By: Jason E. Reisman, Blank Rome LLP
No one questions the incredibly complex and nuanced web of wage and hour regulations that the U.S. Department of Labor (DOL) has laid down over the last 80 or so years as guidance under the Fair Labor Standards Act (FLSA). Of course, in one sense, the regulations represent a grand effort to try to address just about every possible scenario implicating minimum wage and overtime pay concerns. On the other hand, the sheer volume of the regulations and embedded intricacies often leave employers scratching their heads. Well, compliance help may be on the way! In another (expected) move under Republican administration stewardship, which typically focuses on compliance assistance rather than “gotcha” enforcement, there will soon be an option for any employer that realizes it has been mistakenly out of compliance to self-report and obtain a final resolution.
The DOL’s Wage and Hour Division (WHD) has just announced that it will implement a new nationwide pilot program, the Payroll Audit Independent Determination (PAID) program, which it says is designed to “facilitate resolution of potential overtime and minimum wage violations under the [FLSA].” See the WHD’s information page here (https://www.dol.gov/whd/paid/) for more details. The DOL has created the program to assist in expeditiously resolving claims and avoiding unnecessary litigation, while also providing a vehicle to (1) improve employer compliance with minimum wage and overtime obligations, and (2) ensure that more employees receive the back wages they are owed without the delay associated with pursuing claims through lawsuits or DOL investigations.
The WHD plans to implement this pilot program nationwide for approximately six months. Upon completing the pilot, the WHD will evaluate how effective it is, whether potential modifications to the program would enhance it, and whether to make the program permanent. Voluntarily participating employers can correct compliance errors without risk of paying liquidated damages, civil money penalties, or attorneys’ fees.
The benefits of this program (to the extent it ultimately becomes permanent) will be for those employers who are vigilant and monitor their wage and hour compliance … and want to properly correct any mistakes found, which includes voluntarily paying any back wages employees are owed. Currently, when an employer identifies a compliance issue where back pay is owed, it cannot simply calculate and pay the back wages and have certainty that the matter is resolved. The potential for litigation remains (possibly seeking more money, liquidated damages, a longer back pay period, and attorneys’ fees) as well as a time-consuming and costly DOL investigation.
With the PAID pilot program, a self-reporting employer coming forward in good faith can pay 100% of the back wages owed under the WHD’s supervision and achieve peace of mind knowing the matter is conclusively resolved. Of course, not surprisingly, employers currently in litigation or under investigation by the WHD cannot participate in this program for the issues involved in the litigation/investigation. Although employees being offered back wages do not have to accept the payment (and can retain any right to pursue an action), if the employee accepts the payment, she/he will be required to grant a release “tailored to only the identified violations and time period for which the employer is paying the back wages.”
Stay tuned for the DOL announcing exactly when the pilot program will begin and providing more detailed information about participation. Please don’t hesitate to reach out to any member of the Wage and Hour Defense Institute with questions.
By: Jason E. Reisman, Blank Rome LLP
Today, the U.S. Department of Labor finally issued its much-anticipated proposed update to the regulations governing the “white collar exemptions” (those for executive, administrative, and professional employees) under the Fair Labor Standards Act. The last changes to the regulations occurred in 2004. With this latest update, explained in just under 300 pages in the Notice of Proposed Rulemaking (NPRM), the DOL’s key focus is on increasing the minimum salary threshold required to meet the exemptions. (If you are interested in reading more detail or 300 pages of “fun,” surf to the DOL’s announcement page here.)
Effort to Provide Overtime Pay to 5 Million More Workers
Although we have not yet parsed through the full NPRM, it is clear that the DOL has taken President Obama’s instructions to heart and sought to broaden the federal overtime pay requirements to cover an estimated 5 million additional workers in the U.S. The primary method for this expansion comes through raising the minimum salary level required to meet the applicable white collar exemption tests. To meet one of these exemptions, an employee must be paid at least the minimum salary, be paid on a salary basis, and primarily perform certain job-related duties. The DOL does not appear to have proposed any material changes to the salary basis requirements or duties tests for the exemptions.
Minimum Salary Hike to $970 a Week in 2016
Since 2004, the minimum required salary has been $455 per week (or $23,660 annually). The proposed rule would increase that amount to what is expected to be $970 per week in 2016 (or $50,440 annually). The DOL is setting the salary threshold to be equal to the 40th percentile of weekly earnings for full-time salaried workers. The DOL’s logic behind the substantial increase is that too many white collar salaried workers (85%) get paid at least $455 per week yet fail to meet the duties tests to be exempt. That means, in the DOL’s view, that the current salary level is only screening from exemption approximately 15% of overtime-eligible white collar salaried employees. By changing the salary level as proposed, the DOL states that it would screen out an additional approximately 44% of overtime-eligible white collar salaried employees. By enhancing the effective screening ability of the salary threshold, the DOL believes there will be less pressure on the duties test and also avoid a return to the more detailed “long” duties test that existed before 2004.
Additionally, the DOL is seeking to ensure that the salary threshold remains meaningful and grows over time by establishing a mechanism for automatic updates to the standard salary level. The DOL has suggested two different methods for this updating mechanism (one continually tied to the 40th percentile noted above and the other tied to inflation) and seeks public comment on both.
