Court Decertifies Overtime Class of Retail Store Managers

Posted by Greg Mersol on October 01, 2012

Nothing succeeds like success.  Four years ago, in Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233 (11th Cir. 2008), the Eleventh Circuit upheld a $35+ million jury award against the Family Dollar store discount chain for allegedly misclassifying its store managers as exempt.  Predictably, retailers, already a target (no pun intended) of such litigation, were faced with a renewed wave of lawsuits contending that their operations fit perfectly within the Morgan mold.

By facial comparison, the case of Knott v. Dollar Tree Stores, Inc.pdf., Case No. 7:06-CV-1553-LSC (N.D. Ala. Sept. 19, 2012), must have looked like a lay-down for the plaintiffs.  Like Morgan, it involved store managers for a nationwide dollar store chain.  Like Morgan, it was filed in the Eleventh Circuit and, in fact, was filed in the same district court.  As in Morgan, that same court granted conditional certification.  The two defendants even had similar names.  But this would-be clone action suffered a very different end.

The plaintiffs argued, of course, that their case was just a replay of Morgan and they doubtless framed their case and went about discovery to make the case look as much like Morgan as possible.  They asserted that operational controls and limited budgets forced the store managers to spend the majority of their time doing manual, non-exempt work.  The employer relied on the primary duties test under the executive exemption to show that even when the store managers were performing manual work they were also supervising.  It also pointed to differences among the managers due to the size of store, location, level of responsibility and local economic pressures.

The district court followed Morgan, but noted that all Morgan had held was that the lower court there had not abused its discretion in certifying the class.  Put another way, while the Morgan decision had affirmed certification, it had not necessarily required it. 

Moreover, the court found important distinctions between the two cases in that it found the evidence that the class members were similarly situated was relatively weak while there was significant evidence of differences among them.  Interestingly, the court refused to rely on the testimony of those claiming to have the weakest responsibility because the use of such a sample “would be unfair to Dollar Tree.”  Indeed, it questioned whether letting the matter proceed as a collective action would compromise the company’s due process rights.

Finding that the plaintiffs were not similarly situated, the court decertified the class.  The Knott decision is significant because it shows that conditional certification is not the end of the class issues in FLSA litigation and that even with strong authority at their back prevailing on the class issues, plaintiffs are not guaranteed a favorable outcome.

The Bottom Line:  Even in the Eleventh Circuit, holding a class of retail store managers together is still a difficult proposition.

Ninth Circuit Solidifies Split of Authority on Drug Sales Representative Overtime Exemption

Posted by M. Scott McIntyre on February 25, 2011

In a decision that emphasizes practicality over formalism, the Ninth Circuit recently held that pharmaceutical sales representatives (“PSRs”) are exempt from overtime pay.  In Christopher v. SmithKline Beecham Corp.pdf, __F.3d___, 2011 WL 489708 (9thCir. Feb. 14, 2011) the Court concluded that the “outside sales” exemption to the FLSA applies to PSRs, meaning that they are not entitled to overtime pay.  Christopher held that the PSRs’ primary duty was making sales in the sense that “sales” occur in the pharmaceutical industry. 

PSRs have been the subject of numerous class and collective action cases claiming entitlement to overtime, and specifically challenging the application of the outside sales exemption to the FLSA.  The basis for these lawsuits is that the law prohibits manufacturers and PSRs from directly selling prescription drugs to the public or to physicians. Thus, the plaintiffs argue, they cannot be “selling.”

As a result of the legal restrictions on direct sales, the pharmaceutical industry employs approximately 90,000 PSRs to personally convince physicians in a targeted area to prescribe the drugs for which the PSR is responsible.  The PSRs personally visit physicians and provide samples along with information about the products.  The goal of the PSR is to seek non-binding commitments from the physicians to prescribe the assigned product, since the law precludes a direct sale in the strict sense of the word.  (Nota bena for movie aficionados:  The recent film “Love and Other Drugs” depicts the competitive sales atmosphere among PSRs—and, a frolic involving the patient played by Anne Hathaway, raising unrelated issues of binding v. non-binding commitments.). 

In Christopher, the GlaxoSmithKline PSRs were paid a base salary and incentive-based compensation tied to whether market share, sales volume, revenue, or dosage associated with the product increases in the PSR’s territory.  The employer asserted that the “outside sales” exemption applied because the PSRs’ primary duty involved making sales or obtaining orders away from the employer’s business.  The plaintiffs argued that their primary duty was not making sales, but instead communicating features and benefits of the products to physicians.  The Department of Labor (“DOL”) supported the plaintiffs’ position that PSRs do not meet the primary duty test necessary for the exemption. 

