Texas Employment Law Update : Texas Employment Lawyer & Attorney : Russell D. Cawyer : Kelly Hart & Hallman Law Firm : Dallas TX Labor Updates

24 Hour Fitness operates health clubs and fitness facilities across the country.  As part of its operations, 24 Hour Fitness employs sales representatives.  As a condition of employment, employees are required to enter into arbitration agreements to arbitrate their employment disputes with their employer.  FLSA claims (i.e., overtime and minimum wage claims) are covered within the scope of the arbitration agreement.  John Carey was a sales representative for 24 Hour Fitness.  He signed a handbook acknowledgment containing the arbitration agreement.  Not only did the arbitration agreement require the arbitration of disputes, it further provided that disputes could not be brought as class actions or in representative capacities.  Unfortunately for the employer, the handbook also included a provision that permitted it to revise, delete or add to the handbook at any time and that it would communicate those changes to the employees through official written notices.  Nothing in the policy precluded the employer from applying changes to the arbitration agreement retroactively. 

After Carey's employment ended, he filed an FLSA collective action seeking unpaid overtime on behalf of all similarly-situated employees.  24 Hour Fitness moved the court to compel arbitration.  Carey, in response, argued that he agreement was illusory because the employer retained the right to unilaterally amend the agreement. 

The Fifth Circuit Court of Appeals found against the employer holding that its arbitration agreement was unenforceable.  The Court held that the arbitration agreement was illusory because: 1) 24 Hour Fitness retained the right to alter, amend or changes the policy at any time; 2) the policy did not foreclose the prospect of unilateral amendments to claims existing on or before the amendment; and 3) nothing in the policy precluded the employer from applying any of its changes retroactively.  As a result, 24 Hour Fitness will be left to defend Carey's lawsuit in Court, with a jury, and potentially as a collective action. 

The take-away form the opinion is that regardless of the type of ADR you use (e.g., arbitration, waiver of jury trial), if the agreement is contained in an employee handbook, ensure that the handbook's express contractual disclaimer contained in the handbook (You know, that provision that says nothing contained in this agreement is intended to create an express or implied contract) carves out those ADR procedures and specifically states that such provisions are intended to be contractual in nature; that the employer and employee are bound by such provisions and that neither party may alter or amend the contract unilaterally.  At a minimum, if the employer wants to retain the right to unilaterally amend the policy, it should state that the employer cannot amend it to apply retroactively to claims that existed prior to the amendment and notice to the employee. 

A full copy of Carey v. 24 Hour Fitness is available here. 

Follow me on Twitter @RussellCawyer.

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I almost never read the letters to the editor in my local newspaper because, well . . . opinion are like . . . noses; everyone has one. However, last week I “stumbled” on a letter that was thought provoking in this period of high unemployment and borderline recession.

Jack Durham of Fort Worth, Texas proposes that the elimination of overtime would create job growth. He writes:

End overtime

I have a plan to help create jobs. The government should eliminate or drastically reduce the amount of overtime an employee could work. Employers would then seek other full-time employees to cover the gap. Smarter people than me would have to draft the provisions, but we have lawyers for that.

Instead of trying to create jobs over the next two to six years, these new employees could be hired by Labor Day. The job increase should be significant. This would discourage employers from paying 20 hours of overtime to avoid paying benefits to a full-time worker. Just a thought.

Maybe Jack is on to something; although, I think the French tried something similar with the 35-hour workweek.  A prohibition against overtime might create jobs.  It might add to some employee's desire to have better work-life balance (i.e., less work time and more time to spend on the employee's personal endeavors).  It would also negatively impact those employees who are willing to work longer hours for more money and could have a adverse effect on business productivity thereby hurting job growth.

Are there other reforms to the FLSA that might also create job growth?  How about elimination of the "white collar" exemptions?  Rather than paying an employee a salary for all hours worked, employers could be required to pay employees covered by the white collar exemption overtime for hours in excess of forty per week.  Would that lead employers to hire more "white collar" workers to spread the work around and reduce overtime payroll costs?  Employers that wanted to do more with fewer workers would see increased overtime expenses but those employers that wanted to avoid overtime would increase the number of workers to spread the work around so that it would be paid at straight time rates. 

Are there other reforms in the employment law context that create job growth without unduly hampering the operations of employers?  Let me know and I'll post them in the comments section.

Follow me on Twitter @RussellCawyer.