Duties Test – No Changes Right Now, But…
Although no direct changes to the duties tests are proposed, the DOL is seeking comments on the current requirements and whether they are working as intended to screen out employees who are not bona fide white collar exempt employees. So, there certainly could be potential changes in the works. Only time will tell. The comment period will be open for 60 days following the official publication of the proposed rule in the Federal Register.
Don’t Wait – Think Now!
Regardless of whether the proposed new rule goes into place exactly as laid out in the DOL’s NPRM, this is a call to all employers to begin (if you have not already) thinking about the impact on your workforce and where you may need to re-evaluate and re-classify. There’s no better time than with newly issued, or even proposed, regulations to evaluate and plan the implementation of any needed re-classifications. You can “blame” the re-classifications on the new regulations, rather than admitting to any prior misclassification.
Check back soon for more detailed information and updates on the DOL’s efforts!
President Obama Sics The DOL On Corporate Profits, Says Reduce The Number Of Exempt Workers And Pay More Overtime
By: Jason E. Reisman, Obermayer Rebmann (3/14/14)
Just when you thought it was safe to go back in the water … or at least thought you might be getting a handle on the highly technical and nuanced regulations under the Fair Labor Standards Act governing the “white collar exemptions,” President Obama is instructing the Department of Labor to revamp those regulations to ensure that more American workers are eligible for minimum wage and overtime pay.
It’s been reported that today the President will direct the DOL to begin the process of revising the regulations governing the “white collar exemptions”—clearly, an endeavor to combine his efforts to increase to the minimum wage with a broadening of the types of workers who will be entitled to receive the minimum wage and also overtime pay. As you may recall, the white collar exemption regulations were last revised in 2004, which was about 50 years after the prior substantive modification. These regulations define the requirements for specific white collar exemptions and generally apply to those executive, administrative, and professional employees who are paid a minimum weekly salary amount of $455/week, are paid on a salaried basis, and primarily perform duties in line with those described in the regulations. By meeting the requirements of one of the white collar exemptions under the FLSA, a worker is “exempt” from receiving minimum wage and also from receiving overtime pay for hours worked in excess of 40 in a work week. (Note: In states that have minimum wage and overtime laws, to be exempt, an employee must meet the state law requirements as well.)
From the news reports, it sounds like the President has two basic changes in mind:
1. Raising the minimum salary amount that applies to most of the white collar exemptions. The President seeks to substantially increase the current $455/week salary requirement, possibly more than doubling it.
2. Changing the duties requirements. Word has come from the White House that abuse is rampant among employers for using the “primary duty” test (i.e., the duty that is most important or is the principal function) to treat workers as exempt from overtime pay even though they only perform that duty less than 50% of the time. For example, retail store supervisors whose primary duty is to oversee and manage the store may very well spend more than 50% of their time assisting customers and making sales; however, that supervisor can still be exempt under the regulations if her/his “primary duty” is to manage the store (performing duties such as hiring, disciplining, firing employees; directing work; setting schedules; controlling the flow of inventory and supplies; and planning and controlling the budget). Apparently, the revisions contemplate ensuring that, to be exempt, workers must perform exempt duties at least a minimum percentage of the time.
This process and potential revision of these regulations is unlikely to happen quickly, as the DOL will need to evaluate the current regulations and draft proposed changes to meet the President’s goals, which will then be subject to public comment before final approval and issuance by the DOL. Regardless, for employers still not out of the woods from the economic downturn, the prospect of having more employees fall out from under these common FLSA exemptions could be harrowing for their future. Strong objection is expected from business and industry groups, especially as regulation changes often yield substantial increases in lawsuits (FLSA lawsuits have already increased more than 350% over the last dozen years) and DOL enforcement actions. We will continue to monitor this issue and provide further reports as it evolves.
Wal-Mart Dodges Another Bullet, Allowing Third Circuit to Clarify Final Certification Standard in FLSA Collective Action
By: Jason E. Reisman, Obermayer Rebmann Maxwell & Hippel LLP
On August 9, 2012, in upholding decertification in a nearly decade-long class action suit against Wal-Mart, the U.S. Court of Appeals for the Third Circuit took the opportunity to weigh in and clarify the standard for final certification of a collective action under the Fair Labor Standards Act (FLSA). Zavala v. Wal-Mart Stores Inc., No. 11-2381 (3d Cir. Aug. 9, 2012). Originally filed in 2003, in the U.S. District Court for New Jersey, the plaintiffs were Wal-Mart cleaning crew members who sought unpaid overtime compensation and certification of a collective action under the FLSA, as well as civil damages under RICO and damages for false imprisonment. (Note: interestingly, though not for the purposes of this article, the RICO claims alleged Wal-Mart took part in the harboring of illegal immigrants, encouraging illegal immigration, conspiring to commit money laundering, and involuntary servitude. Additionally, they alleged Wal-Mart locked workers in some stores at night without having a manager with a key available.) The plaintiffs were illegal immigrants who had taken jobs with contractors and sub-contractors that Wal-Mart engaged to clean its stores.
In relevant part, after conditionally certifying the FLSA collective action in 2004, the District Court granted Wal-Mart’s motion to decertify the action in June 2010. The District Court concluded that, after extensive discovery, the breadth of factual circumstances underlying the individual workers’ claims prohibited the case from proceeding as a collective action.
