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Similarly, as to the FLSA collective claims, the court reasoned that the broad variations in the SMRs’ work activities made it “impossible to make a blanket determination concerning the FLSA exempt status of the entire class of putative plaintiffs in this case . . . .” In this regard, the court noted that the evidence demonstrated a wide variety of employment practices and time management requirements among the SMRs so that dozens of mini-trials would be required to determine whether individual SMRs satisfied the outside sales exemption.

The Tracy decision is significant for a number of reasons. First, the decision is a notable exception to the many decisions by the district courts in the Second Circuit, which have generally granted certification in both FLSA collective actions and Rule 23 class actions. Although the court specifically noted that “it seems beyond peradventure that the Second Circuit’s general preference is for granting rather than denying class certification,” the court relied on Comcast and Dukes to buck the trend. In doing so, the Tracy court joins the court in Roach v. T.L. Cannon Corp.,* the only other decision to date within the Second Circuit to apply Comcast to deny class certification in a wage and hour case.

Second, the decision is important because of its potential application to other outside sales misclassification cases in other industries, in which sales and marketing representatives who call on customers typically engage in varied activities, in different locations, for varied periods of time outside of the office.

While it remains to be seen how the Second Circuit and courts in the Southern and Eastern Districts of New York will apply Comcast to Rule 23 wage and hour class actions, and how all courts will apply Comcast to FLSA collective actions, so far Comcast has raised the burden on plaintiffs seeking class certification to show not only commonality as to their claims but also that their damages must be measurable on a classwide basis. 

*Littler attorneys represented the defendant in that case.

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The district court also found that the company’s individualized defenses weighed against certification. First, the district court noted contradictions between the plaintiffs’ and managers’ declarations as to whether overtime was denied. “In order to resolve the question of liability, a fact-finder would need to determine whether the employee or the manager was being truthful,” and resolving the dispute as to one plaintiff and one manager would not resolve the issue for any of the others. Second, the district court found that cross-examination about statements by particular plaintiffs in their declarations and depositions would not resolve credibility disputes as to other plaintiffs. Such individualized defenses “destroy the efficiency sought to be gained through a collective action.”

Finally, the court found that a representative sampling of plaintiffs would prejudice the parties. The court stated that “the multitude of differences in the factual and employment settings of Plaintiffs, Plaintiffs’ inability to provide evidence of an overarching illegal policy, and concerns of individualized defenses, . . . [as well as] fairness and procedural considerations” required decertification. Although mindful of the potential problem that would result if hundreds of opt-in plaintiffs initiated suits on an individual basis, the court noted that “lower costs and pooling of resources are not the only considerations. Any efficiency gained through bringing this action collectively would be outweighed by the substantial likelihood of ‘mini-trials’ and the risk of prejudice to both parties.”

While this case provides additional case authority to support decertification arguments such as individualized factual settings and the resulting “mini-trials,” it is perhaps most helpful in its commentary on the need to resolve, on an individualized basis, factual disputes and credibility issues.

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Faced with an FLSA collective action regarding automatic meal break deductions for the first time, the Sixth Circuit Court of Appeals agreed that the plaintiff’s evidence was insufficient to demonstrate that opt-in plaintiffs were similarly situated and experienced a common FLSA injury. It elaborated on the Sixth Circuit standard for decertifying a collective action under FLSA Section 216(b) at the final stage, which occurs after conditional certification and near the end of discovery. The court stated that this stage warrants a “stricter standard” than at the conditional certification stage, considering differences in employment settings, the availability of different individualized defenses, and the fairness and procedural impact of proceeding as a class action.

The Sixth Circuit agreed with the district court that there was insufficient evidence of a common injury as a result of the automatic deduction policy and that the plaintiff’s common theory of injury was essentially nothing more than a critique of the policy. The court emphasized, however, that such a policy, by itself, is lawful under the FLSA and would not alone establish the similarity necessary to maintain a collective action.

The court also agreed that different workplace experiences regarding department procedures to reverse deductions, training, and oversight outweighed any similarities alleged by the plaintiff. The court rejected the plaintiff’s failure to monitor theory based on some employees’ failure to report work during meals breaks, stating that employers could not be required to pay for work where they did not know and had no reason to know about the work. But the court left unresolved the question of whether an employer’s failure to monitor could ever form a basis for certification.

Frye is a welcome decision for healthcare employers facing the continuing threat of FLSA collective actions based on automatic meal break deduction policies. The case is particularly helpful where employers can show that employees understand the policies and procedures to reverse any automatic deduction and have been paid for missed breaks when they have followed the employer’s procedures.

To learn more about the decision, please see Littler's ASAP, Sixth Circuit Upholds Decertification of FLSA Collective Action Challenging Automatic Meal Break Deductions, by Paul Prather, Lisa Leach, and Alex Boals.

