PAY-UP! - WHAT DO FLSA VIOLATIONS REALLY COST?

4th Annual Section of Labor and Employment Law

Conference

November 5, 2010

Panelists

Richard Alfred SEYFARTH SHAW LLP

Rex Burch

BRUCKNER BURCH PLLC

Aashish Desai MOWER, CARREON & DESAI, LLP

Theodora Lee

LITTLER MENDELSON, P.C.

Jennifer Sung ALTSHULER BERZON LLP

Proving Damages for Off-The-Clock Claims

By Jennifer Sung ALTSHULER BERZON LLP

1. The Burden of Proof In most cases involving FLSA claims for off-the-clock work, due to the very

nature of the claim, there are no employer records by which damages can easily be measured. When an employer has failed to keep accurate records of an employee’s work time, an employee need only establish “that he has in fact performed work for which he was improperly compensated” and “produce[] sufficient evidence to show the amount and extent of that work as a matter of just and reasonable inference.” Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 687 (1946). The employee is required to provide only a reasonable approximation of the number of hours worked for which compensation is owed. Id. Once an employee has provided that reasonable estimate, the burden switches to the employer to “come forward with evidence of the precise amount of work performed” or to negate “the reasonableness of the inferences to be drawn from the employee’s evidence.” Id. at 687-88. See also Dove v. Coupe, 759 F.2d 167, 173-75 (D.C. Cir. 1985). “If the employer fails to produce such evidence, the court may then award damages to the employee, even though the result be only approximate.” Anderson, 328 U.S. at 688.

Under Anderson, “[t]he burden to maintain accurate records falls on the employer

regardless of whether the employee is responsible for recording his own hours on a time sheet.” McGrath v. Central Masonry Corp., No. 06-cv-00224, 2009 WL 3158131, at *6 (D. Colo. Sept. 29, 2009) (citing Skelton v. American Intercontinental Univ. Online, 382 F.Supp.2d 1068, 1071-72 (N.D. Ill. 2005)). In two recent cases, however, the Western District of New York has held that the Anderson burden of proof standard does not apply where the employer relies on the employee to self-report time and there is no evidence that the employer’s policies prevented the employee from reporting and getting compensated for all time worked, i.e., “where the time record ‘deficiencies’ alleged by the employee are admittedly and[] voluntarily self-created.” Seever v. Carrols Corp., 528 F. Supp. 2d 159, 170-71 (W.D.N.Y. 2007). See also Keubel v. Black and Decker, Inc., No. 08-CV-6020T, 2010 WL 1930659, (W.D.N.Y. May 12, 2010) (following Seever).

Both Seever and Keubel involved exceptional circumstances. In Seever, the

employer’s written policies expressly prohibited off-the-clock work, and although some of the plaintiffs testified that a manager had instructed them not to record certain work, other plaintiffs testified that they were never so instructed. 528 F.Supp.2d at 170-71. Further, the named plaintiffs who claimed they were instructed to work off the clock admitted that they were responsible for reporting their own time, that they had the power to change their own time records to account for off-the clock work, that they sometimes reported off-the-clock work notwithstanding the manager’s instructions, and that when they did report off-the-clock work, the employer paid it without question. Id. Finally,

the court noted that “[a]fter reviewing all of the evidence, it appears that the [named plaintiffs] . . . were nothing more than disgruntled former employees who were fired for serious breach of [the employer’s] policy and for falsifying their own time records. Much of what occurred at the restaurant was their doing.” Id. at 172. Under these circumstances, the court found there was “no evidence that [the manager’s] alleged `instruction’ ever prevented [the employees] from claiming, and being paid for, all of the time [they] worked.” Id. at 171.

Because it was “undisputed that [the employer’s] record-keeping complied with

the requirements of the FLSA and New York Labor Law, and that the plaintiffs’ time records were maintained and paid exactly as plaintiffs fashioned them,” the court concluded “that any inaccuracies in [the employer’s] records are solely due to the plaintiffs’ deliberate failure to accurately report the time they worked.” Id. (emphasis in original). That is, the court found that the Seever case did “not present the type of factual scenario confronted in Anderson and its progeny, where an employer maintains control over the calculation and compensation of time worked and either alters or fails to keep complete time records as mandated by the FLSA, thereby placing the employee at a marked disadvantage in pursuing an FLSA claim,” and the court declined to apply the Anderson burden of proof standard. Id. at 170-71.

In Kuebel v. Black & Decker, Inc., the court construed Seever as establishing a

more stringent burden of proof standard, under which plaintiffs are required to prove the amount of time worked off the clock “with specificity,” in cases where time records are “admittedly and voluntarily self-created.” 2010 WL 1930659 at *10. The court, citing Seever, 528 F.Supp.2d at 170, “noted that the lower burden of proof allowed under Anderson is applicable only where ‘an employer maintains control over the calculation and compensation of time worked and either alters or fails to keep complete time records as mandated by the FLSA, thereby placing the employee at a marked disadvantage in pursuing an FLSA claim.’” 2010 WL 1930659 at *10. The court rejected the plaintiff’s argument “that he need not satisfy the requirement that he must prove his off-the-clock work with specificity” because “he was instructed by his supervisors not to record over 40 hours per week.” Id. at *11. The court was unpersuaded by the plaintiff’s claim that his supervisor coerced him to falsify his own time records, finding the circumstances of the case to be analogous to those in Seever: Black and Decker had “established practices, policies and procedures for accurate timekeeping and payment for all hours worked,” the plaintiff “was responsible for preparing his own time records,” and “[o]n the single occasion when plaintiff’s time sheet showed overtime, he was paid overtime for the work performed.” Id. Notably, in Kuegel, as in Seever, there was substantial evidence that the named plaintiff had a poor performance and disciplinary record, which included discipline for falsely reporting hours that he did not actually work. Id. at *6-7.

Because both Seever and Kuegel involve exceptional facts and run contrary to the

Supreme Court’s decision in Anderson and its progeny, it is highly unlikely that these cases will establish a prevailing trend. Indeed, other courts already have rejected defendants’ attempts to rely on Seever as creating an exception to the Anderson burden of proof standard for cases in which employees exercise control over their own time

records; instead, recognizing that Seever is aberrant and in conflict with well-settled FLSA principles, these other courts have strictly limited the holding of Seever to its facts. See Brennan v. Qwest Communications Intern., Inc., --- F.Supp.2d ----, No. CIV 07-2024 ADM/JSM, 2010 WL 2901002 at *8-9 (D.Minn. Jul. 20, 2010); England v. Advance Stores Co. Inc., 263 F.R.D. 423 (W.D. KY. 2009).

In England v. Advance Stores Co. Inc., 263 F.R.D. 423 (W.D. KY. 2009), the

court concluded “that to dismiss England’s own off-the-clock claim based on Seever would not only be incorrect given the materially distinguishable facts of Seever, but also would ignore the general principles arising under the FLSA case law on this issue.” Id. at 450. The court noted that Seever involved exceptional circumstances, including but not limited to evidence of serious misconduct by the named plaintiffs, including self-interested falsification of time records. Id. at 449-50 (explaining “the Court cannot simply ignore the equitable considerations that played an oversized role in the outcome of the Seever case” and finding no evidence of “the type of fraudulent and inequitable conduct practiced by the [named plaintiffs] against their employer in Seever”). The court then reiterated the burden of proof principles established by Anderson and its progeny:

In the broadest sense, [the plaintiff’s] burden on his off-the-clock claim is merely to establish that he performed compensable work for a number of hours for which he was not properly compensated by his employer, who either did know or had reason to know that he was working off-the-clock. . . . In considering whether a plaintiff employee such as England has met his burden, the Court is required first of all to keep in mind the remedial nature of the wage and hour statutes involved and the public policy embodied therein. Merely because an employee may have difficulty in calculating the amount of damages, or that the amount may be uncertain, is not of itself an appropriate basis on which to entirely deny a right of recovery. As one federal case puts the matter, “This burden is not intended to be ‘an impossible hurdle for the employee.’ “ Kasten v. Saint-Gobain Performance Plastics Corp., 556 F.Supp.2d 941, 952 (W.D.Wis. 2008).

England, 263 F.R.D. at 450 (citations omitted).

Similarly, in Brennan v. Qwest Communications, the court held that Seever is inapplicable where there is a “genuine dispute” as to whether the inaccuracies in the time records are not solely due to the employees’ “deliberate failure to accurately record time” but also to the employer’s policies or rules, such as unreasonable performance standards. Brennan, 2010 WL 2901002 at *8-9. The court further explained that it is well-settled that an employer cannot create an exception to Anderson by requiring employees to record their own hours worked:

‘The burden to maintain accurate records falls on the employer regardless of whether the employee is responsible for recording his own hours on a time sheet.’ McGrath v. Central Masonry Corp., No. 06-cv-00224, 2009

WL 3158131, at *6 (D. Colo. Sept. 29, 2009); see also Skelton v. Am. Intercontinental Univ. Online, 382 F.Supp.2d 1068, 1071-72 (N.D. Ill. 2005) (‘The FLSA makes clear that employers, not employees, bear the ultimate responsibility for ensuring that employee time sheets are an accurate record of all hours worked by employees.’). Accordingly, if an employer commands, entices, or encourages its employees not to record all of their overtime, it cannot then ‘hide behind a policy of having employees keep their own time.’ Id. at 1072. Likewise, if an employer has actual or constructive knowledge that its employees are not recording all of their overtime, whatever the reason for the under-reporting might be, the employer ‘cannot sit back’ or ‘stand idly by’ and allow the employee to under-report his time. Bull v. United States, 68 Fed. Cl. 212, 224-25 (Fed.Cl. 2005), aff’d, 479 F.3d 1365 (Fed.Cir. 2007); Russel v. Ill. Bell Tel. Co., Inc., --- F.Supp.2d ----, 2010 WL 2595234, at *9 (N.D. Ill. 2010) (holding that ‘lawful written (or [oral]) policies will not shield [an employer] from liability if [the employees] can show other companywide practices that may have been contrary to those policies and violated the FLSA’).

Brennan, 2010 WL 2901002 at *9.

2. Use of Representative Testimony or Statistical Samplings Representative evidence is used regularly in wage and hour cases to establish both

liability and damages. See, e.g., Martin v. Selker Bros., Inc., 949 F.2d 1286, 1296-98 (3d Cir. 1991) (plaintiffs could use representative testimony to make prima facie case that non-testifying employees performed some work for which they were not properly compensated); Donavan v. Bel-Loc Diner, Inc., 780 F.2d 1113, 1115-16 (4th Cir. 1985) (district court properly made classwide determinations regarding whether employees received uninterrupted 30-minute breaks based on representative testimony; approximately 30 out of 98 employees testified); Brennan v. General Motors Acceptance Corp., 482 F.2d 825, 826-29 (5th Cir. 1973) (no error in permitting representative evidence to establish prima facie case that non-testifying employees worked overtime for which they were not compensated); Takacs v. Hahn Auto. Corp., 1999 WL 33127976, *1 (S.D. Ohio Jan. 25, 1999) (“[C]ourts including the Sixth Circuit, have uniformly held that damages in an FLSA overtime case can be proved with testimony from a representative group of plaintiffs and, thus, without requiring each plaintiff seeking same to testify.”). “Courts have allowed all employees to recover backwages on the representative testimony of 18 percent, 11 percent, or even 3.5 percent of employees.” Solis v. Best Miracle Corp., --- F.Supp.2d ----, 2010 WL 1766851 (C.D. Cal. May 03, 2010) (citing McLaughlin v. Ho Fat Seto, 850 F.2d 586, 589-90 (9th Cir. 1988); McLaughlin v. DialAmerica Marketing, 716 F.Supp. 812, 824 (D. N.J. 1989); Anderson, 328 U.S. at 684) (quotation marks omitted).

