FLSA Year in Review 2010: Death Star Workers Were Independent Contractors; Other Cases Also Side With Empire

01/31/2011

“Never a dull moment” – 2010 was an eventful year for Fair Labor Standards Act (“FLSA”) jurisprudence in the Fifth Circuit and across the country. What’s new? 

  • The Fifth Circuit finally answered the FLSA’s biggest question, namely, when the Rebel forces destroyed the uncompleted Death Star in “Return of the Jedi,” were the construction workers caught in the blast independent contractors or employees? The court’s analysis in three 2010 cases suggests that the independent contractor versus employee question has shifted from an emphasis on control to a renewed focus on the nature and permanency of the parties’ relationship. 
  • The argument that misclassified employees should recover only half-time gained some steam, but the final word now rests with the United States Supreme Court. 
  • The circuits are still split on whether mental anguish or punitive damages are available in FLSA retaliation cases; however, district court cases in the Fifth Circuit suggest these damages should not be awarded in FLSA cases. 
  • Employer attempts to offset FLSA damages with other payments received a serious blow.
  • As a backdrop to these developments, the Department of Labor (“DOL”) and several federal courts continued to narrowly construe many FLSA exemptions.

What is in store for 2011? We expect the DOL to continue its aggressive enforcement of the wage and hour laws which, of course, will likely lead to more litigation over alleged wage and hour violations. From the U.S. Supreme Court, we should receive a final determination (a) whether prevailing FLSA Plaintiffs may only recover half-time for unpaid overtime; and (b) whether a verbal complaint is sufficient to support an FLSA retaliation claim. Stay tuned.

Independent Contractors: The Death of the Control Test?

The FLSA only applies to employees. Thus, workers who are properly classified as independent contractors are not entitled to overtime payments and will not succeed in pursuing FLSA wage claims. Traditionally, when an individual worker challenged an employer’s designation of the worker’s independent contractor status, the courts’ analysis focused on whether the employer or the worker maintained control over the work performed. If the employer controlled the work, courts generally deemed the worker to be an employee. In contrast, courts were more likely to find that a worker who exercised control over the means and methods of the work performed was an independent contractor.

In 2010, the Fifth Circuit decided three cases dealing with the distinctions between independent contractors and employees. Interestingly, the court appeared to shift its emphasis away from the “control” factors and more towards the nature and permanency of the relationship. The three cases, Thibault v. BellSouth Telecommunications, Inc., 612 F.3d 843 (5th Cir. 2010), Lindsley v. BellSouth Communications, Inc., No. 09-30699, (5th Cir. Nov. 15, 2010), and Talbert v. Am. Risk Ins. Co., No. 10-20355, 2010 U.S. App. LEXIS 25889 (5th Cir. Dec. 20, 2010), all had some question regarding whether the worker or the alleged employer maintained more control over the work. Nevertheless, the Fifth Circuit found that the workers were independent contractors in all three.

In Thibault and Lindsley, the workers were splicers temporarily engaged by BellSouth to repair BellSouth’s New Orleans network in the wake of Hurricane Katrina. In Talbert, the worker was a claims adjuster contracted to handle increased insurance claims based on damage caused by Hurricane Ike. In each case, the Fifth Circuit’s decision was based in large part on the employer’s decision to hire its workers for distinct, temporary projects and the workers performed services for only a few months.

This could signal a substantial shift in Fifth Circuit independent contractor law and gives employers a semi-bright line test; if the worker is hired for a temporary project spanning a few months, the worker can be classified as an independent contractor – if the worker is hired to perform services on a permanent project or for work in the regular course of business and the relationship spans more than a few months, the worker should be classified as an employee. Thus, the temporary contractors hired only to complete the Death Star’s production were merely independent contractors, not regular Imperial employees – unfortunate casualties of a war they had nothing to do with.

Damages: Who’s Afraid of the Big Bad FLSA?

Damages are always a hot topic in FLSA cases. The good news for employers is that there are two new cases holding that plaintiffs that prove they have been misclassified as exempt are not entitled to time and a half for overtime hours worked. Both the Seventh Circuit, in Urnikis-Negro v. American Family Property Services, 616 F.3d 665 (7th Cir. 2010), and the Fourth Circuit, in Desmond v. PNGI Charles Town Gaming, LLC, No. 09-2189 (4th Cir. Jan. 14, 2011), joined other circuits and district courts in concluding that the correct calculation of damages in misclassification cases is to award the successful plaintiff only the half time premium for overtime hours because the plaintiff’s salary compensated the plaintiff for the straight time.

