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Wage and Hour Issues in Life Sciences: Strategies to Avoid Litigation John Battenfeld Thomas A. Linthorst Michael J. Ossip July 25, 2006 www.morganlewis.com
Wage and Hour Issues in Life Sciences: Strategies to Avoid Litigation INTRODUCTION Thomas A. Linthorst July 25, 2006 www.morganlewis.com
Introduction: Explosion in Wage and Hour Litigation Increased enforcement through DOL Surge in wage and hour representative actions FLSA actions shot up 86% between 2000 and 2004 More filed in federal court than employment discrimination class actions Not confined to low-wage earners Greater incentive for plaintiffs lawyers to find higherwage earners
Explanations for the Surge in Collective and Class Actions Large settlements and judgments spur copycats Farmers Insurance - $262 million UBS - $89 million Computer Sciences Corp. - $24 million Starbucks - $18 million Publicity concerning the revised regulations FLSA s complexity often leads to misinterpretation Overly broad assumptions Improper reliance on job title or salary
Discussion Topics Exemption issues Off the clock work issues State law issues Litigation avoidance strategies
Wage and Hour Issues in Life Sciences: Strategies to Avoid Litigation WAGE AND HOUR ISSUES Michael J. Ossip July 25, 2006 www.morganlewis.com
Bases of Wage and Hour Lawsuits Fair Labor Standards Act (FLSA) State wage and hour laws Breach of contract claims Quantum meruit claims
Main Types of Wage and Hour Class and Collective Actions Misclassification of nonexempt employees Improper salary deductions Requiring or permitting off the clock work Miscalculating regular rate for overtime purposes Failure to comply with more stringent state laws
Industries Targeted by Plaintiffs Attorneys Customer Service Delivery Employees in call centers Retail Store managers and assistant store managers Insurance Claims adjusters Financial Services Securities brokers/financial advisors Loan officers
Industries Targeted by Plaintiffs Attorneys Are life sciences industries next? March 2006 three proposed class/collective actions filed against Novartis Suits brought in California and New Jersey state courts, and federal court in New York Allege that Novartis deliberately misclassified thousands of sales representatives nationwide and other unlawful pay practices Suits together seek $375 million in wages and liquidated damages
Class Actions Against Novartis
Class Actions Against Novartis Key issue: Are sales representatives exempt from state and federal overtime laws as either outside salespersons or administrative employees? Do they actually sell a product to a customer? Do they exercise sufficient independent judgment and discretion? Are their duties considered sales or production work, or are they more administrative in nature?
White Collar Classifying Employees as Exempt or Nonexempt New regulations as of August 23, 2004 Salary level, salary basis, and duty requirements Executive, administrative, professional, outside sales, computer Retail Commission Applicable to employees working for retail or service establishments; defined compensation requirements apply Other Exemptions
Exempt Employees Salary Test FLSA: Minimum salary/fee for white collar exemptions is $455 per week: Executive employees must be paid on a salary basis Administrative and professional employees may be paid on a salary or a fee basis Computer employees may be paid: $455 per week on a salary/fee basis; or an hourly rate of at least $27.63 No minimum compensation level or required method of payment for outside sales employees Retail commission employees must receive total compensation greater than 1½ times minimum wage, and at least 50% from commissions State laws may require higher minimum salary
Exempt Employees Salary Test Highly compensated employees are deemed exempt under the new FLSA regulations, if they Receive total annual compensation of $100,000, at least $455 per week of which is paid on a salary or fee basis, and Customarily and regularly perform any one or more of the exempt duties or responsibilities of an exempt executive, administrative or professional employee But many states have not adopted the exemption for highly compensated employees
Exempt Employees Salary Test Generally, salary basis means guaranteed pay, free and clear Permissible deductions: Full-day absences for personal reasons or for sickness or disability Salary offset of jury duty fees, witness fees and temporary military pay One or more full days of unpaid disciplinary suspensions pursuant to workplace conduct rules that are in writing and applicable to all employees Partial-day deductions from an exempt employee s salary for unpaid FMLA leave Penalties imposed in good faith for infractions of safety rules of major significance Additional compensation beyond salary is permitted
Exempt Employees Duties Test General duties test for executive employees: Primary duty must be management of an enterprise or a customarily recognized department or subdivision of the enterprise Employee must customarily and regularly direct the work of at least two other full-time employees or their equivalent Employee has authority to hire or fire other employees, or significant influence regarding hiring, firing, promotion or other status changes of subordinate employees