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Walter Olson at Overlawyered started they debate by asking “If I could press a button and instantly vaporize one sector of employment law…”  He answered age discrimination.  I'll let him defend his selection and you can read his explanation here. 

Jon Hyman and Daniel Schwartz weighed in that they would reform the depression-era outdated Fair Labor Standards Act and leave laws generally.  Both areas are ready for reform and simplification.  I asked my partners what area of employment law they thought most needed vaporizing (or at least reform).  One identified the varying mosaic of state immigration laws that are being passed across the country and that carry substantial (perhaps catastrophic) financial penalties for employing individuals not authorized to work in the U.S.  Another colleague identified the new health care law that requires employers to provide health plans or pay a penalty for each uninsured employee as an area of law that is stifling job growth --at least for small to mid-sized employers. 

My choice for vaporization is a little more specific.  I would target the FMLA regulations that limit how much information an employer can require from an employee on intermittent FMLA leave --particularly when the leave results from unexpected, anticipated and unscheduled flare-ups of serious health conditions.  These limitations place unreasonable restrictions on an employer's ability to manage and identify intermittent FMLA abuse.  Employers face regulatory barriers in determining whether the employee's absence on Friday was a result of his migraine headache (for which he was approved to take intermittent leave) or because he stayed out too late with friends carousing.  Verifying, in a meaningful way, that employees are using intermittent FMLA leave for approved purposes should not be prohibited or even discouraged.

If you think a particular area of employment law needs vaporizing (or at least reform), post it in the comments below and I'll publish them to continue the debate.

Follow me on Twitter @RussellCawyer.

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In a recent case out of the U.S. District Court for the Northern District of Texas, a federal judge entered summary judgment for the City of Fort Worth in an FLSA overtime case filed by four former police officers.   

In Clark v. City of Fort Worth, Texas, four retired City of Fort Worth police officers filed a FLSA putative collective action seeking to represent a class of current and former officers for unpaid overtime they claimed they worked when they provided security services for third-parties leasing City properties (e.g., events at the City owned convention center).  According to the plaintiffs, these off-duty hours providing security for sporting events and concerts on City property (but for non-City events) should have been added to their regular official law enforcement hours with any work over forty hours per week being paid at overtime rates.  The City moved for summary judgment arguing that the special detail exemption excluded those hours worked for the separate employers and that no overtime was due and owing.  There are only six reported cases involving the special detail exemption so this opinion is important if for no other reason than to add to the scant case law on the issue.

The special detail exemption applies to law enforcement and fire fighter employees who voluntarily perform work for separate and independent employers.  Under the exemption, the hours voluntarily worked for the separate and independent employer are excluded from the officer's hours worked on behalf of the the primary employer for FLSA overtime purposes.  In a well-reasoned opinion, the federal judge presiding over the case, concluded that the City has established its affirmative defense that the hours sued on were exempt under the special detail exemption and entered a judgment in favor of the City. 

You can download a copy of the Court's opinion here.

Follow me on Twitter @RussellCawyer.

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This morning the Education and the Workforce Committee Subcommittee on Workforce Protections will examine whether the FLSA is outdated in today's modern workforce.  The hearing is entitled  “The Fair Labor Standards Act: Is It Meeting the Needs of the Twenty-First Century Workplace?”

According to the Subcommittee's media advisory:

Despite the broad impact of the [FLSA] on the American workforce, it is largely outdated and does not accurately reflect the realities of modern technology or today’s economy. The law has also created an environment of uncertainty with employers facing a patchwork of conflicting interpretations of the law and employees facing difficulty understanding their rights under the law.

As the committee continues to review laws and regulations affecting American workers, Thursday’s hearing will give members an opportunity to examine the effects of the Fair Labor Standards Act on the American workforce.

Representatives from the business and legal communities as well as workers' advocacy groups are expected to testify.  You can watch a webcast of the hearing beginning on July 14, 2011 at 9:00 a.m. CST here.

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Schools are out for the summer and many college and graduate students are looking for experience in what they hope will be their chosen careers.  Employer's looking to provide that experience through the use of unpaid internships must understand the rules that qualify an internship for "unpaid" status or unwittingly create potential wage and hour liability.  Last summer, the U.S. Department of Labor announced that it would crack down on employer's improper use of unpaid internships.  There is no reason to believe the DOL's interest in these kinds of investigations will be lessened this summer and so a refresher course is in order.

