Employers should be advised that the New York State Department of Labor ("NYSDOL") adopted new Regulations last week, amending the state’s Minimum Wage Orders. A Notice of Adoption of these changes was published in the State Register on December 11, 2013, and the corresponding amendments will take effect on December 31, 2013.
These amendments follow enactment of recent state legislation to raise the minimum wage in New York to $8.00 per hour, also effective December 31, 2013. Accordingly, the new Minimum Wage Orders reflect this change, as well as future scheduled raises in the state minimum wage to $8.75 per hour as of December 31, 2014, and to $9.00 per hour as of December 31, 2015.
Notably, the new Minimum Wage Orders also increase the minimum salary basis amounts for employees to qualify for the executive and administrative exemptions to $600.00 per week (up from $543.75 per week), inclusive of board, lodging, and other allowances and facilities. This amount is also slated to increase to $656.25 as of December 31, 2014, and to $675.00 as of December 31, 2015.
Finally, employers should take note that the amended Minimum Wage Orders impose other pay-related changes for employees in certain industries, including changes to the amount of allowances that may be taken for the provision of meals, lodging, and (where applicable) tips.
On October 16, our firm conducted a webinar, which provided a detailed explanation of the wage deduction regulations promulgated by the New York State Department of Labor ("NYSDOL") on October 9. If you wish to view a recording of the webinar in its entirety and print out a copy of the PowerPoint slides from the webinar, you can click here.
The New York State Department of Labor (“NYSDOL”) just published final regulations on its website, governing employee wage deductions under Section 193 of the Labor Law. According to NYSDOL, the final Section 193 regulations are effective today – October 9, 2013 – and will be codified at and replace the existing 12 N.Y.C.R.R. Part 195. As we previously reported, these regulations were published in draft form earlier this year and made available for public comment. The final regulations contain only minimal changes from this earlier draft version.
Most notably, the final Section 193 regulations retain and set forth detailed procedures which employers must follow when seeking to recover wage overpayments and advances by payroll deduction. As the Section 193 regulations are now in force and effective, it is imperative that employers establish and implement the correct procedures before attempting to recover overpayments and advances by payroll deduction. An employer’s failure to follow these mandatory procedures will create a presumption that the deductions were illegal.
Among other things, the final regulations also list specific prohibited deductions, impose precise requirements for obtaining proper “authorization” from employees, and provide guidance on what types of deductions may be deemed permissible “similar payments for the benefit of the employee.”
We will be following up soon with more detailed guidance on these and other issues under the final Section 193 regulations, and encourage you to check back for an updated post.
The U.S. Department of Labor recently issued a final rule which narrows the companionship exemption to the Fair Labor Standards Act (“FLSA”) and extends the FLSA’s minimum wage and overtime protections to most direct care workers who provide essential home care assistance for the elderly and individuals with illnesses, injuries, or disabilities. The new rule will take effect on January 1, 2015.
The final rule defines “companionship services” to include “fellowship” (engaging the person in social, physical, and mental activities) and “protection” (being present to monitor the person’s safety and well-being). The final rule also provides that “companionship services” may also include “care” (assistance with activities of daily living, such as dressing, feeding, and bathing), but only if such services do not exceed 20 percent of the employee’s total hours worked in a workweek per consumer. In other words, an employee who spends more than 20 percent of his or her workweek performing “care” will not fall within the companionship exemption and will be entitled to minimum wage and overtime under the FLSA.
The final rule also specifies that third-party employers of direct care workers (such as staffing agencies, public agencies, and home care agencies) may not claim either the exemption for companionship services or the exemption for live-in domestic service employees, even when the employee is jointly employed by the third-party employer and the individual, family, or household using the employee’s services. However, the individual, family, or household may still claim any applicable exemption, even where there is a third-party joint employer.
