July 2012 - Page 2 of 2

Who’s The Boss: Third Circuit Announces Joint Employer Test for FLSA Cases, Opening the Door to Broader Exposure to Wage and Hour Liability

On June 29, 2012 the Third Circuit responded for the first time to a question pondered by many employers and courts within its judicial districts: what constitutes a “joint employer” under the FLSA? In a case captioned In re: Enterprise Rent-a-Car Wage & Hour Employment Practices Litigation, the Third Circuit announced a four part, multi-factor test as an answer to this question.

In the Enterprise case, the joint employer question was raised as a result of the filing of a collective action by assistant branch managers at subsidiaries of Enterprise Holdings, Inc., seeking overtime pay under the Fair Labor Standards Act (FLSA). While these assistant managers were employees of Enterprise Holdings’ subsidiaries, they nevertheless sought relief from Enterprise Holdings on the theory that it was a joint employer.

In answering whether Enterprise Holdings falls within the category of “joint employer,” the Third Circuit noted that the definition of “employer” under the FLSA is “the broadest definition that has ever been included in any one act.” Emphasizing that the definition of employer focuses on “control,” the Third Circuit concluded that ultimate control over employees is not necessarily required and even “indirect” control may be sufficient

To determine whether a party is a “joint employer,” and thereby subject to FLSA liability, the Third Circuit adopted the following analysis:

Does the alleged employer have:

Authority to hire and fire employees;
Authority to promulgate work rules and assignments, and set conditions of employment, including compensation, benefits, hours and work schedules, including the rate and method of payment;
Day-to-day supervision, including employee discipline; and
Control of employee records, including payroll, insurance, taxes, and the like.

The Third Circuit emphasized that the factors identified do not constitute an exhaustive list and should not be “blindly applied.” Rather, under the Third Circuit’s guidance, courts are to look to the “total employment situation” and “economic realities of the work relationship.”

How did Enterprise Holdings, the sole stockholder of thirty-eight domestic subsidiaries, avoid the label of “joint employer”? Even despite finding that a three-member board of directors for each subsidiary consisted of the same people who sat on Enterprise Holding’s three-member board, the Third Circuit focused on other key facts in support of its decision: (i) Enterprise Holdings had no authority to hire or fire assistant managers; (ii) Enterprise Holdings had no authority to promulgate work rules or assignments; (iii) Enterprise Holdings had no authority to set compensation benefits, schedules, or rates or methods of payment; (iv) Enterprise Holdings was not involved in employee supervision or employee discipline; and (v) Enterprise Holdings did not exercise or maintain any control over employee records. Among these factors, the Third Circuit emphasized that Enterprise Holdings only “suggested” various Human Resources and salary policies and that the adoption of such suggestions was not mandatory, rendering the parent company more akin to a third-party consultant.

In light of this decision, employers and, in particular, parent corporations, should be aware of the fact that courts within the Third Circuit (Delaware, New Jersey and Pennsylvania) will apply the “Enterprise” test going forward. Notwithstanding, while the test has been articulated, the analysis remains highly fact intensive and courts are by no means limited to consideration of the factors identified in the Enterprise decision. Employers unsure of their FLSA joint employer status should contact their labor and employment counsel.

NLRB Chills At-Will Acknowledgements

Having warned employers about the legality of their social media policies under the National Labor Relations Act, NLRB Acting General Counsel Lafe Solomon has apparently turned his attention to at-will employment statements in employer handbooks and manuals. Employers of union and non-union workforces need to pay careful attention to this development.

Many employers use standard language in their handbooks and manuals in which their employees acknowledge that their employment is at-will; that the employer may terminate the employment relationship at any time, for any reason; and that the at-will employment relationship cannot be amended, altered or modified except by a writing signed by a senior member of management. The Acting General Counsel apparently believes that such at-will disclaimers may interfere with or chill the right of employees to engage in protected concerted activity.

In a case that did not receive extensive publicity, the General Counsel’s Office filed an unfair labor practice charge in February 2012 against Hyatt Hotels (NLRB v. Hyatt Hotels Corp., Case 28 CA-061114) in which it alleged that the at-will disclaimer in the company’s employee handbook violated Section 8(a)(1) of the Act to the extent it required employees to acknowledge that their at-will employment status could not be altered except by a writing signed by management. The charge appears to reflect the Acting General Counsel’s belief that such an acknowledgement will have a chilling effect on the Section 7 right of employees to engage in concerted activity for the purpose of organizing to alter their employment relationship with the employer by choosing union representation. The Hyatt case was settled before the issue was presented for a hearing. An Administrative Law Judge issued a similar ruling in a case decided in early February against the American Red Cross; the case was resolved when the Red Cross agreed to modify its at-will disclaimer before the issue could be presented to the Board for review. (NLRB v. Am. Red Cross, 2012 WL 311334, Feb 1, 2012).

