California Labor and Employment Defense Blog : California Employment Lawyer & Attorney : Van Vleck Turner & Zaller Law Firm : Wage and Hour Class Actions : Serving Los Angeles, San Diego, San Francisco

Previously we blogged about the Second Circuit decision in which a class of loan officers were found to be entitled to federal overtime pay under the Fair Labor Standards Act because their duties fell on the "production" side of the so-called "administrative/production dichotomy."   (See Financial Service Workers May Be Glorified "Production Workers" Who Are Entitled to Overtime -- Davis v. J.P. Morgan Chase & Co. )

In Pellegrino v. Robert Half International, Inc. the Fourth District Court of Appeal has clarified that this same "dichotomy" litmus test also applies to any employer attempt to avoid California overtime by claiming the administrative exemption under the California Wage Orders.

Robert Half is the world's largest staffing firm (a/k/a "headhunter" firm).  The Plaintiffs in Pellegrino were "account executives" who were responsible for recruiting and placing candidates with Robert Half's customers.  The plaintiffs received salary and commissions but were classified as exempt from overtime.  Based on its analysis the position's job duties, however, the Court upheld a verdict that the account executives were essentially glorified salesman rather than exempt administrators.  

The Court reached this conclusion by noting that the first element of the administrative exemption is that an exempt position must be "directly related to management policies or general business operations."  This element, in turn, triggers the so-called "dichotomy" test, which the Court described as follows:

The phrase ‘directly related to management policies or general business operations of his employer or his employer's customers' describes those types of activities relating to the administrative operations of a business as distinguished from ‘production’ or, in a retail or service establishment, ‘sales' work. In addition to describing the types of activities, the phrase limits the exemption to persons who perform work of substantial importance to the management or operation of the business of his employer or his employer's customers.

By contrast, the evidence showed that the account executives had little or nothing to do with setting the internal policies of their employer were instead trained and evaluated for the purpose of achieving quantitative success in "selling the services of RHI's temporary employees to clients."  

The Court thus concluded that the duties of an account executive "were not directly related to management policies because they instead constituted sales work."  As a result, it determined that the six plaintiffs were properly found to have been misclassified and were collectively entitled to unpaid overtime and penalties of $615,000.

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According to a recent Los Angeles Time article tough economic times are taking their toll on California jurors.  According to the article, prospective jurors are more insecure about their employment than ever before.  As a result, they are less willing or able to lose wages or take time away from work in order to serve on any case lasting more than a day or two. 

Based on his observation of jury selection proceedings and interviews with prospective jurors, the author opines that more prospective jurors are claiming "economic hardship" to be excused and those who can't get out of service are more likely to constitute a volatile, "disgruntled jury."  

The author cites one juror as suggesting that the recession is causing jurors to raise the bar for plaintiffs seeking money through the judicial system:  

"I think with what is going on in the country, there are a lot of angry people," said retired Broadway actor Sammy Williams. "Money is such an issue and to give money to someone for results of a case, it's really important that they're getting it for a real reason, an important reason."

I'm not so sure.  I could also see a "disgruntled jury" taking out its anger on an employer who fires an employee in this bad job market.  Or, perhaps, disgruntled jurors will tend to vent their frustration against whichever side is wasting the most trial time and keeping it empaneled unnecessarily.

Even if the "disgruntled jury" phenomenon is primarily anecdotal at this point, however, it's definitely something to think about whether you are representing plaintiffs or defendants. 

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Most employment law claims, including most claims for discrimination and unpaid wages, require the award of attorney fees to a "prevailing plaintiff."  Indeed, it is very common for a Plaintiff to recover tens of thousands in damages at trial and yet be awarded hundreds of thousands of dollar to compensate his attorney for the time spent on the case.  This creates a strong incentive for employers to reach early settlement in small dollar cases before the accumulated attorney fees become the driving economic factor in the case.  Many an employer has settled a case based on the threat that "if plaintiff recovers one dollar, you will have to pay all of his attorney fees."

The recent California Supreme Court decision in  Chavez  v. City of Los Angeles threatens to change that dynamic by giving trial courts the discretion to severely limit the recovery of attorney fees where a plaintiff achieves only limited success.  In Chavez the plaintiff sued and won at trial in an action for discrimination in violation of the California Fair Employment and Housing Act the ("FEHA").  At trial, however, she recovered a mere $11,500 in damages.  Yet her attorneys claimed a whopping $870,935.50 in fees for prevailing in the case.  

The Supreme Court decided that "in light of plaintiff's minimal success and grossly inflated attorney fee request, the trial court did not abuse its discretion in denying [all] attorney fees."   In reaching this result, the Court articulated the following guidelines for trial courts to consider in deciding whether to reduce, or even deny outright, any fee request.

• Where a plaintiff brings an "unlimited civil action" and yet recovers less than $25,000 (which is the maximum jurisdictional threshold for a streamlined "limited" civil action), the trial court has greater discretion to deny the request  for fees.
• Plaintiffs are not entitled to recover for attorney time expended on any factually distinct claim on which they did not prevail.
• “A fee request that appears unreasonably inflated is a special circumstance permitting the trial court to reduce the award or deny one altogether."