Exempt Employees Duties Test Common mistakes regarding the executive exemption: Confusing lead or low-level supervisors with managerial employees Misapplication of the term to supervisors who are not directing the work of two or more employees Employee s influence on hiring, firing, etc. of other employees is limited
Exempt Employees Duties Test General duties test for administrative employees: Primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer s customers Primary duty must include the exercise of discretion and independent judgment with respect to matters of significance Administrative vs. production/sales dichotomy Some traditional administrative departments: marketing, HR, legal, finance, information systems, public relations
Exempt Employees Duties Test Common mistakes regarding the administrative exemption: Confusing exercise of discretion and independent judgment with use of skill in applying techniques, procedures or specific standards Misapplication of the term to employees making decisions relating to matters of little consequence
Exempt Employees Duties Test General duties test for learned professionals: Primary duty of work requiring advanced knowledge In a field of science and learning Advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction General duties test for creative professionals: Primary duty of performing work requiring invention, imagination, originality or talent In a recognized field of artistic or creative endeavor
Exempt Employees Duties Test General duties test for computer employees one or more of the following: Application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications Design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications Design, documentation, testing, creation or modification of computer programs related to machine operating systems
Exempt Employees Duties Test General duties test for outside sales employees: The primary duty is making sales or obtaining orders or contracts for services Promoting sales may be exempt work: Exempt if actually performed incidental to and in conjunction with an employee s own outside sales or solicitations Not exempt if incidental to sales made, or to be made, by someone else Employee is customarily and regularly engaged away from the employer s place(s) of business in performing the primary duty
Common Classification Mistakes Not considering differences in state and federal salary and duties tests Treating trainees as exempt before they fully qualify as exempt Failing to guarantee the proper minimum salary Prorating the salary of a part-time exempt employee to less than $455/week Making improper deductions from salaries of exempt employees
Exempt vs. Nonexempt: Specific Issues for Life Sciences Industries Corporate Positions Human Resources Legal Marketing and Communications Training Finance Analysts, Coordinators, Specialists Trainees
Wage and Hour Issues in Life Sciences: Strategies to Avoid Litigation IMPROPER SALARY DEDUCTIONS AND OFF THE CLOCK WORK ISSUES John Battenfeld July 25, 2006 www.morganlewis.com
Improper Salary Deductions Many states have strict laws about what deductions may be made from pay Employer may try to recoup losses or expenses caused by the employee: Lost or returned merchandise, canceled sales, etc. Compensation to sales assistants Deductions for employee errors Deductions for business expenses (e.g., licenses, trade journals) Deductions for broken equipment
Commissions Can a California employer deduct unearned commissions from future compensation advances without violating the California Labor Code? Yes, if the agreement makes clear the payments are advances on commissions that are not earned until a future event occurs. See Steinhebel v. Los Angeles Times, 126 Cal.App. 4th 696 (2005)
Off the Clock Work Off the Clock work refers to work done by an employee that is not compensated by employer Notable examples that have resulted in recent litigation: New economy jobs such as call centers and contact centers - issues with timekeeping have provided fertile ground for litigation Donning and doffing (i.e., putting on and taking off) protective gear
Off the Clock Work Issue: What is compensable work? Effort engaged in for the benefit of the employer Any activity that is integral and indispensable to the principal activity of the workplace Preliminary/postliminary effort - is it work? Time spent reading product or service updates? Time spent logging in to or out of computer programs? Time spent donning and doffing protective work clothing?
Off the Clock Work Donning and doffing IBP, Inc. v. Alvarez, 126 S. Ct. 514 (Nov. 8, 2005) Employee time spent walking between work stations and locker rooms where employees don and doff protective gear, as well as the time spent waiting to doff gear at the end of the shift, is compensable time for purposes of the FLSA. Action brought by numerous plaintiffs in Puerto Rico against pharmaceutical companies Alleges numerous violations under FLSA and Puerto Rico law: donning and doffing, improper deductions for meal periods, other off-the-clock work
Off the Clock Work Large amount of litigation involving call centers Challenges regarding employees who use computers and headsets: Is logging in analogous to punching a time clock? Is it work because the job cannot be done without logging in? Is a customer service representative required to log in to computer before first call?
