Originally published in In-House Litigator, Volume 22, Number 4, Summer 2008. © 2008 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Litigation over misclassification of employees under wage and hour laws is one of the largest growing areas of employment litigation. Much of this activity is class litigation, with representative plaintiffs initiating lawsuits on behalf of hundreds or even thousands of coworkers. According to one recent report, wage and hour collective actions generated more rulings in 2007 than class actions for employment discrimination or under the Employee Retirement Income Security Act.1
A job category that has been targeted for particularly close scrutiny under wage and hour laws is information technology (IT) positions. Seemingly every few days there is news of a new wage and hour lawsuit involving IT employees who claim they were misclassified and wrongfully denied overtime. For instance, IT employees of Baker Hughes Oilfield Operations recently filed a lawsuit in a federal district court in Texas, on behalf of themselves and other employees whom they claimed had been misclassified as exempt from overtime. In allegations typical of such lawsuits, the employees claimed that they merely solved computer glitches and fixed equipment, and so should have been classified as non-exempt and paid overtime.2 This article seeks to provide in-house counsel with an overview of the law underlying these cases as well as information and strategies to assist in avoiding or, if necessary, facing down such litigation.
Class Actions And IT Employees
The trend of challenges to the exempt classifications of IT professionals started during the technology boom of the 1990s and has only increased with the continuing growth in computer-related industries and positions. Some plaintiffs' law firms specifically target salaried computer professionals as potential class action participants, via media campaigns and online advertising. For instance, one national law firm touts its extensive experience in successfully seeking overtime compensation for IT workers, including system administrators, web administrators, help desk support workers, and systems analysts, and encourages current and former tech workers to "report in confidence their work experiences."3
Wage and hour class actions may be brought under federal or state law, or both. The federal law governing such claims is the Fair Labor Standards Act (FLSA),4 which is applicable to virtually all employers. In addition, some states have their own wage and hour laws governing such claims. Some state wage laws, particularly the California Labor Code, place significantly more stringent requirements on employers than federal law does. It is no coincidence, then, that many of the headline-grabbing settlements in wage and hour cases arise from California litigation.
Plaintiffs proceeding under state wage laws typically initiate wage and hour class litigation under Federal Rule of Civil Procedure 23, which allows for an opt-out process, whereby anyone who does not wish to be part of the class must withdraw from it. This maximizes the number of people in the class and the size of the recovery, as almost all employees in the targeted job category will be bound by a Rule 23 order. By contrast, in collective actions under section 216(b) of the FLSA, if the court certifies the class, members must opt in to participate. An employer's exposure is typically significantly reduced in a 216(b) scenario as opposed to under Rule 23, as it has been estimated that no more than 20 percent of the eligible workforce in a case are likely to participate in an opt-in proceeding.5 Plaintiffs also have the option of bringing claims under both federal and state law, creating what is known as a "hybrid" class action.
Factors contributing to the popularity of exemption lawsuits include the availability of liquidated damages under the FLSA and state law (meaning that backpay awards are typically doubled),6 automatic recovery of attorney fees for plaintiffs who prevail, and the ease with which plaintiffs can point to a single, undisputed practice or policy (namely, an exempt pay designation) that instantly encompasses an entire category of employees. For this last reason, it is fairly easy for plaintiffs to obtain at least a conditional certification of a collective action under the requirements of federal law requiring a showing of "similarly situated" employees. Plaintiffs also benefit from the complexity of the FLSA and the uncertainty caused by the relative dearth of case law in most jurisdictions on the overtime exemptions. In many instances, the facts and legal issues being debated in exemption litigation have never been presented to a court or the U. S. Department of Labor for review. This is especially true with relatively new kinds of jobs, such as those found in the IT field. Employers are understandably uncomfortable being in the position of possibly making new law, and plaintiffs' attorneys are well aware of this fact and take full advantage of it in settlement negotiations. Finally, IT workers in particular are targeted as potential litigants because these workers are frequently paged during breaks and after regular work hours to address emergency issues and, for that reason, may work significant amounts of overtime.