On appeal, the Third Circuit affirmed and took the opportunity to clarify the final certification standard. The Third Circuit stated that the standard for final certification is clearly more stringent than the standard for conditional certification and noted that final certification requires the District Court to “make a finding of fact that the members of the collective action are ‘similarly situated.’” The proper analysis involves an “ad-hoc approach, which considers all the relevant factors and makes a factual determination on a case-by-case basis.” The Third Circuit recognized the following non-exhaustive list of relevant factors to consider: “whether the plaintiffs are employed in the same corporate department, division, and location; whether they advance similar claims; whether they seek substantially the same form of relief; and whether they have similar salaries and circumstances of employment. Plaintiffs may also be found dissimilar based on the existence of individualized defenses.”
The Third Circuit also held that, at the final certification stage, the burden of proof falls squarely on the plaintiffs to establish the “similarly situated” requirement under the FLSA. Also, addressing an unresolved issue, the Court held that plaintiffs must satisfy this burden by a preponderance of the evidence, rather than a heightened standard.
Under the standard and burden articulated, the Third Circuit found the plaintiffs failed to prove the potential opt-in class members were similarly situated. “The similarities among the proposed plaintiffs are too few, and the differences among the proposed plaintiffs too many.” The Third Circuit went on to clarify that being similarly situated is more than simply “sharing a common status, like being an illegal immigrant. Rather, it means that one is subjected to some common employer practice that, if proved, would help demonstrate a violation of the FLSA.” Although there was some commonality and link between the potential plaintiffs, the Third Circuit agreed with the District Court that the similarities were insufficient to allow the case to proceed as a collective action: “the putative class members worked in 180 different stores in 33 states throughout the country and for 70 different contractors and subcontractors. The individuals worked varying hours and for different wages depending on the contractor.”
At the end of the day, the Third Circuit effectively assisted employers (in Delaware, Pennsylvania, New Jersey and the Virgin Islands) by clarifying that establishing different factual circumstances and individualized defenses will go a long way towards preventing final certification of a collective action under the FLSA. As has been the case in courts around the country, it remains critical for plaintiffs seeking collective action certification to demonstrate some common policy, plan or decision that links the proposed class members together in pursuing FLSA violations. The more breadth in the proposed class, whether across state lines or differing job classifications, the more difficult the burden appears to be on the plaintiffs. Wal-Mart (and, of course, other employers in the Third Circuit) could not agree more.
There Goes The Neighborhood–Third Circuit Decides FLSA “Opt-In” Collective Actions and State Law “Opt-Out” Class Actions Can Exist In The Same Lawsuit
By: Jason E. Reisman, Obermayer Rebmann Maxwell & Hippel LLP
Back in the beginning of 2011, in Knepper v. Rite Aid Corporation, the United States District Court for the Middle District of Pennsylvania effectively held that collective actions (i.e., opt-in actions) under Section 216(b) of the Fair Labor Standards Act (“FLSA”) and class actions under Rule 23 (i.e., opt-out actions) of the Federal Rules of Civil Procedure were “inherently incompatible.” In the case, Rite Aid assistant store managers were pursuing claims that they had been improperly classified as exempt from the overtime provisions of the FLSA and state law. As a result of the court’s decision, the plaintiffs’ Rule 23 class actions were dismissed. (For additional details of the 2011 decision, please refer to my prior post of April 5, 2011.)
On March 27, 2012, on appeal, the U.S. Court of Appeals for the Third Circuit took up the issue of “inherent incompatibility” in Knepper and reversed the decision of the Middle District of Pennsylvania. Knepper v. Rite Aid Corp., 3d Cir., Nos. 11-1684 & 11-1685, March 27, 2012. The Third Circuit found that the FLSA opt-in action was not inherently incompatible with a Rule 23 state law opt-out action, thereby bringing the Third Circuit in line with four other federal appeals courts–the Second, Seventh, Ninth and District of Columbia Circuits. In analyzing the plain text of the FLSA, the Third Circuit found nothing in the statute that precludes a Rule 23 action from proceeding at the same time as an FLSA Section 216(b) action. In fact, the court noted that the FLSA is not ambiguous–it “explicitly limits its scope to the provisions of the FLSA, and does not address state-law relief.” Although noting it unnecessary given the clear text of the FLSA, the court stated that the FLSA’s legislative history also did not support the inherent incompatibility argument. Announcing its decision, the Third Circuit stated: “In sum, we disagree with the conclusion that jurisdiction over an opt-out class action based on state-law claims that parallel the FLSA is inherently incompatible with the FLSA’s opt-in procedure.”
Certainly, the Third Circuit has now fallen in line with, and indeed reinforced, the trend set by the four other Circuit Courts of Appeal. It is a critical blow to employers defending such cases in Pennsylvania, New Jersey, Delaware and the Virgin Islands, as they no longer will have the argument or opportunity to limit pursuit of such claims to an FLSA opt-in action, which traditionally only achieves opt-in rates of 15 to 20 percent of those potentially eligible class members. The ruling also allows employees to more efficiently pursue both FLSA and state law claims in a single federal court action.
 The opt-in FLSA claims and opt-out state law claims originated in separately filed actions, so this was not the typical “hybrid” single action. Ultimately, the Middle District of Pennsylvania heard the claims on the issue of whether the separately filed actions were compatible and decided to extend the “inherent incompatibility” rationale to the situation at hand.