Although the final rule does not go into effect until January 1, 2015, home healthcare agencies should begin evaluating which of their currently exempt employees will need to be converted to non-exempt status as a result of the final rule. Home healthcare agencies will need to ensure that their non-exempt workers are paid at or above the minimum wage for each hour worked and are paid overtime for all hours worked in excess of 40 in a workweek. Agencies will also need to ensure that they maintain required records for such non-exempt employees and pay non-exempt employees appropriately for all travel time, sleep time, and waiting time between patient visits, to the extent required by the FLSA.
On August 9, 2013, in Sutherland v. Ernst & Young LLP, the Second Circuit Court of Appeals ruled that the Fair Labor Standards Act (“FLSA”) does not prohibit the enforcement of a class action waiver in an arbitration agreement. The Second Circuit determined that nothing in the FLSA could be construed to override the liberal policy favoring the enforceability of arbitration agreements established by the Federal Arbitration Act ("FAA"). The Second Circuit further held that a class action waiver in an arbitration agreement was not rendered invalid simply because that waiver removed the financial incentive for the employee to pursue a claim under the FLSA.
Stephanie Sutherland (“Sutherland”) sued her former employer, Ernst & Young LLP (“E&Y”), in a putative class action to recover overtime wages under the FLSA and the New York State Department of Labor’s Minimum Wage Order. When Sutherland accepted her offer of employment with E&Y, she signed an offer letter and a confidentiality agreement, both of which provided that disputes between Sutherland and E&Y would be resolved in mandatory mediation and arbitration, pursuant to the terms of E&Y’s Common Ground Dispute Resolution Program (the “Arbitration Agreement”), a copy of which was attached to the offer letter and the confidentiality agreement. Sutherland and E&Y agreed that the Arbitration Agreement barred both civil lawsuits and any class arbitration proceedings.
After Sutherland filed her putative class action in federal court, E&Y filed a motion to dismiss or stay the proceedings, and to compel arbitration on an individual basis. The U.S. District Court for the Southern District of New York denied the motion, and E&Y appealed. The Second Circuit reversed the District Court’s order.
The Second Circuit noted that the FAA establishes a liberal federal policy favoring arbitration and that federal courts should enforce arbitration agreements according to their terms unless there is a contrary congressional command overriding the FAA’s mandate in favor of arbitration. The Second Circuit held that the FLSA contains no contrary congressional command against waiving class actions. The court reasoned that since Section 16(b) of the FLSA requires an employee to affirmatively opt-in to any collective action brought under the statute, the employee surely also has the power to waive participation in class proceedings as well. Notably, the Second Circuit expressly declined to follow the National Labor Relations Board’s decision in D. R. Horton, Inc., which held that a waiver of the right to pursue a claim under the FLSA collectively in any forum violates the National Labor Relations Act.
Sutherland asserted that the Second Circuit should invalidate the class action waiver in the arbitration agreement because the waiver prevented her from effectively vindicating her statutory claims, and thus operated as a prospective waiver of her "right to pursue” statutory remedies. She argued that she could not effectively vindicate her FLSA claims because she had no financial incentive to pursue those claims on an individual basis. She claimed that she would be forced to expend approximately $200,000 in an individual action to recover less than $2,000 in damages. The District Court had been persuaded by this argument, relying on the Second Circuit’s 2009 decision in In re: American Express Merchants’ Litigation.
After the District Court’s ruling, however, the Supreme Court reversed the Second Circuit’s decision in American Express. The Supreme Court held that the plaintiffs in that case could not justify the invalidation of a class action waiver under the “effective vindication doctrine” by showing that they had no economic incentive to pursue their antitrust claims individually in arbitration. The Supreme Court noted that the mere fact that it was not worth the expense to prove a statutory remedy did not constitute an elimination of the right to pursue that remedy. Accordingly, the Second Circuit concluded that its 2009 American Express decision, upon which the District Court relied, was no longer good law.
With this decision, the Second Circuit has joined the trend among the federal circuit courts to enforce class action waivers in FLSA lawsuits. Given the high cost of litigating wage and hour class actions, arbitration agreements containing class action waivers can be a useful tool for some employers. Employers should carefully evaluate whether it would be worthwhile to enter into arbitration agreements with employees and whether to include a class action waiver in such arbitration agreements.