The Fair Labor Standards Act requires that employees be paid at least minimum wage for all hours worked.  The FLSA excludes from coverage those persons who work for another for their own advantage such as an unpaid internship.  The DOL has developed a six factor test for determining whether an internship qualifies for unpaid status.  The factors include:

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

If the internship meets all six factors, it may qualify for unpaid status.  However, the DOL takes a very narrow view of this exemption and believes that very few "for profit" employers can properly offer these programs.  The DOL has published a Fact Sheet on Internship Programs under the FLSA.  You can download the Fact Sheet here.

Other posts about unpaid internships:

Unpaid Internships May be a Problem:  Are they Employees or Not?

Unpaid Internships:  Do they Violate the FLSA?

When to Pay Summer Interns:  FLSA Guidance You Need to Know

6th Circuit Tosses DOL's Internship Test (Cautionary Note:  The Fifth Circuit (which includes Texas) has not tossed the DOL's internship test).

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The Fair Labor Standards Act is the federal law that requires most employers to pay a minimum wage and overtime.  The FLSA also includes an anti-retaliation provision that prohibits an employer from discharging any employee who has "filed a complaint" under the FLSA because of that complaint.  The issue at the high court in Kasten v. Saint-Gobain Performance Plastics Corp., was whether an oral complaint constitutes the "filing of a complaint" under the anti-retaliation provisions of the FLSA.

Kasten filed his suit after his employment ended claiming that he was retaliated against for making oral complaints about the Company's placement of time clocks that Kasten believed had the effect of preventing workers from receiving credit for time spent for donning and doffing work-related protective gear.  In other words, Kasten alleged that he made complaints to his employer that employees were not being paid for all working time as required by the FLSA.  Kasten apparently never put his complaints in writing.  The trial court dismissed Kasten's claim holding that Kasten failed to engage in legally protected activity under the FLSA because the Act did not cover oral complaints. 

The U.S. Supreme Court reversed the judgment against Kasten and held that the FLSA's statutory language prohibiting retaliation for filing a complaint includes oral as well as written complaints. The Court arrived at its decision by interpreting the statutory phrase itself and by taking into account the remedial purpose of the anti-retaliation provisions.  Consequently, when an employee makes an oral complaint about an FLSA violation, he or she has filed a complaint for purposes of the FLSA's anti-retaliation provisions and can bring a suit alleging that he or she was discharged in violation of the Act.

A full copy of the Court's opinion in Kasten v. Saint-Gobain Performance Plastics Corp. can be accessed here.

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Employers often consider asserting counterclaims against employees who file lawsuits against them.  Most lawyers representing employers counsel against filing counterclaims except in exceptional cases (e.g., an employee’s theft of trade secrets or breach of a covenant not to compete). However, where an employer pays an employee valuable severance benefits in return for a release or a covenant not to sue, the employer may consider avenues to recoup the benefits paid to a former employee who breaches that agreement and sues the employer.  A recent opinion from the Fifth Circuit explains an employer should not generally seek a set-off against damages in a claim seeking unpaid wages or overtime under the Fair Labor Standards Act (FLSA) in the FLSA action. 

In Martin v. Pepsi, Martin was an hourly route settlement clerk for Pepsi for approximately five years. During this time she was paid overtime for the hours she worked in excess of forty hours per week. She was promoted to route settlement supervisor and her manner of compensation was changed to a weekly salary. When Martin was laid off she was provided with nearly $23,000 in severance payments in return for a complete release of claims and a promise not to file any lawsuits or other claims against Pepsi arising from her employment or termination of employment.  After pocketing the severance money, Martin sued Pepsi for unpaid overtime under the FLSA and asserted state law claims for fraudulent misrepresentation and punitive damages under state law. Pepsi moved to dismiss Martin’s claims arguing that the trial court lacked jurisdiction. The crux of the argument was that because Pepsi was entitled to an off set for the severance payments made to Martin due to her broken promise not to sue Pepsi and the amount of the set-off exceeded the unpaid overtime and liquidated damages Martin could recover, there was no controversy for the court to decide. The trial court agreed and dismissed Martin’s case. 

In reversing the trial court’s dismissal, the Fifth Circuit held that counterclaims seeking damages or set offs against recovery in FLSA cases are not permitted unless the money being set-off can be considered wages that the employer pre-paid to the plaintiff-employee. In Martin, the money that was sought to be set-off against the FLSA overtime was the severance benefits paid in return for a release of claims.

