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When the case was considered by the district court, it dismissed the plaintiffs’ claims, finding the Reps were exempt employees under both the “outside sales” and “administrative” exemptions set forth in the FLSA. Analyzing first the outside sales exemption, the district court concluded that even though the Reps “may not ‘sell’” in a “technical[ ]” sense, they do “make sales in the sense that sales are made in the pharmaceutical industry” and therefore they meet the “spirit and the letter” of the outside sales exemption. The district court also found that the Reps meet the administrative exemption, because they “exercise discretion and independent judgment with respect to matters of significance” when they meet with physicians, provide them with information about the company’s products, and attempt to get commitments to prescribe the products. The Second Circuit reversed and held that the Reps do not meet either exemption.

Outside Sales Exemption

The Second Circuit concluded that the Novartis Reps do not meet the requirements of the outside sales exemption because they do not “make sales.” The court relied heavily on the Secretary of Labor’s amicus curiae position that a “sale” requires an exchange of consideration between buyer and seller and that, at best, Reps simply seek a positive affirmation from physicians that they will prescribe Novartis’s products in the future.

Although Novartis argued that the preamble to the regulations accompanying the FLSA provides that “commitments to buy” may constitute “making sales” under the exemption, the court rejected the argument as applied to this case. It held that “[t]he type of ‘commitment’ the Reps seek and sometimes receive from physicians is not a commitment ‘to buy’ and is not even a binding commitment to prescribe.”

Administrative Exemption

The plaintiffs also challenged the application of the administrative exemption based on the degree of discretion the Novartis Reps have in the performance of their duties. The Second Circuit again deferred to the Secretary of Labor’s interpretation of the regulations and her position regarding their application to the facts of the case. It noted that, despite the importance of the Reps’ efforts to promote the company’s products, there was “no evidence in the record that the Reps have any authority to formulate, affect, interpret, or implement Novartis’s management policies or its operating practices, or that they are involved in planning Novartis’s long-term or short-term business objectives, or that they carry out major assignments in conducting the operations of Novartis’s business, or that they have any authority to commit Novartis in matters that have significant financial impact.” Instead, the Second Circuit accepted the plaintiffs’ claim that they do “low-level discretionless marketing work, strictly controlled by Novartis” and concluded that they did not exercise sufficient discretion and independent judgment to satisfy the administrative exemption. 

This entry was written by Lori Alexander, Michael Harvey, and Theresa Waugh.

¹ On the same day the In re Novartis ruling was issued (July 6, 2010), the Second Circuit also issued a summary order in Kuzinski v. Schering Corp., 2d Cir. No. 09-1945-cv, affirming the district court’s denial of summary judgment in a similar case.

The Eleventh Circuit affirmed the district court’s conclusion that certification of each claim was improper under Rule 23(b)(3) because individualized factual inquiries into whether each employee worked without compensation and, if so, for how long, would swamp any issues that were common to the proposed class. The court analyzed the gap period, break period and quantum meruit claims separately, but in each instance reached the same conclusion: that individualized inquiries would predominate with respect to each claim. Notable points made by the Eleventh Circuit in the discussion of each claim include the following:

Breach of Contract Claim (Gap Period)
• The time records the plaintiffs proposed to rely on did not provide common proof of any uncompensated work during gap periods, particularly in light of employee testimony about various non-work related activities that took place during gap periods and various personal reasons that employees listed for coming in early and staying late;
• Even if a contract to pay for such gap time existed (an issue the parties disputed that was not ruled on), an individualized defense existed as to whether an employee knew of FedEx’s policy prohibiting off-the-clock work and yet deliberately chose to engage in such work in breach of contract;
• Even if, as the plaintiffs asserted, the FLSA was incorporated into the alleged contract, an individualized inquiry would still be necessary to determine whether each employee voluntarily arrived early or stayed late, and whether the employee engaged in any work during that time (under 29 C.F.R. § 785.48(a) early or late clock punching may be disregarded if it was voluntary and no work was performed); and
• Even if, as the plaintiffs alleged, there was a policy requiring or encouraging employees to arrive early or stay late, it would not predominate individualized issues, as the record showed that many employees arrived early or stayed late voluntarily and purely for personal reasons.

Breach of Contract Claim (Break Period)
• The time records that the plaintiffs proposed to rely on might not be sufficient to prove that an employee actually worked during a break, which would then require individualized inquiries;
• Even if work occurred, there is no way to tell from those time records how long an employee worked during a break; and
• Even if a contract to pay for such break time existed (an issue the parties disputed that was not ruled on), an individualized defense existed as to whether an employee who worked during the break violated the terms of the contract.

Quantum Meruit Claim
• A quantum meruit claim is highly individualized and would require an inquiry into whether each employee expected compensation for non-work related tasks or for activities performed while the employee was supposed to be on break.