The Second Circuit Court of Appeals recently ruled that the Chairman and CEO of a corporate supermarket chain – Gristede’s Foods, Inc. (“Gristede’s”) – could be held personally liable for damages arising from Fair Labor Standards Act (“FLSA”) claims brought by employees of the supermarkets. Specifically, the Second Circuit ruled that the Chairman and CEO – John Catsimatidis – was an “employer” within the meaning of the FLSA, and could therefore be held jointly and severally liable along with Gristede’s for such damages.
At the time of the case, Gristede’s operated between thirty and thirty-five supermarket stores in the New York City area, and employed approximately 1,700 workers. In 2004, a group of Gristede’s employees filed a class/collective action lawsuit for unpaid overtime under the FLSA and New York Labor Law (“NYLL”). The employees prevailed on their claims filed in federal district court, and the parties subsequently entered into a settlement agreement. However, Gristede’s defaulted on its payment obligations under the agreement, and the plaintiff employees then moved to hold Catsimatidis personally liable for the FLSA damages in question. The federal district court granted the motion, finding Catsimatidis could be held personally liable, which then prompted an appeal to the Second Circuit.
The Second Circuit affirmed the district court’s decision, holding that, in certain circumstances, an individual may be considered an “employer” under the FLSA and, consequently, held personally liable for violations of the statute. Further, the court found those circumstances existed with respect to Catsimatidis because, among other things: (a) he “was active in running Gristede’s, including contact with individual stores, employees, vendors, and customers”; (b) he was ultimately responsible for the employees’ wages and signed their paychecks; and (c) he supervised other managerial personnel, such as the CFO and COO of Gristede’s.
As one might expect in a large corporation employing nearly 2,000 workers, Catsimatidis maintained oversight of Gristede’s business at a high level and was not typically involved in day-to-day operations at the supermarkets. For example, Catsimatidis did not hire or fire rank-in-file employees, did not fix their specific wages or schedules, and had only limited interaction with his subordinate mangers who handled such matters. Nevertheless, Catsimatidis’s limited, high level activity was sufficient to find him liable. The court also alluded that Catsimatidis’s unexercised authority, as Chairman and CEO, to decide these types of issues may also be an “important and telling factor” in whether he could be held personally liable as an “employer” under the FLSA.
Further, the Second Circuit found that it was irrelevant that Catsimatidis was not alleged to have been personally complicit in the FLSA violations at issue and that the FLSA would carry an “empty guarantee” to remediate employees for violations if it did not hold an employer’s controlling individuals accountable to the law. Notably, the Second Circuit did not decide whether Catsimatidis could also be held personally liable under the NYLL, and instead remanded the case to the original federal district court to decide that issue.
Startling in its potential implications, the Second Circuit’s decision emphasizes the importance of maintaining compliance with the FLSA’s minimum wage and overtime requirements and the risks associated with violations of the statute.
There are mirages in the labor relations and employment desert. Concepts and principles that, for a moment, you see and understand, but moments later you have confused or misapplied. The “fluctuating work week” method of calculating overtime is one of those employment law mirages. At first glance, it appears as an oasis for employers in the FLSA desert – then, like a mirage, disappears when carefully scrutinized and correctly applied.
The “fluctuating work week” (FWW) method of calculating overtime is an alternative to the familiar “time and one-half” method for paying non-exempt employees who actually work more than 40 hours in a workweek. It was first recognized more than 70 years ago by the United States Supreme Court in Overnight Motor Transport Co. v. Missel, and was later codified in the federal wage and hour regulations at 29 C.F.R. §778.114.
