The Expanding World of Non-Exempt Employees
Employers in any industry can be caught unaware of the recent contraction of exemptions from the duty to pay minimum wage and overtime compensation, effectively expanding the category of non-exempt employees. This can result in surprisingly expensive class action liability for back wages, with settlements (or judgments) well into the millions of dollars.
The general rule with respect to our topic is set forth in the Fair Labor Standards Act (“FLSA”), which mandates that employers pay overtime wages to its employees. See, 28 U.S.C. § 207(a). There are certain exceptions to this general rule, however, and Congress delegated to the Department of Labor the authority to define the scope of those exceptions. The DOL’s regulations, in turn, are found in 29 C.F.R. § 541. Taken together, the FLSA and the DOL regulations exempt “any employee employed in a bona fide executive, administrative or professional capacity... or in a capacity as outside salesman” from the federal overtime wage requirement. Recently, these so-called “white collar” exemptions have been narrowly construed against employers. The current state of white-collar exemptions is as follows:
Managers. An executive employee is exempt only if he or she has genuine authority to hire, fire, manage and discipline subordinates. Absent such actual authority, the executive – regardless of his or her title – will be deemed a “non-exempt” employee. A manager who serves in a dual role may lose exempt status if he/she is primarily a production employee who only engages in supervisory activity from time to time.
Outside Sales Persons. The U.S. Supreme Court recently confirmed that pharmaceutical sales representatives are properly considered “outside sales persons,” exempt from FLSA wage and overtime mandates. See, Christopher v. SmithKline Beecham Corp., 183 L.Ed.2d 153 (2012). The Court noted that the sales representatives “bear all of the external indicia of salesmen,” as they both: (a) had a primary duty of sales, and (b) sold to customers outside of the office on at least a weekly basis. The Court further opined that highly-paid salespersons (who earned an average of more than $70,000 per year) were “hardly the kind of employees that the FLSA was intended to protect.” Conversely, “inside” sales representatives who sell from an office desk have traditionally been considered non-exempt.
Computer Professionals. A computer employee exemption currently exists under the FLSA, but applies only to “computer systems analysts, computer programmers, software engineers or similarly skilled workers.” A number of courts have further interpreted this category of exempt employee. For example, under California law a worker meeting the federal “computer professional” exemption standard must be: (a) highly skilled and proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming and software engineering, and (b) primarily engaged in work that is intellectual or creative and that requires the exercise of discretion and independent judgment. Interestingly, the state of Pennsylvania does not recognize any exemption for computer professionals.
Independent Contractors. When does an independent contractor become a non-exempt employee? A two step analysis is necessary. First, a court will analyze whether the employer controls the “manner and method” of the contractor’s job duties. If so, then the independent contractor will be deemed an employee. Second, the employer must be able to fit the independent contractor into one of the recognized white-collar exemptions outlined above. The issue of whether an independent contractor is really an employee is a difficult one for most employers, with some additional (and unexpected) consequences. For example, if the independent contractor serves in a representative or agency capacity, then he/she may owe fiduciary duties to the employer, which would effectively prohibit the contractor from working for a competitor.
Interns. The seminal Supreme Court case with respect to this area is Walling v. Portland Terminal Co.,, 330 U.S. 148 (1947), where the Court held that unpaid trainees of a railroad were not “employees.” Last year the Department of Labor initiated a crackdown on the use of unpaid interns, issuing Fact Sheet No. 71, which required interns to be paid minimum wage and overtime compensation, unless certain strict criteria are met. These criteria are that the training provided to the intern: (1) is similar to that given in an educational surrounding; (2) is for the benefit of the intern; (3) does not result in displacement of regular employees; (4) does not result in an immediate advantage the employer; (5) does not entitle the intern to a job at the conclusion of the internship; and (6) employee and employer understand that the intern is not entitled to wages. The mere fact that the intern derives a “benefit” from the internship experience does not mean the intern is exempt from minimum wage and overtime requirements.
Since governmental entities (such as the DOL) and not-for-profit organizations are exempt from a duty to pay interns, this issue impacts for-profit entities only. In today’s economy, there is no need to comment upon how important internships are for graduates entering the job market. However, the DOL’s crackdown appears to have the unintended impact of depriving many such graduates of much-needed experience. Recently employers in the media industry have been targets of DOL investigations on this issue, which will likely result in class action litigation for back wages.
Class Actions and Waivers Thereof. On the topic of class actions, many mandatory arbitration agreements applicable to employees require the employee to waive his or her right to commence or participate in a class action. However, state courts, including those in New York, have begun to strike down such waivers on a variety of rationale, including unconscionability. Separately, this year, in D.R. Horton v. The National Labor Relations Board, the NLRB concluded that such agreements violate the National Labor Relations Act. The issue is currently under review by the U.S. Court of Appeals for the Fifth Circuit. See, Dkt. No. 12-60031.
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If you would like more information relating to this topic, please do not hesitate to contact John Polster at john.polster@gmail.com or Christopher S. Griesmeyer at cgriesmeyer@grglegal.com or by phone at (312)428-2741.
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