The Eleventh Circuit also affirmed the district court’s refusal to certify a class under Rule 23(b)(1)(A). The appellate court agreed that certification under this Rule is improper where, as here, the plaintiffs request compensatory damages in addition to injunctive relief. In fact, the court noted that the primary remedy sought by the plaintiffs was unquestionably monetary relief.

The Eleventh Circuit characterized Babineau as “round two” of the plaintiffs’ litigation against FedEx, because the same district court previously denied certification of a nationwide class of FedEx employees who asserted substantially similar claims in the matter of Clausnitzer, et al. v. Federal Express Corp., 248 F.R.D. 647 (S.D. Fla. 2008). The Eleventh Circuit referred to Babineau as an attempt by the plaintiffs to cure the defects that the district court identified in Clausnitzer, by limiting the scope of the class to Florida employees, adding the quantum meruit claim and altering the breach of contract claim. Nonetheless, as discussed above, the plaintiffs’ “round two” attempt at class certification has now been rejected as well.

This blog entry was authored by Aaron Reed.

The court of appeal in Dave & Busters first observed that § 351 does not distinguish on its face between “direct” and “indirect” servers. (See our previous entries on recent DOL and judicial interpretation of tip pooling arrangements here and here).  The court explained that § 351 contains only two conditions: (1) the person must be an employee, and (2) the tip must have been “paid, given or left for” the employee. The court then “put to rest a controversy” caused by a 1990 case, Leighton v. Old Heidelberg, Ltd., 219 Cal. App. 3d 1062 (“Old Heidelberg”). The employee in Old Heidelberg contended that § 351 prohibits an employer from appropriating tips left for the server, and that requiring the servers to give part of his or her tip to the busboys was unlawful. The appellate court rejected the employee’s argument, reasoning that in leaving a tip, the patron intends to tip more than just the server or waiter. The plaintiff in Dave & Buster’s seized on language in Old Heidelberg “[i]f more than one employee, for example a waitress or a busboy, directly serve the table of a patron, the gratuity is left for the ‘employees’ within the meaning of section 351, and thereunder becomes their sole property as against the employer, to be equitably distributed between them” Old Heidelberg, 219 Cal. App. 3d at 1070.

The Dave & Buster’s court rejected the plaintiff’s “direct service” limitation on tip-pooling for four reasons: (1) Old Heidelberg did not define “direct” versus “indirect” service. A reasonable interpretation is that a bartender who mixes or pours a drink that a server delivers to a patron is “directly” serving the table. (2) Old Heidelberg made no attempt to fashion a rule that would limit tips to servers and busboys. (3) Old Heidelberg only held that busboys were entitled to share in tips; it did not address who is excluded from tip-pooling arrangements. (4) Old Heidelberg may have recognized some limitations on which employees could share in tips, but the court “did not decide what those limitations are, nor did it address the criteria or standards under which those limitations should be set.” The court noted that tip-pooling exists to “minimize friction between employees and to enable the employer to manage the potential confusion about gratuities in a way that is fair to the employees.” The court found it unnecessary to “ignite an artificial controversy over “direct” versus “indirect” service when the statute’s test is whether the tip was “paid, given to, or left for” the employee.

The Dave & Buster’s court provided helpful language for employers in different industries:

It is in the nature of a tip pool that it is based on the general experience of each particular establishment, that it is only broadly predictive of the reasons for and the patterns of tipping in that particular restaurant and that, in the final analysis, this is the best that anyone can do. It is simply not possible to devise a system that works with mathematical precision and Solomonic justice in each one of the millions of transactions that take place every day.

The Dave & Buster’s court also determined that the bartenders need not personally deliver the drinks to the table, and rejected the plaintiff’s reliance on a DLSE Opinion Letter dated Dec. 28, 1998, which identifies dishwashers, cooks and, for the most part, chefs, as employees who “do not provide direct table service” and therefore cannot share in tips. The court noted that “the propriety of administrative action predicated on the phrase ‘direct table service’ is not before us and therefore we do not express an opinion about any such administrative action involving the phrase ‘direct table service.’” Finally, in light of its holding, Dave & Buster’s did not address the employer’s arguments that the plaintiff could not invoke Cal. Bus. & Prof. Code § 17200 because he was not injured, and Labor Code § 355 mandates that the Department of Industrial Relations, and thus by implication not private parties, enforces § 351, i.e., there is no private right of action for an alleged violation of § 351. Employers should also note that California Labor Code § 353 and the FLSA require employers to retain accurate records of tips paid.

Until the Supreme Court of California decides the pending Starbucks tip-pooling class action case (in which a San Diego judge awarded $86 million, plus interest and attorneys’ fees) Chou v. Starbucks, trial court case no. GIC 836925, employers should ensure that anyone with any management responsibilities does not share in the tips. A more conservative approach would be to limit the sharing only to those employees (1) without any management responsibilities and (2) with direct face-to-face contact with customers. 

This blog entry was authored by Tyler Paetkau.