's owner's son was a volunteer not engaged in compensable employment when the plaintiff stated, "I was a volunteer."

4.  Drivers Covered By Motor Carrier FLSA Are Exempt. The FLSA provides that the overtime provisions "shall not apply?...with respect to whom the Secretary of Transportation has power to establish qualifications and maximum hours of service pursuant to the provisions of section 31502 of Title 49 [the Motor Carrier FLSA]?..." 29. U.S.C. §213.

  1. Under the FLSA a carrier may not be subjected simultaneously to the regulation of the Secretary of Transportation and the Secretary of Labor. As a result, the FLSA will not apply to any employee who:

    i. Is employed by a motor carrier that is regulated by the Secretary of Transportation under the Motor Carrier FLSA ("MCA");
    ii. Engages in activities which directly affect the safety of the motor vehicle they operate; and
    iii. Operates in interstate commerce. See Grotta, Glassman & Hoffman, Overtime USA: You Can't Get There from Here; Federal Court Holds Intrastate Bus Drivers To Be In Interstate Commerce and Exempt From Overtime, Metropolitan Corp. Counsel, 20 (October 2000).
  2. Therefore, an FLSA action for overtime brought by 79 intrastate bus drivers, who were found to be in interstate commerce, was dismissed. Id.

5.  Public Employers May Force Employees To Use Compensatory Time. The United States Supreme Court, in Christensen v. Harris County, 529 U.S. 579 (2000), held that public employers are not prohibited from forcing employees to use accrued compensatory time.

  1. In Christenson, Harris County adopted a policy requiring its employees to schedule time off to reduce the amount of accrued time for which the County would have to pay cash for under some circumstances. County deputy sheriffs sued, claiming that the FLSA prohibits such a policy.
  2. The Court rejected the proposition since it found nothing in the FLSA that prohibited the policy. 529 U.S. at 588.

6.  What is a "Custom or Practice" Under the FLSA? Courts have held that "where the union and employer discuss an issue, the result may be custom or practice, even if the collective bargaining agreement is silent on the issue." Bejil v. Ethicon, Inc., No. 00-10847, 2001 WL 1168084 (5th Cir. Oct. 2, 2001).

  1. In Bejil, the union had discussed the issue of compensating employees for donning and doffing clothing before and after work with the employer during collective bargaining negotiations. Since no payment was agreed upon by the union and the employer, and the contract was silent, the Fifth Circuit determined that nonpayment became "the custom or practice." Id., at *2.
  2. Accordingly, the time spent changing clothes could be legally excluded when computing compensation.

Please feel free to contact Peter M. Panken or Lauri F. Rasnick at 212/351-4500 in the firm's New York office if you have any questions or comments. Mr. Panken's e-mail address is [email protected] and Ms. Rasnick's e-mail address is [email protected] .

This publication is provided by Epstein Becker & Green, P.C. for general information purposes; it is not and should not be used as a substitute for legal advice.