Wage and hour class actions, once certified, present a troubling dilemma for employers. Such actions are very costly to defend, with the employer defendant typically bearing the lion's share of potentially enormous discovery costs. Nor does settlement come cheap. In January 2007, a California district court granted final approval of a settlement of $12.8 million for technology workers employed by Wells Fargo.7 The case involved the claims that salaried employees with the job titles of "business systems consultants" and "business systems analysts" who worked for the firm between 2001 and 2006 producing automated versions of paper forms and performing other "routine production" duties were misclassified as exempt from overtime pay.8 Other notable recent settlements include $65 million approved by a Northern California District Court in January 2007, to settle the claims of approximately 37,000 system administrators, network technicians, and other technical staff of IBM.9
The Computer Employee Exemption
The FLSA and state wage laws establish minimum wage and overtime standards, while also exempting certain employees from these requirements.10 The core question in any IT employee misclassification case is whether the positions at issue qualify for exempt status. Prior to 2004, employees who used computers could be classified as exempt from overtime under the FLSA only if they qualified for one of the so-called "white collar" exemptions: executive, administrative, or professional. All of these exemptions require a fixed salary and the exercise of discretion and independent judgment in carrying out the duties of the position. In addition, exempt executive employees must supervise other employees, whereas exempt professional employees typically must possess an advanced degree. In the 1970s and 1980s, computer employees were typically divided between "programmers" and "analysts," who had obtained advanced degrees and therefore qualified for the professional exemption, and "key punch" or data entry employees, who were typically deemed nonexempt. However, in the late 1980s and 1990s, with rapid development of the IT industry and the increasing role of computers in just about every kind of organization and the attendant increase in computer-related positions, it became clear that the realities of the workplace had overwhelmed the antiquated, industrial-era wage and hour regulations. The old programmer/data entry dichotomy was no longer a helpful guide. Employers began to rely more frequently on the administrative exemption to classify IT employees but were limited by the exemption's salary-basis requirements as well as the discretion and independent judgment requirement, which excluded employees engaged in high-level systems analysis or programming work who were not managing projects or making policy decisions. The administrative exemption also failed to cover highly skilled yet nonexempt "production" work11 (such as designing software for sale to the employer's customers).
In 2004, partly in reaction to these changes in the American workplace, the Department of Labor revised the FLSA to create a separate exemption for computer professionals.12 To qualify for the computer employee exemption, the employee must be compensated on either a salary or fee basis at a rate of not less than $455 per week or, in the case of an employee who is compensated on an hourly basis, not less than $27.63 an hour.13 In addition, "the exemptions apply only to computer employees whose primary duty consists of" the following:
- The application of systems analysis techniques and
procedures, including consulting with users, to determine
hardware, software or system functional specifications;
- The design, development, documentation, analysis,
creation, testing or modification of computer systems or
programs, including prototypes, based on and related to user
or system design specifications;
- The design, documentation, testing, creation or
modification of computer programs related to machine
operating systems; or
- A combination of the aforementioned duties, the
performance of which requires the same level of
skills.14
The Department of Labor intentionally avoided citing specific job titles as examples of exempt computer employees in light of rapidly changing technology and terminology in the computer field. Clearly, however, the computer employee exemption is applicable only to a narrow range of high-level, highly skilled jobs. It nevertheless covers positions missed by the other white-collar exemptions in that it does not require an advanced degree (or any academic degree), supervision of other employees, or the exercise of discretion and independent judgment, and may encompass production work. In addition, this exemption offers the flexibility of an hourly pay option, thus including employees who work part-time or flexible schedules or on a consulting or project basis.
It is important for employers to understand that while the Department of Labor has not spelled out all of the kinds of positions to which the computer employee exemption might apply, it has made some statements regarding categories of IT positions to which the exemption does not apply. For example, federal regulations state that the computer employee exemption does not apply to employees whose work is highly dependent upon, or facilitated by, the use of computers (i.e., engineers, drafters, and others skilled in computer-aided design software), or to employees engaged in the manufacture or repair of computer hardware and related equipment.15 The Department of Labor has also issued an opinion letter taking the position that employees whose primary duties consist of educating and assisting computer users, such as "troubleshooters" or help desk personnel, generally do not qualify for the computer employee exemption.16 The department explained that such employees usually cannot meet the primary duty test of the exemption because their duties do not include actual analysis of the employer's computer systems. Likewise, the department has opined that IT support specialists who spend a majority of time "conducting problem analysis, and researching and resolv[ing] complex problems" do not meet the computer employee exemption because such positions do not require development and analysis skills.
Only a few courts have considered the relatively new computer employee exemption, with mixed results. In Martin v. Indiana Mich. Power Co.,17 for example, a computer help desk employee who provided computer maintenance and support was deemed not covered by the computer employee exemption. The employee did not do computer programming or software engineering, nor did he perform systems analysis, which would involve making actual analytical decisions about how the company's computer network should function. Instead, he was responsible for installing and upgrading hardware and software on workstations, configuring desktops, checking cables, replacing parts, and troubleshooting problems, all of which was held to be nonexempt work. By contrast, in Berquist v. Fidelity Information Services,18 a Florida federal district court ruled that the computer employee exemption was applicable to an employee whose primary duties consisted of designing, developing, and modifying programs, requiring application of a high degree of specialized knowledge.
