By Aaron F. Olsen

The United States Supreme Court declined to review the Second Circuit’s decision in Irizarry v. Catsimatidis in which the Court of Appeals affirmed the District Court’s decision holding a Supermarket CEO personally liable for violations of the Fair Labor Standards Act (FLSA).

By way of background, in July 2013, the United States Court of Appeals for the Second Circuit affirmed the District Court’s decision that the CEO of a supermarket chain could be held personally liable for damages in Irizarry v. Catsimatidis.  The District Court had granted summary judgment in favor of plaintiffs in the class action case and held that plaintiffs were entitled to liquidated damages on their claims concerning reduction of hours, withholding of overtime, misclassification as exempt employees, and retaliation.  The parties entered into a settlement agreement.  However, the corporate defendants later defaulted on their obligations under the agreement.  Plaintiffs then moved for partial summary judgment on the CEO’s personal liability as an employer.

Individual liability under the FLSA turns on whether an employment relationship exists between the employee and the purported employer, the individual defendant.  The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee….”  29 U.S.C. § 203(d).  An “employee” is defined as “any individual employed by an employer.”  29 U.S.C. § 203(e)(1).  Quoting from the U.S. Supreme Court’s  decision Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947), the Court of Appeals in Irizarry stated that the FLSA contains “no definition that solves problems as to the limits of the employer-employee relationship under the Act.”

The District Court reasoned that the CEO hired managerial employees, signed all paychecks to the class members, had the power to close or sell the stores, routinely reviewed financial reports, worked at the corporate office and generally presided over the day to day operations of the company.  The District Court concluded that there was no area of the store which was not subject to the CEO’s control, whether or not he chose to exercise it, and therefore the CEO had “operational control” and could held liable as an employer.

The CEO argued that he was a high-level employee who made symbolic or, at most, general corporate decisions that only affected the plaintiffs through an attenuated chain of causation.

The Court of Appeals noted that it had previously set forth four factors to determine the “economic reality” of an employment relationship: (i) whether the alleged employer had the power to hire and fire the employees, (ii) supervised and controlled employee work schedules or conditions of employment, (iii) determined the rate and method of payment, and (iv) maintained employment records.  However, the Second Circuit also stated that it had examined different indicia of “operational control” in other cases, with the intent of assessing whether a defendant exercised functional control over a worker.

In conducting its analysis, the Court of Appeals noted that the CEO personally owned the building where the headquarters were located.  In addition, he stayed apprised of how the supermarket chain was doing, reviewing the overall profit and loss statements as well as the “sales to purchases” statements of particular stores. He received weekly gross margin reports from all the “perishable departments” and a comprehensive Profit and Loss report on a quarterly basis that he studied in depth and sometimes used to make general recommendations. He also made “big picture” merchandising decisions, like whether to push Coca-Cola or push Pepsi-Cola” and the decisions on having pharmacies in the stores.  He would also visit the stores regularly and make comments to the store managers about displays, merchandising decisions and discuss what is going right and what is going wrong.

The Court of Appeals concluded, in what it described as a “close case,” that there was no evidence that the CEO was responsible for the FLSA violations, or that he ever directly managed or otherwise interacted with the plaintiffs.  Nevertheless, the supermarket CEO was an “employer” for the purposes of the FLSA because his control over the hiring of managerial employees, and his overall financial control of the company meant that he possessed “operational control” over the plaintiffs’ employment.

The potential to be held personally liable for violations of the FLSA understandably creates concern for CEOs – especially those of medium-sized companies that have a large enough number of employees to create significant exposure but not enough resources for the Company to pay for a large judgment that may come from losing a class-action.

 

By Nancy L. Gunzenhauser

On March 13, 2014 President Obama issued a memorandum instructing the Department of Labor (“DOL”) to review and revise overtime regulations under the Fair Labor Standards Act (“FLSA”).  Under the FLSA employees are eligible to receive overtime for all hours worked over 40 per week, unless they fall within certain specified exemptions.  The most common of exempt classifications in the retail industry are executive, administrative, and commission sales.

The executive exemption applies to managers and supervisors who direct the work of others and who earn a salary of at least $455 per week. The administrative exemption applies to employees who (i) earn a minimum weekly salary of $455, (ii) perform non-manual work directly related to the employer’s business operations and (iii) have as a primary duty the exercise of discretion and independent judgment with respect to matters of significance. The commissioned sales person exemption applies to employees who receive more than half of their earnings from commissions.