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The court found that the employer’s decision to change the exempt status of employees in the particular sub-department where plaintiffs worked did not constitute evidence that the employer’s original classification of the employees was wrong or unlawful. With respect to the plaintiffs’ second argument, the court stated that although plaintiffs faced a light burden, they at least had to demonstrate “a reasonable basis for crediting their assertions that aggrieved individuals exist in the broad class that they propose.” Because the plaintiffs failed to provide any evidence to support a finding that members of the proposed class were similarly situated, the court denied certification.

Proper employee classification is something that can impact every employer. Employee classification is also an area where the applicable law is constantly developing and employers sometimes have to make reactionary adjustments. Knowing that employee reclassification does not automatically create a potential class of employees should provide even more encouragement for employers to make sure employee classifications are consistent with the most current law.

Though Judge Marshall’s holding will not prevent future class action filings, it is another arrow in the quiver of employers who must vigorously defend against class actions from their inception. We encourage employers to contact experienced labor and employment counsel with questions and concerns about properly classifying new and current employees.

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The court began its analysis by first explaining that the FLSA controls because New York’s overtime statute is defined and applied in the same manner as the FLSA. The court then explained how the FLSA exempts from its overtime requirements any employee whose primary duty is making sales, among other criteria. The court noted that although the determination of an employee’s primary duty must be based on all of the facts in a particular case, consideration is also given to certain “hallmark activities” such as whether the employee generates commissions for himself through his work; and the amount of work done away from the employer’s place of business.

In its analysis, the court first noted that the plaintiff’s case was almost identical to that of Chenensky v. New York Life Insurance Co., in which New York Life won summary judgment against a similarly situated plaintiff – although not a registered representative – whose primary duty was sales. The court declined to distinguish Gold’s case from Chenensky on this fact, declaring that “the fact that Gold’s employment is subject to certain regulatory requirements does not mean that compliance with the regulations is his primary duty under FLSA.” In other words, compliance with the FINRA regulations “[did] not convert a sales position into an advisory one.”

The court next highlighted the fact that the Gold had been paid solely on commission, received no compensation for pure financial advice in the absence of a sale, and consistently followed his employer’s six-step “Sales Cycle,” which involved mandated sales practices such as prospecting and closing the sale. In response, Gold cited case law in which courts found that a registered representative’s primary duty was something other than sales. The Gold court, however, distinguished these cases as inapplicable because, among other things, the FLSA’s “outside sales exemption” was not at issue in any of the cases. The court was similarly unpersuaded by Gold’s reliance on Department of Labor (DOL) opinion letters, one of which stated that a registered representative may qualify for the FLSA’s administrative exemption. Indeed, the court rejected the DOL letters as non-binding, and further held that because Gold’s duties did not involve managerial or promotional responsibilities, the FLSA’s administrative exemption did not apply.

Gold’s other claims, involving violations of New York’s minimum wage law and allegations of illegal deductions, either survived summary judgment or were allowed to move forward by the court. The case is significant in that it further solidifies insurance agents whose primary duty is sales as subject to the “outside salesman” exemption of the FLSA. The case also provides further support for application of the exemption even where an insurance agent has taken on arguably non-sales duties, such as due diligence, in order to comply with FINRA’s regulations.

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Next, the court considered whether the prohibition of a class action voided the agreement. Notably, the Fourth Circuit in Adkins v. Labor Ready, Inc. had already addressed the issue and held that an arbitration agreement precluding class actions, and specifically a collective action under the FLSA, is not per se unlawful in light of the clear federal directive in support of arbitration. In this case, however, the court found that, in conjunction with the fee splitting provision, it would likely be that “no individual suits” would be brought except as a collective action under the FLSA.

Lastly, the court found that the provision truncating all statutes of limitations to one year would prevent Plaintiffs from vindicating their statutory rights, although the court recognized that some limitation periods may be shortened by agreement. Relying on Ninth Circuit precedent in Davis v. O’Melveny & Myers, the court held that a strict one year limitation period for employment-related statutory claims is oppressive in an arbitration context.

This case suggests that an employer may include one of the above provisions in an arbitration agreement, but not all three. In addition, the court left open the question of whether parties could agree to a two-year statute of limitations on some claims. 

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The U.S. District Court for the Northern District of Illinois, Eastern Division, granted conditional certification on the plaintiffs’ FLSA claims, but then denied the plaintiffs Fed. R. Civ. P. 23(b)(3) certification on their supplemental state-law claims based on the court’s finding that FLSA collective actions and state law class actions cannot be litigated together. The court reasoned that the plaintiffs could not satisfy Fed. R. Civ. P. 23(b)(3)’s superiority requirement because the FLSA collective action was now certified and proceeding. According to the court, allowing both types of actions to proceed would mean that some of the individuals included as part of the state-law classes (those who did nothing) would be excluded from the FLSA collective action (for failing to opt-in). The court thought that such a result would undermine congressional intent as expressed in the FLSA.

