Threat to CEOs, Directors and Joint Employersmedia.straffordpub.com/products/expanded-flsa-liability-responding-t… · 12-03-2014 · Threat to CEOs, Directors and Joint Employers

Expanded FLSA Liability: Responding to the New

Threat to CEOs, Directors and Joint Employers Establishing Best Practices for Corporate Structuring, Pay Practice Reviews,

and Employment Relationship Audits of Shared or Leased Employees

Today’s faculty features:

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WEDNESDAY, MARCH 12, 2014

Presenting a live 90-minute webinar with interactive Q&A

Christopher B. Kaczmarek, Shareholder, Littler Mendelson, Boston

William C. Martucci, Partner, Shook Hardy & Bacon, Washington, D.C.

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4

Section 1: Brief FLSA Foundation Overview

William C. Martucci

Shook, Hardy & Bacon, LLP

Washington, D.C.

202-783-8400

[email protected]

5

FLSA Filings Continue to Rise

• Practitioners are well aware of the 400% increase

from 2000 to 2011

• From 2011-2012, FLSA filings increased only 1%

– Commentary suggested a possible trend towad

slower growth in FLSA filings

• Plaintiffs filed 7,764 FLSA cases from April 2012-

March 2013 – a 10% increase

6

FLSA Overview

• The FLSA authorizes actions to recover damages for violation of

the Act’s minimum wage and overtime provisions and to enforce

the retaliation prohibition. 29 U.S.C. §216(b) and (c).

• FLSA actions can be “individual” or “collective.” If collective,

employees “opt in” to join the case. Those who do not opt-in are

not bound by the result and can pursue their own lawsuits.

• There is a two-year statute of limitations, which can be extended

to three years for violations that are “willful.” 29 U.S.C. §255(a).

• Most courts apply a “two-tier” framework – (1) notice phase –

whether to conditionally certify the action (lenient standard); and

(2) decertification phase (more stringent standard).

• The focus is on whether sufficient evidence exists to suggest

that the named plaintiffs and putative class members are

“similarly situated.”

7

FLSA Theories

• Recent filings highlight several areas of focus

• Traditional theories:

– Misclassification

– “Off the clock”

– Miscalculation of overtime

• Plus some newer wrinkles:

– Automatic Deductions

– Rounding

– Remote work and the challenges of technology

– Tip pooling and tip credits

8

“Similarly Situated” Key Factors

• The employment and factual settings of the plaintiffs

• Evidence of a company-wide policy

• The various defenses available to defendants

• Considerations of fairness, procedure and

manageability

9

Typical FLSA Case Sequence

1. Filing

2. Preliminary, limited discovery

3. Early motion for conditional certification

4. If conditionally certified, broadened discovery

5. Potential motion to decertify

6. Resolution – dismissal, settlement or trial

Individual Liability Under the FLSA

Presented by: Christopher B. Kaczmarek

Littler Mendelson, P.C.

March 2014

Christopher B. Kaczmarek Shareholder

Littler Mendelson, P.C. Boston

617.378.6000 [email protected]

Presented by:

• 92% of employment class actions = wage & hour claims

• $467 million in total wage and hour settlements in 2012

• $4.8 million = average wage-hour case settlement in 2012.

* Data from “Trends in Wage and Hour Settlements:

2012 Update.” NERA Economic Consulting (March 2013)

Recent Trends Wage & Hour Class/Collective Actions

12 12

Why Sue an Individual Defendant?

• Provides another avenue for recovery against smaller or potentially insolvent employers

See, e.g., Boucher v. Shaw, 572 F.3d 1087 (9th Cir. 2009)

• Generates attention – internally and externally

• Creates leverage

• State law claims – may destroy diversity

13

The Root of the Problem

• The FLSA defines “employer” to include “any person acting directly or indirectly in the interest of an employer in relation to an employee . . .”

• The FLSA defines “person” to include “an individual”

14

Who Is Liable?

Given these vague definitions, courts generally engage in a fact-specific inquiry to determine the extent of an individual’s involvement in significant aspects of the company’s operations.

Two recent Appeals Court decisions shed some light on the analysis under this “economic reality” test.

15

Irizarry v. Catsimatidis 722 F. 3d 99 (2d Cir. 2013)

• Is the CEO an “employer” under the FLSA?

• “To be an employer, an individual defendant must possess control over a company’s actual operations in a manner that relates to a plaintiff’s employment.”

• But, “nothing . . . in the FLSA itself requires an individual to have been personally complicit in FLSA violations”.

16


• Is there evidence showing the individual defendant’s authority over the company’s management, supervision and oversight in general?

17


The Bonnette factors:

• Does he have the power to hire and fire employees?