The bottom line is that Plaintiffs attorneys can no longer assume that they will be permitted to recover all of their fees even if they prevail.  If a request is grossly disproportionate to the plaintiff's actual recovery they will face the prospect of taking a substantial "haircut" on their fees.  Indeed, if the trial judge believes they are being greedy or padding their fee request they may get nothing at all.   

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Loan officers, analysts, and brokers of various financial products are generally considered to be well compensated and prestigious positions.   As a result, these positions are often reflexively classified as exempt from overtime.  The Second Circuit's recent decision in Davis v. J.P. Morgan Chase & Co. should cause employers to question this assumption.

The Davis decision holds that a given position cannot be considered exempt unless it falls on the correct side of the so-called "production/administrative dichotomy."  According to this "dichotomy" test, the administrative exemption cannot apply if a worker's services are not being performed for the purpose of internally running the company, but are instead being sold to customers to generate revenue. 

The court noted that classifying a position as "production" depends solely on the relationship between the work performed by the employee and the nature of the Company's business.  According to the Court, the key distinction is between, on the one hand, those employees "directly producing the good or service that is the primary output of a business" and, on the other hand, those "employees performing general administrative work applicable to the running of any business." 

Significantly, the Court also specifically found the following factors were irrelevant to this distinction: (i) whether the company is selling "an  intangible service rather than a material good;" (ii) "the level of responsibility, importance, or skill needed to perform a particular job;" (iii)  "the monetary value" of the transactions handled by the employee; and (iv) whether the employee's is highly paid.  

Applying this "dichotomy" may lead to counter-intuitive results where the employer is in the business of selling financial products and services to the public.  For example, an employee who creates these financial products or provides these services to the firm's clients may be found to be a non-exempt "production" worker just as surely as if he were welding car parts on a GM assembly line. 

The Davis Court thus determined that a group of loan underwriters for Chase who investigated customer finances and approved loans could not be classified as exempt administrative employees.  To the contrary, in the context of Chase's loan business, they had to be classified as mere "production" workers. 

Although decided under the FLSA, Davis is also relevant to California overtime law, which expressly incorporates most federal definitions of  exempt duties.

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The California Labor Code is very strict in protecting an employee's right to be paid for all compensation that he earns.  As we have repeatedly blogged in the past, it is often a thorny issue to determine exactly when these protections attach -- in other words, when has a mere hope or expectation of a reward matured into a fully vested proprty right that must be paid by the employer without further delay or reduction?  

The California Supreme Court recently shed a bit more light on this issue in Schachter v. Citigroup, Inc.  In that case, a stockbroker had elected to take some of his compensation in the form of "restricted stock," which would only vest if he were still employed by the Company on a specified date.  The broker quit before the vesting date and never received the stock.  Schachter argued that  this arrangement violated the Labor Code because it required him to "forfeit" compensation that he had already earned.  (He also argued that it was irrelevant that he had agreed to the deal in the first place because the Labor Code also prohibits any agreement to waive its protections).

The Supreme Court rejected the theory that this restricted stock deal was an illegal forfeiture.  In doing so, the Court basically construed the deal as a "stay bonus" or "longevity bonus."  Under this construction, the employee never earned the compensation in the first place because he voluntarily quit.

Only when an employee satisfies the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon resignation or termination).

The Court seemingly went out of its way, however, to caution employers against overreaching.  For example, the Court specifically noted that bonuses, commissions, and other incentive compensation may have to be paid out where the worker does not quit but is fired.  

If the employee is discharged before completion of all of the terms of the bonus agreement, and there is not valid cause, based on conduct of the employee, for the discharge, the employee may be entitled to recover at least a pro-rata share of the promised bonus.  In the analogous context of commissions on sales, it has long been the rule that termination (whether voluntary or involuntary) does not necessarily impede an employee's right to receive a commission where no other action is required on the part of the employee to complete the sale leading to the commission payment.  This concept has been colorfully described as “He who shakes the tree is the one to gather the fruit.”

The Bottom Line:  Employers may lawfully condition bonus payments on an employee's voluntary decision to quit.  But employers generally cannot condition payment on matters solely within their own unilateral control, such as a decision to fire an employee before he can perform all of the contractual conditions.  

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In Parth v. Pomona Valley Hospital Medical Center, the Ninth Circuit authorized employers and employees to exercise some flexibility in attempting to work around the overtime requirements of the FLSA.

In Parth, a group of nurses was originally assigned to work almost exclusively in 8-hour shifts.  The majority of the nurses, however, "preferred working 12-hour shifts in order to have more days away from the hospital."  As a result, the Company implemented a new pay plan.

The pay plan provided nurses the option of working a 12-hour shift schedule in exchange for receiving a lower base hourly salary (that at all times exceeded the minimum wage set forth by the FLSA) and time-and-a-half pay for hours worked in excess of eight per day. The result: nurses, who volunteered for the 12-hour shift schedule, would make approximately the same amount of money as they made on the 8-hour shift schedule (while working the same number of hours and performing the same duties).