On appeal, the Seventh Circuit disagreed. First, the court found no categorical rule or case law against certifying a state-law class action in the same proceeding as an FLSA collective action. In addition, the court pointed to the familiar savings clause in the FLSA which states that no provision of the FLSA shall excuse non-compliance with any federal or state law establishing a higher minimum wage or a shorter maximum workweek. In other words, both FLSA collective actions and state-law class actions can peacefully co-exist in the same lawsuit.

On the issue of how to notify potential class members when both types of representative actions are certified (thus requiring opt-in and opt-out notices), the court acknowledged how the potential for confusion was a valid case-management consideration under Rule 23(b)(3)(D), but nonetheless failed to see how this notice problem was “any worse” than numerous other problems district courts face in managing class actions. According to the court:

It does not seem like too much to require potential participants to make two binary choices: (1) decide whether to opt in and participate in the federal action; (2) decide whether to opt out and not participate in the state-law claims.

Finally, the court noted that if an FLSA collective action were allowed to proceed separately in federal court while the state-law class action proceeded in state court, the situation would be much worse as the two courts would send uncoordinated notices to the putative classes. As a general rule, the court explained, it is preferable to have notice issued from a single court and in a unified proceeding.

This entry was written by Milton Castro.

Background

Plaintiffs are former pharmaceutical sales representatives (“PSRs”) for Alpharma, Inc., a manufacturer of pain medication that is now owned by King Pharmaceuticals. On July 10, 2007, the plaintiffs filed a complaint alleging they are due unpaid wages and overtime pursuant to the FLSA. Thereafter, on March 24, 2009, the court granted Alpharma, Inc.’s motion to stay the proceedings pending the outcome of Smith v. Johnson & Johnson in the Third Circuit Court of Appeals. Following the Third Circuit’s decision in Smith, Alpharma filed a motion for summary judgment before the instant court.

Analysis

The court held that the former PSRs qualify for the administrative exemption and analyzed the three-prong test that the Secretary of Labor sets forth in the administrative regulations. Under the test, an administrative employee must (1) make no less than $455 per week; (2) perform “non-manual work directly related to the management or general business operations of the employer;” and (3) exercise sufficient “discretion and independent judgment with respect to matters of significance.”

With the weekly salary requirement conceded by the parties, the court held that the second prong of the administrative exemption test was met, reasoning that the PSRs were involved in “marketing” and “promoting sales.” The court recognized that federal statutes and regulations prohibit the sale of Alpharma’s prescription medication directly to the public. The PSRs “called on doctors and pharmacies to encourage them to prescribe or stock Alpharma’s products over the products of its competitors.”

Concerning the third prong, the court further examined federal regulations defining the exercise of discretion and independent judgment as involving “the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.”

Alpharma relied heavily on the Third Circuit’s holding in Smith that “a pharmaceutical sales representative was not entitled to overtime pay because she qualified for the administrative exemption under the FLSA.” The district court noted that the plaintiff in Smith “described herself as ‘the manager of her own business who could run her own territory as she saw fit.’”

The court stated that “the facts in Smith are startlingly similar to the case at bar.” The court identified the following similarities: the employer gave Smith a list of target doctors including “high-priority” doctors, set a minimum number of doctors to visit per-day, permitted Smith to determine the order of doctor visits each day, provided Smith with a prepared “message,” allowed Smith “some discretion when deciding how to approach the conversation,” provided Smith with visual aids and did not allow her to use other aids.

The PSRs here worked alone, developed business plans, decided their “routing” (i.e., when and where to travel), and determined the doctors to meet with each day “in order to effectuate the most business.” The court stated that the PSRs also had discretion to decide “how to approach the physician.”

On the other hand, the plaintiffs characterized Alpharma’s PSR supervisors as “micro managers,” and argued that the PSR in Smith was more of a “freelancer.” The plaintiffs also urged the court to examine the full list of factors set forth in the regulations for determining “whether or not an employee exercises the requisite discretion and judgment to fit within the exemption.”

The court reasoned that the plaintiffs satisfied the same two factors as the plaintiff in Smith. First, the court noted that the PSRs’ work “affects business operations to a substantial degree.” Second, the court stated that the PSRs “are ‘involved in planning long-or short-term business objectives’ related to the marketing of their products within their territories.”

In addition to satisfaction of these two factors, the court stated that its conclusions were “buttressed by the plaintiffs’ duties to write reports and business plans to determine where their business was coming from, to detect trends in the sales of the drug, and to generate ideas on how to grow the business.”

The plaintiffs submitted supplemental submissions to direct the court’s attention to other PSR misclassification cases: Jirak v. Abbott Laboratories, Inc. and In re Novartis Wage and Hour Litigation. The court found it unnecessary to discuss these cases in light of the Third Circuit’s decision in Smith and in a subsequent nonprecedential opinion.

This entry was written by Michael Harvey.