Statistical sampling techniques also may be used to determine both liability and

damages issues. In a recent class certification decision, the Eastern District of California

approved the use of a sampling technique that was originally developed to establish liability in the mass tort context to determine liability and damages for off-the-clock claims on a class-wide basis. See Adoma v. Univ. of Phoenix, Inc., --- F.Supp.2d ----, No. CIV. S-10-0059 LKK/GGH, 2010 WL 3431804 at *4-8 (E.D. Cal. Aug. 31, 2010). See also Bell v. Farmers Ins. Exchange, 115 Cal.App.4th 715 (2004) (looking to federal authority to conclude it is appropriate to use statistical sampling and extrapolation to determine aggregate classwide damages); Sav-On Drug Stores, Inc. v. Superior Court, 17 Cal.Reptr3d 906, 917-18 (2004) (citing Bell approvingly).

In Adoma, plaintiffs were enrollment counselors whose primary job duty was to

respond to the calls of potential students. 2010 WL 3431804 at *1. The employer used two computer systems, one to track the counselors’ availability for taking calls, and another to track overtime hours worked. Id. Plaintiffs claimed that the former system, known as the “Avaya system,” could be used to demonstrate that the counselors worked overtime not recorded by the latter system, and that this “off-the-clock” overtime was unpaid. Id. The employer argued, however, that the Avaya system was not entirely accurate, because individual counselors sometimes failed to log out of the system for meal breaks or made other errors, but the counselors had no opportunity or incentive to correct such errors. Id. at *5-6. The employer further argued that class certification was inappropriate because “any method of reconstructing records of hours worked using the Avaya system will be imperfect” and “[r]ecognition of these imperfections invites individualized inquiries into their scope.” Id. at *6. Acknowledging this problem, plaintiffs contended that “the reliability of the Avaya system, and plaintiffs’ proposed use thereof, may be demonstrated using a few representative inquiries whose results will be extrapolated to the class,” relying principally on Hilao v. Estate of Marcos, 103 F.3d 767 (9th Cir. 1996). Adoma, 2010 WL 3431804 at *6. The court agreed. Id. at *8.

Hilao was a class action brought by Philippine nationals who were victims of

torture, disappearance, or summary execution under the regime of Ferdinand Marcos. Although certain aspects of liability were resolved classwide, a sampling process was used to determine which fraction of the class had valid claims. Out of 9,541 claims, 137 were selected at random, which was determined to be a statistically valid sample. Id. at 782. A special master then deposed the 137 sample claimants, determined that six of the claims were invalid, assessed different damages amounts for each of the remaining 131 individual claimants, and then recommended average compensatory damage awards for subclasses experiencing each the type of injury (torture, disappearance, and summary execution). Id. Then, “[b]ased on his recommendation that 6 of the 137 claims in the random sample (4.37%) be rejected as invalid, he recommended the application of a five-per-cent invalidity rate to the remaining claims.” Id. He determined a total compensatory damage award for each subclass by reducing the number of remaining claims by 5%, and then multiplying that number by the average amount of damages associated with the injury at issue. Id. at 783-84. The special master’s findings were largely adopted by the jury, though the jury found only 2 of the 137 claims to be invalid. The 137 individuals received individualized compensatory damage awards (the two whose claims were deemed invalid received nothing), and the remaining 9,404 class

members received awards based on the average damage amounts, paid from the aggregate award, which was discounted by the 5% invalidity rate. Id.

Although this method represented rough justice for most individual class

members, as some would receive less than the amount to which they were actually entitled and some who had invalid claims would still be compensated, the Ninth Circuit recognized that without this method, most class members would receive nothing at all. Id. at 785-86. The court then rejected the defendant’s due process challenge to this method because “[t]he defendant’s interest was in the aggregate amount of damages; thus, provided that the average was properly calculated, it was of no consequence to defendant that some plaintiffs would have been entitled, in individual adjudications, to more or less than this average.” Adoma, 2010 WL 3431804 at *7 (citing Hilao, 103 F.3d at 786).

The Ninth Circuit’s recent en banc opinion in Dukes v. Wal-Mart Stores, Inc., 603

F.3d 571 (9th Cir. 2010), affirmed the continuing validity of Hilao. In Dukes, the Ninth Circuit concluded that the class was manageable because Hilao demonstrated there was “at least one method of managing th[e] large class action,” and the court saw “no reason why a similar procedure to that used in Hilao could not be employed.” Dukes, 603 F.3d at 627.

After considering Hilao and Dukes, the Adoma court concluded that there was no

basis for distinguishing Hilao; thus, although the Avaya system provided an inaccurate indicator of the number of hours employees actually worked, a representative inquiry (as opposed to individualized inquiries) could be conducted to determine the magnitude of the inaccuracies. Adoma, 2010 WL 3431804 at *8.

3. The De Minimis Defense An employer may not be liable for de minimis off-the-clock work, however, “[t]he

burden is on the employer to show that the time consumed by the activity is de minimis.” Arnold v. Schreiber Foods, Inc., 690 F.Supp. 2d 672, 685 (M.D. Tenn. 2010) (citation omitted). See also Rutti v. Lojack Corp., Inc., 596 F.3d 1046, 1057 n.10 (9th Cir. 2010); Wren v. RGIS Inventory Specialists, 2009 WL 2612307, *25 (N.D. Cal. Aug. 24, 2009) (“Because the de minimis doctrine is an exception to the general rule that ‘hours worked’ must be compensated, the burden is on the defendant to established that it applies. See Spoerle v. Kraft Foods Global, Inc., 527 F.Supp.2d 860, 869 (W.D.Wis. 2007) (citing Walling v. General Industries Co., 330 U.S. 545, 547-48 (1947); Yi v. Sterling Collision Centers, Inc., 480 F.3d 505, 507 (7th Cir. 2007)”). But cf. Bull v. U.S., 68 Fed.Cl. 212, 225 (Fed.Cl. 2005) (“To establish that preliminary or postliminary work is compensable, plaintiffs first must show that the time spent engaged in the activity was not so ‘insubstantial and insignificant’ as to bar recovery under the ‘de minimis doctrine.’”).

In Lindow v. United States, 738 F.2d 1057, 1063 (9th Cir. 1984), the Ninth Circuit

adopted a three-prong standard for “determining whether otherwise compensable time is de minimis.” Under this three-prong test (which has been widely adopted, see, e.g.,

DeAsencio v. Tyson Foods, Inc., 500 F.3d 361, 374 (3d Cir. 2007); Reich v. Monfort, 144 F.3d 1329, 1332 (10th Cir. 1998)); a court “will consider (1) the practical administrative difficulty of recording the additional time; (2) the aggregate amount of compensable time; and (3) the regularity of the additional work.” Lindow, 738 F.2d at 1063.

Although some courts have found daily periods of approximately 10 minutes de

minimis, others have found that comparable amounts of working time “go[] beyond the level of de minimis and trigger the FLSA.” Reich, 144 F.3d at 1333. As the Ninth Circuit explained in Rutti v. Lojack, by adopting the Lindow three-prong balancing test, the courts have rejected “a ten or fifteen minute de minimis rule.” 596 F.3d at 1058.1 In applying the de minimis test, it is appropriate to aggregate the amount of time on an individual basis over the course of years, or to consider an aggregate based on the total number of workers or the total claim involved in the litigation. Reich, 144 F.3d at 1334 (citing Lindow, 738 F.2d at 1063). Further, the U.S. Department of Labor has clarified that even if the individual components of off-the-clock work are small, the time is recoverable if the aggregate amount of time is measurable and exceeds the de minimis threshold. Wage and Hour Advisory Memorandum No. 2006-2 at 3.

1 Although the activity at issue in Rutti took “only five to ten minutes,” the court declined to find that the activity was de minimis as a matter of law. Instead, applying the three-prong Lindow standard, the court found that the first prong (the practical administrative difficulty of recording the additional time), was “closely balanced,” but that the second and third prongs (aggregate amount of compensable time and regularity of the additional work) favored the plaintiff. As a result, the court found there were material issues of fact as to whether the transmissions were de minimis and vacated summary judgment in favor of the employer. Id. at 1058.

Calculation of Regular Rate

By Rex Burch BRUCKNER BURCH PLLC

1. Introduction Calculation of an employee’s “regular rate” is the “linchpin” of every Fair Labor Standards Act overtime case. O'Brien v. Town of Agawam, 350 F.3d 279, 294 (1st Cir. 2003). This is because the FLSA requires employers to pay non-exempt employees at least one and one-half times their regular rate of pay for all hours worked in excess of 40 in a workweek. 29 U.S.C. § 207(a). The requirement that employers pay overtime based on the applicable regular rate covers to all non-exempt employees, including workers paid by salary, the day, the hour, on commission, etc. Further, the employee’s regular rate includes most forms of compensation (such as bonuses, employer provided meals and lodging, commissions, shift differentials, guaranteed longevity pay, incentive pay, retroactive raises, and good attendance bonuses). Errors in the calculation of regular rates are “common.” Michael R. Triplett, Wal-Mart toPay More Than $33 Million in Settlement with DOL Involving Overtime, DAILY LAB. REP. (Jan. 26, 2007). In fact, the largest Department of Labor settlement in history resulted from Wal-Mart’s failure to calculate its employee’s “regular rates” accurately. Id.; Michael R. Triplett, Wal-Mart/DOL Pact May Prompt More Claims Involving Overtime Calculation, Attorneys Say, DAILY LAB. REP. (Feb. 8, 2007). Therefore, the regular rate must be examined in every FLSA overtime case. 2. The General Rule: What is Included in the Regular Rate? The regular rate is a rate per hour. 29 C.F.R. § 778.109. “If the employee is employed solely on the basis of a single hourly rate, the hourly rate is his ‘regular rate.’” 29 C.F.R. § 778.110. However, the FLSA does not require an employer to pay its employees by the hour. Urnikis-Negro v. American Family Prop. Serv’s, -- F.3d --, 2010 WL 3024880, at *8 (7th Cir. August 4, 2010). An employer can pay its workers under a variety of systems (such as on a salary, by commission, or on a day rate basis), as long as the employer computes and pay overtime based on the hourly rate that results from the chosen pay plan. Id. “Where employees are paid on some basis other than an hourly rate, the regular hourly rate is derived, as previously explained, by dividing the total compensation (except statutory exclusions) by the total hours of work for which the payment is made.” 29 C.F.R. § 778.209 (emphasis added). In other words, unless the employee’s sole means of compensation is “a single hourly rate,” the employee’s regular rate includes more than simply his hourly wage or salary. Rather, the employee’s regular rate generally includes “all remuneration for employment paid to, or on behalf of, the employee[.]” 29 U.S.C. § 207(e); cf. Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, 461 (1948) (“The regular rate by its very nature

must reflect all payments which the parties have agreed shall be received regularly during the workweek, exclusive of overtime payments.”).2 Even “payments” such as an employer’s provision of meals or lodging (i.e., non-cash compensation) must be considered. 29 C.F.R. § 778.116. In short, with few statutory exceptions, everything of value provided to the employee must be included in the employee’s “regular rate” for overtime purposes. 3. The Limited Exceptions: What’s Excluded from the Regular Rate? The FLSA contains a relatively few exceptions to the rule that the regular rate includes “all remuneration for employment paid to, or on behalf of, the employee.” 29 U.S.C. § 207(e)(1)-(8). In particular, the calculation of an employee’s regular rate excludes:

