Business Avoid Paying More for Overtime During Tough Economic Times

By Audra Ibarra

At a fundraiser at the St. Regis Hotel in San Francisco on April 21, 2011 President Barack Obama acknowledged that we are in “the worst recession since the Great Depression.” In 2010, over 600,000 businesses closed in the

United States. Although it was relatively low, there was nevertheless 1.6 percent inflation in 2010, as opposed to -.4 percent in 2009. For many businesses, income decreased while expenses increased. One of the expenses that businesses grappled with was the cost of hourlyb labor.

Throughout the country, the Fair Labor Standards Act (FLSA) controls the cost of hourly labor. Although state and local governments may set higher requirements, FLSA sets the floor for minimum wage and overtime pay. Under FLSA, irrespective of hourly wage, generally any work done beyond an eight-hour workday and a 40-hour workweek is overtime, which must be compensated at an hourly rate of at least one-and-a-half times the regular rate.  It would seem as if paying more for overtime is another potential expense increase for a business. However, recent Ninth Circuit and California Court of Appeal cases have shown that, under FLSA, there are certain situations in which a business can avoid increasing overall compensation for overtime.  Editor’s Note: Be sure to check California law before relying solely on these federal decisions.

The Overtime Schedule Is More Desirable

In Parth v. Pomona Valley Hospital Medical Center, a case of first impression, the Ninth Circuit held that, under FLSA, a business can avoid increasing overall compensation for overtime if the overtime schedule is more

desirable. 630 F.3d 794, 797-805 (2010); 29 U.S.C.A. § 201 et seq. This is true even if the regular rate of pay, as opposed to overtime pay, under the overtime schedule is less than it would be under a normal work schedule.

In Parth, a nurse filed a putative class action against a hospital, alleging that it violated FLSA by creating a pay plan that paid a nurse working a twelve-hour shift a lower regular hourly rate than a nurse working an eight-hour shift.

The District Court (C.D. Cal.) granted summary judgment in favor of the hospital, finding that the law did not support Parth’s claims. The Ninth Circuit affirmed. It held that if an employee prefers an overtime schedule,

an employer may lower the regular hourly rate under that schedule, so that after adding in overtime pay of one-and-a-half times the regular rate, the employee receives the same overall compensation that she would receive under a regular schedule: “When an employer changes its shifts schedule to accommodate its employees’

scheduling desires, the employer may reduce the employee pay rate to pay its employees the same wages they received under the former schedule, so long as the rate reduction was not designed to circumvent the provisions (including overtime) of the Fair Labor Standards Act.” Parth, 630 F.3d at 797 (emphasis added). Quoting the Supreme Court, the Ninth Circuit reiterated that “nothing in the [FLSA] bars an employer from contracting with his employees to pay them the same [total] wages that they received previously, so long as the new [hourly] rate equals or exceeds the minimum rate required by the FLSA.” Id. at 801 (Walling v. A.H. Belo Corp., 316 U.S. 624, 630 (1942)).  The Ninth Circuit explained, “employers and employees are generally free to set the pay rates

if minimum wages and overtime payments are paid when due.” Id. at 804 (citing t Walling v.Youngerman-Reynolds Hardwood Co., Inc., 325 US 419, 424 (1945).

The Job Is Similar to a Traveling Sales Position

In Christopher v. SmithKline Beecham Corp., a case of first impression, the Ninth Circuit recently held that, under FLSA, a business can avoid increasing overall compensation for overtime if the job is similar to a traveling sales position. 635 F.3d 383, 395-401 (2011).  It further held that this is true even if the law prohibits “the actual physical exchange of the goods offered for sale” and sales “commitments are non-binding.” Id. at 396. (emphasis in original).

In Christopher, two former pharmaceutical sales representatives (PSRs) filed a class action against a drug  company, alleging that it violated FLSA by failing to pay the PSRs for overtime. The District Court (D. Ariz) granted summary judgment in favor of the company, finding that a PSR is exempt from overtime pay “under the ‘outside salesman’ provision of FLSA.” Id at 398. Under FLSA, minimum wage and overtime pay requirements do “not apply with respect to . . . any employee employed . . . in the capacity of outside salesman.” 29 U.S.C.