The Administrative Exemption
For some categories of IT employees, the exempt category most likely to apply may still be the administrative exemption. With respect to the duties requirements for the administrative exemption, the regulations require that an employee's primary duty be "the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers" and the employee's primary duty must include "the exercise of discretion and independent judgment with respect to matters of significance."19 It is important for employers seeking to fit their employees into this classification to understand the true parameters (and limitations) of the administrative exemption. First of all, as previously explained, the exemption will not apply to IT employees who are engaged in production work. The principle is illustrated in Eicher v. Advanced Business Integrators,20 in which a California appellate court ruled that an employee of a software company whose duties included installing and customizing the company's software product for customers and training customers on how to use the product, was not an exempt administrative employee. The court in Eicher ruled that because the employee worked on the core product of his employer's business— software—he was a "production" worker and therefore could not be classified as exempt. Employers in the software, hardware, and wi-fi industries, some of whose IT employees may be "production workers" similar to the employee in Eicher, need to be particularly mindful of the distinction between production and administrative work.
It is also important to remember that an employee will not qualify for the administrative exemption merely by performing exempt administrative work. In addition, the employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.21 Factors to consider when determining whether an employee exercises discretion and independent judgment with respect to matters of significance include whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree, even if the employee's assignments are related to operation of a particular segment of the business; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; whether the employee has authority to negotiate and bind the company on significant matters; whether the employee provides consultation or expert advice to management; whether the employee is involved in planning long- or short-term business objectives; and whether the employee investigates and resolves matters of significance on behalf of management.22
Federal regulations further state that the "exercise of discretion and independent judgment implies that the employee has authority to make an independent choice, free from immediate direction or supervision."23 The regulations also emphasize that "the exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards," and that it "does not include clerical . . . work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work."24 This is an extremely important point, particularly with respect to IT positions. It means that, even if the task an employee is charged with completing is complex and requires a high level of skill to execute, and even if the task is very important to the organization, if the employee is merely applying preset rules and procedures to the issue presented, without the need, opportunity, and/or authority to deviate from these standards, the administrative exemption will not apply.
The issue of the applicability of the administrative position to IT personnel was addressed in some detail by the Department of Labor in a recent opinion letter. Asked to evaluate the status of an "IT Support Specialist" position, the department's administrator noted that "[t]he fact that work may be unusually complex or highly specialized along technical lines, or that significant consequences or losses may result from improper performance of an employee's duties, do not automatically qualify the work as being significant to the management or general business operations of an employer."25 The department further opined that, though a job may be viewed by an employer as "indispensable," it is not necessarily exempt, specifically stating that "although the upkeep of a computer system may be viewed as essential to an employer's business operations, the nature of the individual employee's particular work, and not the possible results or consequences of its performance, is the focus of the analysis for determining an employee's exempt status." Finally, the department pointed out that "performing highly skilled technical work in troubleshooting computer problems does not, by itself, demonstrate the exercise of discretion and independent judgment with respect to matters of significance."
Courts have also considered the administrative exemption as applied to IT employees. In Bohn v. Park City Group, Inc.,26 the court held that there was not enough evidence in the record to support a finding that a computer professional was exempt from the FLSA. The court noted that even though the plaintiff's salary was sizeable, because he testified that much of his time was spent in routine clerical tasks, the employer failed to meet its burden of proof that the employee was exempt. Likewise, in Turner v. Human Genome Science, Inc.,27 computer system support technicians were deemed not exempt because their primary duties, providing technical support by loading, monitoring, and troubleshooting general software programs, failed to satisfy the duties test for the administrative or any other exemption.
However, in Combs v. Skyriver Communication,28 a California appellate court recently upheld a trial court's ruling that a start-up company's director of network operations was exempt from overtime pay under the administrative exemption. The employer in Combs was a start-up broadband Internet service provider that used an Internet network to sell its broadband services to customers. The employee, who held the title of "Director of Network Operations," testified at trial that he spent 60–70 percent of his time maintaining the well-being of the network. His tasks included overseeing day-to-day network operations, management of the integration and standardization of the company's networks, and reporting to the board. As with many start-up companies, the employee wore many hats and, in addition to performing high-level, discretionary functions, also performed the same tasks that would have been performed by nonexempt entry-level employees at a larger company. The court held that the fact that the employee was ultimately responsible for maintaining and improving the employer's network systems function was overriding and that, therefore, the employee had been correctly classified as an exempt administrative employee.