THIRD CIRCUIT HOLDS THAT OFFER OF JUDGMENT TO FLSA NAMED PLAINTIFF DOES NOT MOOT POTENTIAL COLLECTIVE ACTION
By: Jason E. Reisman and Seth Spiegal, Obermayer Rebmann Maxwell & Hippel LLP
In a setback for employers concerned about the possibility of facing an FLSA collective action, the Third Circuit recently ruled that an employer’s offer of judgment to an FLSA plaintiff in the full amount of the plaintiff’s claim, prior to the plaintiff’s moving for conditional certification, does not moot the collective action. This holding eliminates the viability of an employer’s tactic of “picking off” named FLSA plaintiffs in an attempt to foreclose pursuit of a collective action. The case did provide, however, a small victory for employers. Resolving a split among district courts, the Court held that a plaintiff at the conditional certification stage must make at least a “modest factual showing” that other employees are similarly situated in order to pursue a collective action. See Symczyk v. Genesis Healthcare Corporation, 10-3178 (3d Cir., Aug. 31, 2011)
The plaintiff, Symczyk, brought an FLSA collective action on behalf of herself and others similarly situated. The employers immediately made an offer of judgment under Federal Rule of Civil Procedure 68 for $7,500.00 in alleged unpaid wages plus attorneys’ fees, costs, and expenses. Although Symczyk did not dispute the adequacy of the offer, she did not respond, allowing the offer to lapse. The district court then scheduled a discovery period prior to the plaintiff’s moving for conditional certification. The employer moved under Federal Rule of Civil Procedure 12(b)(1) to dismiss for lack of subject matter jurisdiction, arguing that following the rejection of the offer of judgment, Symczyk no longer had a personal stake or legally cognizable interest in the outcome of the action. The district court found that the individual FLSA claim mooted the collective action and dismissed the case.
Symczyk appealed. The Third Circuit framed the issue as “whether a collective action brought under § 216(b) of the FLSA becomes moot when, prior to moving for conditional certification and prior to any other plaintiff opting in to the suit, the putative representative receives a Rule 68 offer.”
The Third Circuit explained that in general, where an offer of complete relief is made, whether or not it is accepted, “no justiciable controversy remains.” It noted, however, that “conventional mootness principles do not fit neatly within the representative action paradigm.” The Court cited its own case of Weiss v. Regal Collections, 385 F.3d 337 (3d Cir. 2004), which addressed the identical issue in the context of Rule 23 class actions. In Weiss, the Third Circuit held that an offer of judgment in full satisfaction of the named plaintiff’s claim, prior to moving for class certification, does not moot the Rule 23 class action. The Weiss court determined that, where a defendant makes a Rule 68 offer to an individual’s claim that has the effect of mooting possible class relief asserted in the complaint, the class certification motion “relates back” to the filing of the original complaint, and the district court retains jurisdiction over the matter. The Symczyk court described the “relation back” doctrine as “an equitable principle” that “has evolved to account for calculated attempts by some defendants to short-circuit the class action process and … prevent a putative representative from reaching the certification stage.”
In Symczyk, the plaintiff cited Weiss and contended that for the purposes of the application of the “relation back” doctrine, no material distinction between Rule 23 and
§ 216(b) existed. The employer attempted to distinguish the two doctrines. It pointed out that unlike in a Rule 23 action, where the named plaintiff putatively represents a class as soon as the case is filed, a named plaintiff in an FLSA collective action must affirmatively “opt in.” Thus, according to the employer, an FLSA named plaintiff “whose individual claim has been mooted by a Rule 68 offer of judgment before anyone has opted in to the action cannot purport to possess a personal stake in representing the interests of others.” The Third Circuit rejected the employer’s position. While conceding that the argument “has some surface appeal,” the Court found that the employer’s argument “incentivizes the undesirable strategic use of Rule 68 that prompted our holding in Weiss.” It held that, if the mootness inquiry in the 216(b) context “were predicated inflexibly on whether any employee has opted in to an action at the moment a named plaintiff receives a Rule 68 offer, employers would have little difficulty preventing FLSA plaintiffs from attaining the ‘representative’ status necessary to render an action justiciable notwithstanding the mooting of their individual claims.” Explaining further, the Court found that the policy of Rule 23 – allowing plaintiffs to pool claims that would be uneconomical to litigate individually – was similar to that of § 216(b), which affords plaintiffs “the advantage of lower individual costs to vindicate rights by the pooling of resources.”
The Court cited with approval the Fifth Circuit’s decision in Sandoz v. Cingular Wireless LLC, 553 F.3d 913 (5th Cir. 2008), which addressed this issue and held that in enacting § 216(b), Congress did not intend to create an “anomaly” by allowing employers “to use Rule 68 as a sword, ‘picking off’ representative plaintiffs and avoiding ever having to face a collective action.”
As an additional justification for its holding, the Court found that the “relation back” doctrine “helps safeguard against the erosion of FLSA claims by operation of the Act’s statute of limitations.” It pointed out that, for an opt-in plaintiff, the FLSA action commences only upon filing of a written consent. The Court rationalized that protracted disputes over the propriety of dismissal in light of Rule 68 offers may deprive potential opt-ins whose claims are in danger of being barred by the statute of limitations.
The Court summarized its holding: “Absent undue delay, when an FLSA plaintiff moves for ‘certification’ of a collective action, the appropriate course – particularly when a defendant makes a Rule 68 offer to the plaintiff that would have the possible effect of mooting the claim for collective relief asserted under § 216(b) – is for the district court to relate the motion back to the filing of the initial complaint.”