Martin does not appear to foreclose an employer’s ability to maintain a state court lawsuit for breach of contract arising from an employee’s breach of a contract not to sue in return for severance payments. For example, the employer might sue for recession to have the plaintiff return any severance benefits paid to him or for the attorney’s fees and costs incurred in defending a lawsuit the plaintiff promised he would not file. What is clear is that a counterclaim in the FLSA suit or an affirmative defense seeking a set off against FLSA damages is not the proper way to seek a return of the severance benefits paid to a plaintiff who promised not to sue the employer.

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Last year I wrote about the risks associated with providing company issued cell-phones or PDA's to nonexempt employees.  Since that post, there continues to be lawsuits filed seeking unpaid overtime for the off-the-clock time nonexempt employees spend reading and responding to work-related e-mails.  The most recent example is that of a police sergeant for the City of Chicago who filed a collective action on behalf of all similarly-situated police officers who were provided PDA's by the City and who were required to review and respond to work-related e-mails after hours.  A copy of the complaint can be downloaded here.

Company's providing their non-exempt employees with PDA's should carefully review their policies and procedures to ensure that they have defensible positions in the event they are confronted with an overtime suit based on the time spent reading and responding to e-mails after hours.  Some considerations that I proposed last summer include:

• Do not provide nonexempt, hourly employees with company issued phones capable of reading or responding to e-mail (i.e., smart phones). 
• Purchase a technology solution that captures the amount of time the user spends reading and responding to e-mail and pay nonexempt employees for that time.
• If the employer does not intend to pay for this off-hours review of e-mails, it should clearly set out its expectations that employees should not read and review those messages outside regular work hours.  For example, implement policies that prohibit employees from reading and responding to e-mails outside of regular working hours; require employees to leave company issued smart-phones at work; require employees to program the smart phones to turn themselves off during non-working hours. 
• Limit the employees that are provided with company issued cellphones to those who have a legitimate business need to be routinely contacted outside of business hours and limit that outside contact for matters where it is necessary.
• Pay employees who submit time for the non-business hours review of e-mail and then discipline the employee for violating the employer's policy prohibiting business use of company cellphones outside working hours (if the employer has implemented such a policy).

Employers need to be proactive to ensure that the efficiencies provided by technology are not swallowed by the inconvenience and costs associated in the defense of overtime lawsuits

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Lawyers prosecuting and defending wage and hour misclassification cases (i.e., exempt/nonexempt and employee/contractor) will emphasize how fact intensive these inquiries can be.   The importance of factual distinctions in litigating misclassification cases is demonstrated by two cases recently decided by the Fifth Circuit.  In Cromwell v. Driftwood Electrical Contractors, a panel of the court of appeals held that workers performing cable splicing work in New Orleans were not independent contractors and were employees entitled to overtime.  Contrast Cromwell with Thibault v. BellSouth, where a different panel of the court concluded that a cable splicer performing the same work in the same geographic area under similar circumstances, was an independent contractor not entitled to overtime.  This table summarizes some of the relevant facts in Cromwell and Thibault. 

Despite the similarities of the work, subtle differences in the facts resulted in different outcomes.  In misclassification cases over overtime exemptions or employee/contractor status, facts matter.

Full copies of Cromwell and Thibault can be accessed here and here.

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In another cable splicer misclassification case arising in the aftermath of hurricane Katrina, the Fifth Circuit affirmed a trial court decision that Louis Thibault was an independent contractor rather than an employee. Therefore, he was not entitled to overtime under the FLSA.

Thibault owned a business in his home state of Delaware selling picnic tables, storage tables and golf carts. He also owned several rental properties and realized a small income from racing automobiles.  When hurricane Katrina seriously damaged the telephone infrastructure of BellSouth’s grid, Thibault and his friend Bill Peek, drove their RV to Louisiana to perform splicing work on behalf of BellSouth to rebuild the grid.  Peek was an experienced cable splicer but Thibault had never worked as a splicer.  He did have prior experience as a naval aircraft mechanic and according to him easily learned mechanical tasks if shown how to do the task.  Peek taught Thibault the basics of splicing in one evening and Thibault was able to learn the remainder of what he needed to know on the job.