Often referred to as the “half-time” measure of overtime, it applies: (1) if there is a mutual understanding between an employer and a non-exempt employee that the employee will be paid a fixed weekly salary no matter how many hours that employee works in a week; (2) if the fixed salary is sufficiently large so that the employee’s regular rate of pay never drops below the minimum wage (federal or state); (3) if the employee’s work week fluctuates both over and under 40 hours per week; and (4) if the employee is paid a “half-time” overtime premium for hours worked beyond 40 in a week. Using the “half-time” method, the employee’s overtime rate is one-half of the rate determined by dividing the employee’s weekly salary by the number of hours that the employee actually works in a week. In other words, the overtime rate paid for hours worked in excess of 40 in a week declines the more hours that an employee works.
Not surprisingly, employees are not quick to embrace this system, and employers must consider the “labor relations” and “employee morale” implications of using the FWW method, even in those limited circumstances where it can be lawfully applied. Employers who do use the FWW method are subject to legal challenges on many fronts. For example, the USDOL takes the position that the FWW method may only be applied to employees whose weekly hours do not customarily follow a regular schedule and fluctuate both above and below 40 hours per week. In other words, there must be evidence that the employee’s hours regularly dip below 40 in a week without any diminution in that employee’s fixed salary. Second, the USDOL insists that the employee be paid a fixed salary – obviously without deductions or offsets, but also without non-discretionary enhancements such as commissions or bonuses. Note, this “fixed salary” requirement is more stringent than the “salaried basis” test applicable to the “white collar” overtime exemptions. In 2011, the USDOL considered, but ultimately rejected, proposed amendments to its regulations that would have allowed employers to use the FWW method even if the employer paid employees non-discretionary earned bonuses in addition to the required “fixed salary." Clearly, the USDOL is not a fan.
Further complicating the use of the FWW method for New York employers is the open question whether this method also applies to overtime payments under New York law. Several decisions (and an older NYSDOL opinion letter) have suggested that the federal methodology for computing overtime is permissible, but there is no clear precedent on this issue. Employers should carefully consider whether to use the FWW method to compute overtime, and those who do should regularly review those arrangements to insure that they continue to meet the applicable standards (fluctuating work week, fixed salary, regular rate above the minimum wage, etc.). Be careful or this FLSA “oasis” may turn out to be a “mirage” that will only produce unhappy employees and costly litigation.
New York State's 2013-2014 budget -- approved on March 29, 2013 -- includes a three-stage increase in the state's minimum wage. Effective December 31, 2013, the minimum wage will increase from $7.25 per hour to $8.00 per hour. Effective December 31, 2014, the minimum wage will increase to $8.75 per hour, and effective December 31, 2015, the minimum wage will increase to $9.00 per hour.
These minimum wage increases do not apply to tipped food service workers and service employees who are covered by the New York State Department of Labor's Hospitality Industry Wage Order. However, the Commissioner of Labor is authorized under the legislation to promulgate a wage order increasing the hourly minimum wage for such tipped employees.
Employers are eligible for a minimum wage reimbursement credit for each employee who: (1) is between the ages of 16 and 19; (2) is paid at the applicable minimum wage rate; and (3) is a student during the period in which he or she is paid at the applicable minimum wage rate. During the period of time when the minimum wage is $8.00 per hour, the reimbursement credit is $0.75 per hour for each hour worked by an eligible employee (which is the entire amount of the increase from the current $7.25 per hour minimum wage). During the period of time when the minimum wage is $8.75 per hour, the reimbursement credit is $1.31 per hour for each hour worked by an eligible employee. During the period of time when the minimum wage is $9.00 per hour, the reimbursement credit is $1.35 per hour for each hour worked by an eligible employee. If the federal minimum wage is increased to above 85% of the state minimum wage, however, the reimbursement credit will be reduced to the difference between the federal minimum wage and the New York minimum wage.