The fundamental question underlying administrative classification of an IT employee is whether the employee has true decision-making authority and accountability for some aspect of the employer's operations, or whether he or she merely applying an (albeit advanced) skill set to certain (albeit complicated) tasks, while someone else (such as a supervisor or department head) takes care of the "big picture" issues. Another very important concept to keep in mind is that of "primary duty." An employee must regularly spend a significant portion of his or her time performing exempt work to qualify for an exemption, and this is true of the computer employee exemption as well as the administrative exemption. For instance, an employee who mainly performs troubleshooting duties but is occasionally assigned projects involving exempt work (such as programming, designing software, or making significant financial decisions regarding purchase of equipment) most likely will not qualify as exempt, regardless of the importance of these isolated projects, because the exempt work is not his or her "primary duty."
Avoiding And Defending Wage And Hour Litigation
The best way of dealing with wage and hour litigation, obviously, is avoiding it altogether. In-house counsel are advised to take the lead in spearheading periodic internal audits of the company's classification of IT positions. Such audits should take into account differing standards in federal law and the wage and hour laws of any states in which the company has employees, bearing in mind that a position might qualify as exempt in one jurisdiction but not in another. The first order of business in such an audit is to review job descriptions and interview the management employees most knowledgeable about their employees' job functions.29 Job descriptions should be revised to reflect current actual job duties for all employees—constant revisiting of job descriptions is particularly crucial in the rapidly changing world of IT. If employees are performing exempt functions, the functions should be listed at the top of the job description. Employees who have been classified as exempt who clearly do not meet the requirements (such as help desk workers, equipment repair personnel, personnel not meeting minimum salary or hourly pay requirements) should be promptly reclassified.
Despite the most diligent auditing efforts, some IT positions will stubbornly remain in a gray area. For these, it is a good idea to conduct a cost/benefit analysis to determine whether it is worth the risk of classifying such positions as exempt. Are the arguments in favor of the exemption relatively weak or outweighed by the arguments on the other side? Can the positions be converted to nonexempt hourly positions without resulting in significant additional expenditures for overtime? If the answer to either question is yes, reclassification is probably the best and certainly the safest course. If widespread reclassification has a significant economic downside, however, it may be worth it to take a chance, providing there are at least some factors supporting an argument in favor of the exemption. Employers choosing this course should consider consulting with outside labor and employment counsel for a second opinion regarding the merits of the proposed classification and the magnitude of the risk. Another option is to seek a formal opinion letter, from outside counsel, or even from the U.S. Department of Labor or a state department of labor. Such efforts will not immunize a company from being sued or even from receiving an adverse ruling in an exemption case, but they may reduce or even eliminate damages under certain "good-faith" defenses available under state and federal law.30 Indeed, even wholly internal audits and evidence of thoughtful discussions within a company demonstrating attempts to understand and correctly apply exempt classifications may be offered as evidence that a company did not act willfully in misclassifying its employees, further reducing potential damages. The worst thing an employer can do is keep its head in the sand regarding classification issues. Ignorance of the law is no defense in the wage and hour arena.
For employers already facing wage and hour litigation, the question becomes whether to settle or fight. Wage and hour class actions are so costly to litigate, even employers who feel strongly that they have classified their employees correctly enter settlements prior to receiving a ruling from the court on the exemption issue, simply to stop the bleeding. Early settlements may be a cost-effective solution in the short term. However, employers should bear in mind that, unless a settlement payout is accompanied by a reclassification of the targeted position, the same category of employees (indeed, the very same individuals) who sued and collected a nice windfall for minimal effort can turn around and do it again a few years down the line. The tendency of employers to settle wage and hour litigation also contributes to the problem that fuels this type of litigation to begin with, namely, the uncertainty engendered by the lack of binding legal authority on exemption issues. Indeed, the constant threat of wage and hour class litigation may eventually render perfectly legal exemptions essentially useless to employers who are too afraid to use them.
Employers who are willing to aggressively use the exemptions set forth in the law may wish to take a similarly aggressive approach to litigation and consider the merits of investing the resources necessary to see a meritorious exemption case through to the end, including an appeal, if necessary. A favorable ruling means that the employer is free to continue to classify the subject employees as exempt, with the attendant cost savings, for the foreseeable future, and is unlikely to be sued again regarding the issue, at least in the jurisdiction in which the opinion was rendered. If the court rules against the employer, at least the guesswork is over and the state of the law becomes a known quantity that the employer can factor into future business decisions. Another point to consider is that a court decision tends to level the playing field by forcing all employers within the jurisdiction (including the targeted employer's competitors) to classify their own employees in accordance with the dictates of the court's ruling.
