Financial Service Workers May Be Glorified "Production Workers" Who Are Entitled to Overtime -- Davis v. J.P. Morgan Chase & Co.

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.


Vesting of Incentive Compensation -- Schachter v. Citigroup, Inc.

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.