Congress has defined “sell” for purposes of the exemption as a “sale” or “other disposition.” Congress has not defined the specific parameters of the outside sales exemption but has granted the DOL power to issue regulations to this end.  Courts typically defer to the DOL interpretation as long as it is based on a permissible construction of the statute.  However, Christopher found that the DOL had not provided specific, meaningful language interpreting the meaning of sales in this context. 

Christopheranalyzed the current and historical job functions for PSRs industry-wide and concluded that the job duties are homogeneous among various drug manufacturers and have changed little over the past 50-60 years.  The Court emphasized that the DOL had interpreted the exemption as far back as 1940 to require only a sale “in some sense” of the word.  As a result, Christopher held that the DOL’s current position in the context of an amicus brief was not entitled to deference since it had essentially acquiesced to the industry practice for decades.  Further, the Court concluded that the DOL view was plainly erroneous and inconsistent with regulations and practice. 

Christopher recognized that legal restrictions prohibit the PSRs from directly selling the drugs, but that physicians are in reality the decision makers that result in the sales.  Based on the pharmaceutical business model, the prescription is the sale for practical purposes.  The manufacturers hire PSRs based on their sales experience, exercise limited oversight of day-to-day activities of the PSRs, and tie compensation to whether sales of the product for which the PSRs are responsible increase.  As a result, the Court concluded that the PSRs’ jobs involve selling at least  in “some sense” of the word.  The Court opined that the bulk of the PSRs’ job duties are in line with those of the “classic salesman” as set forth in a 1941 case, Jewel Tea Co. v. Williams, 118 F.2d 202 (10th Cir. 1941).  The PSRs’ primary duty is not promoting their employer’s products in general to the at-large public.  Instead, the PSR is primarily concerned with inducing a particular physician in a particular territory to prescribe a particular drug.

In contrast to Christopher, the Second Circuit has found that PSRs do not qualify for the outside sales exemption because they do not literally consummate sales with physicians or receive binding commitments from physicians.  In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d Cir. 2010).  The Novartis Court gave controlling deference to the DOL view requiring essentially a transfer of title to fall within the outside sales exemption.  The Court construed the outside sales exemption narrowly against the employer and viewed the PSRs’ primary duties as promotional in nature. 

Other courts have considered whether the separate “administrative” exemption to the FLSA applies to PSRs.  This exemption requires that the employee receive at least $455 per week and that the “primary duty” involve discretion and independent judgment in the performance of significant office or non-manual work directly related to management or general business operations.  In Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), the Court held that  the administrative exemption applied to the PSRs, finding that they engaged in planning, exercised discretion to develop their own strategies for marketing, and could chose which doctors to visit within territories.  As a result, Smith rejected the PSRs’ claim that they lacked discretion with respect to matters of significance and found it unnecessary to consider the outside sales exemption.

In contrast to Smith’s application of the administrative exemption, Novartisfound that the PSRs did not exercise discretion and independent judgment with respect to matters of significance.  The Court stated that the PSRs had no role in planning sales strategy or the core message to physicians and were forbidden from answering any questions for which they had not been scripted.  In the wake of Novartis, the Eastern District of New York has denied summary judgment due to a factual dispute concerning the job duties and discretion of telephone claims representatives alleged to be exempt under the administrative exemption.  Harper v. Government Employees Ins. Co., ___F.Supp.2d___, No. 09-2254 2010 WL 4791635 (E.D. N.Y. Nov. 16, 2010).  The Court stated that the employer’s argument in favor of the exemption was strong but that more facts were needed based on the Second Circuit’s “very narrow” interpretation of the administrative exemption.

The Bottom Line:   Courts are now split over the application of the outside sales exemption.  The Ninth Circuit views PSRs as exempt based on the outside sales exemption and the Third Circuit reaches the same result based on the administrative exemption.  The Second Circuit disagrees, holding that PSRs do not qualify for either exemption.  Courts disagree on fundamental concepts, such as the deference owed to the DOL and the proper construction of the exemptions based on decades old industry practice.  The Supreme Court is considering petitions for certiorari and may weigh in to resolve the difference of opinion among lower courts.  Regardless, employers relying on the outside sales and administrative exemptions should review the realities of employees’ day-to-day duties, including the amount of discretion and judgment exercised. 

Court Grants Summary Judgment in Multidistrict Independent Contractor Cases

Posted by Greg Mersol on January 05, 2011

We've written at least three times now on the case of Dukes v. Wal-Mart, now pending before the United States Supreme Court, as it is the largest employment class action in history.  Perhaps a relatively distant second is the collection of cases against FedEx Ground Package System, currently being handled through the multidistrict litigation docket in Northern Indiana.  See In re FedEx Ground Package System, Inc., Employment Practices Litigation.pdf Cause No. 3:05-MD-527 RM (MDL-1700). The MDL litigation includes over 40 cases arising in more than half of the states in the Union. Those cases, together, challenge various aspects of the decision by FedEx Ground of classifying its drivers as independent contractors under a variety of theories and statutes that include (depending upon the case), state laws of contract, state tort claims, various state employment and business practices acts,  ERISA, the FMLA, USERRA, and the FLSA.  During the litigation's long, complex, and tortuous procedural history, several of the cases were certified, at least in part, and over 2,000 pleadings or orders were filed.