• Does he supervise and control employee work schedules or conditions of employment?

• Does he determine rates and methods of payment?

• Does he maintain employment records?

18


• It was a “close case” but the Second Circuit found the CEO to be an “employer” under the FLSA.

• The CEO – who also was the Chairman and President – did not report to anyone else and had functional control over the company.

• He was active in running the stores and had financial control.

19

Manning v. Boston Regional Medical Center 725 F.3d 34 (1st Cir. 2013)

• Are the CEO and Senior Human

Resources Director “employers” under the FLSA?

• The analysis focuses on “the totality of the individual’s level of involvement with the corporation’s day to day operations” and his or her role “in creating or adopting the unlawful pay practices” at issue.

20


• The Court is looking for evidence

suggesting that an individual “controls a corporation’s financial affairs and can cause the corporation to compensate (or not to compensate) employees in accordance with the FLSA”

• Ownership interest and financial control are critical factors

21


• CEO did not have an ownership interest and

there were no allegations linking her to the pay practices at issue, but . . .

– She exercised substantial control over the company’s finances, including budgetary decisions.

– She was involved in strategic decisions, including those regarding staff reductions.

22


• She “had the authority to, and

did, make critical decisions regarding the allocation of [the company’s] resources,” which is suggestive of operational control

23


• What about the Senior Human Resources

Director?

The complaint lacked sufficient factual allegations against him.

• Court seemed reluctant to extend the definition of “employer” to “senior-level employees,” as opposed to “high-level corporate officers.”

24

Other Tests

• “To be personally liable, an

officer must either be involved in the day-to-day operation or have some direct responsibility for the supervision of the employee.” Patel v. Wargo, 803 F.2d 632 (11th Cir. 1986) .

• The four-factor test of Bonnette v. California Health & Welfare Agency, 704 F.2d 1465 (9th Cir. 1983). See also Gray v. Powers, 673 F.3d 352 (5th Cir. 2012).

25

Key Points

• Expansive definition to meet the statute’s remedial purpose.

• Ownership interest matters.

• Job titles are not determinative under the FLSA (but may be under state law).

• Actual control and the exercise of authority, as opposed to a theoretical right to control, are important.

• Financial decision-making is important.

• Need not know of the alleged practices.

26

27

Section III: Joint Employer Liability

William C. Martucci


Washington, D.C.

28

General Principles

• Occurs when an employee works for multiple

employers at the same time

• Joint employers are held jointly and severally liable

for the FLSA’s obligations for employers

• Hours worked by an employee for each employer

are totaled to determine overtime

29

Parent/Subsidiary Relationships

• The law generally imposes a strong presumption that a parent corporation

is not the employer of its subsidiaries’ employees. See, e.g., Lusk v.

Foxmeyer Health Corp., 129 F.3d 773, 778 (5th Cir. 1997); Maddock v.

KB Homes, Inc., 631 F.Supp.2d 1226, 1239 (C.D. Cal. 2007); In re

Enterprise Rent-a-Car Wage & Hour Employment Practices Litigation,

2010 U.S. Dist. LEXIS 83120, at *168 (W.D. Pa. Aug. 13, 2010).

• Plaintiffs attempt to avoid this presumption by arguing that the parent

company is a joint employer

30

Parent/Subsidiary Relationships

• Courts approach the matter differently:

– Some analyze parent/subsidiary joint employment claims the

same as any other joint employment claim

– Other courts look to whether there is a single employer or

some sort of integrated enterprise

• Factors: interrelation of operations, common management,

centralized control of labor relations and personnel, common

ownership and financial control

– Others rely on strict application of the DOL joint employer

regulations:

• Joint employment exists where employers are not completely

disassociated with respect to the employment of a particular

employee and may be deemed to share control of an employee,

directly or indirectly, by reason of the fact that one employer

controls, is controlled by, or is under common control with the

other employer

31

Enterprise Rent-a-Car, 683 F.3d 462 (3rd Cir. 2012)

• Issue: whether Enterprise Holdings (the sole stockholder of 38 domestic

subsidiaries) was a joint employer of the assistant managers who worked

for those subsidiaries

• Holding: Parent company Enterprise Holdings was not a joint employer

– Court noted that joint employment relationship exists where 2 or more

employers exert significant control over the same employees –

meaning they share or co-determine those matters governing

essential terms and conditions of employment

– 3-member board of directors for each subsidiary consisted of the

same people who sat on parent company’s 3-member board

– Parent company provided administrative support to subsidiaries and

provided them with business guidelines, employee benefit plans,

rental reservation tools, job descriptions, best practices,

compensation guides, and performance review forms

• But each individual subsidiary could choose to use any or all of

the guidelines in its own discretion—that discretion was key for

the court

32

Cano v. DPNY, Inc., 287 F.R.D. 251 (S.D.N.Y. 2012)