The minimum wage reimbursement credit has been criticized because it may create an incentive for employers to hire teenage student employees over adult non-student employees. Although the legislation creating the reimbursement credit prohibits employers from discharging a non-eligible employee and hiring an eligible employee "solely for the purpose of qualifying for this credit," critics maintain that this provision will be difficult to enforce and point out that nothing in the legislation precludes employers from gradually replacing non-eligible employees with eligible employees through normal attrition rather than by discharging employees. The reimbursement credit may also create an incentive for employers to keep student employees between the ages of 16 and 19 exactly at the minimum wage because payment of those employees above the minimum wage may result in loss of the reimbursement credit under the language of the legislation.
Based on this criticism, a bill has been introduced in the State Senate to repeal the minimum wage reimbursement credit. The bill has been referred to the Senate Committee on Investigations and Government Operations.
Employers who have employees in New York are required to issue annual notices under the Wage Theft Prevention Act ("WTPA") to all New York employees between January 1 and February 1, 2013. Although a bill was introduced in the New York State Legislature to repeal the annual notice requirement in early 2012 (which was the first year that the annual notice requirement was in effect), the bill passed in the Senate but remains dormant in the Assembly. Therefore, the WTPA annual notice requirement continues to be in effect.
As we have summarized in previous blog posts, the annual notice must contain the following information:
the employee's rate or rates of pay (for non-exempt employees, this must include both the regular rate and overtime rate);
the employee's basis of pay (e.g., hourly, shift, day, week, salary, piece, commission, or other);
allowances, if any, claimed as part of the minimum wage (e.g., tips, meals, lodging);
the regular pay day; and
the name (including any "doing business as" name), address, and telephone number of the employer.
The annual notice must be provided to each employee in English and in the primary language identified by each employee, if the New York State Department of Labor ("NYSDOL") has prepared a dual-language form for the language identified by the employee. At this point, the NYSDOL has prepared dual-language forms in Chinese, Haitian Creole, Korean, Polish, Russian, and Spanish. The English-only and dual-language forms created by the NYSDOL are available on the NYSDOL's web site. If an employee identifies a primary language other than one of the six languages for which a dual-language form is available, the employer may provide the annual notice in English only. Employers are not required to use the NYSDOL's forms, but employers who create their own forms must be sure that all of the information required by the WTPA is included.
Employers are required to obtain a signed acknowledgment of receipt of the annual notice from each employee. The acknowledgment must include an affirmation by the employee that the employee accurately identified to the employer his/her primary language, and that the notice was in the language so identified. Signed acknowledgments must be maintained for at least six years.
It is commonly accepted by employment law practitioners that Fair Labor Standards Act settlements must be approved by the United States Department of Labor or court-supervised to be enforceable. However, the U.S. Court of Appeals for the Fifth Circuit recently rejected this prevailing belief and upheld a private settlement on the grounds that it resolved a “bona fide dispute as to the number of hours worked,” rather than constituting a waiver of plaintiffs’ substantive FLSA rights.
In Martin v. Spring Break ’83Productions, LLC, the plaintiffs, who were represented by a union, claimed they were not properly paid overtime while working on the set of a movie. The union filed a grievance on the plaintiffs’ behalf claiming they had not been paid for all hours worked and conducted an investigation that concluded it would be impossible to determine whether plaintiffs actually worked on all the days claimed. Plaintiffs subsequently filed a lawsuit in June 2009. In November 2009, the defendants and plaintiffs’ union representatives entered into a settlement agreement resolving plaintiffs’ FLSA claims. Because the settlement was not approved by the USDOL or a court, the plaintiffs argued that the FLSA releases were not enforceable.
The district court granted the employer’s motion for summary judgment finding the FLSA releases to be valid and the Fifth Circuit affirmed. In so holding, the Circuit Court held that the plaintiffs were bound by the terms of the settlement agreement even though they did not sign it because both the settlement and the collective bargaining agreement stated that the union was the plaintiffs’ authorized representative. The Court further noted that the plaintiffs accepted and cashed their settlement checks, and the fact that the plaintiffs were represented by a union and the settlement was reached during the course of pending litigation minimized any suggestion of unequal bargaining power between the parties.