(1) sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency;

(2) payments made for occasional periods when no work is performed due to

vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment;

(3) Sums paid in recognition of services performed during a given period if

either, (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly; or (b) the payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan, meeting the requirements of the Administrator set forth in appropriate regulations which he shall issue, having due regard among other relevant factors, to the extent to which the amounts paid to the employee are determined without regard to hours of work, production, or efficiency; or (c) the payments are talent fees (as such talent fees are defined and delimited by regulations of the Administrator) paid to performers, including announcers, on radio and television programs;

(4) contributions irrevocably made by an employer to a trustee or third person

pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees;

2 This case preceded Congress’ adoption of a definition of the term “regular rate.”

(5) extra compensation provided by a premium rate paid for certain hours

worked by the employee in any day of workweek because such hours are hours worked in excess of eight in a day or in excess of the maximum workweek applicable to such employee under subsection (a) of this section or in excess of the employee’s normal working hours or regular working hours, as the case may be;

(6) extra compensation provided by a premium rate paid for work by the

employee on Saturdays, Sundays, holidays, or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than one and one-half times the rate established in good faith for like work performed in nonovertime hours on other days;

(7) extra compensation provided by a premium rate paid to the employee, in pursuance of an applicable employment contract or collective-bargaining agreement, for work outside of the hours established in good faith by the contract or agreement as the basic, normal, or regular workday (not exceeding eight hours) or workweek (not exceeding the maximum workweek applicable to such employee under subsection (a) of this section, where such premium rate is not less than one and one-half times the rate established in good faith by the contract or agreement for like work performed during such workday or workweek; or

(8) any value or income derived from employer-provided grants or rights

provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program which is not otherwise excludable under any of paragraphs (1) through (7) if: (A) grants are made pursuant to a program, the terms and conditions of

which are communicated to participating employees either at the beginning of the employee’s participation in the program or at the time of the grant;

(B) in the case of stock options and stock appreciation rights, the grant

or right cannot be exercisable for a period of at least 6 months after the time of grant (except that grants or rights may become exercisable because of an employee’s death, disability, retirement, or a change in corporate ownership, or other circumstances permitted by regulation), and the exercise price is at least 85 percent of the fair market value of the stock at the time of grant;

(C) exercise of any grant or right is voluntary; and (D) any determinations regarding the award of, and the amount of,

employer-provided grants or rights that are based on performance are—

(i) made based upon meeting previously established performance criteria (which may include hours of work, efficiency, or productivity) of any business unit consisting of at least 10 employees or of a facility, except that, any determinations may be based on length of service or minimum schedule of hours or days of work; or (ii) made based upon the past performance (which may include any criteria) of one or more employees in a given period so long as the determination is in the sole discretion of the employer and not pursuant to any prior contract. Id.

The “list of exceptions is exhaustive[.]” O'Brien, 350 F.3d at 295. Simply designating compensation as a “gift” or “reimbursement for expenses” does not mean the item will not be included in the regular rate. Gagnon v. United Technisource, Inc. 607 F.3d 1036, 1041 (5th Cir. 2010) (finding the employer “tried to avoid paying … a higher “regular rate” by artificially designating a portion of [the employee’s] wages as “straight time” and a portion as “per diem.”). Further, the employer bears the burden of establishing that a payment should be excluded from an employee’s regular rate. O'Brien, 350 F.3d at 295.3 Compensation that does not fall within one of the statutory exclusions must be included in the calculation of an employee’s regular rate. Id.; 29 C.F.R. § 778.200(c). 4. Application of Regular Rate Principles. A. Hourly Workers Who Earn Bonuses. As noted above, if “the employee is employed solely on the basis of a single hourly rate, the hourly rate is his ‘regular rate.’” 29 C.F.R. § 778.110(a). However, if the employee receives, for example, a production bonus in addition to his hourly rate, the bonus must be included in his regular rate for overtime purposes. Id. at 778.110(b). For example, if an employee whose hourly rate is $10 an hour receives a $50 production bonus in a week in which he works 50 hours, his regular rate is $11. The regular rate is calculated as follows: 50 hours at $10 an hour = $500 Production bonus = $50

3 See also, Local 246 Util. Workers Union v. Southern Cal. Edison Co., 83 F.3d 292, 296 (9th Cir.1996); Minizza v. Stone Container Corp. Corrugated Container Div. E. Plant, 842 F.2d 1456, 1459 (3rd Cir.1988).

Total weekly “straight time” earnings = $500 Total “straight time” earnings ($550) divided by hours worked (50) = $11 an hour “regular rate” This employee is then entitled to $55 in overtime premiums ($11 an hour divided by 2 times 10 overtime hours). B. Piece-Rate Workers. “When an employee is employed on a piece-rate basis, his regular hourly rate of pay is computed by adding together his total earnings for the workweek from piece rates and all other sources (such as production bonuses) and any sums paid for waiting time or other hours worked (except statutory exclusions).” 29 C.F.R. § 778.111(a). Once this sum is divided by the number of hours worked in the week for which such compensation was paid, the result is the piece-rate worker’s “regular rate” for that week.” Id. The piece-rate worker is entitled to one-half this regular rate of pay multiplied by the number of hours worked in excess of 40 in the week (in addition to his regular earnings). Alternatively, if the employer and employee come to an agreement prior to the performance of the work, the employer can simply pay one and one-half times the piece for time worked in excess of forty hours in a workweek. For example, if the employee is normally paid $1 per “widget” made during non-overtime hours, the employer could pay the employee $1.50 for each widget made during overtime hours. 29 U.S.C. § 207(g)(1); 29 C.F.R. § 778.418.4 If the piece-rate worker is guaranteed a minimum hourly rate, overtime must be calculated based on the minimum hourly rate in workweeks were the employee’s piece-rate earnings fall short provided the guaranteed hourly rate is actually paid. 29 C.F.R. § 778.111(b); DOL Field Op. Handbook § 32b02. C. Day Rates. The overtime requirements apply to employees paid on a day rate basis. 29 C.F.R. § 778.112; see also, Dufrene v. Browning-Ferris, Inc., 207 F.3d 264, 267-68 (5th Cir. 2000). The regular rate is calculated by “totaling all sums received at such day rates … in the workweek and dividing by the total hours actually worked.” Id. The employee is then entitled to one-half this amount for every hour worked in excess of forty in a workweek. Id. The more hours an employee works, the less his regular rate of pay becomes. The supposed “trade-off” is that the employee receives a full day’s pay even if the employee works less than a full day. 29 C.F.R. § 778.112 (day rate must be paid regardless of the 4 Of course, the employee’s regular rate cannot be less than the minimum wage.

number of hours worked). If the employee’s pay is docked for working less than a full day, the employer does not have a “valid day-rate plan.” Solis v. Hooglands Nursery, L.L.C., 372 Fed.Appx. 528, 529-30 (5th Cir. April 7, 2010). As a result, the employer may be liable for overtime based on the rate at which the employee is docked. Id. D. Salaried Employees. Where an employee is compensated on a salary basis, her regular rate is computed by dividing her weekly salary5 by the “by the number of hours which the salary is intended to compensate.” 29 C.F.R. § 778.113; Rodriguez v. Farm Stores Grocery, Inc., 518 F.3d 1259. 1268-69 (11th Cir. 2008) (the factual question of how many hours the salary was intended to cover must be answered prior to calculating damages). For example, if the employee is hired at a salary of $450 a week with the understanding that this salary is compensation for a regular workweek of 45 hours, the employee’s regular rate is $450 divided by 45 hours, or $10 an hour. If the employee works 50 hours in a particular week, the employer owes the employee “one-half times their regular rate for the other five hours a week for which the straight time was already compensated” but owes “one-and-a-half times their regular rate for all hours worked over 45[.]” Johnson v. Big Lots Stores, Inc., 604 F.Supp.2d 903, 930 (E.D.La. 2009). The calculation is different where the employer and the employee agree that the salary is intended “as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many.” 29 C.F.R. § 778.114(a). This payment plan, known as the fluctuating work week (or FWW) plan, is subject to a number of important limitations. Urnikis-Negro, -- F.3d --, 2010 WL 3024880, at *11-13. However, assuming all the required conditions are met, the regular rate for an employee covered by a FWW plan is calculated by dividing the salary by the total number of hours worked in the workweek. Id. The employee is then entitled to an additional ½ of the regular rate for each hour worked in excess of forty. Id. E. Regular Rate for Commissioned Employees Commissions are “payments for hours worked and must be included in the [employee’s] regular rate.” 29 C.F.R. 778.117. If the employee is paid purely on a commission basis, the commissions form the total “straight-time” earnings for the employee. Id. However, if the employee receives commissions in addition to some other form of payment (salary, hourly rate, day rate, etc.), the commissions must be included with other forms of pay for hours worked in order to calculate the total straight time pay. Id. In either instance, the total straight time pay is then divided by the hours worked during a workweek in order to arrive at the regular rate for that workweek. Id. 5 “Where the salary covers a period longer than a workweek, such as a month, it must be reduced to its workweek equivalent.” 29 C.F.R. § 778.113(b). For example, a month salary should be multiplied by 12 (to equal a yearly salary) then divided by 52 (the number of weeks in a year) to yield the “weekly” salary. Id.

This basic method applies whether the commissions are paid on a weekly basis or on some other, less frequent basis. Since commission payments often vary from week to week, it is very common for employees paid on a commission basis to have a regular rate that likewise varies from week to week. 29 C.F.R. 778.117 explains the general issues in computing the regular rate for commission-pay employees. 1. Commissions Paid on a Workweek Basis. If commissions are paid weekly, add the commission payment to any other forms of pay for that week and divide the total amount by the number of hours worked that week. Since the commission payment (and any other forms of pay) represent the straight-time earnings for that week, any overtime would be compensated by paying half of the regular rate times the number of overtime hours. 29 C.F.R. 778.118. Of course, this payment is in addition to the employee’s straight-time earnings, bringing the employee up to time and a half. Id. 2. Deferred Commissions. An employer is not required to pay commissions on a weekly basis. Until the commission is actually paid, the employer can simply pay overtime based on the regular rate calculated exclusive of the commission payment. 29 C.F.R. § 778.119. However, once the commission can be computed and paid, the employer must calculate any additional overtime owed by apportioning it across the workweeks of the period during which it was earned. Id. For example, if the commissions can be tied to particular workweeks, the commissions are added to the other earnings for those particular workweeks. 29 C.F.R. § 778.119. The employer must then calculate the regular rate, and pay the “back” overtime pay, in the same manner as commissions paid on a workweek basis. For example, assume the employee earned $600 in commissions tied to two workweeks, i.e., the employee earned an additional $300 a week in commissions. In the first of two workweeks, the employee worked 50 hours. In the second, the employee worked 60. Assuming the employer paid overtime has already paid the overtime owed on the employee’s non-commission pay, the employer can simply use the commission and hours to calculate the unpaid overtime as follows: For Week 1: $300 divided by 50 hours = $6 “additional” regular rate. $6 regular rate times ½ = $3 additional overtime premium owed $3 times 10 overtime hours = $30 overtime due For Week 2: $300 divided by 60 hours = $5 “additional” regular rate.

