Laborsphere

U.S. Supreme Court to Hear Arguments in Case that Could Have Significant Impact on Strategies Available to Defend FLSA Collective Actions

The United States Supreme Court recently granted certiorari of a decision by the Third Circuit Court of Appeals, Symczyk v. Genesis HealthCare Corp., 656 F.3d 189 (3d Cir. 2011), a case that could have a significant impact on employers’ litigation strategy in putative FLSA collective actions. The Third Circuit in Symczyk held that a collective action brought under the FLSA is not rendered moot when the defendant makes a Rule 68 offer of compromise in full satisfaction of the individual claim to a putative representative before the class representative moves for “conditional certification” and before any other plaintiff opts into the action.

Under the FLSA, an employee may file a “collective action” against an employer on behalf of himself and other similarly situated employees. Unlike traditional class actions, however, the FLSA requires that the “similarly situated” employees affirmatively decide to join or opt into the collective action. In Symczyk, the plaintiff filed a putative FLSA collective action, alleging that her employer, Genesis, automatically deducted her pay for meal breaks regardless of whether she performed any compensable work during the break. After answering the Complaint, Genesis served the plaintiff with an offer of judgment for the full amount of her claims, including costs and attorneys’ fees, pursuant to Federal Rule of Civil Procedure 68. Genesis then moved to dismiss the Complaint, arguing that the offer to pay her claims in full mooted the claims, depriving the plaintiff of any ongoing personal stake or legally cognizable interest in the litigation, and divesting the court of any jurisdiction over the case.

The district court granted Genesis’ motion, holding that an offer in full satisfaction of a plaintiff’s claims moots those claims. At this point, no other employees had opted into the suit because the plaintiff had not yet sought conditional certification of the collective action. Thus, the case was dismissed. The Third Circuit reversed, holding that “conventional mootness principles do not fit neatly within the representative action paradigm.” Id. at 195. The court compared FLSA collective actions to class actions, in which it is settled law that a defendant cannot moot a putative class action by making an offer of judgment to the named plaintiff before the class is certified and held that there was no rationale for treating the two types of actions differently. Id. at 197-201.

Accordingly, the Third Circuit reversed, holding that “[w]hen Rule 68 morphs into a tool for the strategic curtailment of representative actions, it facilitates an outcome antithetical to the purposes behind [the FLSA].” Id. at 200. The Third Circuit remanded to the district court in order to allow the plaintiff to file a motion for conditional certification, which would then be deemed to “relate back” to the filing of the original complaint and thus preserve the district court’s subject matter jurisdiction. Id. at 201 The Third Circuit noted that if the mootness inquiry were based solely on whether another employee had opted in at the same moment a plaintiff receives a Rule 68 offer of judgment, employers would encounter little or no difficulty in “preventing FLSA plaintiffs from attaining the “representative” status necessary to render an action justiciable.” Id. at 199.

The Third Circuit’s decision in Symczyk cited with approval the Fifth Circuit’s decision in Sandoz v. Cingular Wireless LLC, 553 F.3d 913, 922 (5th Cir. 2008) (holding that, although a Rule 68 Offer of Judgment could theoretically moot a FLSA collective action, the “relation back principle applies to ensure that defendants cannot unilaterally “pick off” collective action representatives and thwart availability of collective actions under the FLSA.”)

However, both the Ninth and Eleventh Circuits have held, to the contrary, that an offer of judgment for the full amount of the named plaintiff’s claims prior to the certification of a class does moot a collective action. See Smith v. T-Mobile USA, Inc., 570 F.3d 1119, 1122-23 (9th Cir. 2009); Cameron-Grant v. Maxim Healthcare Serv., Inc., 347 F.3d 1240 (11th Cir. 2003).

The Supreme Court granted Genesis’ petition for certiorari on June 25, 2012 and stated the question presented as “Whether a case becomes moot, and thus beyond the judicial power of Article III, when the lone plaintiff receives an offer from the defendants to satisfy all of the plaintiff’s claims.” The Supreme Court’s decision in this case will likely have a significant impact on the strategies available to employers to defend against FLSA collective actions and will also resolve a circuit split on this issue.

The Court will hear the case in the term beginning October 2012, and a ruling is expected by the end of the term in June 2013.

Georgia’s Pro-Employee Restrictive Covenant Law Is Back (If Only Briefly)

Just when it seemed safe for companies with employees in Georgia to try to enforce their restrictive covenant agreements, the Eleventh Circuit has brought back to life – if only for one last hurrah – the old Georgia law that made non-competition and other restrictive covenant agreements virtually impossible to enforce. The Court did so in Becham, et al. v. Synthes USA, et al., No. 11-14495, 2012 U.S. App. LEXIS 11225 (11th Cir. June 4, 2012), by holding that Georgia’s first attempt to re-write the State’s non-competition law was unconstitutional and that the second attempt did not apply to the agreement at issue.

The backdrop, well known to those who practice in Georgia, is a frustrating one for employers who have attempted to enforce restrictive covenant agreements. For years, Georgia statutory and constitutional law disfavored non-competition and other restrictive covenants and, through a very narrow view of what is reasonable and a refusal to reform overly broad agreements, made them nearly impossible to enforce. This changed beginning in 2009 when the Georgia legislature approved a law allowing the enforcement of previously unenforceable covenants, by, among other things, creating presumptively reasonable time periods for restrictions, removing the requirement of an expiration date for certain confidentiality covenants, and, perhaps most importantly, giving Georgia courts the ability to reform overly broad agreements. The law was subject to a constitutional amendment permitting the change, which occurred on November 2, 2010 through Georgia’s citizens’ ratification of the amendment.

The confusion then began. The new law went into effect on November 3, 2010, the day after the constitutional amendment was ratified. The constitutional amendment, however, did not take effect until January 1, 2011. Fortunately, the Georgia General Assembly recognized the gap and passed a second law that repealed the first law and authorized a second, virtually identical law effective May 11, 2011. Problem solved, right?

Not so fast. Unfortunately for Synthes, the restrictive covenants at issue were reaffirmed on December 1, 2010, after the effective date of the first law, but before the effective date of the second law. The Eleventh Circuit thus focused on the first law and held that, because the law was implemented before the constitutional amendment went into effect, it “was unconstitutional and void the moment it went into effect.” The Court then went back to “old” Georgia law, and like so many agreements before it, found Mr. Becham’s restrictive covenant agreement unenforceable.

Although the result was an unfortunate one for Synthes, the impact can be managed going forward by making note of the critical May 11, 2011 date. Restrictive covenant agreements entered into on or after May 11, 2011 will be subject to the second new law, and hence subject to more favorable court review. Agreements entered into prior to that date, even if after the November 2, 2010 constitutional amendment, will be judged under “old,” pro-employee Georgia law. Employers of Georgia employees will therefore want to make sure that their restrictive covenant agreements are effective on or after May 11, 2011 and, where they are not, arrange for the execution of new agreements.

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.