Employers are often confronted with the issue of how best to resolve an FLSA claim out of court, and specifically whether it should obtain a release knowing that such a release would most likely be unenforceable. The Fifth Circuit decision is encouraging as it may pave the way for other courts to enforce private FLSA settlement agreements using the specific factual findings there as a road map for employers to follow, particularly in the unionized setting.
The case also serves as a good opportunity to remind New York employers that private settlement agreements releasing minimum wage and overtime claims under the New York Labor Law are generally enforceable. Furthermore, even if an FLSA release may be deemed unenforceable, there may be certain provisions an employer may want to include in a private settlement agreement that might be helpful in defending any subsequent litigation. For example, it may be helpful to include certain affirmative acknowledgments with respect to the employee's duties and/or the employee's hours worked depending on the type of claim being asserted.
As we reported in a prior blog post, an amendment to New York's wage deduction statute -- New York Labor Law Section 193 -- was passed by the Senate and Assembly in June. Governor Andrew Cuomo signed the legislation on September 7. This amendment – effective on November 6, 2012 – will permit New York employers to make a wider range of payroll deductions than currently enumerated in Section 193 and will impose several new deduction-related requirements.
As many employers are aware, the New York State Department of Labor (“NYSDOL”) in recent years significantly narrowed its interpretation of Section 193. To summarize, NYSDOL has taken the position that a wage deduction is not permissible unless it is very “similar” to those expressly recognized in the statute as lawful (e.g., deductions for “insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, [and] payments for dues or assessments to a labor organization”). This interpretation varied from the NYSDOL’s historical focus on whether the deduction is for the “benefit of the employee.”
Diverging from this historical focus, NYSDOL more recently opined that the following types of employee wage deductions, among others, are unlawful: (a) deductions for loans, wage overpayments, or wage advances owed to an employer; (b) deductions for the recoupment of tuition assistance monies owed to an employer; and (c) deductions for purchases from employers or employer-sponsored stores, cafeterias, and like establishments. To reiterate, NYSDOL found these types of deductions to be unlawful (even with an employee’s voluntary agreement and written authorization) because they were not sufficiently “similar” to Section 193’s enumerated list of permissible payments.
Fortunately for New York employers and employees, the recent amendment to Section 193 will expand the enumerated list of permissible wage deductions to include deductions for:
Prepaid legal plans;
Purchases made at events sponsored by a bona fide charitable organization affiliated with the employer, where at least twenty percent of the profits from the event are contributed to a bona fide charitable organization;
Discounted parking or discounted passes, tokens, fare cards, vouchers, or other items that entitle an employee to use mass transit;
Fitness center, health club, and/or gym membership dues;
Cafeteria and vending machine purchases made at the employer’s place of business and purchases made at gift shops operated by the employer, where the employer is a hospital, college or university;
Pharmacy purchases made at the employer’s place of business;
Tuition, room, board, and fees for pre-school, nursery, primary, secondary, and/or post-secondary educational institutions;
Day care, before-school and after-school care expenses; and
Payments for housing provided at no more than market rates by non-profit hospitals or affiliates.
The amendment will also expressly permit deductions made in conjunction with an employer-sponsored pre-tax contribution plan approved by the Internal Revenue Service or other local taxing authority. As the above list indicates, some of the new enumerated deductions will only be permitted for certain types of employers (e.g., hospitals, colleges and universities). It is not apparent why legislative drafters included these limitations.
Importantly, the amendment will additionally permit employers to recover inadvertent wage overpayments and wage advances by payroll deductions under certain circumstances and subject to future NYSDOL rulemaking. According to the amendment, these forthcoming rules must include provisions governing the terms and conditions under which employers may deduct for wage overpayments and advances and must also include provisions relating to employee notice and dispute resolution procedures.