$5 regular rate times ½ = $2.5 additional overtime premium owed $2.5 times 20 overtime hours = $50 overtime due Thus, even though the amount allocated for each workweek is the same, the employee’s regular rate will depend on the number of hours worked in a particular workweek. 29 C.F.R. § 778.119. If the commission cannot be tied to specific workweeks, the commission must be allocated pro-rata to each workweek in the period covered by the commission payment. 29 C.F.R. 778.120(a). If the employee worked overtime in the covered workweeks, the regular rate would be recalculated as set forth above. Id. However, the employee’s work hours vary significantly from week to week such that it is unrealistic to allocate equal portions of the commission to each workweek, commissions may be allocated to hours worked during the covered period. 29 C.F.R. 778.120(b). The commission is divided by the total number of hours worked during the computation period. Id. Overtime is then calculated by multiplying one-half of that figure (representing the increase in the regular rate attributable to the commission) by the number of overtime hours worked in each workweek during that period. See 29 C.F.R. 778.119 and 778.120 for examples of the above calculations. Reich v. Interstate Brands Corp., 57 F.3d 574, 575-76 (7th Cir.1995) (explaining how to incorporate an annual lump-sum payment into an employee's regular rate). 3. Basic Rate. The FLSA provides for overtime calculations based on a “basic rate” an alternative to the methods listed above. 29 C.F.R. § 778.122. The Department of Labor’s regulations provide several means for calculating a basic rate. Id. These methods generally amount to an average of the employees’ earnings (except overtime premiums) over the course of a specified period of time. See, e.g., 29 C.F.R. § 548.3. Several conditions must be satisfied in order for the employer to take advantage of paying overtime pay based on a “basic rate.” For example, the rate must be agreed upon (in an individual or collective bargaining agreement) before the performance of the work. 29 C.F.R. § 548.2(a). F. Regular Rate for Tipped Employees. Provided certain conditions are met, the FLSA permits employers to pay a sub-minimum wage ($2.13 per hour) to certain “tipped employees” (provided certain conditions are met). 29 U.S.C. § 203(m). However, employers must still pay tipped employees overtime based on the full minimum wage. See, e.g., 29 C.F.R. § 531.60; Perez v. Palermo Seafood, Inc., 548 F.Supp.2d 1340, 1349 (S.D. Fla. 2008) aff’d 2008 WL 5207047 (11th Cir. Dec. 12, 2008). Thus, even where an employer is properly paying a “tipped employee” a cash wage of $2.13 per hour (because the employer qualifies for a “tip credit”) for straight time hours, overtime cannot be paid at $3.195 an hour ($2.13

times 1.5). Instead, the employer cannot pay must pay the employee $2.13 plus an additional ½ times the minimum wage for each overtime hour worked. See National Restaurant Association Legal Problem Solver for Restaurant Operators, Overtime: How to Compute It (Apr. 15, 010).6

6 www.restaurant.org/pdfs/legal/lps/employees_overtime.pdf.

Calculating Back Overtime Wages in Misclassification Cases

By Richard Alfred1 and Rebecca Bromet2 SEYFARTH SHAW LLP

I. Introduction

Wage and hour litigation continues to out-pace all other types of workplace class actions. Collective actions pursued in federal court under the Fair Labor Standards Act (“FLSA”) currently outnumber all other types of employment-related class actions. Significant growth in wage and hour litigation also is centered at the state court level, and especially in California, Florida, Illinois, New Jersey, New York, Massachusetts, Minnesota, Pennsylvania, and Washington. This trend, one likely to continue into the foreseeable future, is reflected in the value of the top ten wage and hour settlements in 2009, which totaled $363.6 million, as compared to only $253 million in 2008.

The most prevalent wage and hour cases are misclassification cases, where employees allege they were improperly classified as exempt from overtime pay requirements. Some of the largest misclassification settlements in 2009 and 2010 include:

• Poole v. Merrill Lynch (D. Or. Feb. 8, 2010) - $43.5 million: Misclassification case related to stock brokers.

• In Re Staples Wage & Hour Litigation (D.N.J. Jan. 29, 2010) - $42 million before reverter: Misclassification case related to assistant store managers.

• In Re Wachovia (C.D. Cal. 2009). - $39 million before reverter: Misclassification case related to stock brokers, referred to as financial advisers or financial adviser trainees.

• Westerfield v. Washington Mutual (E.D.N.Y. 2009) - $38 million: Misclassification case related to loan consultants.

1 Richard Alfred is a partner in Seyfarth Shaw’s Labor and Employment Department. He is the chair of the firm’s national Wage and Hour Litigation Practice Group and of the firm’s Boston office Labor and Employment Group. Mr. Alfred devotes the majority of his practice to the representation of employers in wage and hour collective and class actions in jurisdictions throughout the country including cases consolidated by the federal Panel on Multi-District Litigation. 2 Rebecca Bromet is a partner in the Chicago office of Seyfarth Shaw and a member of the firm’s national Wage and Hour Litigation Practice Group. Ms. Bromet focuses her practice on representing employers in their defense of collective and class actions alleging violations of federal and state wage and hour laws. Ms. Bromet also devotes a substantial portion of her practice to advising employers of their rights and obligations under those laws.

• Veliz v. Cintas Corp., $22.75 million (N.D. Cal. 2009). Misclassification case related to delivery drivers.

• Conley v. Pacific Gas & Electric, $17.25 million (Cal. 2009). Misclassification case related to salary basis issues for variety of positions..

As these settlements reveal, misclassification cases cut across industries and can significantly impact a company’s bottom line.

II. Calculating Back Overtime Pay In Misclassification Cases

In the typical misclassification case, employees in a particular position were treated as exempt and received a salary, but did not receive overtime compensation. If these employees were legally misclassified as exempt, the employer would owe the employees back wages for unpaid overtime. Courts have taken at least three different approaches in calculating those back overtime wages. Under the first, and most common approach, misclassified employees receive an additional half-time their regular rate of pay for all overtime hours worked (“half-time multiplier”) based on the principles outlined in the fluctuating workweek interpretive guideline, 29 C.F.R. § 778.114 (“FWW method”). Under the second approach, courts have found that the FWW method is inapplicable in misclassification cases and award misclassified employees one-and-a-half times their regular rate of pay for all overtime hours worked (“one-and-a-half time multiplier”). Most recently, the Seventh Circuit in Urnikis-Negro v. American Family Property Services, __ F.3d ___, 2010 U.S. App. LEXIS 16126 (7th Cir. 2010), found the FWW method inapplicable to misclassification damages, but, nonetheless, applied the half-time multiplier to calculate damages for a misclassified employee. The Urnikis-Negro Court primarily based its decision on the Supreme Court’s analysis in Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942) (“Overnight Motor method”). Each of these approaches is discussed more fully below.

A. Courts Are Divided As To Whether The FWW Method Applies In Misclassification Cases

• Faced with calculating damages in a misclassification case, a majority of courts have turned to 29 C.F.R. § 778.114 to guide their decision-making process.

Section 778.114 outlines five criteria which must be established before it is appropriate to use the half-time multiplier to calculate overtime compensation:

(1) the employee’s hours fluctuate from week to week; (2) the employee receives a fixed weekly salary that remains the same regardless of the number of hours worked per week; (3) the fixed salary is sufficient to provide compensation at a regular rate not less than the legal minimum wage; (4) the employee receives at least 50 percent of his regular hourly pay for all overtime worked; and (5) the employer and the employee have

a clear mutual understanding that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek.

Perez v. Radioshack Corp., 2005 U.S. Dist. LEXIS 33420, *7-8 (N.D. Ill. Dec. 14, 2005); see also 29 C.F.R. § 778.114. If the employer can establish these five elements, then the employee’s back overtime pay is calculated according to the following formula:

the regular rate of the employee will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week. Payment for overtime hours at one- half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate, under the salary arrangement.

29 C.F.R. § 778.114(a).

The first three elements of 29 C.F.R. § 773.114 typically are easily satisfied in a misclassification case: (1) the hours worked by exempt employees generally varies from week to week; (2) the very nature of being an exempt employee means that the employees salary remains the same regardless of the quantity of hours worked; and (3) exempt employees typically receive a salary sufficient to compensate them for all hours worked at a rate of at least equal to minimum wage. Disputes arise over whether the fourth and fifth elements are satisfied – namely, when the employee must receive the overtime payment and the nature of the understanding required.

1. Courts Are Divided On Whether The FWW Method Applies Where An Employee Did Not Receive The Contemporaneous Payment Of Overtime

The FWW method sanctions the use of the half-time multiplier to calculate overtime pay provided that the employee “receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half his regular rate of pay.” 29 C.F.R. § 778.114(a). Courts that have applied § 778.114 in misclassification cases have found that the contemporaneous payment of overtime compensation is not necessary and have found this element satisfied when the employer makes overtime payments on a retroactive basis. See Perez, 2005 U.S. Dist. LEXIS 33420, at *23-26 (“Nothing in the language of § 778.114 mandates that the fluctuating workweek method of calculations is precluded where the overtime payments are awarded retroactively as a remedy”); see e.g., Valerio v. Putnam Assocs., Inc., 173 F.3d 35, 39-40 (1st Cir. 1999) (affirming the use of the fluctuating workweek method of calculating back overtime pay on a retroactive basis); Tumulty v. FedEx Ground Package Sys., Inc., No. 04-cv-1425, 2005 U.S. Dist. LEXIS 25997 (W.D. Wash. Aug. 16, 2005) (holding the contemporaneous payment of overtime is not required). This reasoning is supported by the Department of Labor’s own interpretation of § 778.114, which does not require such a contemporaneous payment. See Department of Labor Opinion Letter FLSA 2009-3 (approving the retroactive application of the half-time method of calculating overtime for

a misclassified employee; “because the fixed salary covered whatever hours the employees were called upon to work in a workweek; the employees will be paid an additional one-half their actual regular rate for each overtime hour worked, which at all times exceeds minimum wage; and the employees received and accepted the salary knowing that it covered whatever hours they worked, it is our opinion that the employer’s method of computing retroactive payment of overtime complies with the FLSA.”).

Courts that have rejected the use of the FWW method in misclassification cases have held that “contemporaneous payment of overtime compensation is a necessary prerequisite for application of the fluctuating workweek method.” See Rainey v. American Forest & Paper Ass’n, Inc., 26 F. Supp. 2d 82, 100 (D. D.C. 1998); see also Cowan v. Treetop Enters., Inc., 163 F. Supp. 2d 930, 941 (M.D. Tenn. 2001) (explaining that section 773.114 “requires a contemporaneous payment of the half-time premium for an employer to avail itself of the fluctuating workweek provision”). Courts find support for this contemporaneous payment requirement in the text of section 773.114, which states “[w]here all facts indicate that an employee is being paid for his overtime hours at a rate of no greater than that which he receives for non-overtime hours, compliance with the Act cannot be rested on any application of the fluctuating workweek overtime formula.” See also Russell v. Wells Fargo & Co., 672 F. Supp. 2d 1008, 1012 (N.D. Cal. 2009) (finding section §773.114 requires the contemporaneous provision of overtime pay). This reasoning leads those courts that have adopted it to the conclusion that 29 C.F.R. § 778.114 is not satisfied where an employee merely received his salary and did not receive any overtime payments at the time the overtime was worked, such as in a misclassification case. Courts following this line of authority, therefore, conclude that misclassified employees are entitled to time-and-one-half their regular rate of pay for all overtime hours worked. See Russell, 672 F. Supp. 2d 1008.

