Employment Law Watch : Employment & Labor Lawyer & Attorney : Reed Smith Law Firm

Tracking the trend of increased federal and state focus on the misclassification of workers, the U.S. Court of Appeals for the Ninth Circuit recently applied California law to hold that plaintiffs were entitled to a trial on the merits against their former employer for improperly classifying its California drivers as independent contractors, notwithstanding that the drivers had all signed independent contractor agreements that provided that Texas law controlled.  Narayan v. EGL, Inc., Case No. 07-16487 (9th Cir. July 13, 2010).

EGL - an international transportation, supply chain management, and information services company headquartered in Texas - retained drivers to pick up and deliver freight in California, classifying them as independent contractors rather than as employees.  EGL required each driver to sign a "Leased Equipment and Independent Contractor Services" agreement that, among other things, referred to the driver as a "Contractor," provided that the parties intended to "create a vendor/vendee relationship," and in which each driver acknowledged that neither the "Contractor nor any of its employees or agents shall be considered to be employees of" EGL.  The agreements also contained a provision requiring that they be interpreted under Texas law.

Several California drivers sued EGL, claiming that they had been misclassified as independent contractors, and demanding damages for unpaid overtime wages, business expenses, missed meal breaks, unlawful deductions from wages, and other relief under the California Labor Code.  Applying Texas law per the agreement, the district court found that the drivers were independent contractors and granted summary judgment in favor of EGL.

The Ninth Circuit reversed.  As a starting point, the court refused to apply Texas law to the dispute.  Noting that the drivers sought entitlement to employment benefits under California's Labor Code and that state's statutory and regulatory scheme, the court held that it was not required to interpret the agreements to decide the case.  The court instead found that California law should apply to determine whether EGL could be liable for violating the California Labor Code.

Turning to the merits of the case, the Ninth Circuit again disagreed with the district court, finding that the drivers had established a prima facie case that they were employees rather than independent contractors.  The appellate court applied California's multifactor test in analyzing whether the drivers worked as employees or independent contractors, citing, among others, the following facts as supporting the drivers' claim that they were employees:

• The delivery services provided by the drivers were integral to the regular business operations of EGL
• EGL's Safety and Compliance Manual and Driver's Handbook instructed the drivers on how to conduct themselves
• The drivers were ordered to report to the EGL station at a set time each morning
• EGL controlled other aspects of the details of the drivers' performance, such as requiring that they wear EGL-branded shirts, safety boots, and EGL identification cards
• EGL supplied branded equipment, such as boxes and packing tape
• The agreement provided for automatic renewal clauses and could be terminated on 30 days' notice, which was a substantial indicator of an at-will employment relationship
• The drivers' occupation did not require a high level of skill
• The indefinite and lengthy duration of the drivers' relationship with EGL (some of whom had worked for EGL for several years)

The court noted that in light of these facts, the drivers' acknowledgment that they were independent contractors was not significant under California law.

In reaching its conclusion, the Ninth Circuit found that once a plaintiff presents evidence that he provided services for the "employer," the plaintiff is presumed to be an employee unless the employer can prove that the individual was in fact an independent contractor.

In light of this case, and the continuing scrutiny by federal and state agencies on the misclassification of workers as independent contractors, companies should audit and analyze their independent contractor agreements with vendors, owner-operators, or contractors, as well as the practices of its contractors, to determine whether the relationship is truly one of independence.  Where there are any questions or concerns about possible misclassification,  experienced employment counsel should be consulted to determine how best to address the situation before any company is forced to defend time-consuming and expensive litigation.

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This post was written by Samantha M. Clancy, E. David Krulewicz and Robert M. Jaworski.

The United States Department of Labor (“DOL”), Wage and Hour Division, recently published an Administrator’s Interpretation that takes the position that mortgage loan officers with certain “typical” job duties are not subject to the administrative employee exemption of the Fair Labor Standards Act. The DOL reasoned that mortgage loan officers’ primary duties are to make sales, and these are not administrative functions as defined by federal regulations. As a result, mortgage loan officers are not exempt from the FLSA’s minimum wage and overtime compensation rules under the administrative employee exemption. The DOL based its new interpretation on the statutory and regulatory framework, as well as on a thorough review and analysis of recent case law. With this determination, the DOL reverses its previously held position and explicitly withdraws Opinion Letters from February 2001 and September 2006, which stated that mortgage loan officers could be considered exempt administrative employees. 