The amendment also imposes new deduction-related requirements, which New York employers must follow. For example, the amendment provides that “all terms and conditions of the payment and/or its benefits and the details of the manner in which the deductions will be made” must be provided to employees in advance. Additionally, employers must give advanced notice to employees if there is a “substantial change” in the terms or conditions of the payment (e.g., a change in the amount of the deduction, or in the corresponding benefits). The amendment also establishes limitations on the total amount of deductions that may be made for certain purposes each pay period, and requires that employees have access to real-time information regarding certain deduction-related expenses.
Employers must now also keep any “written authorization” required under Section 193 for the respective employee’s entire period of employment and, then, for an additional six (6) years after the end of that employment. For employers with union-represented workers, the amended Section 193 clarifies that the requisite “written authorization” may be provided pursuant to the terms of a collective bargaining agreement. Except where a deduction is “required or authorized” in such a current collective bargaining agreement, the amendment further provides that employees are free to revoke their authorization at any time. In such an event, employers must then cease the wage deduction in question “as soon as practicable” and not later than four pay periods or eight weeks after the employee’s revocation, whichever occurs sooner.
Finally, New York employers should take note that the amendment has a three-year “sunset” provision, and, therefore, would require additional legislation to make the corresponding changes to Section 193 permanent. As with any new legislation, employers should carefully review the amendment to Section 193 and should prepare accordingly in advance of the pending effective date.
On June 18, 2012, the U.S. Supreme Court affirmed a decision of the Ninth Circuit Court of Appeals finding that pharmaceutical sales representatives at GlaxoSmithKline fall within the outside sales exemption from the overtime pay requirements of the Fair Labor Standards Act ("FLSA"). As reported in a previous blog post, the Second Circuit Court of Appeals had reached the opposite conclusion in July of 2010, finding that pharmaceutical sales representatives employed by Novartis were not FLSA-exempt and that a class of more than 7,000 current and former employees in that position were entitled to pursue their overtime claims. The Supreme Court's 5-4 decision resolves the split in the Circuit Courts on the scope of the FLSA's outside sales exemption and addresses the amount of deference owed to the Secretary of Labor's interpretation of the U.S. Department of Labor's regulations promulgated under the FLSA.
In amicus briefs filed with both the Second and Ninth Circuits, the Secretary of Labor initially took the position that a "sale" as described in the regulations required a "consummated transaction directly involving the employee for whom the exemption is sought." Because pharmaceutical sales representatives promote drugs to physicians in exchange for nonbinding commitments to prescribe the drugs in appropriate cases, the Secretary argued that they did not "make sales" and, accordingly, could not qualify for the outside sales exemption. After the Supreme Court granted certiorari, however, the Secretary argued instead that an employee does not make a sale unless he "actually transfers title to the property at issue."
Although an agency's interpretation of its own ambiguous regulations is normally entitled to deference, the majority found "strong reasons" for not deferring to the Secretary's interpretation in this instance. Specifically, the majority found that the Secretary's current interpretation would impose potentially massive liability on employers without fair warning, especially given the U.S. Department of Labor's apparent acquiescence in the longstanding pharmaceutical industry practice of treating sales representatives as exempt. In addition, the majority found that the Secretary's interpretation was not persuasive in its own right for a number of reasons, including that it was first announced in a series of amicus briefs with no opportunity for public comment, that the Secretary's initial interpretation argued before the Second and Ninth Circuits had proven to be untenable, and that it was "flatly inconsistent" with the FLSA's definition of "sale."
The majority held that the FLSA's statutory language regarding the outside sales exemption called for a functional inquiry, taking into consideration an employee's responsibilities in the context of the particular industry in which he or she works. In light of the unique regulatory environment within which pharmaceutical companies operate, including the prohibition against dispensing certain drugs without a physician's prescription, the majority found that the sales representatives' promotional efforts to obtain non-binding commitments from physicians was "tantamount . . . to a paradigmatic sale of a commodity" within the pharmaceutical industry. Furthermore, the majority found that its holding comported with the apparent purpose of the FLSA's exemption, because pharmaceutical sales representatives who typically earn over $70,000 per year are hardly the type of employees the FLSA was intended to protect.