In a small consolation for employers, the Court resolved in the employer’s favor the question of which standard a plaintiff must meet to demonstrate that potential class members are “similarly situated” at the conditional certification stage. It noted that courts within the Third Circuit have been split over whether a plaintiff is required to make merely “substantial allegations” in the pleadings or a “modest factual showing” of similarly-situated status following limited discovery. The Third Circuit adopted the latter standard, requiring the plaintiff to produce “some evidence, beyond pure speculation, of a factual nexus between the manner in which the employer’s policy affected her and the manner in which it affected other employees.” The Court concluded that the “modest factual showing” standard worked in harmony with the opt-in requirement “to cabin the potentially massive size of a collective action.”
For an employer in the Third Circuit, Symczyk removes what was a potentially important tool in its FLSA arsenal. The employer may no longer thwart a collective action by making an offer of judgment that would fully satisfy the demand of the named plaintiff.
A DISTINCTION WITHOUT A DIFFERENCE—FEDERAL COURT EXTENDS INHERENT INCOMPATIBILITY DOCTRINE TO SEPARATELY FILED FLSA AND STATE WAGE-AND-HOUR CLAIMS
By: Jason E. Reisman and Tiffani McDonough, Obermayer Rebmann Maxwell & Hippel LLP
Recently, in Knepper v. Rite Aid Corporation, No. 09-cv-2069 (M.D. Pa. Feb. 16, 2011) and Fisher v. Rite Aid Corporation, No. 10-cv-1865 (M.D. Pa. Feb. 16, 2011), the United States District Court for the Middle District of Pennsylvania addressed the issue of whether Fair Labor Standards Act (“FLSA”) § 216(b) collective actions and Federal Rule of Civil Procedure 23 class actions are “inherently incompatible,” where the actions are filed separately. In Knepper and Fisher, the plaintiffs were assistant store managers who filed putative Rule 23 class actions against their employer claiming to be misclassified and seeking overtime pay under state law. Prior to filing the Rule 23 class actions, both plaintiffs had consented (i.e., opted in) to become party-plaintiffs in Craig v. Rite-Aid Corporation, No. 08-cv-2317, (M.D. Pa.) (“the Craig action”). In the Craig action, current and former Rite Aid assistant managers had filed a § 216(b) collective action alleging that they were misclassified as exempt from the FLSA’s overtime-pay requirements.
In Knepper and Fisher, the court dismissed the Rule 23 class actions, holding that the § 216(b) collective action (the Craig action) and the Rule 23 class actions were “inherently incompatible” despite the fact that the actions were filed separately. The Court explained that “Congress labored to create an opt-in scheme when it created Section 216(b) specifically to alleviate the fear that absent individuals would not have their rights litigated without their input or knowledge . . . . To allow [a] Section 216(b) action to proceed accompanied by a Rule 23 opt-out state law class action claim would essentially nullify Congress’s intent in crafting Section 216(b) and eviscerate the purpose of Section 216(b)’s opt-in requirement.” The court further explained that allowing the plaintiffs “to proceed in a separate action that is in contravention of the important policies underlying the federal statute . . . would still ‘eviscerate the purpose of Section 216(b)’s opt-in requirement’ just as much as in a dual-filed action . . . . [F]iling a separate action rather than asserting the same, related claim in another action . . . is a distinction without a difference.”
Although Knepper and Fisher dealt with separately filed actions, there is a substantial body of conflicting case law regarding the compatibility of FLSA opt-in collective action claims and state-law wage-and-hour Rule 23 opt-out class claims asserted in the same lawsuit—often referred to as “hybrid” actions. As such, there is no established rule defining the parameters of the inherent incompatibility doctrine. Because plaintiffs increasingly file state-law wage-and-hour claims alongside FLSA claims, the procedural split amongst the courts translates into the prospect of increased litigation and costs associated with wage-and-hour claims. This issue will likely make its way to the Supreme Court for final clarity. But, for now, at least in the Middle District of Pennsylvania, FLSA opt-in collective action claims are “inherently incompatible” with Rule 23 opt-out class claims, whether pursued together in a hybrid action or separately in different actions.
 There is a deceptively simple difference between “collective actions” brought pursuant to the FLSA and “class actions” brought pursuant to Federal Rule of Civil Procedure 23 (“Rule 23”). FLSA claims are governed by an “opt-in” mechanism in § 216(b). In these collective actions, litigants who do not affirmatively file notice and join the litigation are not bound by the judgment. Conversely, the Rule 23 “opt-out” device governs non-FLSA claims: class action litigants who do not affirmatively file notice and exit the litigation are bound by the judgment.
 Of interest, the court dismissed the cases without prejudice, thereby allowing both plaintiffs the opportunity to re-file their claims in state court.
Flat-Rate Fees Paid To Sales Associates Are “Commissions” Sufficient To Be Exempt From Fair Labor Standards Act’s Overtime Pay Requirements
By: Jason E. Reisman & Thomas Hearn, Obermayer Rebmann Maxwell & Hippel LLP
On September 7, 2010, a divided U.S. Court of Appeals for the Third Circuit affirmed a grant of summary judgment to NutriSystem, Inc. (“NutriSystem”) in a lawsuit challenging the concept of “commissions” under the retail commission exemption of Section 7(i) of the Fair Labor Standards Act (“FLSA”). In Parker v. NutriSystem, Inc., the Third Circuit held, in a 2-1 decision, that NutriSystem’s call center sales associates were not entitled to overtime pay under the FLSA because, in relevant part, they received “commissions” that qualified them for the Section 7(i) exemption. In finding for NutriSystem, the Third Circuit refused to defer to the U.S. Department of Labor’s interpretation of the term “commission.”