Once in New Orleans, Thibault and Peek worked 14 days shifts (13 days on with 1 day off) 84 hours per week; received a fixed hourly wage ($68 per hour) and were required to provide their own trucks and tools.  BellSouth decided what jobs would be done daily and assigned BellSouth contractors to distribute the assignments. Thibault received his daily assignments from the BellSouth contractor. 

Thibault had intended to work 6-7 months and then return to his home in Delaware. After only three months; however, he was laid off. He earned $51,628 during the three month period. After he was released he sued BellSouth and its contractors for unpaid overtime claiming he was an employee rather than an independent contractor. The trial court concluded that Thibault was an independent contractor and granted summary judgment for the defendants.

A panel of the Fifth Circuit Court of Appeals affirmed the trial court decision. Applying the economic realities test, the panel found Thibault was not an employee. Significant to its decision was the fact that:

• Thibault owned his own business and therefore did not work exclusively for BellSouth and its contractors;
• Thibault intended to work on 7-8 months and then return to Delaware;
• Defendants considered him an independent contract and many other splicers also considered themselves contractors;
• Splicing required little skill and initiative as evidenced by the fact Thibault learned it in one evening;
• Thibault continued to oversee his primary business during the three months he performed splicing work.

In the panel’s opinion, there was insufficient evidence in the summary judgment record to create a genuine issue of material fact that Thibault was an employee. 

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The Department of Labor's Wage and Hour Division issued its second Administrator's Interpretation.   The Administrator Interpretations are issued by the Division in areas where it believes it is useful to clarify the law as it relates to an entire industry, a category of employees, or to all employees.

Administrator's Interpretation No. 2010-2 discusses the Fair Labor Standards Act's exclusion from work time for certain preliminary and postliminary activities like changing clothes.  The FLSA excludes from compensable time the time spent "changing clothes or washing at the beginning or end of each workday" if that time is excluded from compensable time pursuant to "the express terms or by custom or practice" under a collective bargaining agreement.  Interpretation 2010-2 provides that exclusion from compensable time "does not extend to protective equipment worn by employees that is required by law, by the employer, or due to the nature of the job."  Consequently, the Division takes the position that time spent changing into or out of protective equipment required by law, the employer, or the nature of the job is compensable under the FLSA.

Second, the Interpretation offers the Division's opinion on whether whether noncompensable clothes changing can be a principal activity under the Portal to Portal Act rendering all subsequent activity compensable.  The Portal to Portal Act clarifies what activities are intended to be compensable work time such as work occurring before and after the employee's regular work activities.  Any activity that occurs after the employee's first principal activity and before the last principal activity is compensable.  For example, once an employee performs the first principal activity of the work day, all subsequent activity (e.g., waiting time) is compensable until the last principal activity of the workday.  It is the opinion of the Administrator that changing clothes, even if noncompensable, may be a principal activity such that it can make subsequent activities such as walking and waiting compensable.

You can download the full Administrator's Interpretation here. 

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Since at least 1995 Texas law has provided that women has a right to breastfeed in public in any place in which they are legally authorized to be.  Last week, the health care reform signed by the President amended the Fair Labor Standards Act to require covered employers to provide reasonable break time for nursing mothers to express breast milk for nursing children.  The FLSA is the federal law that requires most employers to pay minimum wages and overtime for hours worked in excess of forty per week.

The new law provides that:

• Employers must provide reasonable break time for an employee to express breast milk for her nursing child for one year after the child's birth;
• Provide a place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public, which may be used by an employee to express breast milk;
• Break time is unpaid in Texas (unless of course the employee is an exempt employee entitled to full salary in workweeks where any work is performed).

The law does not apply to employers with 50 or fewer employees if "the requirements would impose an undue hardship by causing the employer significant difficulty or expense when considered in relation to the size, financial resources, nature or structure of the employer's business."

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As a light dusting of snow falls on much of North and West Texas, I thought it was a good time to review the rules regarding deductions from exempt employee salaries for weather-related absences.  Employees qualifying for the white collar exemptions (e.g., professional, administrative and executive exemptions) are generally entitled to receive their entire salary for any workweek where they perform work, regardless of the amount of work performed during the week (like most things, there are some exemptions not addressed here). 