Several years later Parth filed a class action claiming that the whole plan was just an artificial scheme to avoid paying overtime, and that the lower base rate for 12 hour shifts therefore violated the FLSA.  The Court disagreed.  It held instead that the use of a lower base rate of pay for longer shifts is permissible so long as the rate is not so low as to be wholly "unrealistic and artificial." 

A number of other factors, while not strictly relevant to its interpretation of the FLSA, also influenced the Court.  For example, the employees had apparently expressed their preference for the longer shifts, the 12 hour shifts were voluntary, and  the whole arrangement was eventually codified in a CBA that was ratified by the bargaining unit.   Under these circumstances it was pretty difficult to paint a picture of employees being unfairly exploited.

Since its passage in the 1930's the FLSA has been one of the preeminent examples of government paternalism designed to protect employees by taking away their right to bargain with their employers over certain working conditions.  The Parth decision is an especially refreshing development because it restores a small degree of discretion to employers and employees to work together to craft "win-win" alternatives to the standard 9 to 5 workweek.  

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California employees have a right to be reimbursed for their work related expenses, such as business travel, equipment, materials, training, and even legal expenses.  On the other hand, companies typically have their own deadlines, rules, special forms, and  other procedural requirements which must be followed in order to request and receive reimbursement.

So what happens when an employee sues for reimbursement and the Company argues that his claim should fail because he did not make a proper request under its internal rules?

In Stuart v. RadioShack, the Northern District addressed this very question and held, in effect, that the requirements of the statute must override any internal reimbursement rules set by the employer. 

Indeed, California Labor Code section 2802 provides that "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties."  And Section 2804 further provides that "Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void." 

Thus, companies must reimburse employee expenses and the parties can't do anything to forfeit or limit these rights even if they wanted to.  According to the District Court, the employer's duty to reimburse expenses should be triggered by the same standard that applies in cases of "off-the-clock" work:

The Court concludes that a fair interpretation of [Labor Code] §§ 2802 and 2804 which produces “practical and workable results,” consistent with the public policy underlying those sections, focuses not on whether an employee makes a request for reimbursement but rather on whether the employer either knows or has reason to know that the employee has incurred a reimbursable expense. If it does, it must exercise due diligence to ensure that each employee is reimbursed.

The Bottom Line:  Employer's should continue to set internal deadlines and procedures for expense reimbursement.  However, they should also recognize that the failure to follow these procedures will ultimately not  be a defense to legal liability if they know or have reason to believe the expense was actually incurred.

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Dan Rather was famously terminated following his 2004 "60 Minutes II" report which used forged documents to accuse George W. Bush of evading military service.   And a New York State Appellate Court has just dismissed the last remnants of Rather's wrongful termination lawsuit against the network.

After the 2004 scandal, CBS had continued to pay Rather's $6 million salary even while it stopped using his services for any on-air broadcasts.  Once he was formally terminated in June 2006, CBS accelerated and paid the remaining five-months of compensation due under the term of the contract. 

Rather claimed, however, that if he were not utilized as the CBS Evening News anchor his contract required CBS to reassign him to actual broadcast stories on 60 Minutes or 60 Minutes II.  The Appellate Court disagreed.  It held that the contract's "pay or play" clause clearly allowed the network to keep him off the air so long as it continued to pay the compensation due under the contract.

Rather claims that, in effect, CBS "warehoused" him, and that, when he was finally terminated and paid in June 2006, CBS did not compensate him for the 15 months "when he could have worked elsewhere." This claim attempts to gloss over the fact that Rather continued to be compensated at his normal CBS salary of approximately $6 million a year until June 2006 when the compensation was accelerated upon termination, consistent with his contract.

Contractually, CBS was under no obligation to "use [Rather's] services or to broadcast any program" so long as it continued to pay him the applicable compensation. This "pay or play" provision of the original 1979 employment agreement was specifically reaffirmed in the 2002
Amendment to the employment agreement.
 

The Court also dismissed Rather's final claim that CBS breached a fiduciary duty on the ground that "employment relationships do not create fiduciary relationships."   

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In Halpert v. Manhattan Apartments, Inc. a job applicant sued after being told he was "too old" for a position.  The prospective employer initially won summary judgment on the ground that it was not liable as the hiring decision was made by an outside contractor who was not its employee.  

The Second Circuit reversed on the ground that the independent contractor status of the decision maker was irrelevant -- so long as he was acting as an authorized agent on behalf of the Company it is directly liable for his discriminatory decisions:

That prohibition [against age discrimination] applies regardless of whether an employer uses its employees to interview applicants for open positions, or whether it uses intermediaries, such as independent contractors, to fill that role. . . . [I]t makes no difference whether the person whose acts are complained of is an employee, an independent contractor, or for that matter a customer.  If a company gives an individual authority to interview job applicants and make hiring decisions on the company's behalf, then the company may be held liable if that individual improperly discriminates against applicants on the basis of age.

This result is logically sound since a corporation acts only through its agents and must therefore bear legal responsibility for the illegal personnel decisions of those agents.   The decision is a stark reminder, however, that employers cannot absolve themselves of liability merely by delegating personnel decisions to outsiders such as temp agencies, business consultants, or even unions. 

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