The FLSA’s Section 7(i) exemption applies to employees in retail or service establishments if, among other things, more than 50% of their compensation is derived from commissions on the sale of goods or services. The term “commissions,” however, is undefined by the FLSA or its interpretive regulations.
NutriSystem had created a compensation plan to pay its call center sales associates flat-rate payments based on the direct sales of pre-packaged meal programs to consumers. These flat-rate payments were not based on the consumer’s price paid, but rather on when a sale was consummated and from what type of sales call it resulted. NutriSystem’s flat-rate fees were paid to its sales associates at varying rates of $18.00, $25.00, and $40.00 per sale. These payments were not linked to the costs of any particular meal program sold. Rather, the higher rates were paid on sales made on outgoing sales calls and for sales on calls made during less desirable work shifts (such as the overnight shift).
The employees claimed that such payments were not “commissions” because they were not based on the final cost to the consumer. NutriSystem, on the other hand, argued that its payments were commissions in that the sales associates’ pay varied across pay periods, their compensation was not linked to the number of hours worked, and the payments were proportionate to the cost to the consumer. The DOL filed an amicus brief in support of the sales associates, arguing that “to qualify as a commission, an increase in the costs to the consumer must result in a corresponding increase to the amount of payment made to the employee.”
In affirming the summary judgment for NutriSystem, the Third Circuit made two critical decisions: (1) it declined to grant deference to the DOL’s interpretation and arguments; and (2) it rejected the premise that, to be a commission, payments must be based on a percentage of the price paid by the consumer.
The significance of the Third Circuit’s refusal to defer to the DOL should not be underestimated. The Third Circuit did not simply bow in deference to the DOL’s interpretations. Rather, it appeared to hold the DOL to a higher standard, intently analyzing the rationale behind the DOL’s arguments before rejecting them. The decision clarifies for retail sales employers in the Third Circuit (Delaware, New Jersey, Pennsylvania and the U.S. Virgin Islands) that their compensation plans do not have to be strictly based on a percentage of sale prices to qualify as a “commission” under Section 7(i). However, employers should be aware that the Third Circuit’s decision in this case likely will not be embraced by the DOL. Accordingly, for example, if the DOL conducts an audit, it may adhere to its own interpretation of the term “commission,” leaving the employer to battle to reach a potentially more favorable venue in the courts of the Third Circuit.
The Third Circuit held that “when the flat-rate payments made to an employee based on that employee’s sales are proportionally related to the charges passed on to the consumer, the payments can be considered a bona fide commission rate for the purposes of [Section] 7(i).” In reaching that decision, the Third Circuit was persuaded by four primary factors. First, although NutriSystem’s flat-rate payments ranged from 5% to 14% of the price of the meals charged to the consumer, the variance was nominal, and, therefore, the flat-rate payments were proportionate to the costs. Second, the flat-rate fees were based on sales made by the associates and not on the number of calls made or on time worked. Third, from a policy standpoint, the flat-rate fees created incentives for sales associates to be actively making outgoing calls and to work less desirable shifts, thereby allowing NutriSystem to operate at peak efficiency around the clock. Finally, NutriSystem’s compensation system did not offend the history or intent of the FLSA and its overtime provisions, which were enacted to protect lower income employees, to spread available work among the larger pool of employees, and to compensate workers for the increased risk of workplace accidents that they might face from exhaustion in having worked overtime hours.
The Third Circuit’s decision has provided retail employers within the Third Circuit with greater latitude in developing commission plans for employees under the Section 7(i) exemption. Of course, any retail employer must remain mindful of the potential for the DOL to take a conflicting position as it did in this case, and also of how future courts within the Third Circuit interpret this opinion. However, a retail employer may now embark on a path to develop a commission plan similar to the NutriSystem plan that better fits its business model, knowing that the Third Circuit has supported such an effort.
DIFFERENT NAMED PLAINTIFFS IS NOT AN IMPEDIMENT TO THE APPLICATION OF THE “FIRST-FILED” RULE TO FLSA COLLECTIVE ACTIONS
By: Jason E. Reisman & Betina Miranda, Obermayer Rebmann Maxwell & Hippel LLP (Philadelphia, PA)
A recent case out of the New Jersey federal district court clarifies the application of the “first-filed” rule to collective actions brought under the Fair Labor Standards Act (“FLSA”). According to the June 7, 2010, opinion in Abushalieh v. American Eagle Express, Inc., No. 1:10-cv-00211, the “first-filed” rule is indeed applicable to two consecutively filed proposed FLSA collective actions, where the named plaintiffs are different but both sets of plaintiffs seek to represent the same class. The remedy in such a situation is the transfer of the latter-filed case to the district where the first-filed case is pending.
The “First-Filed” Rule
The “first-filed” rule directs that, in cases of federal concurrent jurisdiction, the court which first has possession of the subject matter must decide it, for reasons of judicial economy and sound judicial administration. To be applicable, the latter-filed case must be truly duplicative of the first-filed case, “on all fours” in material aspects. The issues do not have to be identical but must be so similar that a determination in one case would leave little or nothing to be resolved in the other.