The administrative exemption applies to employees whose job duties and qualifications meet all of the following tests: (1) the employee is compensated on a salary or fee basis as defined in the regulations at a rate of not less than $455 per week; (2) the employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (3) the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. 

The DOL’s interpretation focuses on the second test. The DOL noted that a mortgage loan officer’s typical duties include contacting and gathering financial information from customers, entering data into computer programs to determine which loan products may be offered to a customer, assessing the loan products identified, and trying to match the customer’s needs with one of the company’s products. Those duties, combined with other factors, led the DOL to conclude that mortgage loan officers’ primary duty is to make sales, rather than administrative functions.     

In reaching its conclusion, the DOL also relied on the following factors:

• In lawsuits brought by mortgage loan officers, mortgage companies have typically conceded that the officers’ primary duty is sales.
• Mortgage loan officers are usually paid commissions based on sales, and their performance is evaluated based on sales volume.
• The DOL could not find any reported case holding that a mortgage loan officer, whether working inside or outside, had a primary duty other than sales.
• A primary duty to make sales is not directly related to the management or general business operations of an employer or an employer’s customers, a necessary part of meeting the administrative exemption. 

Although Wage and Hour Administrator Interpretations do not have the force of law, they are given considerable weight by the courts.  This new interpretation, therefore, will significantly affect financial institutions and other related organizations that currently consider their mortgage loan officers to be exempt from overtime pay. Such employers should take immediate steps to address this new interpretation, such as by engaging outside counsel to audit current practices and to otherwise ensure full compliance with all parts of the FLSA. And given that the DOL’s new approach does not limit application of other FLSA exemptions to mortgage loan officers, employers should also consider whether other exemptions may apply. For example, mortgage loan officers may qualify as exempt employees pursuant to the FLSA’s exemption for outside sales staff, i.e., employees who are primarily responsible for sales or for obtaining contracts for services, and who are customarily and regularly engaged away from their employer’s place of business in performing such duties. Counsel familiar with FLSA issues can provide valuable assistance in this process. It may also be necessary to reorganize compensation plans or reclassify employees to ensure compliance.

Whatever approach is chosen, in light of the real potential for class action lawsuits seeking double damages and attorneys’ fees on behalf of all mortgage loan officers who an employer has employed going back as far as three years, this Administrator’s Interpretation cannot be safely ignored.

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On October 9, 2008, Governor Ed Rendell provided a victory for nurses’ unions by signing the Prohibition on Excessive Overtime in Health Care Act. The Act prohibits employers from mandating overtime for direct patient caregivers, including nurses and nurses’ assistants, in Pennsylvania’s hospitals and health care facilities. Effective July 1, 2009, hospitals and health care facilities will be prohibited from requiring nurses and nurses’ assistants to work hours beyond a predetermined, regularly scheduled daily work shift. The Act also includes an anti-retaliation provision, which prohibits employers from retaliating against workers who refuse to work extra hours.

The new law contains a relatively narrow exception, permitting employers to mandate overtime in certain unforeseen emergency circumstances. These circumstances include the following:

• A declared national, state or municipal emergency
• A highly unusual or extraordinary event that substantially affects the provision of needed health care services or increases the need for health care services
• An act of terrorism
• A natural disaster
• A widespread disease outbreak
• An unexpected absence, discovered at or before the commencement of a scheduled shift, which could not be prudently planned for by an employer, and which could significantly affect patient safety. (This cannot be used to overcome habitual short-staffing.)

If such an emergency occurs, the employer is permitted to mandate overtime as a last resort and only after: (1) exhausting reasonable efforts to obtain other staffing; and (2) providing the employee with up to one hour to arrange for the care of the employee’s minor child, or elderly or disabled family member.

While the statute does not address whether this Act supersedes any provisions in an existing collective bargaining agreement that permits an employer to mandate overtime, the legislative history and prior case law suggest that such a provision would continue “as is” until the expiration of that labor agreement.

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