The upcoming changes to overtime regulations will be the first since 2004, when the threshold for the executive exemption was raised from $250 to $455 per week.

While the exact changes the Obama administration has in mind remain unclear, the impact on the retail industry, and indeed nearly all employers, may be be significant because the express purpose of the mandated review is to increase the number of workers eligible for overtime. One likely change will be a further increase to the minimum weekly salary threshold for executive and administrative exemptions. Inasmuch as many, if not most, exempt employees already have salaries of more than $455 per week, the change to the salary threshold alone might not be significant – depending on the new minimum. But, other changes cannot be ruled out.

The DOL has not indicated when it expects to issue the proposed amendments. A comment period will follow before any rule amendments are adopted, however.   Rulemaking may take a year or more. We will be monitoring the process and will alert you here to developments.

In addition, you may wish to download the EBG Wage & Hour app to your smart phone,  where changes to the regulations will also be posted.

by Michael D. Thompson

Apple Inc.’s practice of requiring hourly employees to wait (off the clock) in order to undergo “personal package and bag checks” prior to meal breaks and at the end of shifts is the subject of a purported wage-hour collective action.

According to a complaint filed in the U.S. District Court for the Northern District of California, these security checks take approximately 50 minutes to 1.5 hours per week of uncompensated time to search for “possible store items or merchandise taken without permission and/or contraband.”

The lawsuit seeks to certify a nationwide collective action class under the federal Fair Labor Standards Act, as well as classes in California and New York class for alleged violations of those states’ labor laws.

Bag check requirements are relatively common in the retail environment, and a similar lawsuit against Polo Ralph Lauren settled for $4,000,000.

Preliminary and Postliminary Activities

An analysis of the time spent waiting for security checks at the end of the workday is similar to the analysis in “donning and doffing” cases dealing with the compensability of “preliminary” or “postliminary” activities such as putting on uniforms or safety equipment before a shift begins.

The FLSA, as amended by the Portal-to-Portal Act of 1947, generally precludes compensation for activities that are “preliminary” or “postliminary” to the “principal activity or activities” of the employee. 29 U.S.C. § 254(a). But preliminary and postliminary activities are compensable if they are “integral and indispensable” to an employee’s principal duties. In IBP v. Alvarez, the U.S. Supreme Court ruled that an activity is “integral and indispensable” if it is (1) “necessary to the principal work performed” and (2) “done for the benefit of the employer.”

The Impact of Busk v. Integrity Staffing Solutions, Inc.

The compensability of time spent clearing security was recently addressed in Busk v. Integrity Staffing Solutions, Inc., and the Ninth Circuit created a distinction that may spur a new wave of litigation.

In Busk, the District Court found time going through security checks to be non-compensable, and relied on Second Circuit and Eleventh Circuit precedent involving employees at a nuclear power plant and an airport construction project, respectively.

However, the Ninth Circuit reversed, concluding that those security screenings were not in place because of the nature of the employee’s work, and indeed were applicable to employees and non-employees. Accordingly, those screening were not integral to the principal activities of the employees.

Conversely, the Ninth Circuit held that requiring “screening to prevent employee theft … stems from the nature of the employees’ work (specifically, their access to merchandise),” and therefore may be compensable work time.

Perhaps with an eye towards this distinction, the complaint against Apple notes that its bag check policy applies to all employees, but not to customers.

De Minimis Time

To the extent that time spent on bag checks is not preliminary or postliminary, the time is likely to be compensable unless it is de minimis. 29 CFR 785.47 provides that “insubstantial or insignificant periods of time beyond the scheduled working hours … may be disregarded.” While there is no definitive maximum, periods of ten minutes or less will typically be regarded as de minimis.

The de minimis rule “applies only where there are uncertain and indefinite periods of time involved of a few seconds or minutes duration, and where the failure to count such time is due to considerations justified by industrial realities.” Furthermore, not all states recognize the de minimis principle.

Accordingly, employers with security check requirements should review those policies to determine whether the time involved is preliminary/postliminary, de minimis or compensable.

*The author appreciates the assistance of summer associate, Kristopher Reichardt, in the preparation of this article.

By Jennifer A. Goldman

As the summer internship season gets underway, unpaid interns are continuing to file a spate of lawsuits claiming violations of the federal Fair Labor Standards Act (“FLSA”) and state wage and hour laws.  On May 29, 2013, fashion designer Norma Kamali was slapped with a lawsuit from a former apprentice filed in New York federal court.  This lawsuit continues a trend of unpaid interns suing employers including the Hearst Corporation, Fox Searchlight Pictures, Elite Model Management, and the Charlie Rose Show.