Calculation of Employee s Regular Rate for Overtime Purposes Nonexempt employees must be paid 1½ times their regular rate of pay for all overtime hours in a single workweek Employer may not compensate nonexempt employees for overtime in paid time off rather than in premium wages Employer may not carry over overtime worked in one week into a different week Regular rate determined by dividing total remuneration in a workweek by the number of hours worked in that workweek
Calculation of Employee s Regular Rate for Overtime Purposes Regular rate includes: Nondiscretionary bonuses Commissions Shift differentials Supplemental compensation Regular rate does not include: Discretionary bonuses Profit-sharing/stock options Gifts Value of benefits (paid time off, health insurance premiums)
Impact of State Wage and Hour Laws FLSA sets only the minimum standards to be met by employers State laws can differ from federal law: Higher minimum wage Higher amounts of overtime compensation More limited categories of exempt employees More restrictive child labor laws Different rules regarding breaks Stricter rules regarding deductions from wages Employers must follow whichever applicable laws are most favorable to the employee
Impact of State Wage and Hour Laws Key points under New Jersey law: New Jersey has very strict limits on amounts that may be deducted from an employee s earned wages Unlike the FLSA, inside sales representatives may be exempt under New Jersey law New Jersey s minimum wage is $6.15/hour (will become $7.15/hour on October 1, 2006) New Jersey s definitions of the white-collar exemptions are similar to the federal definitions, but with some differences
Impact of State Wage and Hour Laws Key points under California law: Generally requires daily overtime for hours worked in excess of eight per day plus overtime for hours beyond 40 in a week Additional overtime for hours beyond 12 in one day Does not allow use of the fluctuating workweek method of overtime calculations More limited definitions of the duties for white-collar exemptions and a higher salary test Many restrictions on deductions from employee pay Minimum wage is $6.75 ($8.50 in San Francisco) California s far-reaching Unfair Competition Law, Bus. and Prof. Code 17200, has been used in wage and hour context
Impact of State Wage and Hour Laws Onerous meal and rest period rules Requires employees to be reimbursed for expenses or losses necessarily incurred in discharging their duties
Pay in Lieu of Expense Reimbursement Is it OK not to reimburse employees for their actual business expenses (T & E) and instead pay a higher wage rate? In California, the answer is unclear.
Pay in Lieu of Expense Reimbursement A court held that you can so long as the increase of the wage rate is sufficient to cover the expenses. Gattuso v. Harte-Hanks Shoppers, Inc. (2005) 133 Cal.App.4th 985. Labor Code Section 2802 permits an employer to pay increased salaries or commissions instead of reimbursing the employee s actual expenses incurred in the discharge of the employee s duties
Pay in Lieu of Expense Reimbursement In this case, outside sales reps were paid $4 - $5 per hour more than inside sales reps, which the company claimed (without having conducted a study) was more than enough to cover the costs of employees use of their car. However, the California Supreme Court has granted review of this case.
Impact of State Wage and Hour Laws State law claims may be brought as class actions as opposed to FLSA collective actions Class vs. collective actions: A class member must affirmatively opt in to an FLSA collective action in order to participate and be bound by the judgment Under traditional class actions, each class member is bound by the judgment and notified of award or settlement unless he or she affirmatively opts out Thus, class actions under state law may have very large classes
Wage and Hour Issues in Life Sciences: Strategies to Avoid Litigation STRATEGIES TO AVOID LITIGATION Thomas A. Linthorst July 25, 2006 www.morganlewis.com
Steps Employers Can Take To Avoid Costly Litigation Conduct periodic audits: Compliance with recordkeeping and posting obligations Employee handbook and other written statements related to wage and hour issues How is regular rate being calculated for overtime pay? Inspect payroll records for compliance Managers practices consistent with law? Job descriptions and exemptions classifications. Periodic training for payroll and management to ensure that proper wage and hour practices are followed
Steps Employers Can Take To Avoid Costly Litigation Stay informed of FLSA and state law requirements Subscribe to publications Attend training courses Seek periodic advice regarding changes in the law or interpretation of the law Have a communication plan in place for when problems are discovered
Red Flags Re: Payroll Practices Watch out for red flags regarding payroll practices: Improper deductions from salaried employees Improper calculation of regular rate Job descriptions for exempt employees that do not reflect exempt duties Nonexempt employees working through meal breaks Nonexempt employees performing work before or after they punch or log in/out Employees who routinely stay late but have no overtime Not complying with employer s own written policies
What to Do When Problems Are Discovered Fix problems prospectively Decide whether to pay back wages Prudently communicate the fix
Communicate the Fix Articulate the reason for the change in clear and simple terms Anticipate the implications (good and bad) of the change for the company and the affected employees Address the implications consistently with your corporate culture and business realities Develop talking points, answers to anticipated questions, a process for communicating the changes, a Plan B
Questions and Answers
Morgan, Lewis & Bockius LLP Attorneys John Battenfeld Los Angeles 213.612.1018 jbattenfeld@morganlewis.com Thomas A. Linthorst Princeton 609.919.6642 tlinthorst@morganlewis.com Michael J. Ossip Philadelphia 215.963.5761 mossip@morganlewis.com