When an employer closes its business for less than a full week due to weather-related conditions such as snow, the employer must pay the exempt employee the full salary for the week.  In this case, while the employer must pay the exempt employee the full salary for the workweek, nothing prohibits the employer from deducting that period of time from the exempt employee's PTO or vacation bank --so long as the employer's written policies do not prohibit it from doing so.  If an exempt employee has exhausted all available PTO or vacation, the employer should still pay the full salary for the workweek under this situation.

Conversely, where the workplace is open for business and the exempt employee elects not to report to work for a full day because road conditions are treacherous, the employer may reduce the exempt employee's salary for the workweek for the period of full day absences caused by weather.  An absence under these circumstances constitutes an absence for personal reasons.  An employer could also pay the employee and deduct the time from the employee's PTO or vacation balance.  An employer should not, however, deduct from the exempt employee's salary a partial day deduction (e.g., where the employee reports late for work due to road conditions).  Treating exempt employees' pay for absences occasioned by weather-related absences is important because failing to do so may jeopardize the employees' eligibility for exempt status.

DOL Opinion letters here and here.

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There has been a significant amount of litigation against employers over the compensability of work time for putting on and taking off safety-related clothing and equipment prior to the start of a shift but necessary for the work to be performed.  For example, Pilgrim's Pride Corporation recently agreed to pay $1 million in back wages to settle a donning and doffing case with the U.S. Department of Labor.  

The U.S. Court of Appeals for the Fifth Circuit (the federal appellate court hearing appeals from Texas, Mississippi and Louisiana) recently affirmed a trial court judgment in favor of McWane, Inc. (a cast iron pipe and fitting manufacturer) in a Fair Labor Standards Act collective action filed on behalf of 2,100 employees. The lawsuit sought unpaid wages for time spend putting on and taking off safety gear before and after employees' scheduled shift (i.e., hard hats, steel-toed boots, safety glasses and ear plugs). This is commonly referred to as donning and doffing pay. 

Employees at McWane worked at ten different plants. Three of the plants had collective bargaining agreements (CBA) that expressly excluded donning and doffing time from compensable time. The remaining seven plants had CBAs that were silent on the issue of donning and doffing pay. Employees were paid based on “line time,” which measures shift working time as starting when the first item hits the processing line and ends when the last item leaves the processing line. None of the plants had ever paid (in over 40 years) employees for pre-shift donning and doffing time and the issue had never been previously discussed at union meetings or during contact negotiations (and union officials and employees admitted that they never knew pre- and post-shift changing time was potentially compensable under the FLSA). 

The Fair Labor Standards Act generally requires that employees receive overtime pay for all hours worked in excess of 40 hours per week at one and one-half times the regular rate of pay. An exception exists for time spent changing clothes if it has been excluded by custom or practice under a bona fide collective-bargaining agreement. The McWane employees argued that donning and doffing was subject to exclusion as time worked only when it has been affirmatively bargained away in the labor contract, and therefore no waiver existed in this case because the union representatives did not have knowledge of the right to compensation for this changing time nor any knowledge of or agreement to a policy of nonpayment for that time.

The Fifth Circuit rejected these arguments and sided with other courts of appeals to hold that “even where negotiations never included the issue of non-compensation for changing time, a policy of non-compensation for changing time that has been in effect for a prolonged period of time, and that was in effect at the time the CBA was executed, satisfies the [FLSA’s] requirement of ‘ a custom or practice under a bona fide’ CBA.” The Court further held that burden of establishing the absence of a custom or practice under a CBA is on the plaintiff employees and is not an affirmative defense on which the employer bears the burden of proof.

Access the opinion here: Allen v. McWane, Inc., No. 08-41037 (5th Cir. 2010)

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Recently I wrote about the risks posed by misclassifying employees as independent contractors.   In an unpublished opinion, the U.S. Court of Appeals for the Fifth Circuit (the federal appellate court that hears appeals from Texas) reversed a summary judgment awarded in favor of a company that had classified two cable splicers who performed post-Katrina telecommunications repair work for an AT&T contractor as independent contractors.  In reversing the judgment for the company, the Court remanded the case to the trial court for a determination of the damages the "employees" are entitled to recover.  A copy of the opinion can be accessed here.