The Pre-Abushalieh Cases
Prior to the filing of Abushalieh on January 14, 2010, two other similar cases were filed against American Eagle Express, Inc. (“AEX”). All three cases allege that AEX improperly classifies delivery drivers as independent contractors when they are actually employees. The first case, Sherman v. AEX, was filed February 10, 2009, in the U.S. District Court for the Eastern District of Pennsylvania, as a putative class action under Federal Rule of Civil Procedure (“FRCP”) 23. The case was brought exclusively pursuant to Pennsylvania wage and hour laws, and was filed on behalf of all AEX delivery drivers in Pennsylvania between February 10, 2006, and the present, who were designated by AEX as independent contractors.
The second case, Spellman v. AEX, was filed in the U.S. District Court for the District of Columbia, on September 1, 2009, under the FLSA and Maryland and District of Columbia wage and hour laws. The Spellman plaintiffs seek to represent all AEX delivery drivers who drove delivery vehicles of less than 10,001 pounds gross vehicle weight for AEX. The Spellman plaintiffs also ask that two subclasses be designated for their Maryland and District of Columbia claims. The Spellman case was later transferred on April 9, 2010, to the Eastern District of Pennsylvania at the plaintiffs’ request, principally because of the pending Sherman matter, although it has yet to be consolidated with that matter.
Is Abushalieh on “All Fours” with Sherman and Spellman?
The Abushalieh plaintiffs bring claims solely under the FLSA as a collective action on behalf of all AEX delivery drivers who, between January 15, 2007, and the present, drove delivery vehicles with a gross vehicle weight of 10,000 pounds or less in New Jersey, Pennsylvania, Maryland, and Delaware. AEX filed a motion to dismiss on the basis of the “first-filed” rule citing the Spellman action. The Abushalieh plaintiffs opposed the motion, arguing that (1) the rule is inapplicable because the named plaintiffs were different; (2) the rule should not apply because of concerns about coordinating opt-in FLSA collective actions with opt-out state class actions under FRCP 23; (3) if the rule applies, then Sherman is the first-filed case; and (4) if the rule applies, transfer and not dismissal is the appropriate remedy.
After considering the parties’ arguments, the court issued a ruling which essentially split the baby. First, the court found that Spellman and Abushalieh brought virtually identical FLSA claims seeking the same relief. While Spellman additionally sought relief under state law, its FLSA claim fully encompassed the entire Abushalieh matter. However, Sherman did not encompass the Abushalieh matter, as Sherman brought only state law claims while Abushalieh only brought federal claims. The court found that these facts precluded Sherman from being considered the “first-filed” case.
Second, the Abushalieh court found that the plaintiffs’ concerns about coordinating FLSA collective actions with state law class actions to be inconsequential. While the combination of an opt-out state law class action and an opt-in FLSA collective action could have the effect of nullifying the opt-in requirement, the court noted that there would be adequate remedies for such a conflict, including the dismissal or severing of the state law class action claim, or creating the state law class to include only those who opt in.
Third, and of particular interest, the court found that the parties in Spellman and Abushalieh were sufficiently similar for purposes of the “first-filed” rule despite the different named plaintiffs. The Third Circuit has yet to address the situation where, in two proposed collective actions, the named plaintiffs are different but seek to represent the same class of individuals against the same defendant. So, the Abushalieh court looked to a 2009 decision in the District of New Jersey, Alvarez v. Gold Belt, LLC, No. 08-4871, 2009 WL 1473933. The Alvarez court, while technically not applying the “first-filed” rule because both cases at issue were pending before the same court, drew upon the principles of the rule, especially the importance of judicial economy and consistent judgments. Applying these principles, the Alvarez court stayed proceedings on the case at bar until the judge in the other case ruled on the earlier class certification request.
Relying on the principles of Alvarez, the Abushalieh court ruled that when different named plaintiffs seek to represent the same class against the same defendant with virtually identical FLSA claims, the “first-filed” rules applies. The court further held that the appropriate remedy is transfer of the latter-filed case to the district where the first-filed case is pending, pursuant to the forum non conveniens requirements of 29 U.S.C. 1404(a). Thus, the Abushalieh matter was ordered transferred to the U.S. District Court for the Eastern District of Pennsylvania, where it could be consolidated with the pending Spellman case.
 The colorful phrase “on all fours with” has been explained by the story, perhaps apocryphal, of a case involving a dispute over a living cow. One of the attorneys, in making his argument, cited a prior decision involving a dead cow. Opposing counsel cited a different decision that involved a living cow. The judge sided with opposing counsel, stating that he had better authority because it was “on all fours” (i.e., alive).
Department of Labor Argues that FLSA Collective Actions and State-Law Class Actions May Be Asserted Simultaneously Against the Same Employer
In a recent amicus brief to the Third Circuit, the United States Department of Labor has formally taken the position that state-law class actions under Federal Rule of Civil Procedure 23 are compatible with collective actions under § 16(b) of the Fair Labor Standards Act (“FLSA”), such that the two claims may be brought against the same employer in the same federal lawsuit. While this position is at odds with a majority of district courts within the Third Circuit – and arguably even with the Third Circuit opinion of De Asencio v. Tyson Foods, Inc., 342 F.3d 301 (3d Cir. 2003) – employers within the jurisdiction are anxiously awaiting the Third Circuit’s ruling.
