United States: Another Employer Takes A "Collective" Hit

Last Updated: August 28 2014
Article by Chuck Mataya

Fair Labor Standards Act ("FLSA") "collective action" cases have become big business for plaintiffs' lawyers. A recent decision by the United States Court of Appeals for the Sixth Circuit, Killion v. KeHe Distributors, not only illustrates the point, but also limits the usefulness of one tool employers have begun using to help manage the risks associated with such claims: "collective action" waivers.

In Killion, several former sales representatives of a food distributor sued alleging that it had failed to pay them overtime wages as required by the FLSA. The former employees claimed that the employer had improperly classified each of them as "outside sales employees." When applicable, such exemption relieves an employer of the obligation to pay overtime pay. Of course, if not applicable, the overtime pay obligation would exist. In this case, the employees challenging the employer's use of the outside sales exemption also sought to certify a collective action under § 216 of the FLSA.

A collective action, though not quite the same as a "class action," is the FLSA's mechanism for bringing the claims of multiple employees in one suit. One big difference between a collective action and a class action is that, of those similarly situated to the plaintiff, only those who actually consent to joining the lawsuit will be considered part of the collective. At one time, a plaintiff wanting to bring a collective action would literally need to approach each potential similarly situated plaintiff and ask him to join the suit. In some cases, it was a difficult logistical task. As such, not many suits with really large collectives were filed. Things have changed.

Now, employers are required to help the plaintiff determine the identities of those arguably similarly situated to him so that those persons with potential claims may be notified of the option to join in the suit. In conditional certification, the initial stage of a collective action, only "a modest factual showing" that the plaintiff is similarly situated to others with a potential claim is required. If this relatively easy threshold is met, the employer must provide contact information for each potential plaintiff, and notices are sent en mass to those who may choose to "opt-in" to the lawsuit. Although the certification may be challenged later, the collective process can quickly magnify a relatively small claim.

Some employers have attempted to combat this risk by requiring employees to waive the right to participate in a collective. Under these waivers, an employee typically agrees that any dispute with the employer will be brought individually. In Killion, the employer had taken that step when it included a collective waiver in separation agreements some of the discharged employees had executed. Citing the waivers, the employer argued before the District Court that those employees had waived the right to participate in a collective. The employer also asserted that, in any event, all of the plaintiffs were exempt from the overtime provisions of the FLSA because they were "outside sales employees."

The District Court upheld the validity of the waivers and certified a collective action consisting only of employees not covered by waivers. It made for a small collective. Subsequently, the District Court also granted summary judgment to the employer, holding that all of the plaintiffs were outside sales employees. On appeal, the Sixth Circuit disagreed on both issues.

On the exemption issue, the appellate Court determined that there was sufficient evidence to dispute whether the employees actually performed the duties of outside sales people, specifically, whether sales was their primary duty. Each employee had been assigned several stores of large chain retailers. At their assigned stores, the representatives were responsible for stocking shelves and reordering merchandise whenever a store was low on any of the employer's products. However, as the Court saw it, the employees might not be involved in sales at all.

The Court noted that other employees established the initial relationship with a store, negotiated the parameters of the overarching distribution contract, and determined which products would be sold in the stores. The sales representatives determined the quantity of products to be ordered and transmitted the orders for subsequent delivery to maintain proper inventory levels. While the representatives made a few cold calls to independent stores, it was not a routine occurrence. Noting that exemptions are narrowly construed against an employer, the Court concluded that the issue of whether these employees had outside sales as their primary duty was for a jury to decide.

On the waiver issue, the Court determined the waivers to be invalid essentially because rather than allowing for arbitration, the waivers required each employee to bring a lawsuit for his claim. Reviewing the cases that had upheld the use of collective action waivers, the Court decided that the primary reason those agreements had been enforced was in deference to arbitration's "favored" status, as recognized by the Supreme Court in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 29 (1991). Even then, the Sixth Circuit explained that "an employee can waive his right to a judicial forum only if the alternative forum allow[s] for the effective vindication of [the employee's] claim." Without arbitration in the picture, there was no countervailing federal policy to outweigh an employee's right to bring a collective action under the FLSA.

Employers can learn some valuable lessons from this case. Initially, the case reminds us that an employer accepts a risk when it decides to treat an employee, or group of employees, as exempt under the FLSA. The exemption decision may be subsequently questioned by a disgruntled current or former employee, whether through the Department of Labor or in litigation. Secondly, the relatively easy availability of a collective action compounds the risk. As such, employers should carefully consider whether there exists a sound basis for claiming a specific exemption. If the facts do not weigh heavily in favor of the exemption, perhaps it should not be used. Exemptions will be narrowly construed against an employer; so, close will not cut it. Finally, if an employer is considering the use of collective action waivers, at least in the Sixth Circuit, those waivers should have an arbitration provision in them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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