2. Courts Are Divided On The Nature Of The Understanding Required By The FWW Method

The final requirement of 29 C.F.R. § 778.114 is that “there is a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period…” Courts have grappled with what the “clear mutual understanding” must relate to.

Courts applying the FWW method in misclassification cases have held that the requisite understanding is established when the employer and employee agree that the employee will be paid a salary for all hours worked. See Clements v. Serco, Inc., 530 F.3d 1224, 1230 (10th Cir. 2008) (“our inquiry is whether the Employees and [the employer] had a clear and mutual understanding that they would be paid on a salary basis for all hours worked.”); Valerio v. Putnam Assocs., 173 F.3d 35, 40 (1st Cir. 1999) (“The parties must only have reached a ‘clear and mutual understanding’ that while the employee’s hours may vary, his or her base salary will not.”). Several courts have found this understanding to be an “implied term of one’s employment agreement if it is clear from the employee’s actions that he or she understood the payment plan…” Mayhew v. Wells, 125 F.3d 216, 219 (4th Cir. 1997) (explaining that the requisite agreement may be

implied from the parties actions); see also Clements, 530 F.3d at 1231 (“the Employees understood they would not be docked when they worked fewer than forty hours and would not be paid more when they worked over forty hours. This is sufficient to establish the Employees understood they would receive a fixed salary”); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135, 1138 (5th Cir. 1988) (using the fluctuating workweek method where the employees understood “they would be paid a fixed weekly salary, and would work whatever number of hours were required to get the job done”).

In its 2009 Opinion Letter, the DOL explained that its guidelines “do not require that the ‘clear and mutual understanding’ extend to the method used to calculate the overtime pay. … Rather, 29 C.F.R. § 778.114 only requires that the employees have a ‘clear and mutual understanding that they would be paid on a salary basis for all hours worked.’” (internal citations omitted).

Courts rejecting the FWW method, by contrast, have required that the understanding extend to an agreement that the employee would receive overtime premiums in addition to his salary. Where an employee has been misclassified as exempt and has not received any overtime compensation, the reasoning goes, “it was not possible for [the employer] to have had a clear mutual understanding with [the employee] that she was subject to a calculation method applicable only to non-exempt employees who are entitled to overtime compensation.” Rainey v. American Forest & Paper Ass’n, Inc., 26 F. Supp. 2d 82, 102 (D.D.C. 1998); see also In re: Texas EZPawn FLSA Litigation, 633 F. Supp. 2d 395, 402 (W.D. Tex. 2008) (“Attempting to ascertain whether there was a ‘clear mutual understanding’… becomes awkward at best in a misclassification suit, as there was obviously no understanding on the issue, given that both employer and employee were acting on the assumption that the employee was exempt from overtime, and that the rule had no application to that job.”); Russell, 672 F. Supp. 2d 1008 (declining to apply § 773.114 in a misclassification case where it was not established that there was “a clear mutual understanding between an employer and employee that the employee will be paid a fixed salary for fluctuating weekly hours but nonetheless receive overtime premiums”). Courts applying this line of reasoning apply the one-and-a-half multiplier to calculate back overtime wages due.

3. Recent Seventh Circuit Decision Affirms Use Of Half-Time Multiplier But Rejects Reliance On The FWW Method

In August 2010, the Seventh Circuit addressed the issue of how to calculate back overtime pay in a misclassification case and held that the half-time multiplier should be used, although the Court rejected the application of § 778.114 in misclassification cases. See Urnikis-Negro, 2010 U.S. App. LEXIS 16126. In contrast to the many other courts, including all of the other Circuit Courts that have addressed this issue, the Seventh Circuit based its decision on long-standing Supreme Court precedent underlying the proper method for calculating an employee’s regular rate of pay and for calculating overtime for a salaried employee.

In the Urnikis-Negro case, the District Court ruled that the plaintiff had been misclassified as exempt. See Urnikis-Negro v. American Family Property Services, 2008

U.S. Dist. LEXIS 102034 (N.D. Ill. July 21, 2008). The plaintiff received a salary of $1,000 per week, which, according to the District Court, the plaintiff understood was intended to compensate her for all hours worked in any workweek. The District Court held that the requirements of 29 C.F.R. § 778.114 were satisfied and used the half-time multiplier to calculate the plaintiff’s unpaid overtime compensation. The plaintiff appealed, arguing that the District Court erred in applying 29 C.F.R. § 778.114 in a misclassification case.

The Seventh Circuit affirmed the District Court’s holding, but rejected its reasoning and reliance on § 778.114, which the Seventh Circuit deemed a “dubious source of authority” for calculating a misclassified employee’s damages. Urnikis-Negro, 2010 U.S. App. LEXIS 16126, at * 41-42. First, the Seventh Circuit explained, § 778.114 is “forward looking” in that it describes a way an employer may compensate an employee for variable hours with a fixed wage. Id., at *37. Second, the guideline requires a “clear mutual understanding” between employer and employee that the fixed wage will constitute the employee’s regular or straight-time pay for any and all hours worked in a given week and the separate payment of an overtime premium for any hours in excess of 40 that are worked in that week. Id. Where an employee was wrongly classified as exempt, there can be no “clear mutual understanding” that overtime premiums would be received because the employee receives no contemporaneous overtime premium payment. Id. Finally, the Seventh Circuit explained, § 778.114 is not a remedial measure—it describes how an employer may comply with the FLSA in the first instance, but says nothing about how a court is to calculate damages. Id. at 37-38.

Rejecting the application of the FWW method in a misclassification case, the Court in Urnikis-Negro turned instead to the principles outlined in Supreme Court precedent, which led the Seventh Circuit to the same result. Following this approach, the first step in determining back overtime compensation due is to calculate the employee’s regular rate of pay. See Walling v. Youngerman-Reynolds Hardwood Co., 325 U.S. 419, 424 (1945) (“The keystone of § 7(a) is the regular rate of compensation”). “An employee’s regular rate of pay is the amount of compensation he receives per hour.” Urnikis-Negro, 2010 U.S. App. LEXIS 16126, at *23 (citing Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942). For a salaried employee, such as a misclassified employee, the regular rate of pay is determined by dividing the weekly salary “by the number of hours which the salary is intended to compensate.” 29 C.F.R. § 778.113 (emphasis added). Thus, it is important to determine the nature of the parties’ agreement about the number of hours the employee’s salary was intended to compensate for. See Urnikis Negro, 2010 U.S. App. LEXIS 16126, at *44 (explaining that “[t]he employee’s regular rate of pay is a factual matter”). Once the employee’s regular rate of pay is determined, “[t]he employee is then entitled to an overtime premium of one-half of that rate.” Id. at 49 (discussing that it is Overnight Motor that controls these calculations).

Thus, according to the Seventh Circuit, where the employer and employee have agreed that the employee’s salary is intended to compensate the employee for all hours worked in each workweek, a misclassified employee’s unpaid overtime wages are calculated using the following formula:

• Divide the employee’s weekly salary by the employee’s hours worked in each workweek to determine the regular hourly rate;

• Multiply the resulting regular rate by one-half;

• Multiply the half-time rate by the number of overtime hours worked in each workweek.

The Seventh Circuit is not the first Court to find the half-time multiplier to be appropriate in misclassification cases independent from § 773.114. See e.g., Desmond v. PNGI Charles Town Gaming, LLC, No. 3:06-CV-128, 2009 U.S. Dist. LEXIS 84632 (N.D. W.Va. Sept. 16, 2009) (finding a misclassified employee is only entitled to an additional half-time compensation for any overtime worked; explaining its decision “is based upon the logic of Overnight Motor as well as the general tenets of the calculation of compensatory damages”); Torres v. Bacardi Global Brands Promotions, Inc., 482 F. Supp. 2d 1379, 1382 (S.D. Fl. 2007) (finding misclassified employee is only entitled to an additional half time compensation for overtime worked because the misclassified employee, by receiving his salary each week, “has already received his regular rate for all hours worked” and therefore, “he is entitled to half-time for those hours worked in excess of forty per week.”).

III. Impact Different Methods Of Calculating An Employee’s Regular Rate Of Pay And Overtime

The method of overtime calculation has a dramatic impact on the amount of back overtime owed. For example, assume an employee with a weekly salary of $1,000 works a total of 50 hours a week.

Calculation of Regular Rate Calculation of Unpaid Overtime

Weekly Salary

WeeklyHours

Regular Hourly

Rate Calculation of Amount

Amount of Unpaid Weekly

Overtime

Half-time Method $1,000 50 $20.00 $20.00 x 0.5 x 10 overtime

hours $100.00

Time-and-a half Method and

Regular Rate With All Hours

Worked3

$1,000 50 $20.00 $20.00 x 1.5 x 10 overtime hours $300.00

Time-and-a half Method $1,000 50 $25.00 $25.00 x 1.5 x 10 overtime hours $375.00

Using the above example for one employee, for one workweek, the impact of these different calculations is obvious. In a class action, the impact of applying a time-and-a-half method can be devastating to a defendant. For example, if an employer faced three years of liability related to misclassifying 500 employees who worked an average of 50 hours a week and were paid a salary of $1,000 per week, the employer’s damages would be $6,000,000 using the half-time method and $22,500,000 using the time-and-a-half method.4

IV. Conclusion

The weight of authority, especially after Urnikis-Negro, supports the position that employers typically have taken for calculating back overtime wages where exempt employees are found to have been misclassified. Whether under the FWW method or Overnight Motor method, the proper approach to determining damages in such cases, assuming the above-discussed requirements have been met, is to multiply all overtime hours worked by one-half the regular rate of pay. By applying this method, employers will dramatically reduce their exposure in misclassification cases, including those cases seeking collective or class treatment.

3 The Urnikis-Negro Court explained that “[a]ssuming without deciding that it might be appropriate to presume that a misclassified employee’s fixed salary was meant to compensate him solely for 40 hours, the presumption cannot be irrebutable.” 2010 U.S. App. LEXIS 16126, at *44. 4 Assuming all 500 employees worked 40 overtime workweeks each year.

Liability Under the Fair Labor Standards Act

By Theodora Lee LITTLER MENDELSON, P.C.

I. Introduction

The maximum liability for violations of the Fair Labor Standards Act (FLSA) is the equivalent of six-years of back wages consisting of: (1) two years of back wages, (2) a third year of back wages for willful violations, and (3) an equal amount in liquidated damages. In addition to the plaintiffs’ attorneys fees and interest recoverable in private litigation, the U.S. Department of Labor (DOL) also may impose civil money penalties of up to $1,100 for each willful violation of the minimum wage and overtime requirements of the FLSA.

II. Statute of Limitations

The FLSA has a two-year statute of limitations on collecting back wages for non-willful violations of the law. For willful violations, the statute of limitations on collecting back pay is extended to three years. 29 U.S.C. §  255(a). The same two- or three-year limitations period has also been applied to private actions for retaliatory discharge under FLSA Section 15(a)(3) in which back wages are sought. Crowley v. Pace Suburban Bus. Div. of Reg’l Transp. Auth., 938 F.2d 797, 800 (7th Cir. 1991).

