In the past few weeks, appellate courts in California have issued a number of opinions in wage and hour cases, which have been helpful to employers. As all too many of our clients are aware, we have seen an explosion in the number of such cases filed in our trial courts. And, as these cases make their way through the litigation process, we also are seeing this subject predominate at the appellate level. While it seems we mostly bring you bad news on this topic, in this issue we recap four cases that will be helpful to employers as they mount their defenses to wage and hour claims.

Court of Appeal Finds Claims Adjusters Are Exempt Administrative Employees

The California Court of Appeal found that workers’ compensation claims adjusters are exempt administrative employees in Hodge v. Aon Ins. Serv., a well-reasoned opinion certified for publication on February 24, 2011. In reaching this result, the court rejected the notion that Bell v. Farmers Ins. Exchange stands for the proposition that claims adjusters who work for insurance companies are ineligible for the exemption without regard to the importance of the work they perform, the judgment and discretion they exercise, or the fact that they perform such work on behalf of clients of their employer who are not in the claims adjusting business.

Kenneth Hodge, among others, brought a collective action on behalf of claims adjusters employed in California against Cambridge Integrated Services Group, Inc. to contest the fact that Cambridge classified them as exempt employees. While employed by Cambridge, the adjusters regularly interacted with clients and lawyers, doctors and other professionals, and they made independent conclusions about issues such as causation and appropriate compensation, using their professional judgment and discretion and their specialized training, experience and skills. They were involved in assessing complex litigated claims and responsible for millions of dollars of Cambridge’s clients’ money.

In analyzing whether these employees were exempt under California Wage Order 4, the court readily found that such workers – who, among other duties, set reserves of substantial importance to the business operations of their employer’s clients – qualify for exempt status as employees who exercise the judgment and discretion required by the administrative exemption. Even though the work of Cambridge’s adjusters arguably could be considered “production” work due to the fact that claims adjusting is the very work that the company exists to perform, the court looked beyond the so-called “production/administrative” dichotomy and noted that it is but one analytical tool available for use in making a determination regarding the administrative exemption.

In reaching its holding, the court looked first at adjusters who perform work for clients not in the insurance industry. By way of example, it noted that if Kmart, a retailer whose “production” workers sell consumer goods, has in-house claims adjusters who perform exempt administrative duties, they would clearly not be performing the production work of Kmart. The fact that Kmart may outsource such claims adjusting work to an insurance company, such as Cambridge, does not render the administrative exemption unavailable to workers employed by Cambridge who perform the exact same duties as Kmart’s in-house adjusters. Thus, the case stands for the important – and common sense – proposition that work for a client that would qualify under the administrative exemption for that client does not become nonexempt production work by virtue of the fact that the employer is in the business of providing that service to the client.

The court also concluded that the adjusters who performed work for insurance-related entities qualified for the administrative exemption. It focused on the actual work performed by the adjusters, notably the fact that they develop litigation strategies and set reserves that may total in the millions of dollars, with the average claim being $75,000 in one of the company’s offices. The court concluded that this work involved the exercise of judgment and discretion on matters of significant monetary import to the insurance company clients, and accordingly the administrative exemption was available. It distinguished Bell due to the low level of responsibility afforded to the claims adjusters who were the subject of that opinion.

This is an important case for employers both in the insurance industry and more broadly, as it has become common for plaintiffs, in reliance on Bell, to assert that they do not qualify for the administrative exemption if they perform work their employer was established to provide, without regard to the fact they may be paid very high salaries and make decisions that have a significant economic impact on their employers and/or their clients. The Hodge opinion will be extremely useful to employers in defending against such claims.

Ninth Circuit Rules Pharmaceutical Sales Reps Are Exempt Under FLSA

In a ruling that is of great import to employers in the pharmaceutical industry – and to others who engage salespeople who may not sell directly to end users – on February 14, 2011 the Ninth Circuit Court of Appeals in Christopher v. SmithKline Beecham Corp., DBA GlaxoSmithKline held that pharmaceutical sales representatives (PSRs) qualify as exempt outside sales representatives who are not entitled to overtime pay under the Fair Labor Standards Act (FLSA). In so holding, the Ninth Circuit issued a strong rebuke to the arguments advanced by the U.S. Secretary of Labor, who intervened in the case, and its ruling directly contradicts the conclusion reached by the Second Circuit Court of Appeals in Novartis Pharmaceuticals Corp. v. Lopes., where the court sided with the view advanced by the Secretary that PSRs do not come within the outside sales exemption. Surprising many court watchers, on February 28, 2011, the U.S. Supreme Court declined to grant review of the Novartis decision, so it remains controlling in the Second Circuit.

The plaintiffs in Christopher were employed by Glaxo as outside salespeople who marketed drugs to physicians. Due to regulations governing the distribution of pharmaceutical drugs, consumers cannot purchase them from a pharmacy without first obtaining a prescription from a licensed physician. Drug companies, such as Glaxo, sell their products to distributors or retail pharmacies, who cannot, in turn, sell them to the end user unless the consumer first obtains a physician’s authorization. In the context of what the court called “this restrictive sales environment,” PSRs call on doctors and encourage them to prescribe Glaxo’s drugs.  They provide information and product samples, build relationships with doctors and convince them to use Glaxo’s drugs over those offered by competitors. Glaxo recruits applicants who have prior sales experience and trains them on its “Assertive Selling Always Professional” model. PSRs usually work outside the office and spend much of their time traveling to the offices of physicians within their assigned territory. They are paid a salary, as well as a bonus that is tied to sales volume within the territory.