The case before the Court of Appeals is Parker v. NutriSystem Inc., No. 09-3545. The plaintiff filed suit in the Eastern District of Pennsylvania, bringing an FLSA collective action and a Rule 23 class action under the Pennsylvania Minimum Wage Act (“PMWA”). The plaintiff alleged that he and other call center employees were denied overtime pay for weeks in which they worked more than 40 hours. Call center employees were paid the larger of their hourly pay or their flat-rate payments per sale of the employer’s weight-loss program.
The district court granted the employer’s motion to dismiss the PMWA class action. The court declined to exercise supplemental jurisdiction over the state-law claim, finding that “the opt-out mechanism of a Rule 23 class action is ‘inherently incompatible with the opt-in scheme specified by Congress with respect to FLSA collective actions.’” In its perfunctory opinion, the district court expressly adopted the reasoning of Woodard v. FedEx Freight East., Inc., 2008 U.S. Dist. LEXIS 11919 (M.D. Pa. Feb. 19, 2008), and Ramsey v. Ryan Beck & Co., Inc., 2007 U.S. Dist. LEXIS 56129, *6 (E.D. Pa. Aug. 2, 2007). The courts in those cases dismissed Rule 23 class actions filed concurrently with FLSA collective actions because, in their view, including both an “opt-in” and an “opt-out” claim in a single lawsuit would permit the plaintiff to circumvent the FLSA’s opt-in requirement and bring unnamed parties into federal court.
The district court also granted summary judgment in favor of the employer on the FLSA claim. The court found that the call center employees were paid on a commission basis and were therefore exempt from overtime requirements under the FLSA’s § 7(i) retail commission exemption.
On appeal, in its brief, the DOL argued that the district court improperly declined to exercise subject matter jurisdiction over the PMWA claim. It cited 28 U.S.C. § 1367’s mandate that a court has supplemental jurisdiction over all state-law claims that are “so related” to the federal claims “that they form part of the same case or controversy.” The DOL stressed that the FLSA and the PMWA are parallel laws and that an FLSA claim and a PMWA claim share a “common nucleus of operative fact,” such that a district court should exercise supplemental jurisdiction over a the PMWA claim.
Next, the DOL argued that the FLSA is not the exclusive remedy in the area of wage payment, that states may enact wage laws that are broader and more protective than the FLSA, and that the FLSA is not intended to occupy the entire field of wage payment.
With respect to the “inherent incompatibility” of the opt-in and opt-out mechanisms, the DOL contended that nothing in either the text or the legislative history of § 16(b) of the FLSA or the Portal-to-Portal Act evidenced a congressional intent to prohibit simultaneous state-law class actions. According to the DOL’s reasoning, the FLSA’s “opt-in” requirement applies only to FLSA claims and not to state-law class actions, and accordingly, state-law, “opt-out” claims may be brought irrespective of the FLSA. The DOL stated that Congress’s enactment of the FLSA “opt-in” provision was not “a choice against, or a relegation of, the opt-out process of Rule 23.” The DOL essentially argued that, absent any indication that Congress intended for an FLSA collective action to preclude a Rule 23 class action, the state-law class action is permissible in the same suit. Supporting the DOL’s argument was the fact that Rule 23’s “opt-out” provision was enacted in 1966 – almost 20 years after the passage of the Portal-to-Portal Act, which enacted the “opt-in” requirement for FLSA collective actions.
The DOL then distinguished De Asencio, in which the Third Circuit found that the district court had abused its discretion in exercising supplemental jurisdiction over a Rule 23 class action under the Pennsylvania Wage Payment and Collection Law (“WPCL”). The DOL argued that the Third Circuit’s decision was based primarily on the fact that the WPCL claim predominated over the FLSA claim due to its novel questions of state law and standards of proof different from those under the FLSA. It pointed out that, unlike in De Asencio, a PWMA claim and an FLSA claim are identical.
It should be noted that De Asencio contains language that may prove to be problematic for the DOL’s position:
Another countervailing interest in relegating the WPCL claims here to state court is Congress’s express preference for opt-in actions for the federal cause of action. Congress’s interest in these matters is manifest. For policy reasons articulated in the legislative history, Congress chose to limit the scope of representative actions for overtime pay and minimum wage violations.
De Asencio, 342 F.3d at 310-11. The DOL attempted to marginalize this language by stating in a footnote that “there is no basis for concluding that Congress made that ‘choice’ for anything other than collective actions.”
Finally, the DOL cited cases both within and outside of the Third Circuit that disagreed with the lower court’s conclusion and found that an FLSA collective action and a Rule 23 class action may proceed simultaneously.
On the merits of the FLSA claim, the DOL asserted that the retail commission exemption did not apply to the employees in question. According to the DOL’s interpretation, flat fees paid without regard to the value of the service performed or the amount charged to the customer – which described the fees paid to the call center employees – do not constitute commissions for the purposes of the
§ 7(i) retail commission exemption.
Parker has the potential to be a landmark case. If the Third Circuit adopts the DOL’s position, wage and hour plaintiffs within the Circuit’s jurisdiction will be permitted to bring FLSA collective actions and Rule 23 class actions simultaneously against the same employer for the same alleged violation.
By Jason E. Reisman and Seth Spiegal, Obermayer Rebmann Maxwell & Hippel LLP