 It's not over yet, but on December 13, 2010, the court rendered a 182-page opinion that will pare down the case's massive scope.  The court's opinion is notable not only because of the size of the case, but because even after granting much of the employer's summary judgment motion, several large cases remain.  The case is also worthy of note because the court had to deal with the unique variations among states regarding tests for "independent contractor" status.

The beginning of the end, so to speak, came a few months ago, on August 11, 2010, when the court granted summary judgment with respect to the claims of the company's Kansas drivers.  Applying Kansas law, and focusing on the "right of control," the court concluded the terms of the FedEx operating agreements under which the drivers worked did not render them employees. Finding the agreement to be controlling, the court largely rejected arguments by the plaintiffs regarding the control they claimed that the company actually exercised, and drew a distinction between the company's requirements as to results versus the manner and means by which work was to be performed.   Following that decision, the court directed the parties to brief the same issues regarding the cases in states other than Kansas. 

In its lengthy December 13 order, the court reviewed the laws of the various states regarding the tests for independent contractor status and, for the most part, concluded that the company was also entitled to summary judgment because the laws were substantially similar to those of Kansas.  It did not grant summary judgment with respect to some of the federal claims (such as the FLSA or FMLA) as well as certain state law tort or statutory claims.  Interestingly, in some cases, such as the Kentucky Wage Payment statute, the court actually granted summary judgment in favor of the plaintiffs.  With respect to the surviving claims, the court generally asked the parties to submit proposed pretrial orders to resolve the outstanding issues.

The Bottom Line:   Even very large cases are amenable to summary judgment.  State law variations may or may not lead to different determinations on complex issues.

California Court Dismisses Employment Antitrust Class Action

Posted by Greg Mersol on December 07, 2010

Cases involving employment and antitrust are rare.  Typically, such cases involve claims that a group of employers agreed expressly or impliedly to cap or limit wages among their employees.  For example, they may claim that the employers in a particular industry agreed not to pay more than a set wage for employees in certain positions. These types of claims are difficult to make and maintain for reasons reflected in the recent decision of a California Court of Appeals in Zumbowicz v. Hospital Association of Southern California, Case No. B215633 (Nov. 16, 2010).

The Zumbowicz case arose out of a bill passed in California in 1999 that obligated employers to pay overtime to non-exempt employees for hours in excess of 8 hours per day.  This new bill went beyond federal and the then existing state law, which required payment of overtime only for time in excess of that over 40 hours per week.  The new statute posed particular problems for the hospital industry because of the popularity of 12-hour shifts among nurses.  While, under the prior law, no overtime would be incurred so long as the nurses did not work more than 40 hours per week, the new law would have created 4 hours of overtime liability each 12-hour shift, even though a given nurse may only have worked a total of 36 hours for the week.  At the same time, the existence of 12-hour shifts, even apart from the potential overtime premium, was an important recruiting tool for nursing staff.

To address this issue and to keep the 12-hour shift a financially viable option, several southern California hospitals came up with the expedient solution of simply reducing the rate of pay of those on 12-hour shifts so that, with the new overtime, there was no change in their total compensation.  The actual reduction was equal to about 15 percent of the hourly rate, but the employee's total paycheck would stay more or less the same.

The plaintiffs, a group of nurses and technical care specialists, brought a putative class action challenging the change as being an antitrust violation under California law.  They contended that the area hospitals, through a hospital association, conspired to depress their wages by reducing their pay.  Much of their case rested upon a theory of “conscious parallelism,” under which they claimed that the hospitals consciously followed each other in reducing the hourly rate for 12-hour shifts. The trial court granted summary judgment against them, and they appealed.

The Court of Appeals affirmed the dismissal of the lawsuit on several grounds.  First, it found that only about half of the hospitals in the association actually adopted the pay reduction, suggesting strongly that there was no “parallel” conduct at all.  Second, they failed to prove even that the hospitals were aware of each others' conduct, let alone that such knowledge was part of the decisional process.  Finally, the court noted the absence of other "plus" factors of anti-competitive conduct, primarily because they failed to show that the hospitals did anything but to act in their own economic self-interest in the wake of the changes in California law.

The court also rejected the plaintiffs’ claim of an outright conspiracy, primarily because of a lack of evidence that any such conspiracy took place, and also held that the trial court had properly limited discovery from third parties such as other hospitals, unions, and the trade association's attorney.

The bottom line:  Absent solid evidence of a conspiracy to fix wages, anti-trust employment class actions are difficult to maintain.

