California Wage and Hour Issues, Quirky Question # 107

Quirky Question # 107:

I keep hearing about companies getting hit with class action lawsuits under California’s tough wage and hour laws.  As I understand it, when a company treats its employees the same under a single policy, it is much more likely to have a class action certified against it.  Our company’s policy is to treat as exempt from overtime its outside sales representatives.

Does this count as a uniform policy, and does it open us up to a lawsuit?  Would we be better off treating some of the sales representatives as exempt and others non-exempt, based on some differences in job duties that already exist or we could implement?

Dorsey’s Analysis:

What you hear is indeed happening. Wage and hour cases are proliferating. Federal cases have tripled in the last decade. California’s onerous wage and hour laws make potential violations by employers even more likely here, and, thereby, increase the threat of class actions in California. So, your question is both timely and important.

First, a little background. Federal and state wage and hour laws place a number of requirements on employers with respect to hourly employees, most importantly, the duty to pay overtime compensation. Certain employees may be classified as salaried and exempt from these requirements. The law offers a number of exemption classifications based on employee duties, including, among others, administrative, learned professional, executive, outside salesperson, and inside commissioned salesperson (generally applicable only to employers in the retail or mercantile industries). Except for the salesperson classifications, the exemptions also require certain salary requirements. When an employee is misclassified as exempt under one of these classifications, the employee may sue the employer to recover past wages and penalties, including for overtime hours that were worked but not properly compensated. When a group of employees are misclassified, rather than individual lawsuits, representative employees may be permitted to bring a class action lawsuit against their employer on behalf of all similarly situated employees. Damages from these wage and hour class actions (as well as attorneys’ fees) can accumulate quickly, which may explain the substantial growth in these kinds of lawsuits.

You are also correct that when an employer treats employees under a common policy, the common issues created by that policy can predominate over issues pertaining to individual employees and create the risk for a lawsuit to be certified as a class action.

It is important to note the difference, however, between an employer’s policy of classifying a group of employees as exempt from wage and hour laws, and other policies that are applied uniformly across a group of employees. Regarding the former, for many types of exemption classifications (including that of ‘outside salesperson’), a policy of classifying a group of employees as exempt does not necessarily increase an employer’s risk of becoming a victim of a certified class action. Regarding the latter, a policy governing the working hours or duties of a group of employees certainly may increase an employer’s risk, depending, of course, on the policy at issue.

A recent opinion by the Ninth Circuit Court of Appeals, In re Wells Fargo Home Mortgage Overtime Pay Litigation, — F.3d —, 2009 WL 1927711 (9th Cir. 2009), demonstrates this dichotomy. The case arose from Wells Fargo’s appeal of a district court order certifying a class of Wells Fargo “home mortgage consultants” for the purpose of determining whether they had been misclassified by Wells Fargo as exempt from overtime requirements.

As with your company, Wells Fargo designated all of its home mortgage consultants as being exempt. After it was sued for wrongly classifying these employees as exempt, and in response to the plaintiffs’ argument that the class’s exempt status created common issues making class treatment appropriate, Wells Fargo claimed – despite the fact it had uniformly treated the employees as exempt outside salespersons – that a class could not be certified because of individual issues surrounding each home mortgage consultant’s daily schedule and duties.

The Ninth Circuit held the employer’s decision to treat all members of a given job title as exempt from overtime was relevant to whether those employees could be treated as a class for purposes of the litigation, but did not warrant the great weight accorded this fact by the district court. The Court of Appeals recognized that, notwithstanding a uniform exemption classification, other issues regarding individual variations in putative class member duties and activities may not be susceptible to common proof. The court remanded the case to the district court to reconsider the class certification issue in light of the individual employees’ varying duties.

The existence of such varying duties may be demonstrated by reviewing the requirements for the outside salesperson exemption. Further, an analysis of how employees classified as outside salespersons spend their working time also may provide a compelling argument to defeat class certification.

For the outside salesperson exemption to apply under California law, an employee must regularly work more than half the working time away from the employer’s place of business performing sales. See IWC Wage Order 7-2001(2)(J).

In the relatively recent California state court decision of Walsh v. IKON Office Solutions, Inc., 148 Cal. App. 4th 1440 (2007), the court affirmed a trial court’s decertification of a class of account manager employees based on the defendant’s affirmative defense that the employees were properly classified as outside salespersons and, therefore, exempt from California’s overtime laws. The defendant presented evidence that the account managers’ tasks varied based on, among other things, territory, number of customers and job orders, amount of time spent outside the office, time spent engaged in sales activities, and “the personal approach of each account manager to the job and customers.” Id. The court held these variations were directly material to whether the outside salesperson exemption applied to any individual putative class member, opining:

[T]he time they spent outside the office in sales, whether outside activities such as pick-ups and drop-offs were used as part of their selling activities, and factors such as orders, CSR’s, sales appointments, and other individual circumstances would affect whether any particular subclass member did, in fact, “customarily and regularly” spend over 50 percent of his or her time outside the office on sales activity.

Id. at 1456. The same individual inquiries into putative class member duties may be present, to varying degrees, under other exemptions from wage and hour laws. In sum, then, classifying a group of employees as exempt is relevant to whether the group can be certified as a class, but it does not, in itself, predetermine the outcome of the certification decision.

That should be contrasted with other uniform policies applied across a group of employees that may demonstrate commonality and raise the risk of class actions. Returning to the outside salesperson exemption, the Ninth Circuit in Wells Fargo explored a hypothetical employer policy that employees be required to be at their desks for 80 percent of their workdays. 2009 WL 1927711, at *4. Such a uniform workplace rule – unlike an exemption classification – certainly would provide a common issue about whether employees are spending at least half their time outside of the office performing sales.

With these guidelines in mind, your idea to classify some of your sales representatives as exempt and others as non-exempt may be a good idea, as long as there are clear distinctions between the groups in job duties and how employees actually spend their days which necessitate the different classifications. One possibility is classifying as non-exempt your sales representatives who are new and still learning the job. Once these individuals’ sales skills and activities are documented (measured perhaps at a 6-month initial review), they could be reclassified as exempt. Another possibility, assuming your business is in the retail or mercantile industries, is to move some employees (again, based on specific work-related criteria) to commission-based compensation. This would allow these employees possibly to meet the tests for both outside salespersons and inside commissioned salespersons. The commission payments would also provide a nondiscriminatory objective means of evaluating employees, blunting any possible claims that employees have been the victim of illegal discrimination based on a protected characteristic (age, gender, race, etc.). In making these differentiated classifications, it would be important to have detailed job descriptions and to use employee performance appraisals to highlight the differences between positions.

Of course, reclassifying employees from exempt to non-exempt has its risks. The mere event of reclassifying employees tends to trigger the idea for litigation in some employees’ minds, and generally creates the risk of later claims based on the notion that employees were previously misclassified and are now owed wages and penalties for those prior time periods. Finally, for whatever reason, employees seem to attach status to being salaried rather than hourly, so reclassifying one portion but not another portion of generally similar employees may create personnel conflicts. You should be cognizant of these potential individual problems as you make these organizational decisions.

Dorsey & Whitney

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