• Plaintiff employees of several Domino’s franchises

were permitted to add franchisors Domino’s Pizza, Inc.

and Domino’s Pizza LLC as defendants in a putative

class action

• The court noted that an entity can be a joint employer

under FLSA even when it does not hire and fire

employees, directly dictate hours or pay, or

continuously monitor them

• The court found it persuasive that the proposed

defendants promulgated compensation policies and

implemented them through the franchisor’s computer

system

– System tracked hours and wages and retained

payroll records

33

Section IV: Economic Realities Test

William C. Martucci


Washington, D.C.

34

General Principles

• The FLSA was intended to prevent employers from setting up

“shell” operations to avoid responsibility for wage and hour

compliance

• Courts look to the economic realities of the employment

relationship to determine whether there is a joint employment

relationship—this is called the “economic reality” test

– Fact-intensive test

– Courts are to look to the totality of the circumstances

35

General Principles

• The purpose of the economic reality test is to determine

whether the employee in question is economically

dependent on the putative employer

– Where there is economic dependence, an employer-

employee relationship will be found

36

Department of Labor Regulations 29 CFR § 791.2(a)

A single individual may be an employee to two or more employers at the same

time under the Fair Labor Standards Act. Whether there is joint employment

depends upon all of the facts:

– If the facts show the employers act entirely independent of each other and are

completely disassociated concerning the employment of the employee who

performs work for all of the employers during the same workweek, each

employer may disregard all work performed by the employee for the other

employer(s) in determining his own responsibilities under the Act

37

Department of Labor Regulations 29 CFR § 791.2(a)

– If the facts establish that employment by one employer is not

completely disassociated from employment by the other

employer(s), all of the employee’s work for all of the joint employers

during the workweek is considered as one employment for purposes

of the Act.

• All joint employers are responsible, individually and jointly, for

compliance with all applicable provisions of the Act, including

for overtime provisions, with respect to the entire employment

for the particular workweek.

• In discharging the joint obligation, each employer may take

credit toward minimum wage and overtime requirements for all

payments made to the employee by the other joint employer or

employers

38

Cases Implementing 29 CFR § 791.2(a)

• Liu v. Donna Karan International, Inc., 2001 WL 8595 (S.D.N.Y Jan. 2, 2011)

– Garment workers sued both their sewing shop employers and Donna Karan

International, to which significant amounts of produced goods were provided

– The court applied § 791.2(a) and held that the complaint adequately alleged that

employment of the workers by the shop and Donna Karan was not completely

disassociated

• The complaint alleged Donna Karan dictated prices of the garments and

production requirements, sent representatives to the factories daily, and

controlled hours and wages by setting low prices and high output demands

39

Cases Implementing 29 CFR § 791.2(a)

• Chao v. A-One Medical Services, Inc., 346 F.3d 908 (9th Cir. 2003)

– The court applied the DOL Regulations regarding “joint employment”

to two in-home health services providers with closely coordinated

operations

– The employers shared a single scheduler for employees, and all

employees signed employment agreements with both companies.

Employees, however, received separate paychecks from each of the

two companies. The same supervisor oversaw the work of both

companies’ employees

– The court found the providers were joint employers because they

“were not completely disassociated with respect to the employment

of the individuals at issue” and were operated under common

control

40

Department of Labor Regulations 29 CFR § 791.2(b)

Where the employee performs work which simultaneously benefits 2 or

more employers, or works for 2 or more employers at different times

during the workweek, a joint employment relationship generally will be

considered to exist in situations such as:

1. Where there is an arrangement between the employers to share the

employee’s services, as, for example, to interchange employees; or

2. Where one employer is acting directly or indirectly in the interest of

the other employer(s) in relation to the employee; or

3. Where the employers are not completely disassociated with respect

to the employment of a particular employee and may be deemed to

share control of the employee, directly or indirectly, by reason of the

fact that one employer controls, is controlled by, or is under common

control with the other employer

41

Department of Labor Opinion Letters

• In 2001, the DOL determined a hospital was the joint employer of private duty

nurses where:

– The private nurses were hired by patients to provide care while they were in

the hospital

– The hospital was legally required to provide certain oversight of the nurses

and maintained responsibility for care of the patients

• The DOL noted, “because the ultimate question is one of economic

dependence, the factors are not to be applied as a checklist, but rather

the outcome must be determined by a qualitative rather than a

quantitative analysis”

• WH Op. Letter (May 11, 2001), 2001 WL 1558966.