Two cable splicers brought an action under the Fair Labor Standards Act seeking unpaid overtime that they were not paid due to their classification as independent contractors rather than employees.  The individuals worked for the Driftwood Electrical Contractors for 11 months following Huricane Katrina.  Theyworked twelve days on and one day off.  Twelve-hour days were the norm.  They were paid a fixed hourly wage for their work.  Each day they reported to the BellSouth location to receive their assignments unless they had not completed their jobs from the prior work day. They were given prints describing the type of work needed and were instructed by BellSouth supervisors to follow certain general specifications.  Neither cable splicer was trained by BellSouth or Driftwood and the splicers controlled the details of how they performed their assignment.  During this 11 month period, the splicers worked exclusively for the Driftwood Electrical.

To emphasize how fact intensive the independent contractor/employee analysis is, consider the following:  the cable splicers provided their own trucks, testing equipment, connection equipment, insulation equipment and hand tools totaling $16,000 and $50,000 in value.  They were also responsible for their own vehicle liability insurance and employment taxes.  The company, on the other hand, provided workers' compensation insurance and liability insurance for the cable splicers' work.

It appears that the most significant aspect in the Court's determination that the individuals were employees rather than individual contractors was the fact that they worked exclusively for the company for 11 months rather than in a temporary, project-by-project, on-again-off-again relationship.  Consequently, the Court concluded that as a matter of economic reality, the cable splicers were economically dependent on the company they worked for and were not in business for themselves.  Therefore, they were employees rather than independent contractors and were entitled to be paid overtime for their work.   

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Employers have long been challenged by a variety of wage and hour litigation such as misclassification cases and off-the-clock overtime cases.  One of the latest trends in wage and hour litigation is attacking a company's classification of its workers as independent contractors instead of employees.  Because independent contractors are not entitled to certain aspects of benefits provided to employees, misclassification can result in liability in several forms., including:

• Potential tax exposure from federal and state taxing authorities (i.e., unemployment tax, FICA, FUTA);
• Claims that misclassified contractors should be entitled to participate in employer benefit plans covering employees (e.g., stock option plans, health and benefit plans);
• Claims that misclassified contractors are entitled to overtime compensation.

In Texas, the test for determining independent contractor status is a multifactor analysis that centers around the economic realty of the relationship.  The focus is on whether the worker is, as a matter of economic reality, dependent on the alleged employer in business for himself.   This inquiry includes whether the employer has the right to control the progress, details, and methods of operations of the work.  A nonexclusive list of factors that are usually considered in this analysis include: 

• the degree of control exercised by the alleged employer;
• the extent of the relative investments of the work and the alleged employer;
• the degree to which the worker's opportunity for profit or loss is determined by the alleged employer;
• the skill and initiative required in performing the job;
• the permanency of the relationship.

No one factor is determinative. If a court or taxing authority determines that the independent contractor was misclassified, the employer may be responsible for failing to provide the benefits the employee would have otherwise enjoyed had he been properly classified as an employee (e.g., participation in certain employee benefit plans and unpaid overtime).  Depending on the size of the workforce and the work it engages in, these sums can be significant.  Consequently, companies making extensive use of independent contractors should review these relationships carefully to ensure that the workers are properly classified and incorporate changes in the relationships that enhance the ability to defend that classification.

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Employees frequently stay connected with work through company issued smart phones.  Smart phones, like the iPhone, Blackberry, and Treo, allow employees to have access to their work e-mails, calenders and contacts --in addition to making and receiving calls.  In my practice, a smart phone is incredibly useful in staying in touch with my client's needs when I'm in court or out  of the office.  However, with every advance in technology, come employment law challenges.

As recently reported in the WSJ.com, several lawsuits have been filed seeking damages for unpaid work time spent reading and responding to e-mails and customer complaints outside of regular business hours.  For example,T-Mobile USA Inc. was sued in July 2009 by three current and former employees for unpaid working time claiming they were required to use their T-Mobile issued phones to read and respond to message outside of working hours. (View the Complaint here).  In March 2009, CB Richard Ellis Group, Inc. was sued by a maintenance worker for unpaid work time after hours that included reading and responding to e-mails on his company-issued smart phone.  (View the Complaint here). 

Jon Hyman at the Ohio Employer's Law Blog argues that even if employees use smart phones for isolated and sporadic short-term reading and responding to business e-mails, that time is not necessarily compensable time.   Hyman argues that:

Most messages can be read in a matter of seconds or, at most, a few short minutes.  The Fair Labor Standards Act calls such time de minimus, and does not required compensation for it.  "Insubstantial or insignificant periods of time beyond the scheduled working hours, which cannot as a practical administrative matter be precisely recorded for payroll purposes, may be disregarded."