§ 213(a)(1).  The Ninth Circuit affirmed. It held that if an employee’s job is more similar than dissimilar to a traveling sales position, an employer does not have to provide overtime pay: “[W]e consider the rationale for applying the outside sales exemption to PSRs to be . . . “apparent.” . . . Of course, this case does not involve door-to-door consumer-product sales. But, the FLSA is not an industry-specific statute. . . . [N]ot all FLSA claims will involve the “archetypal businesses envisaged by the FLSA.” . . .

 Even though PSRs lack some hallmarks of the classic salesman, the great bulk of their activities are

the same, as is the overarching purpose of obtaining a commitment to purchase (prescribe) something….[¶] [PSRs] receive commissions in lieu of overtime and enjoy a largely autonomous work-life outside of an office. The pharmaceutical industry’s representatives – detail men and women – share many more similarities than differences with their colleagues in other sales fields, and we hold that they are exempt from the FLSA

overtime-pay requirement.” Christopher, 635 F.3d at 398-401 (emphasis added) (quoting Reiseck v. Universal Commc’ns of Miami, Inc., 591 F.3d 101, 106 (2nd Cir. 2010)). The Ninth Circuit concluded that whether a job is similar to a traveling sales position “has been recognized as a multifactor review.” Id. at 400. But it explained “that ‘obtaining a commitment to buy’ is the sine qua non [or hallmark] of the exemption” under FLSA. Id.

The Business Is a Payroll Service

In Futrell v. Payday California, Inc., a case of first impression, the California Court of Appeal held that, under FLSA, a business can avoid increasing overall compensation for overtime if it is a payroll service. 190 Cal.

App.4th 1419, 1429-35 (2010). The Court further held that this is true even if the business pays the employee and has a contract with the employee explicitly stating that it is the employee’s employer.  In Futrell, a crewmember for television  commercials filed a class action against his production company and payroll service, alleging that they violated FLSA by not paying an overtime rate for work exceeding 8-hours. The Los Angeles Superior Court granted the payroll service’s motion for summary adjudication, finding that the payroll service (as opposed to the production company) was not the crewmembers’ employer.

The Court of Appeal affirmed. It held that if the only relationship between a business and a worker is that the business prepares the worker’s paychecks, then the business is not liable for the worker’s overtime pay. A business is only liable for a worker’s overtime pay if the business is the actual employer of the worker.

The court explained that whether a business is an employer is determined by an economic reality test:  “An “economic reality test” applies in determining whether a person or entity is an ‘employer’ for purposes of the FLSA.  Under this test a court must consider the totality of the circumstances of the relationship, including such factors as whether the alleged employer had the authority to hire and fire the employee, whether the alleged employer supervised and controlled the employee’s work schedules and the conditions of his or her employment, and whether the alleged employer determined the rate and method of payment and maintained employment records.” 190 Cal.App.4th. at 1430 (emphasis added), citing Bonnette v. California Health and Welfare

Agency, 704 F.2d 1465, 1469-70 (9th Cir. 1983).

Significance

Of course, the Ninth Circuit and California Court of Appeal did not decide these cases to help businesses avoid paying more for overtime during tough economic times. Nevertheless, a business can take solace from the fact that the cases identify exceptions to the general rule that, under FLSA, overtime must increase overall compensation. The cases suggest that the rule does not apply if the overtime schedule is more desirable, the job is similar to a traveling sales position, or the business is a payroll service. More importantly, given the fact that FLSA was enacted in 1938 and most of these exceptions have only come to light since December, 2010, the cases indicate that there are more exceptions yet to be identified.

Audra Ibarra practices in Palo Alto, where she handles civil and criminal appeals, writs and habeas petitions in federal and state courts. For more information, please go to www.aiappeals.com.

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