In 1988, in McLaughlin v. Richland Shoe Company, 486 U.S. 128 (1988), the United States Supreme Court ruled that an employer is guilty of a willful violation, thus triggering a three-year statute of limitations, only when it acts with actual knowledge or reckless disregard of whether its compensation scheme violates the FLSA. Explaining the willfulness standard, the Supreme Court noted that “[i]n common usage, the word ‘willful’ is considered synonymous with such words as ‘voluntary,’ ‘deliberate,’ and ‘intentional’…it is generally understood to refer to conduct that is not merely negligent.” McLaughlin, 486 U.S. at 133. Notably, proof of a willful violation is a separate and more burdensome inquiry than merely proving a violation of the FLSA. Scott v. City of N.Y., 592 F. Supp. 2d 475, 490 (S.D.N.Y. 2008) (“Simply because this Court found a violation based on undisputed facts at the summary judgment phase does not rule out the possibility that defendants undertook diligent, albeit flawed, efforts to comply with the FLSA.”).

Examples of circumstances in which willful violations were found and, thus, a three-year statute of limitations was applied include the following:

1. An employer with legal training was aware of the minimum wage requirements but had never investigated their potential application to his business. Once aware, the employer attempted to come into compliance by discharging all but one employee. Ford v. Sharp, 758 F.2d 1018 (5th Cir. 1985).

2. A company officer had actual notice of the FLSA requirements by virtue of the company’s earlier violations, his agreement to pay unpaid overtime, and his assurance of future compliance. Dole v. Elliott Travel & Tours, Inc., 942 F.2d 962, 967 (6th Cir. 1991).

3. The U.S. Court of Appeals for the Federal Circuit upheld the trial court’s determination of a willful violation and imposition of a three-year statute of limitations. Evidence demonstrated that the employer had knowledge that canine enforcement officers were working off duty without proper compensation including an internal memorandum noting there could be compensation issues for off-duty time required to meet the department’s requirements. Bull v. United States, 479 F.3d 1365 (Fed. Cir. 2007).

Examples of circumstances in which non-willful violations were found and, thus, a two-year statute of limitations was applied include the following:

1. An employer acting upon erroneous legal advice was found liable for non-willful violation of the FLSA. The district court held that “[a]lthough the District ultimately acted on the basis of an erroneous legal interpretation, it did not thwart settled law or recklessly disregard pertinent legal questions.” Hilbert v. District of Columbia, 784 F. Supp. 922, 925 (D.D.C. 1992), rev’d on other grounds, Hilbert v. District of Columbia, a Mun. Corp., 23 F.3d 429 (D.C. Cir. 1994).

2. The Third Circuit Court of Appeals affirmed a district court holding that an employer did not willfully violate the FLSA because it did not “thwart any settled FLSA doctrine.” Reich v. Gateway Press, Inc., 13 F.3d 685, 703 (3d Cir. 1994).

3. A company did not willfully violate the FLSA’s provisions where it had discussed minimum wage requirements with the state employment commission and had reviewed some “brochures and pamphlets” on the topic. Mireles v. Frio Foods, Inc., 899 F.2d 1407, 1415 (5th Cir. 1990).

While it is difficult for employees to waive their rights under the FLSA, employers may waive the statute of limitations as a defense. First, if an employer does not promptly raise the statute of limitations as a defense, it is waived. [See, e.g., Davis v. Mountaire Farms, Inc., 598 F. Supp. 2d 582, 588-91 (D. Del. 2009). Second, an employer’s prior agreement with the DOL may contain a waiver that acts against the employer, including a waiver of the statute of limitations, if the DOL ultimately brings suit. For example, a nursing home company sued by the DOL, after a prior agreement with the DOL, was held to have waived the statute of limitations as part of that prior agreement. As a result, the DOL could seek overtime going back almost four years. Herman v. Hogar Praderas de Amor, Inc., 130 F. Supp. 2d 257 (D.P.R. 2001). Limited waivers may sometimes be negotiated as part of a settlement with the DOL.

III. Liquidated Damages Under the FLSA

The FLSA provides that employees may be awarded liquidated damages in addition to any back-pay award. The amount of liquidated damages generally is an amount equal to the minimum wage and overtime compensation wrongfully withheld. FLSA Section 216 states that an employer that violates the overtime and minimum wage provisions of the FLSA “shall be liable to the employee or employees affected in the amount of their unpaid minimum wages, or their unpaid overtime compensation…and in an additional equal amount as liquidated damages.” Standing alone, this provision would enable the successful employee-plaintiff to receive double damages in every successful lawsuit for back wages. In 1947, however, Congress passed the Portal-to-Portal Pay Act, which provides relief from the FLSA’s liquidated damages provision. While liquidated damages are intended to compensate the successful employee-plaintiff for the wait and difficulty of collecting the back wages due, FLSA Section 260 states:

If the employer shows to the satisfaction of the court that the act or omission giving rise to such action was in good faith and that he had reasonable grounds for believing that his act or omission was not a violation of the FLSA, the court may, in its sound discretion, award no liquidated damages.

29 U.S.C. §  260.

A court may award liquidated damages of less than 100 percent of the back wages won by the successful employee-plaintiff. An employer can avoid assessment of liquidated damages altogether if it can demonstrate that it acted in good faith in failing to pay minimum wages or overtime and had a reasonable basis for believing that there was no violation of any federal or state regulation. The employer must show that it honestly intended to ascertain and follow the applicable wage laws. A plea of ignorance does not suffice. Indeed, the FLSA imposes some affirmative duty to investigate potential liability under the FLSA. Barcellona v. Tiffany English Pub, Inc., 597 F.2d 464 (5th Cir. 1979). Moreover, a successful plaintiff may recover liquidated damages under the FLSA or state law, but not both. Pascoe v. Mentor Graphics Corp., 199 F. Supp. 2d 1034 (D. Or. 2001); Feniger v. Café Aroma, 2007 WL 853735 (M.D. Fla. Mar. 16, 2007) (the court found, and the parties agreed, that plaintiff could not receive relief for unpaid wages under both the FLSA and Florida law because it would constitute a double reward).

Examples of circumstances in which liquidated damages have been assessed include the following:

1. The employer gave men but not women in similar positions more severance pay; thus violating the Equal Pay Act (EPA), which became part of the FLSA in 1963. The court determined that liquidated damages for EPA violations were the “norm.” Rinaldi v. World Book, Inc., 2002 U.S. Dist. LEXIS 1673, at *5 (N.D. Ill. Feb. 1, 2002).

2. The employer never questioned the legality of its pay practices or took any affirmative steps to determine the FLSA’s requirements or to verify that the FLSA applied to its employees. See, e.g., Troutt v. Stavola Bros., Inc., 905 F. Supp. 295, 302 (M.D.N.C. 1995).

3. The employer argued that its pay practices conformed to industry practice. See, e.g., Martin v. Cooper Elec. Supply Co., 940 F.2d 896, 908 (3d Cir. 1991).

4. The employer had a history of FLSA violations. See, e.g., Avitia v. Metro. Club, 49 F.3d 1219, 1223 (7th Cir. 1995).

5. The employer relied on the terms of a collective bargaining agreement with its workers and a lack of complaints for failing to pay overtime. Ackler v. Cowlitz County, 7 Fed. Appx. 543 (9th Cir. 2001).

6. An employer that failed to pay an employee of a meat packing plant for time spent donning and doffing protective clothing did not take active steps to ensure that its practices complied with FLSA but instead engaged in “ex post explanation and justification” in an attempt to avoid liability for liquidated damages. Alvarez v. IBP, Inc., 339 F.3d 894 (9th Cir. 2003), aff’d, 546 U.S. 21 (2005).

7. An employer based its incorrect conclusion that an employee was exempt from overtime on reading it had done concerning the FLSA 20 years earlier. Friedman v. S. Fla. Psychiatric Assocs., Inc., 139 Fed. Appx. 183 (11th Cir. 2005) (unpublished).

8. The Fifth Circuit Court of Appeals upheld a district court’s imposition of liquidated damages against an employer found liable for non-willful violations of the FLSA’s overtime provisions. The court held that the employer failed to demonstrate reasonable grounds for believing its act or omission was not a violation of the FLSA. Lucio-Cantu v. Vela, 239 Fed. Appx. 866 (5th Cir. 2007) (per curiam).

9. An employer was found liable where the court observed that the employer failed to make any efforts to ensure its employment of temporary health care workers complied with the FLSA. Barfield v. New York City Health & Hosps. Corp., 537 F.3d 132, 139 (2d Cir. 2008).

IV. Section 11 Good Faith Defense Liquidated Damages

The FLSA normally requires a court to award liquidated damages in an amount equal to the back wages awarded (up to three years of back wages). However, Section 11 of the Portal-to-Portal Act allows the court to remit the otherwise mandatory award of liquidated damages:

If the employer shows to the satisfaction of the court that the act or omission giving rise to such action was in good faith and that it had reasonable grounds for believing that his act or omission was not a violation of the [FLSA], the court may, in its sound discretion, award no liquidated damages or award any [lesser] amount thereof.

29 U.S.C. § 260.

The Section 11 good faith defense is available if the employer proves that it “acted in subjective good faith” and “had objectively reasonable grounds for believing that the acts and omissions giving rise to the failure [to pay overtime] did not violate the FLSA.” Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 142 (2d Cir. 1999) (internal quotation marks omitted). “’Good faith’ in this context requires more than ignorance of the prevailing law or uncertainty about its development.” Reich v. So. N. England Telecomm. Corp., 121 F.3d 58, 71 (2d Cir. 1997). Rather, “[i]t requires that an employer first take active steps to ascertain the dictates of the FLSA and then move to comply with them.” Id. The fact that an employer does not purposely violate the FLSA is insufficient to establish that it acted in good faith. Id. “Nor is good faith demonstrated by the absence of complaints on the part of employees.” Id. Moreover, “simple conformity with industry-wide practice” will not establish good faith, id., although at least one court has held that conformity with industry practice is at least relevant to a finding of good faith. See Vega v. Gasper, 36 F.3d 417, 428 n.9 (5th Cir. 1994) (noting that reliance on industry custom can be relevant but not dispositive under § 11). Thus, the Section 11 defense to liquidated damages is available where an employer can prove that it relied on the advice of counsel in determining whether an employee is correctly classified as exempt from the FLSA overtime requirements. See, e.g., Roy v. County of Lexington, 141 F.3d 533, 548 (4th Cir. 1998) (finding § 11 satisfied where employer relied on advice of counsel); Featsent v. City of Youngstown, 70 F.3d 900, 906-07 (6th Cir. 1995) (same); Hill v. J.C. Penny Co., 688 F.2d 370, 375 (5th Cir. 1982) (same); Garcia v. Allsup’s Convenience Stores, Inc., 167 F. Supp. 2d 1308, 1316 (D.N.M. 2001) (“an employer establishes a good faith defense to liquidated damages by diligently consulting legal specialists and labor specialists and following their advice”) (collecting cases); cf. So. N. England Telecomm., 121 F.3d at 72 (rejecting § 11 defense, noting that the employer “does not contend that it was relying on the advice of informed counsel”); cf. Debejian v. Atlantic Testing Labs., Ltd., 64 F. Supp. 2d 85, 91-92 (N.D.N.Y. 1999) (no good faith under § 11 where employer made no specific inquiry of counsel regarding applicability of exemption prior to determining that employee was exempt). Furthermore, an employer’s reliance on an agreement to pay less than the FLSA requires does not avoid a judgment for liquidated damages. Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697 (1945); Honke v. United States, 69 Fed. Cl. 170 (2005); Wright v. Carrigg, 275 F.2d 448 (4th Cir. 1960). Indeed, it is no defense to a liquidated damages award that the employment contract between the plaintiff-employee and the defendant-