Hyman's point is a good one; however, can this time be precisely recorded for payroll purposes?  Redwood Technologies, for example, has a smart phone application (Momentum) that allows the user to capture time spent reading and responding to e-mails and time spent on the telephone.  It allows the user to allocate that time to different client accounts.  Although this same technology could be used by employers to capture the time nonexempt, hourly employees spend reading and responding to e-mails.  This may not resolve the administrative impracticality of determining which e-mails are personal or business related, I suppose that there are applications out there which would allow an employer to capture this time if it was so inclined. 

While is remains to be seen whether the time spent reviewing and responding to e-mails outside of normal business hours will be recoverable in an FLSA lawsuit, some commentators have suggested implementing polices to either pay employees for this time or to prohibit (by policy) employees from using company issued smart phones outside of working hours.  The following is a menu of options employers may consider in deciding how to deal with the issue of providing company issued smart phones to nonexempt, hourly employees. 

• Do not provide nonexempt, hourly employees with company issued phones capable of reading or responding to e-mail (i.e., smart phones). 
• Purchase a technology solution that captures the amount of time the user spends reading and responding to e-mail and pay nonexempt employees for that time.
• If the employer does not intend to pay for this off-hours review of e-mails, it should clearly set out its expectations that employees should not read and review those messages outside regular work hours.  For example, implement policies that prohibit employees from reading and responding to e-mails outside of regular working hours; require employees to leave company issued smart-phones at work; require employees to program the smart phones to turn themselves off during non-working hours. 
• Limit the employees that are provided with company issued cellphones to those who have a legitimate business need to be routinely contacted outside of business hours and limit that outside contact for matters where it is necessary.
• Pay employees who submit time for the nonbusiness hours review of e-mail and then discipline the employee for violating the employer's policy prohibiting business use of company cellphones outside working hours (if the employer has implemented such a policy).

If the lawsuits referenced above conclude with successful results for the employees (or in class certification), employers can expect to see many more of these kinds of cases filed. 

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Most wage and hour lawsuits in Texas focus on an employer's alleged misclassification of an employee as exempt from overtime.  However, a recent jury verdict from a federal court in Houston teaches that even in a highly unregulated wage and hour state like Texas, there are other wage and hour provisions employers must comply with and that can lead to expensive and protracted litigation.

The Lawsuit

On March 25, a federal jury in Houston, Texas awarded 55 employees $270,000 plus interest and attorneys fees.  The employees in this collection action were current and former waiters and waitresses working for the Chili's food chain who were required to contribute a percentage of their tips into the restaurant tip pool.  That tip pool allocated one percent of the total pool to "food expediters."    Food expediters are employees that set up trays of food and condiments that servers take out to customers.  The expeditors could be paid a salary or paid a higher hourly wage than the Texas waiters who are paid $2.13 per hour.  This dispute centered primarily around whether food expeditors were tipped employees under the Fair Labor Standards Act and whether the Chili's tip pool requiring the tipping of expeditors was voluntary.

Tipped Employees and Tip Pooling Arrangements

Tipped employees are employees that customarily and regularly receive at least $30 a month in tips.  Tip pools requiring tipped employees to contribute a portion of their wages to a tip pool that is shared with other normally-tipped employees (e.g., bartenders and bus boys) are legal as long as a tipped employee is not required to contribute more than 15 percent of his or her wages to the pool and the pool is not shared with non-tipped employees.  Tip pooling with non-tipped employees must be completely voluntary and each tipped employee must determine for himself whether and how much to contribute to the pool.  If the tip pool includes non-tipped employees and is not voluntary it is an unlawful deduction from wages.

The Verdict

In the lawsuit, the employees alleged that Chili's mandatory tip pooling arrangement that included typically non-tipped employees (i.e., the expediters) was an illegal deduction from wages.   A Houston jury agreed and awarded the servers the damages that resulted from these alleged illegal deductions.  And while the employees will only obtain an average of approximately $4,900 each from a final judgment, the significant cost to the employer will be in the court awarded attorney's fees that have not yet been determined and will likely be high six figures or more.  According to Dave Faries at the Dallas Observer's Food Blog (City of Ate), Chili's parent company has announced that it will appeal the jury verdict.

Because the defendant in this case was a national restaurant chain I expect the verdict will prompt more lawsuits against restaurant chains challenging their tip pooling arrangements.

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