Second Circuit Affirms Denial of Class Certification for Hertz Station Managers and Provides Guidance on FLSA Certification Standard

Posted by Gilbert Brosky on November 08, 2010

On October 27, 2010, the Second Circuit affirmed a federal court’s refusal to certify a proposed class of Hertz Station Managers allegedly denied overtime under New York law.  (Myers v. Hertz Corp., No. 08-1037 (2d Cir. Oct. 27, 2010)).  In doing so, the court addressed the potential difficulties of certifying Rule 23 overtime exemption cases and expounded on the appropriate certification standard for FLSA exemption cases.  

In a case the court described as “procedurally convoluted,” the plaintiffs originally sought to proceeded as a collective action under the FLSA.  After the district court denied this motion, the plaintiffs then moved for certification under Rule 23 based on alleged violations of unpaid overtime under New York Labor Law § 191.  While the court found the plaintiffs’ state law claim to be nothing more than an alternative method of seeking redress for an underlying FLSA violation, it addressed the plaintiffs’ appeal by using the traditional requirements of Rule 23. 

Finding that it only needed to address Rule 23’s predominance requirement, the court determined the relevant “question of law and fact” to be whether the plaintiffs established they were entitled to overtime under the FLSA.  The court found this to be a “complex, disputed” issue whose resolution required answering a number of subsidiary questions involving whether the plaintiffs fell under the FLSA’s executive exemption.  The court noted that while the exemption issue may not be an inherently individualized inquiry, the exemption inquiry does require examination of actual duties performed and involve evidence that the plaintiffs’ jobs “were similar in ways material to the establishment of the exemption criteria.”

The plaintiffs relied on two categories of evidence to show the required common proof:  (1) Hertz decided to classify all station managers as exempt without an examination of each individual manager’s duties; and (2) testimony of Hertz representatives which, plaintiffs claimed, established that station managers’ duties did not vary materially across Hertz locations.  With respect to the first category, the court found that the existence of such a blanket exemption policy, standing alone, “is not determinative of the main concern in the predominance inquiry:  the balance between individual and common issues.”  The court further explained that such a policy does not establish whether all plaintiffs were actually entitled to overtime pay, and that the question of entitlement to overtime pay is still answered by examining the employee’s actual duties.  As to the second category, the court found that the proffered testimony was general, largely inconclusive, and only provided mixed support for the plaintiffs.  Thus, the court found that the district court did not abuse its discretion in declining to certify a class.

While the court declined to review the district court’s refusal to conditionally certify the plaintiffs’ FLSA claims, it elected to provide guidance on the standard district courts should apply to motions seeking certification of a collective action under § 216(b) of the FLSA.  The court noted that district courts of the Second Circuit have largely adopted a two-step method.  While not required, the court found this approach to be “sensible.”  The court stated that in FLSA exemption cases, plaintiffs make the showing necessary to send notice to potential opt-ins (the first stage) by “making some showing that ‘there are other employees . . . who are similarly situated with respect to their job requirements and with regard to their pay provisions,’ on which the criteria for many FLSA exemptions are based, who are classified as exempt pursuant to a common policy or scheme.”  The court cautioned that while this is a low standard of proof, it cannot be satisfied simply by “unsupported assertions.”  In the second stage, the district court must determine whether the collective action may go forward by determining whether the plaintiffs who have opted in are in fact similarly situated to the named plaintiffs.   

The bottom line:  As this case demonstrates, Plaintiffs seeking a Rule 23 overtime class do not show predominance simply because the employer used a blanket exemption policy.  Rather, the determinative issue should be whether the plaintiffs' job duties are similar enough so that the applicability of the overtime exemption(s) can be determined on a class-wide basis.

Another Court Decertifies An FLSA Class

Posted by Greg Mersol on October 18, 2010

As we wrote on August 31, many plaintiffs and defendants assume, if often implicitly, that conditional certification of an FLSA class is tantamount to a win for the plaintiffs.  This is so even though conditionally certified classes are frequently decertified later in the case.  In fact, conditional certification, despite having the name "certification" in its name, means little more than that notice can go to the putative class to facilitate the process of opting in under section 16(b) of the Act.  It is not a decision that any such class will ever be viable.

Another recent case from the United States District Court for the Northern District of California illustrates this point.  In Wong v HSBC Mortgage Corp.pdf., the plaintiffs sought to represent a class of loan officers nationwide who contended that they were misclassified as exempt for overtime purposes.  More specifically, they challenged whether they met the requirements of the outside salesperson exemption under the FLSA, 29 U.S.C. section 213(a)(1).  The court, relying on the two-step procedure for FLSA cases now used by most courts, conditionally certified the class in 2008, and 124 class members opted in.  Following class-wide discovery of over a year, the defendant moved to decertify the class, arguing that the exempt or nonexempt status of each of the opt-in class members would have to be determined on an individual basis.  

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