employer calls for the accumulation of unpaid overtime to be used to make up for time lost in weeks when, because of sickness or for personal reasons, the employee works fewer than the required number of hours. Brown v. Bouchard, 209 F. Supp. 130 (D. Mass. 1962). Employees simply do not have the ability to prospectively waive rights under the FLSA. Moreover, private settlements between the employer and employee as to back wages only cannot completely protect the employer against claims for liquidated damages. Indeed, it has been held that an employer’s tender or payment to employees for overtime compensation due under the FLSA is not sufficient to avoid an award of liquidated damages. Petrlik v. Cmty. Realty Co., 347 F. Supp. 638 (D. Md. 1972). The Secretary of Labor is authorized to supervise an employer’s payment of any unpaid minimum wages or overtime compensation owed to employees under the FLSA. Employees, however, must consent to the amount of the employer’s voluntary settlement. An employee that agrees to accept the back wages offered by the employer waives his or her right to a civil action against the employer. Thus, the employer can limit its liability to the actual amount of wages or overtime compensation due and avoid the assessment of liquidated damages and attorneys’ fees through a voluntary settlement agreement. 29 U.S.C. § 216(c). For example, the Fifth Circuit Court of Appeals held that when an employee signed a statement acknowledging that he agreed to accept the employer’s payment in return for dropping his claim for overtime compensation, and the statement and check for the full amount were prepared and supervised by the Wage and Hour Division, the employee waived his right to sue the employer for statutory overtime compensation and liquidated damages. Sneed v. Sneed’s Shipbldg., Inc., 545 F.2d 537 (5th Cir. 1977). A settlement that is not supervised and approved by the DOL, however, can be rejected by a court. For instance, agreements between an employer and its employees under which the employees agreed to accept a reduced payment in return for a waiver of their rights under the FLSA to claim back pay were found to be invalid when the agreements were not supervised by the DOL and were not entered as a stipulated judgment in any action by the employees against the employer. Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982). Sums paid under such agreements, however, might be used as a setoff against liability assessed in subsequent litigation. Examples of situations in which no liquidated damages were assessed include the following:

1. In structuring its compensation plan, the employer sought the advice of counsel and consulted with the DOL, but the employer failed to implement the plan correctly. Lee v. Coahoma County, 937 F.2d 220 (5th Cir. 1991), reissued as amended, 37 F.3d 1068 (5th Cir. 1993).

2. The employer conducted an objective study of job classifications to determine exempt and nonexempt status of employees and the regulations did not specifically address its employees. Bratt v. County of L.A., 912 F.2d 1066, 1072 (9th Cir. 1990).

3. A city employer relied on an administrative opinion that concluded that the salary test was not applicable to its fire lieutenants. Atlanta Prof’l Firefighters Union, Local 314 v. City of Atlanta, 920 F.2d 800 (11th Cir. 1991).

A few examples of situations in which liquidated damages were assessed because of failure to prove good faith are as follows:

1. Employer’s only evidence of good faith consisted of employer’s vice president and administrator’s testimony that she was surprised by an opinion letter the court relied on which concluded that home care nurses were not professionals, and employer did not rely on an expert opinion when it instituted its payment plan. Elwell v. Univ. Hosps. Home Care Servs., 276 F.3d 832 (6th Cir. 2002).

2. Employer presented evidence that it acted with reasonable belief that employees were exempt under the Motor Carriers’ Act. The employer argued that because the exemption is complex and confusing an employer attempting to act in good faith could come to the wrong conclusion. The court found the employer’s assertions insufficient, explaining “[w]here a question is complex or uncertain, an employer at the least must show that it made a diligent investigation into the issues and concluded not to pay overtime based upon the results of its investigation.” Williams v. Maryland Office Relocators, L.L.C., 485 F. Supp. 2d 616, 620 (D .Md. 2007).

3. Employer that failed to assert any affirmative defenses and failed to present evidence to support anything less than liquidated damages. Bozeman v. Port-O-Tech Corp., 2008 U.S. Dist. LEXIS 70865, at *47 (S.D. Fla. Sept. 19, 2008).

Employers may also prevail on a Section 11 defense when

1. Uncertainty about the application of the FLSA and lack of controlling precedent caused the FLSA violation. See Martin v. Cooper Elec. Supply Co., 940 F.2d 896, 910 (3d Cir.1991) (legal uncertainty can support a § 11 defense provided the uncertainty “actually led the employer who violated the Act to believe that it was in compliance at the time of the violation”); Hultgren v. County of Lancaster, 913 F.2d 498, 508-10 (8th Cir. 1990) (“uncertainty about the application of the Act may be considered in determining the appropriateness of liquidated damages”) (collecting cases); Horan v. King County, 740 F. Supp. 1471, (E.D. Was. 1990) (§11

defense applied in part because “issue presented was one of first impression,” and “statute and regulations [were] uncertain and confusing”).

2. The application of the FLSA to the particular employees presented a “fact-intensive issue.” See Bond v. City of Jackson, 727 F. Supp. 1516, 1519 (S.D. Miss. 1989).

3. The employer compensated its employees in certain instances more generously than the FLSA required is relevant to a Section 11 defense. See Roy v. County of Lexington, 141 F.3d 533, 548 (4th Cir. 1998).

4. The employer incorrectly but reasonably believes that it is complying with written guidance from DOL. See Nelson v. Ala. Inst. for Deaf and Blind, 896 F. Supp. 1108, 1115 (N.D. Ala. 1995); Schneider v. City of Springfield, 102 F. Supp. 2d 827, 841 n.9 (S.D. Ohio 1999) (although written guidance did not address employer’s particular circumstances and thus could not be relied upon for § 10 defense, the employer did not, as a matter of law, “act[] unreasonably or in bad faith by inferring from them that it properly compensated its [employees]”).

V. Section 10 Is a Complete Bar to Liability

Section 10 of the Portal-to-Portal Act provides a complete bar to FLSA liability if an employer proves that it acted in good faith in conformity with and reliance on written DOL guidance:: No employer shall be subject to any liability or punishment for or on account of the failure of the employer to pay minimum wages or overtime compensation” under the FLSA if the employer “pleads and proves that the act or omission complained of was in good faith in conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation, of the [Administrator of the Wage and Hour Division of the DOL], or any administrative practice or enforcement policy of [the Administrator]. 29 U.S.C. § 259. In addition to the DOL regulations, an employer may rely on a Wage and Hour Division Opinion Letter and materials published in the Field Operations Handbook. See, e.g. Frank v. McQuigg, 950 F.2d 590, 598-99 (9th Cir. 1991) (opinion letters are “rulings” for purposes of § 10 defense); Marshall v. Baptist Hosp., 668 F.2d 234, 237-38 (6th Cir. 1981) (same with respect to Field Operations Handbook). The Section 10 defense applies only if the employer can prove that it had actual knowledge of and relied on an agency regulation, order, ruling, approval, interpretation, practice or enforcement policy before making a decision. See 29 C.F.R. §§ 790.14 to 790.19. But see Int’l Ass’n of Firefighters v. City of Rome, 682 F. Supp. 522, 532 (N.D. Ga. 1988) (“[T]he Court will not hold that because the written interpretations were not originally relied upon, the City was forever deprived of the benefit of the agency’s written advice. . . . Once the City received such written interpretations, proper reliance upon them is protected by the Portal-to-Portal Act. “); Marshall v. Baptist Hosp., Inc.,

473 F. Supp. 465, 479 (M.D. Tenn. 1979) (“[I]t would be patently absurd to hold as a general rule that defendants whose pre-existing views happen to comport with administrative pronouncements could never be said to act thereafter in reliance on them.”), rev’d on other grounds, 668 F.2d 234 (6th Cir. 1981). Also, some courts have held the DOL guidance must provide a clear an unambiguous answer to the employer’s particular situation, and not leave the employer “to its own devices to interpret the [FLSA].” EEOC v. Home Ins. Co., 672 F.2d 252, 265 (2d Cir. 1982). See also Cole v. Farm Fresh Poultry, Inc., 824 F.2d 923, 927 (11th Cir. 1987) (“[a]administrative interpretations hedged with qualifications, here the caveat that the correct answer depends on the particular circumstances, cannot provide the definitive opinion necessary to raise the statutory bar of section [§10].”); Burnison v. Mem’l Hosp., Inc., 820 F. Supp. 549, 558 (D. Kan. 1993) (no section 10 defense based on regulation using terms such as “adequate” and “usually,” which raised distinctly factual questions upon which the regulation offers no guidance.”); but see Marshall v. Baptist Hospital, Inc., 668 F.2d 234, 238 (6th Cir. 1981) (section 10 defense allowed based on the employer’s reasonable construction of an ambiguous regulation: “courts should be hesitant to impose retroactive minimum wage liability on employers in the face of an administrative interpretation which the employer could plausibly interpret as insulating him from liability”).

Attorney’s Fees: Ethical Issues, When and How to Negotiate, and Fee Petitions11

By Aashish Y. Desai MOWER, CARREON & DESAI, LLP

I. There Are Many Ways That Attorney’s Fees Can Be Awarded in FLSA Actions

The FLSA provides that the court “shall, in addition to any judgment awarded to

the plaintiff or plaintiffs, allow reasonable attorney’s fees to be paid by the defendant, and the cost of the action.” 29 U.S.C. § 216(b). Since most of these cases are brought as class hybrid actions, attorney’s fees may also be available under general theories related to class actions. Settlement negotiations for the class may overlap with discuss of class counsel’s attorney’s fees. While such situations may raise difficult ethical issues for plaintiff’s attorneys, the U.S. Supreme Court has declined to inhibit the practice of overlapping fee discussions with damages because “a defendant may have good reason to demand to know his total liability.” MANUAL FOR COMPLEX LITIGATION (4th) § 10.14 (Fed. Jud. Ctr. 2004). Other times, a lump sum is negotiated and attorney’s fees are awarded from that sum.

This paper will discuss practical theories surrounding fee applications and some

of the common conflict scenarios that can arrive in negotiating attorney’s fees in a class environment. In particular, the attorney’s loyalty to the client may be compromised by the attorney’s desire to secure compensation for services. This, naturally, gives rise to a potential conflict in the class action context. But as will be shown, the conflict is more theoretical than practical.

11 Ethics rules vary by jurisdiction and are often difficult to apply in the context of class action lawsuits. There are very few Black Letter rules. Each situation is unique and will require specific, fact, intensive analysis. The views expressed are merely scholarly commentary and are not meant to reflect the proper outcome in any particular case. This is not legal advice.

II. Fee Petitions In contrast to fee shifting statutes in which attorney’s fees are discretionary, an

award of attorney’s fees to a prevailing plaintiff is mandatory under the FLSA. Alaska Pipeline Serv. Co. v. Wilderness Society, 421 U.S. 240 (1975); Shelton v. Irwin, 830 F.2d 182, 184 (11th Cir. 1987), aff’d, 853 F2d 931 (11th Cir. 1988) (holding that attorney’s fees are mandatory and integral to FLSA; determination of amount of fees must be made before appeal). Congress’s mandate to the courts to award attorney’s fees only to plaintiffs was intentional and specifically designed to encourage private litigants to act as “Private Attorneys General” to vindicate FLSA rights. See Save Our Cumberland Mountains, Inc. v. Hodel, 857 F.2d 1516 (D.C. Cir. 1988).