42

Department of Labor Opinion Letters

• In 1998, the DOL determined a nursing facility jointly employed home

health aides together with its referral agencies where:

– The nursing facility’s home health program paid referral agencies an

hourly rate for aides they referred

– The referral agencies then paid and trained aides

– Some aides employed by the nursing facility also worked for the

referral agencies, working more than 40 hours per workweek in

some instances

– WH Op. Letter (May 15, 1998), 1998 WL 852807.

43

Court Articulations of Economic Realities Test

• Courts have articulated varying multi-factored tests, differing by

jurisdiction

• Each circuit has developed its own approach

• The fundamental test is considered the Bonnette test (9th Circuit)

704 F.2d 1465 (9th Cir. 1983):

Did the putative employer:

1. Have the power to hire/fire the employee?

2. Supervise and control employee work schedules or conditions

of employment?

Absence of direct supervisory oversight is generally not

dispositive

3. Determine the rate and method of payment?

Where a putative employer is responsible for paying

the worker, this factor weighs heavily in favor of joint

employment

4. Maintain employment records?

44

Bonnette v. California Health & Welfare Agency, 704 F.2d 1465 (9th Cir. 1983)

• Addressed whether caregivers providing in-home assistance with

housework were jointly employed by the individuals in whose homes

they performed chores and the state social services agency that

administered the assistance program

• The court developed factors to assess the degree of control

possessed by the putative joint employer (functionally and financially)

• The court found the state agency exercised considerable control over

the structure and conditions of employment, including the number of

hours each chore worker would work and which tasks would be

performed

• Economic factors weighed in favor of joint employment

– Agency chose the rate and method of payment and maintained

the caregivers’ employment records

• Court concluded that even though the agency did not have hiring and

firing authority, that factor was overshadowed by the agency’s “power

over the employment relationship by virtue of their control over the

purse strings”

45

Zheng v. Liberty Apparel Company, 355 F.3d 62 (2nd Cir. 2003)

• Analyzed whether there was a joint employment

relationship between garment workers and the

garment manufacturer who had hired contractors to

stitch and finish clothing

• The 2nd Circuit held the district court erred when it

exclusively relied upon the four-factor Bonnette test

• While the court declined to articulate a concrete test,

it noted several factors that should be considered by

the courts in a flexible manner

46

• Zheng Test Relevant factors to consider include:

1. Whether putative employer’s premises and equipment are used for

employee’s work

2. Whether subcontractor (primary employer) has a business that can or

does shift as a unit from one putative employer to another

3. The extent to which the employees perform a discrete line-job integral

to the putative employer’s production process

4. Whether responsibility under the contracts between the putative joint

employer and the subcontractor (primary employer) could pass from

one subcontractor (primary employer) to another without material

changes

5. The degree to which the putative joint employer or its agents supervise

the employee’s work

6. Whether the employees work exclusively or predominantly for the

putative joint employer

47

• Zheng noted that the Bonnette factors may also be relevant to the

analysis, depending upon the particular facts of a case, but the court

rejected the factors as the exclusive test

• Zheng also indicated that industry custom and historical practices may

be relevant

– E.g. when a practice of using subcontractors is widespread, it is

unlikely to be a method of avoiding labor law compliance.

Best Practices for Reducing Risk

• Meal/Rest Periods

• Deductions From Pay

• Wage Statements

• Rounding

• Timely Payment of Wages

• Regular Rate Issues

• Adjustments to Time

1. Be Aware of Potentially Problematic Practices

49

• Audit Policies and Practices

– Watch for Red Flags

• Written Timekeeping Policy

– Prohibits off-the-clock work

– Requires all time recorded

– 1-800 number for violations

– Discipline for violations

2. Foster a Culture of Compliance

50

• Training on Proper Timekeeping

• Timecard Certification

• Timecard Adjustment Protocol

• Safe Harbor Provision

3. Make Compliance an Everyday Reality

51

What About the Individuals?

• Think about who might be at risk.

• Educate executives, board members, etc. about the potential risk.

• Restructure some job responsibilities?

• Consider indemnification agreements.

52

What About Joint Employment?

• Clear agreements with affiliated entities

• Indemnification provisions

• If you build walls between entities, make sure people are not jumping over them

• Monitor communications and publicity for statements suggesting joint status

53

Strafford Live Webinar

March 2014

54

Christopher B. Kaczmarek Shareholder

Littler Mendelson, P.C. Boston

617.378.6000 [email protected]

55

William C. Martucci


Washington, D.C.

202-783-8400

[email protected]

Documents

Threat to CEOs, Directors and Joint Employersmedia.straffordpub.com/products/expanded-flsa-liability-responding-t… · 12-03-2014 · Threat to CEOs, Directors and Joint Employers