The number of lawsuits brought under the FLSA and state law overtime exemptions continues to steadily rise. We typically look to the outcomes of lawsuits to guide employee classification decisions. This year, in addition to the outcome of lawsuits, the President, the Supreme Court, and Congress have sought to further shape - or transform - FLSA overtime rules.
The President seeks to narrow the scope of the current "white collar" exemptions, while the Supreme Court intends to clarify the DOL's power to interpret the meaning of the FLSA. Meanwhile, certain Congressional members hope to broaden the scope of the FLSA's reach to include independent contractors.
Courts are increasingly recognizing the manageability issues inherent in class-wide treatment of alleged misclassification claims, which may curtail class certification of unwieldy misclassification cases. However, independent contractor lawsuits are on the rise as employers attempt to rely on non-employee workers to fall outside FLSA regulations.
The President of the United States has not been shy about making his belief known that there are too many employees eligible for the FLSA's "white collar" exemptions to overtime, including the executive, professional and administrative exemptions. On March 13, 2004, the President issued an Executive Order on Overtime directing the Secretary of Labor to revise FLSA regulations implementing the white collar exemptions. The White House also issued a fact sheet promoting the President's view that the nation's overtime protections have "eroded," and FLSA overtime regulations have not kept up with our modern economy. Currently an employee earning $455 or more per week on a salary basis who performs duties that meet one of these three exempt tests is not eligible for overtime pay.
The President's order directs the DOL to update existing FLSA protections, to address the changing nature of the workplace, and to simplify the regulations to make them easier to understand and apply. As early as November 2014, the DOL will issue a proposed rule revising the regulations interpreting the white collar overtime exemptions. The DOL will likely propose to raise the salary requirement and possibly to clarify the tests concerning the amount of time exempt employees must spend supervising other employees, as well as the other required duties employees to meet the exemption. These rules were last changed in April 2004, under the Bush Administration. The minimum salary floor for exempt status was raised from $155 per week to $455 per week.
For employers, uncertainty and unpredictability can often be worse than adverse law, hindering effective long-term decision-making. Currently, a federal agency interpretation of the law may change with the arrival of a new administration or a new political climate. These changes can acutely impact employers.
The U.S. Supreme Court has taken notice of this issue. In June 2014, the Court granted review of a case examining the circumstances under which the DOL can change its own agency interpretation of the FLSA's administrative exemption. The case arises from the DOL's 2010 Interpretation of the administrative exemption, which had stated that loan officers in the mortgage industry typically do not meet the duties of the administrative exemption. This interpretation was contrary to a prior opinion letter issued by the DOL, and the Court of Appeals for the D.C. Circuit found that the agency violated the Administrative Procedures Act by reversing its position without following notice or rulemaking procedures.
The question the Court will decide is "Whether a federal agency must engage in notice-and-comment rulemaking before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation." This is a closely watched case that is expected to impact federal agency interpretive decisions beyond the DOL. The Court could decide this issue as early as this time next year. However, even if the Court answers the question in the affirmative, the DOL can continue to modify FLSA regulations through proper notice and rulemaking.
Employers often focus on the minimum salary requirements of the executive exemption, and the number of employees the position will supervise, but might overlook the requirement that supervisors be able to hire or fire employees, or at least make meaningful recommendations in order to satisfy the exemption. A recent decision in the Sixth Circuit, Bacon v. Eaton is a reminder that a supervisor cannot be exempt if he or she does not make these significant personnel decisions. The Sixth Circuit found supervisors that merely carry out the orders of a superior to effectuate a hiring, firing, or other status change, are not performing exempt executive duties, regardless of the many other executive duties these supervisors may perform.
The plaintiffs themselves conceded they met the first three prongs of the executive exemption: they were compensated sufficiently, they managed an enterprise or recognized department or subdivision, and they customarily and regularly directed the work of two or more other employees. However, the plaintiffs successfully argued they did not meet the exemption, because they did not have the authority to hire or fire other employees and their "suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees" were not given particular weight.
The takeaway from the case is that employers must expect and ensure exempt supervisors have genuine influence over hiring, firing and discipline. The exemption can be defeated when a supervisor is not trained or expected to conduct recruitment, hiring or firing, or when a supervisor can show that his or her personnel recommendations are "disregarded and rejected."
While lawmakers appear to be chipping away at the scope of the overtime exemptions, courts are demonstrating increasing reluctance to certify exempt misclassification cases without a manageable trial plan that can address the employer's affirmative defenses. A recent California Supreme Court decision Duran v. U.S. Bank National Association, addresses manageability in the context of California's outside salesperson exemption. The court set forth the view that exempt misclassification cases often raise inherently individual issues that "may be difficult, or even impossible, to litigate on a class-wide basis." One difficulty in the manageability of this type of class action is that an exemption analysis must primarily focus on how an individual actually performs his or her job (which is often fact-specific), and only as a secondary consideration examine the employer's realistic expectations (which may be able to be addressed more uniformly).
The Duran opinion indicates that, at least in California, there is a higher bar for class certification of overtime exempt cases than previously thought. A class action trial management plan must permit the litigation of relevant affirmative defenses, even when those defenses turn on individual questions. This echoes the U.S. Supreme Court's 2011 decision in Wal-Mart v. Dukes, which also recognized the need for a trial plan that addresses the litigation of affirmative defenses when relevant.
Employers sometimes use so-called independent contractors to streamline business operations and to outsource non-core operations. Similar to the white collar exemptions, independent contractors also fall outside of the FLSA wage and overtime regulations. However, a recently re-introduced bill in Congress, the Payroll Fraud Prevention Act of 2014, would expand the FLSA to include independent contractors. The proposed law would make it a prohibited act to "wrongfully classify an employee as a non-employee," would add new recordkeeping responsibilities on businesses, and would impose severe penalties for violations. While unclear whether this bill might pass, its re-introduction echoes a growing trend of state and federal initiatives designed to punish employers for independent contractor misclassification.
Even without this legislation, the DOL is actively partnering with the IRS and states to share information concerning independent contractor status as part of the DOL's Misclassification Initiative. State and federal agencies are cracking down on the classification, often applying their own fact-specific tests to determine eligibility. Independent contractors and their attorneys are also pursuing misclassification class actions. A few examples are companies contracting with workers in positions as delivery drivers, photojournalists and exotic dancers. Multi-million dollar settlements continue to make headlines in this area.
As the FLSA regulations are clarified or even changed, employers should continue to exercise caution when classifying positions as exempt from overtime, or using independent contractors. While exempt employees and independent contractors are a necessary part of many business operations, each employee within a particular job classification must be performing duties that would exempt the person from the overtime rules. State laws often impose additional requirements. A comprehensive review of each individual's actual job duties and the reasonable expectations for the position, while time-consuming, is necessary not only to avoid misclassification lawsuits, but also to help defeat class certification should a putative class action lawsuit be filed.