Defendants are not entitled to their fees under the FLSA. Fegley v. Higgins, 19

F.3d 1126, 1135 (6th Cir. 1993). However, a defendant may be entitled to attorney’s fees for bad faith, vexatious, or oppressive litigation. EEOC v. Hendrix Coll., 53 F.3d 209, 211 (8th Cir. 1995). Five Basic Steps for Prevailing Plaintiff Fee Application

1. Entitlement: Under what circumstances and statues are you entitled to attorney’s fees?

2. How many hours were reasonably spent on the matter (the lodestar)?

3. What hourly rate should be applied? 4. Are there any issues with apportionment -- i.e., prevailing and

nonprevailing claims? and 5. Are you entitled to a multiplier?

1. Entitlement A prevailing plaintiff is entitled to attorney’s fees by statute under the FLSA as described above. 29 U.S.C. § 216(B). 2. Legal Standing for Lodestar

The link determining whether fees were reasonably incurred focuses on the attorney’s decision to perform work at the time it was performed and in light of the overall result. Attorney’s fees are not a gift. They are just compensation for expenses actually incurred in vindicating a public right.

The starting point for determining the amount of fees is the number of hours

reasonably expended on the litigation multiplied by a reasonably hourly rate. Hensley v. Eckerhart, 461 U.S. 424, 433 (1983). This lodestar calculation provides an objective

basis upon which to make an initial estimate of the lawyer’s services. Hensely, 461 U.S. at 433. The court may reduce the lodestar by deducting hours which were not “reasonably expended.” Id. at 434. The number of hours that is “reasonable” must be determined according to the facts of each case. Id. at 429.

• Use reasonable billing judgment

A billing partner usually reviews draft invoices before they are finalized into the invoice and ultimately sent to the client for payment. Consequently, prevailing parties are obligated to exercise “billing judgment” to exclude from the fee request hours that are excessive, redundant or otherwise unnecessary. Carson v. Billings Police Department, 470 F.3d 889. 893 (9th Cir. 2006) (holding that a district court may not uncritically accept the number of hours claimed by the prevailing party, but find that the time actually spent was reasonably necessary).12

• Court has broad discretion

The trial court has wide discretion in awarding fees. Because the court has such wide latitude an applicant can increase her chances of success by making every effort to be reasonable. Of course, the court has discretion to deny its fees altogether if the request is “inflated and outrageously unreasonable.” Serrano v. Unruh, 32 Cal.3d 621, 635 (1982).

• Reasonableness factors

The following are some considerations used by courts to determine whether the fees requested are reasonable.

a. Multiple attendance. Courts examine with skepticism claims several lawyers were needed to perform a

task and often deny compensation for needless duplication when many lawyers appear for hearing when one would do. See Democratic Party of Washington State v. Reed, 388 F.3d 1281, 1286 (9th Cir. 2004).

b. Documentation activities Time spent on clerical activities should not be billed at an attorney or paralegal

rate. Missouri v. Jenkins, 4 91 U.S. 274, 288 n.10 (1989) (“holding that it is appropriate to distinguish between legal work and investigation and clerical work). Clerical activities

12 Everyone believes their hours are reasonable. However, consider using billing discretion to reduce the hours being requested from the actual hours billed to bolster your application. This will help counter an argument made by the opposition that you were unreasonable -- i.e., by reminding the court that you have “already reduced the hours claimed by five or ten percent.”

may including updating correspondence and pleadings, file maintenance activities, sending exhibits to expert witnesses, making copies and pulling travel materials.

• Vague entries

Time entries should be detailed and comprehensible. Vague billing descriptions are universally prohibited because of the commonly held perception that a timekeeper can consciously or unconsciously disguise and inflate their billable hours. In re Donovan, 877 F.2d 982, 995 (D.C. Cir. 1989).

• Duplication of efforts and overstaffing

Overstaffing can generate excessive fees. It can also result in a duplication of efforts. While courts are reluctant to lay down strict guidelines, they are critical of law firms who overstaff a matter. Covel v. PaineWebber, 128 F.R.D. 654 (N.D. Ill. 1989). (Cases should be staffed at appropriate levels according to expertise and billing rates).

• Blocked billing

Time spent on each task should be separately recorded. “Blocked billing” is a practice of lumping two or more tasks into a single entry. Due to the uncertainty that blocked billing creates, it has often been found by courts to warrant a percentage reduction. See, e.g., In re The Leonard Jed Co., 103 B.R. 706, 713 (Bankr. M.D. 1989).

• Quarterly hourly increments

The State Bar Advisory cites the use of “high minimum increments” as an example of padding:

The standard minimum is 1/10th of an hour or 6 minutes. If the higher minimum is used such as .25 or .5, this probably increases the time by 15 to 25%. Some courts have criticized the use of .25 or 1/4 hour minimum as being too high.

• Excessive conferences

Internal conferences is an important tool and is certainly valuable to the client. A

classic example are conferences with junior level associates to work more efficiently and the supervision of the senior attorney who can direct the legal research needed on a case or narrow the investigation. Common Cause v. Jones, 235 F.Supp.2d 1076, 1080 (C.D. Cal. 2002). Of course, conferencing can also be subject to abuse. Courts often deny fees for time spent in excessive meetings involving more than two attorneys. While some amount of discussion is useful, excessive time billed for attorneys “discussing” a case maybe questioned. Guckenbberger v. Boston University, 8 F.Supp.2d 91, 101 (1998)

(holding “excessive telephone calls and conferences represent a duplication of effort for which less than full fare should logically be charged for all participants.”). 3. Hourly Rates Once the reasonable number of hours are determined, those hours should then be multiplied by an hourly rate. Market value is determined by the rates charged in the relevant community by attorneys of comparable knowledge, skill, experience and reputation. PLCM Group, Inc. v. Drexler, 22 Cal.4th 1084, 1095-96 (2000). One of the best ways to establish market value is by submitting declarations from practitioners in community. This can help establish current rates for associate attorneys and paralegals as well. Another consideration is to use surveys conducted of attorney hourly rates, including those conducted by RSM McGladrey and Ultman Weil, Inc. See 2006 Law Firm Financial Benchmarking Survey, RSM McGladrey, National Edition. 4. Apportionment Issues A party opposing the fee application will likely claim that fees should be apportioned between successful and unsuccessful claims. This issue turns on whether the claims are “inextricably intertwined” such that no apportionment is either necessary or appropriate. In Hensley, 461 U.S. at 434, the U.S. Supreme Court held that where a lawsuit consists of related claims, a plaintiff was one substantial relief should not have his attorney’s fees reduced “simply because the district court did not adopt each contention raised.” 5. The right to a multiplier In cases of contingent risk, plaintiff’s counsel may ask for a multiplier of their lodestar -- most seek fees in the range of two to three times their lodestars. Under California law, lodestars may be adjusted upwards to compensate for the nature of the case. Crommie v. State of California, 840 F.Supp. 719, 726 (N.D. Cal. 1994) (awarding 2.0 multiplier); Serrano v. Priest, 20 Cal.3d 25, 48-50 (1977) (1.4 multiplier upheld under Private Attorney General theory). The relevant factors that a court may consider in awarding an enhancement include: (i) the contingent nature of the fee award; (ii) the novelty and complexity of the litigation; (iii) counsel’s skill; (iv) extent to which litigation precluded other employment; (v) results obtained; (vi) delay in payment. Contingency risk multipliers in federal fee shifting cases are no longer allowed in the aftermath of City of Burlingame v. Dague, 505 U.S. 557 (1992). However, some states, such as California, has expressly declined to follow Dague and has specifically recognized that a lodestar should be enhanced to compensate attorneys for the risk of loss in contingent cases. Ketchum v. Moses, 24 Cal.4th 1122, 1133 (2001). Thus, plaintiffs should ask for multipliers under state and federal law, i.e., under California’s C.C.P. § 1021.5 for enhancement of companion unfair competition law claims. Chabner v. United

of Omaha Life Ins. Co., 1999 WL 33227443 at *7 (N.D. Cal. October 12, 1999); Parks v. Eastwood Ins., 2005 WL 6007833 (C.D. Cal. June 28, 2005) (awarding fees and multiplier on FLSA and UCL class action). III. Ethical Issues for When and How to Negotiate Fees The problem with simultaneous negotiation of a settlement and attorney’s fees has been recognized by many commentators. The absence of a “real client” impairs the incentive of a lawyer for the class to press the suit to a successful conclusion because his earnings from the suit are determined by the legal fee he receives rather than the size of the judgment. This creates at least a temptation to settlement with the defendant for a small judgment and large legal fee and, such an offer will naturally be attractive to the defendant, provide the sum of the two figures is less than the defendant’s net expected loss from going to trial. See, e.g., Richard A. Posner, Economic Analysis of Law, 570 (4th ed. 1992) (discussing the conflicts that may arise between attorneys and clients in class actions). While this problem is easily recognized, there are no clear-cut solutions. One solution is to flatly prohibit a settlement under certain circumstances. However, courts have rejected that position. The Ninth Circuit posited that an outright prohibition of simultaneous negotiation of settlement and attorney’s fees would not be prudent. Mendoza v. United States, 623 F.2d 1338 (9th Cir. 1980). The Ninth Circuit reasoned that settlement negotiations are a “give and take process” in which all elements should be considered, including attorney’s fees. Another solution that commentators have discussed is to abstain from the discussion of attorney’s fees until an agreement is reached on the relief itself or negotiate lump sum settlement and allow the court to allocate the fund between counsel and client. See Cisek v. National Surface Cleaning, Inc., 954 F.Supp. 110, 111 (S.D.N.Y. 1997). The most serious disadvantage to this theory, however, is that it would result in more responsibility on judges who already have a tremendous amount of work. To adequately determine attorney’s fees out of a lump sum apportionment would take extra time and tremendous discretion. This may actually exacerbate the problem and turn the attorney fee application into satellite litigation.

In the end, the potential or real conflict of interest inherent in simultaneous negotiation is complex and difficult to control. Most defendants simply want to buy peace. At mediation or at a settlement conference, defendants usually ask whether the settlement numbers include attorney’s fees on a forward-going basis so that they know they are negotiating for the final disposition of the case, all in. While not perfect, this approach has the most potential to deal with the conflicts so that it is minimized in the class action context. There will no doubt be consequences that have yet to be discovered, however, this method seems best suited to address the potential pitfalls.13

13 Sometimes defendants create other ethical problems by demanding an agreement for class counsel to refrain from representing future claimants against their company. Model Rule of Professional Responsibility 5.6 specifically prohibits lawyers from entering into “an agreement in which a reservation on the lawyer’s right to practice is part of the settlement of a client’s controversy.” Similarly, defense counsel may ask class counsel to settlement claims that are not contained in the complaint. Courts are not authorized to approve class action settlements with overbroad releases going beyond the facts of the operative complaint. See, e.g., National Super Spuds, Inc. v. New York Mercantile Exchange, 660 F.2d 9 (9th Cir. 1981); Schwartz v. Dallas Cowboys Football Club, Ltd., 157 F.Supp.2d 561, 577-78 (E.D. Pa. 2001).