More good news comes from the Western District of Texas, where the court in Douglas v. Mission Chevrolet, No. EP-10-CV-294-KC (W.D. Tex. Dec. 1, 2010), held that emotional distress and punitive damages are not available remedies in FLSA retaliation cases.

Unfortunately, not all of the recent FLSA damages rulings have been pro-employer. In two cases decided in 2010, the Fifth Circuit reiterated that FLSA actions are not appropriate means for an employer to recover monies allegedly owed by the employee, whether the attempt to do so is by counterclaim or setoff. In Gagnon v. United Technisource Inc., 607 F.3d 1036 (5th Cir. 2010), the employer attempted to offset the employee’s damages by filing a counterclaim against the employee for breach of contract. The Fifth Circuit held that FLSA actions are not the appropriate forum for counterclaims by the employer. Likewise, in Martin v. PepsiAmericas, Inc., No. 09-60896 (5th Cir. Dec. 28, 2010), the appeals court nixed an employer’s argument that the amount of damages for the plaintiff should be offset by the severance package given to the employee. The appeals court reiterated its position that setoffs are not allowed in FLSA cases unless the setoff is for wages paid to the employee.

Exemptions: Hostility Seen Around the Country

Hostility towards employers' use of exemptions can be seen around the country, especially at the Department of Labor. Earlier this year, the DOL opined that mortgage loan officers, positions typically classified as administratively exempt, were in most cases more like inside sales employees and should not be treated as exempt.

In turn, the Second Circuit also remained hostile towards exemptions in In re Novartis Wage & Hour Litig., No. 09-0437-cv, 2010 U.S. App. LEXIS 13708 (2d Cir. July 6, 2010). The court held that a class of pharmaceutical representatives did not make sales in the traditional sense, and, thus, could not be classified as exempt outside sales employees. The Second Circuit also rejected the employer’s claim that these employees exercised the discretion needed to be classified as administratively exempt because they were trained in proper marketing strategies and not allowed to deviate from the company message.

Exemptions: Hope for Employers

Fortunately, some courts have been more receptive towards an employer’s exemption defense in an FLSA case. The Third Circuit, for example, recently upheld an employer’s use of the executive exemption for a gas station manager in Soehnle v. Hess, No. 10-1344 (3d Cir. 2010). The plaintiff spent 85-90 percent of her time running the station’s cash register; nevertheless, the appeals court concluded that it is not the amount of time spent on managerial tasks that is determinative, but the degree of importance. Because the plaintiff’s managerial tasks were far more important, the exemption applied.

Two Fifth Circuit cases also dealt favorably with exemptions. The first, Songer v. Dillon Resources, Inc., 618 F.3d 467 (5th Cir. 2010), allowed a staff leasing company to take advantage of an exemption based on the work the leased employee performed for the leasing company’s client. The second, the Talbert discussed previously in the independent contractor setting, approved of the employer’s use of the administrative exemption for an insurance claims adjuster responsible for making determinations on whether damage was covered under the customer’s insurance policy.

Look for Significant Supreme Court Decisions in 2011

Two important cases will be decided by the United States Supreme Court in 2011. The first is an appeal from the Urnikis-Negro case discussed previously. The Supreme Court will settle whether employees misclassified as exempt will be awarded time and a half as damages or whether only the half-time premium will be paid.

The second is an appeal from Kasten v. Saint-Gobain Performance Plastics Corp., 570 F.3d 834 (7th Cir. 2009), in which the Seventh Circuit held that an oral complaint cannot constitute the “protected activity” basis for an employee’s FLSA retaliation claim. If the Supreme Court concludes that an oral complaint is insufficient, employees will find it more difficult to bring successful retaliation claims.

Last Words

Although the FLSA is an old law, the DOL’s wage and hour focus and the continual FLSA developments require employers to stay alert. Like 2010, we expect 2011 to be an exciting year full of new trends and developments.

If you have any questions, please visit the Haynes and Boone Labor and Employment Practice page of our website or contact one of the following attorneys. You may also view the alert in the PDF linked below.

Matthew T. Deffebach
713.547.2064

matthew.deffebach@haynesboone.com

 

Meghaan C. McElroy

713.547.2082

meghaan.mcelroy@haynesboone.com

 

Laura E. O'Donnell
210.978.7421
laura.odonnell@haynesboone.com

Dean J. Schaner
713.547.2044
dean.schaner@haynesboone.com 

PDF - FLSA_Year_in_Review_2010.pdf

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