This is an important initiative on the part of the Acting General Counsel. As we have seen in the social media context, in analyzing handbooks and policy manuals the Acting General Counsel will apply Section 7 broadly to find statements unlawful to the extent they could be interpreted in almost any fashion to chill employee rights to engage in protected concerted activity. Accordingly, employers may want to take proactive steps to avoid NLRB scrutiny by including a disclaimer in the at-will sections of their handbooks to the effect that the at-will acknowledgment does not, and is not intended to, undermine or interfere with the employee’s right to engage in protected concerted organizing activity under Section 7 of the Act.

The Supreme Court Rules: Pharmaceutical Representatives Qualify as Outside Salespersons

The Supreme Court recently handed down a decision clarifying the contours of the “outside sales” exemption to the Fair Labor Standards Act (“FLSA”) and settled a split between the U.S. Court of Appeals for the Second and Ninth Circuits. The Court rejected the attempt by the Department of Labor (“DOL”) to reverse the longstanding industry practice of classifying pharmaceutical sales representatives as exempt employees based on its finding that the DOL had never suggested that the industry practice was improper and had never taken legal action to stop the practice. The Court observed that to reverse the longstanding practice in that circumstance would be an improper “unfair surprise” to the industry.

In Christopher v. SmithKline Beecham Corp., two pharmaceutical representatives claimed that their employer failed to pay them overtime wages based on an improper classification as exempt outside sales employees. The representatives’ work consisted mainly of visiting doctors’ offices and encouraging them to prescribe SmithKline drugs. Each week, the employees worked about 40 hours calling on physicians, and spent another 10 to 20 hours on other miscellaneous tasks. Although the employees were well-compensated, they were not paid overtime wages for hours they worked in excess of 40 hours per week.

The Supreme Court considered whether these employees were “employed . . . in the capacity of outside salesman” and therefore exempt from overtime wages under the FLSA. Congress did not define the term “outside salesman” but delegated that authority to the DOL by regulation. The statute nevertheless provides that “‘sale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

In reaching its decision, the Court first determined that the DOL’s interpretation of the statute was not entitled to deference because it had never been formally promulgated as a regulation. Instead, after years of silence, the DOL presented its interpretation in amicus briefs filed in related litigation in the Second and Ninth Circuits, and then presented a completely different interpretation in its submission to the Supreme Court in the Christopher appeal.

Having determined that there was no basis to defer to the Agency’s interpretation, the Court used the traditional tools of statutory interpretation to determine whether the pharmaceutical representatives were exempt outside salespersons. Under that analysis, the Court found that pharmaceutical representatives make sales for purposes of the FLSA, and therefore are exempt, even though they do not technically “sell” anything to the physicians they visit, because the “other disposition” catchall category in the statute’s definition of “sale” should be understood to include the sales representatives’ practice of obtaining nonbinding commitments from physicians to prescribe the employer’s drugs. The Court was also convinced that pharmaceutical sales representatives are “outside salespersons” under the statute because they act like salespersons, are paid like salespersons, and receive training to close sales like salespersons.

A cautionary note: this Supreme Court decision is limited to pharmaceutical industry representatives only. While the “outside sales” exemption may continue to be litigated, this decision has provided much guidance on a previously undefined term under the FLSA. And, of course, the decision has no impact on state wage and hour laws that do not track the FLSA.

New Jersey Court Affirms Sanction Against Law Firm For Losing Emails

The New Jersey Appellate Division has affirmed an order imposing sanctions against defense counsel for losing attorney-client emails that were relevant to the question whether a settlement had been reached between the parties and that had been identified on defendants’ privilege log. When the judge directed that the emails be submitted for in camera inspection, defense counsel replied that they were not available because they had been in the file of the defendants’ prior counsel and could no longer be located.

Plaintiffs’ counsel then retained a forensic expert and incurred over $10,000 in costs and attorneys’ fees to recover the emails from backup tapes on the hard drive of the original defense counsel’s firm. The judge then determined after in camera inspection that the emails were admissible, and ordered the defendants and the law firm representing them to jointly reimburse plaintiffs for that expense. The emails ultimately formed the foundation for the trial court’s ruling in plaintiffs’ favor at trial.

On appeal, the defense firm argued that the sanction was improper because it had not violated any Court Rule in connection with its handling of the emails, and because there was no evidence of intentional spoliation. The Appellate Division disagreed.

In its opinion in Goldmark v. Brach Eichler LLC, the Court observed that the trial judge had inherent power to impose discovery sanctions, and held that the sanctions were proper even in the absence of intentional spoliation because counsel had an obligation to preserve the documents identified on its privilege log and produce them as required for in camera inspection. The Court concluded that “[i]t would make a mockery of our discovery rules to allow a party or
its counsel – after identifying privileged information – to destroy or carelessly lose or misplace the materials in question.”

Courts consistently hold that litigants and in-house counsel must preserve documents that bear a relationship to issues in litigation. Consistent with that, the Goldmark opinion reminds counsel of record to preserve all potentially relevant emails – including privileged client communications – during litigation.