Footnotes
1. See Seyfarth Shaw, Annual Class Action Report, 2007 ed., available at http://www.seyfarth.com/index.cfm/fuseaction/publications.publications_detail/object_id/375370ea-8813-4bb1-b964-5452548ad24a/SeyfarthShawClassActionReport2008Edition.cfm.
2. See Dreyer v. Baker Hughes Oilfield Operations, Inc., Case No. 4:08-cv-01212 (S.D. Tex. filed Apr. 21, 2008).
3. See the website of Lieff Cabraser Heimann & Bernstein, LLP, for cites to settlements in 2006 and 2007 of $26 million, $12.8 million, and $7.5 million in class actions involving IT employees, available at http://www.lieffcabraser.com/itovertime.htm.
4. See 29 U.S.C. § 201.
5. Bettina W. Yip, Daniel Turner, and Anthony Collins, Defensive Strategies for Preventing Certification of Wage and Hour Class Actions, Nat'l Conf. on Equal Emp. Opportunity L., at 2, n.2 (Mar. 23, 2006).
6. Massachusetts recently enacted an amendment to its wage and hour statute providing for trebled backpay awards in wage and hour cases. See S. 1059 (Mass.), amending Mass. Gen . Laws ch. 149, §148.
7. See Gerlach v. Wells Fargo & Co., Case no. 05-cv-00585-CW (N.D. Cal.).
8. Plaintiffs sued under both state and federal law, and California workers received larger shares than employees in other states, presumably because of differences between California law and the FLSA or other state statutes regarding eligibility for, and calculations of, overtime pay.
9. Rosenburg v. IBM, Case No. C06- 0430-PH (N.D. Cal.).
10. The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. In situations in which state or local governmental laws provide greater protections to workers than the FLSA, the state or local law governs. 29 U.S.C. § 218(a).
11. To qualify for the administrative exemption, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment. 29 C.F.R. § 541.201(a). This concept, known as the "production worker dichotomy," draws a distinction between production employees (whose primary duty is to produce the commodity, whether goods or services, of the business) and administrative employees (whose work relates to general business operations; in other words, the "behind the scenes" running of the business).
12. See Dep't of Labor, U.S. Wage and Hour Division, Fact Sheet #17E: Exemption for Employees in Computer-Related Occupations under the Fair Labor Standards Act (FLSA), Nov. 2007.
13. See 29 C.F.R. § 541.400(b). California law also contains an exemption for computer professionals, with more stringent requirements than its federal counterpart, including a discretion and independent judgment requirement and a variable minimum hourly rate higher than the federal rate, which is amended yearly. See Cal. Lab. Code § 515.5. The minimum hourly rate for work performed in 2007 was $49.77, whereas the rate for work performed in 2008 is $36.00.
14. Dep't of Labor, Fact Sheet #17E, supra note 12.
15. See U.S. Dep't of Labor, Field Assistance Bull. No. 2006-03 (Dec. 14, 2006) (citing 29 C.F.R. § 541.42).
16. Dep't of Labor, Wage & Hour Opinion Letter FLSA 2006-42 (Oct. 26, 2006).
17. 381 F.3d 574 (6th Cir. 2004).
18. 399 F. Supp. 2d 1320 (M.D. Fla. 2005).
19. 29 C.F.R. § 541.200(a).
20. 151 Cal. App. 4th 1363, No. CV51746 (June 12, 2007).
21. 29 C.F.R. § 541.202(a).
22. 29 C.F.R. § 541.202(b).
23. 29 C.F.R. § 541.202(c).
24. 29 C.F.R. § 541.202(e).
25. Dep't of Labor, Wage & Hour Opinion Letter FLSA 2006-42 (Oct. 26, 2006).
26. 94 F.3d 1457 (10th Cir. 1996).
27. 292 F. Supp. 2d 738 (D. Md. 2003).
28. 159 Cal. App. 4th 1242 (Jan. 2008).
29. A word of caution, however: Auditors should listen to management with an objective perspective, because many managers will "advocate" for the exempt status of their employees, to preserve their current labor costs and avoid paying overtime and in the belief that exempt status is a badge of merit for individuals whom they view as outstanding employees.
30. See 29 U.S.C. §§ 255(a), 259, 260.
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.