According to the Complaint, former apprentice, Erica Van Rabenswaay, alleges that Norma Kamali and corporate defendants Norma Kamali Design Corporation, Norma Kamali, Inc. and Norma Kamali Wellness, LLC (referred to collectively as “Kamali”) insisted that Ms. Van Rabenswaay commit full-time and forgo any compensation for the first three months of the apprenticeship. Ms. Van Rabenswaay claims that the only compensation she received was a MetroCard for commuting.  After the three month unpaid period, Kamali allegedly compensated Ms. Van Rabenswaay for her work for less than a month before terminating her employment.  According to the Complaint, just days after firing Ms. Van Rabenswaay, Kamali electronically posted a position seeking an unpaid apprentice to perform the same tasks performed by her.

The Complaint boldly asserts that Ms. Van Rabenswaay fell victim to a “trend where formerly entry level employees are being misclassified as unpaid ‘interns’  or ‘apprentices’ in an effort by employers to avoid paying wages” and to circumvent federal and state wage and hour laws.  Specifically, Ms. Van Rabenswaay alleges that she performed the same tasks as paid employees, which included photo retouching for web and print publications, photographing products for inclusion on web and print publications, determining the composition of jewelry, and editing Kamali’s “brand book” and “look book,” among others.  She claims that the apprenticeship was purely beneficial to Kamali and no formal training or mentorship was provided.

One of the attorneys representing Ms. Van Rabenswaay has developed the website, “Intern Justice,” which is dedicated to filing lawsuits on behalf of unpaid interns. In a press release, Intern Justice characterized the Kamali lawsuit as the first lawsuit of its self-described “Fair Wage Summer 2013” project.  According to the press release, Intern Justice, is collaborating with another law firm and they intend to file additional lawsuits in the coming months on behalf of unpaid interns.

The Kamali lawsuit comes on the heels of a recent decision in a well-publicized unpaid internship case filed by a former Harper’s Bazaar intern against Hearst Corporation.   In May, U.S. District Court Judge Harold Baer of the Southern District of New York rejected the class certification bid of a group of former unpaid interns for Hearst Corporation.  Judge Baer found that although it was a “close question” the former interns failed to meet a commonality requirement for class certification because they failed to show any evidence of commonality among the interns besides a uniform policy of unpaid internship.  As such, the internships varied greatly among the 20 magazines published by Hearst.  Judge Baer’s ruling is a setback for plaintiffs’ attorneys representing interns with different duties and other conditions of their internships, but those interns can still pursue their claims individually.  Moreover, Judge Baer’s decision likely does not affect class certification bids by interns with the same duties.

The U.S. Department of Labor (“DOL”) uses the following six-factor test to determine whether an individual is exempted from pay under the FLSA or if he or she should instead be classified as an “employee” who must be paid in accordance with minimum wage and overtime laws:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern and, on occasion, its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If the above factors are satisfied, then the intern is not entitled to minimum wage or overtime under the FLSA.  The fourth factor is generally considered to be the greatest obstacle for employers.  Moreover, several states, including New York, have their own wage and hour laws with additional factors to consider in determining whether an individual is an “intern” or an “employee” who must be compensated.  Accordingly, employers should carefully review their internship programs and practices to protect themselves from future wage and hour liability.


 

Epstein Becker Green is pleased to announce the availability of a Wage and Hour Division Investigation Checklist, which provides retail employers with valuable information about wage and hour investigations and audits conducted by the U.S. Department of Labor (DOL). Like EBG’s first-of-its kind Wage and Hour App, which provides detailed information about federal and state laws, the Checklist is a free resource offered by EBG.

The Checklist provides step-by-step guidance on the following issues: preparation before a Wage and Hour Division investigation of the DOL; preliminary investigation issues; document production; on-site inspection activities; employee interviews; and back-wage findings, and post-audit considerations.

“The multitude of wage and hour claims and lawsuits that workers have filed under the Fair Labor Standards Act and its state law counterparts have made wage and hour law the nation’s fastest growing type of litigation. And federal and state agencies are investigating and pursuing wage and hour claims more aggressively than ever,” said Michael Kun, the national Co-Chairperson of the firm’s Wage and Hour, Individual and Collective Actions practice group. “We hope that our Checklist will serve as an important resource for retail employers to use when confronted with an audit – and perhaps help them avoid an audit altogether.”

Click Here to Download EBG’s Wage and Hour Division Investigation Checklist