At issue in this case was whether the work of the PSRs amounts to a “sale” or “sell” that is exempt under 29 U.S.C. section 203(k) of the FLSA, or whether PSRs merely engage in “promotional work that is incidental to sales made” and therefore nonexempt under regulations promulgated by the Department of Labor (DOL). The plaintiffs and the Secretary of Labor argued that PSRs do not engage in selling as contemplated by the FLSA, but rather engage only in promotional work that is “incidental” to sales made by others. To support this position, the Secretary pointed to 29 C.F.R. 541.500(a)(1), which provides that sales within the meaning of Section 3(K) “include transfer of title to tangible property, and in certain cases, of tangible and valuable evidence of intangible property.” Because the “selling” done by PSRs does not include transfer of property, the Secretary argued that they were not engaged in selling under the FLSA. This, of course, is not the end of the story because by use of the term “include,” this provision contemplates that other activities will constitute sales. The Secretary also pointed to the language of section 3(k) which states that “’[sale]’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

The Ninth Circuit found this argument to be so unconvincing that it gave no deference to the Secretary’s interpretation of the law. In dismissing the argument, the court noted that the Secretary had argued by “statutory renvoi – that is, a ‘sale’ is a ‘sale’” and that the Secretary’s argument did not take into consideration that the statute clearly refers to “other disposition.” The court focused on the activities performed by PSRs and concluded that they were, indeed, engaged in sales, albeit to the doctors who prescribe the drugs, rather than to either the distributors and retail pharmacies who buy them from Glaxo or the end users who ultimately purchase and consume Glaxo’s products. In so holding, the court rejected the Secretary’s view that a sale “means unequivocally the final execution of a legally binding contract for the exchange of a discrete good,” and it noted that its holding was buttressed by the “Secretary’s acquiescence in the sales practices of the drug industry for over seventy years.”

The Ninth Circuit ruling in Christopher that PSRs qualify for the outside sales exemption under the FLSA is in direct conflict with the finding of the Second Circuit in Novartis and also Kuzinski v. Schering Corp. Adding to the mix is the Third Circuit, which has found PSRs to be administratively exempt in Smith v. Johnson & Johnson and Baum v. AstraZeneca. Given the importance to the pharmaceutical industry where more than 90,000 PSRs are employed and the split between the Second, Third and Ninth Circuits on this issue, we anticipate that the last word on this subject will be rendered by the U.S. Supreme Court, despite its recent decision to not accept the Novartis case for review. In the meantime, employers in the Ninth Circuit may avail themselves of the helpful analysis in Christopher.

Yet Another Court of Appeal Follows Brinker on Meal Break Issue

In Tien v. Tenet Healthcare, the California Court of Appeal on February 16, 2011 issued another in a long line of cases following Brinker Restaurant Corp. v. Sup. Ct. in holding that employers need only provide their workers with the opportunity to take meal and rest breaks and are not required to ensure that such breaks are taken. The court held that a class was not appropriate because individual issues regarding whether the breaks were provided predominated over common ones. In so holding, the court stated that it was necessary to look beyond the mere fact that time records reflected a missed break, and it noted that the evidence revealed the possibility of numerous individualized reasons why employees did not take their breaks.

This important issue for employers in California is presented in the Brinker case, which is pending before the California Supreme Court, whose opinion will be the final word as to what it means under the wage orders to “provide” a meal period. It appears that the Supreme Court’s long-anticipated opinion in Brinker may be delayed for at least a number of weeks or more due to the court’s recent approval of the filing of an amicus brief. It remains to be seen whether the state’s high court will issue a grant and hold with respect to the Tien case, but in the meantime it is on the books as another example of the line of cases following the logic of Brinker.

Wage Statement and Reporting Time Pay Victory for Starbucks

On February 17, 2011, the California Court of Appeal published a helpful opinion, Price v. Starbucks Corp., which sets forth common-sense standards for when wage statement penalties are warranted and regarding the reporting time pay owed to an employee called in to work for a termination meeting on a day he or she was not scheduled to work.

After less than one month of employment during which David Price demonstrated he could not adhere to the work schedule, Starbucks called him in to report to work for a meeting on a day he was not scheduled to work. In a session lasting all of 45 seconds, Price was informed of his termination and given his final pay, including two hours of reporting time pay for the exit meeting. Price thereafter sued, in a putative class action, alleging Starbucks:

  • Violated Labor Code section 226 by failing to provide a wage statement that set forth the total hours worked, net wages earned, and all applicable overtime rates, which resulted in a “mathematical injury” requiring the alleged class to calculate whether their overtime pay was inaccurate; and
  • Failed to pay all reporting time pay owed on the day of the termination.

In a ruling enormously helpful to employers, the court dismissed Price’s wage statement claim for failure to plead facts that would sustain a finding that he suffered injury under Labor Code section 226(e). In reaching this result, the court held that: (1) actual injury is required by section 226(e); (2) the fact an employee may be required to do simple mathematics to calculate his or her overtime rate of pay is not such an injury; and (3) a court will not presume injury under the statute simply because required information is missing from the pay statement.

Of lesser import, but nonetheless noteworthy, on the reporting time issue the court held that Starbucks complied with Wage Order 5, which requires the employer to pay an employee who reports to work for “half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours” at the regular rate of pay. Because Price was not scheduled to work that day, the court found he was only entitled to two hours of reporting time pay and not half of the hours he would have worked on other days. In this regard, the opinion is at odds with the Policies and Interpretations Manual of the Division of Labor Standards Enforcement (DLSE), making it important for employers to be aware of this case when dealing with the DLSE on this issue.

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