Ohio Court of Appeals Denies Injunction Against Employee Competition

Last month, the Lucas County Court of Appeals affirmed the denial of a preliminary injunction requested by an employer against two former employees who began working for a competitor in violation of their non-compete agreement because the employer could not show any irreparable harm in light of damage to its reputation by the prior termination of a franchise agreement and the fact that it could not identify the loss of any customers because of the former employees. E2 Solutions v. Hoelzer, 2009-Ohio-772.

According to the court’s opinion, the employer had an exclusive franchise agreement with an HVAC equipment manufacturer which accounted for approximately 90% of its business. The manufacturer then terminated the agreement and brought suit in federal court against the employer because: “an audit of company records disclosed what they considered to be a "pervasive pattern of deception to cheat [the manufacturer]" out of "well over $1,000,000" that they claimed had been retained by appellant and were due [the manufacturer].” The manufacturer then opened its own distribution facility and show room. Thereafter, two employees resigned and went to work for a competitor. In doing so, the employees notified two of the employer’s customers and also submitted bids to two of the employer’s customers. The employer brought suit against the two employees and their new employer and sought a preliminary injunction, which was denied.

As noted by the trial court, “The facts demonstrate that proof of any irreparable harm or business loss caused by [the former employees] would be very difficult, particularly in view of the substantial damage to the business by loss of the [manufacturer’s] franchise and damage to its reputation by allegations by [the manufacturer] of fraud. The trial court noted that the allegations of fraud were ‘well known in the business community.’ The trial court concluded: ‘The evidence thus would suggest that, if Plaintiff has suffered a loss of business, [the manufacturer’s] action in canceling the franchise are just as likely, if not more likely, to be the cause of such loss of business.’" In addition, although the employer could show that the employees approached two of its customers, it could not show the loss of any customers as a result of these solicitations. “Under these facts, [the court] conclude[d] that the trial court did not abuse its discretion in denying a preliminary injunction. The trial court reasonably concluded that [the employer] failed to establish by clear and convincing evidence that it would suffer irreparable harm if the injunction did not issue and that [the employer] was likely to succeed on the merits.”

The Court also affirmed the denial of any trade secret claim. First, the employees had never been subject to a confidentiality agreement. In addition, any marketing information which the employees possessed was rendered obsolete by the prior termination of the franchise agreement. Unlike the trade secret product information at issue in Procter & Gamble Co. v. Stoneham (2000), 140 Ohio App.3d 260, this case “concerned company practices in service operations before the termination of the [manufacturer’s] franchise and that [the employer’s] service business has substantially changed because of the [franchise] termination and dispute.” The employee’s “knowledge related to service business and existing building sales when [the employer] was a distributor for [the manufacturer’s] products . . .. Before the franchise termination, as a distributor, [the employer] would make equipment sales on behalf of [the manufacturer] directly to the customer. . . . Now the majority of service work remains work on [the manufacturer’s] equipment. [The employer], however, no longer holds the status of a [manufacturer] distributor to assist in securing sales of service contracts. It purchases parts and equipment for [the manufacturer’s] products used in service just like any contractor in town. The record lacks evidence to indicate that the same marketing strategy or cost structure applied to the service and existing building sales part of the [the employer’s] business after termination of the franchise.”

A plaintiff is required to establish actual irreparable harm or the existence of an actual threat of such injury when the equitable remedy of an injunction is sought. . . . In such a case, proof of irreparable harm must be by clear and convincing evidence. . . . . Such proof is lacking here. This case does not present tangible, highly technical or specific evidence of trade secrets held by either [employee] upon which it could be said that the likelihood of irreparable harm was immediate and concrete as considered by the First District Court of Appeals in Stoneham.

Insomniacs can read the full court opinion at http://www.sconet.state.oh.us/rod/docs/pdf/6/2009/2009-ohio-772.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.

EEOC Announces Record Increase in Filings of Charges of Discrimination

Yesterday the EEOC announced “that workplace discrimination charge filings with the federal agency nationwide soared to an unprecedented level of 95,402 during [the 2008] Fiscal Year” (which ended in September). This is a 15% increase from last year. “The FY 2008 enforcement and litigation statistics, which include trend data, are available online at http://www.eeoc.gov/stats/enforcement.html.”

According to the FY 2008 data, all major categories of charge filings in the private sector (which includes charges filed against state and local governments) increased. Charges based on age and retaliation saw the largest annual increases, while allegations based on race, sex and retaliation continued as the most frequently filed charges. The surge in charge filings may be due to multiple factors, including economic conditions, increased diversity and demographic shifts in the labor force, employees’ greater awareness of the law, EEOC’s focus on systemic litigation, and changes to EEOC’s intake practices.

In particular, there were 95,402 total discrimination charges filed in the last fiscal year (compared to less than 83,000 in FY 2007), including 33,937 race discrimination, 28,372 sex discrimination, 10,601 national origin discrimination, 3,273 religion discrimination, 32,690 retaliation, 24,582 age discrimination, 19,453 disability discrimination and 954 Equal Pay Act Charges filed.

The FY 2008 data also show that the EEOC filed 290 lawsuits, resolved 339 lawsuits, and resolved 81,081 private sector charges. Through its combined enforcement, mediation and litigation programs, the EEOC recovered approximately $376 million in monetary relief for thousands of discrimination victims and obtained significant remedial relief from employers to promote inclusive and discrimination-free workplaces.

Insomniacs can read the full press release at http://www.eeoc.gov/press/3-11-09.html.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.

DOL: Employers Must Pay Employee for Off-Duty Study, But Not for Off-Duty Class Offered by Employer Which Assists Employee Maintain Certifications

The DOL recently published three opinion letters regarding an employer’s obligation to pay non-exempt employees for time they spend studying or performing homework for mandatory and voluntary work-related coursework (both internet courses and in-person seminars). In short, the DOL indicated that employers must pay employees for time they spend studying and performing homework, although the employer could set limits on the amount of time employees are allowed to spend on such activities and discipline employees for violating those time limits. Moreover, even if the training was clearly related to an employee’s job, voluntary participation in coursework outside of working hours need not be compensated if, for example, the course corresponds to courses offered by independent bona fide institutions of learning. Thus, a pre-school which offered voluntary after-hours training to help employees maintain state-required certification – which would assist the employee gain employment at other pre-schools and which corresponded to courses offered at learning institutions– did not constitute compensable hours worked unless the state required the employer to provide the training.

In the first opinion letter, the DOL addressed “whether time spent by employees taking web-based prerequisite classes at home in preparation for a voluntary job-related training class is compensable time under the” FLSA. FLSA Op No. 2009-13 (1/15/09). In that letter, the employer employed “technicians who install, monitor, and service voice and data communications circuits,” including the Tellabs 5500. “Tellabs offers advanced training in the Tellabs 5500 equipment” and the employer hired Tellabs to conduct a voluntary training class during regular business hours for a few of the employer’s “technicians about the Tellabs 5500’s new and advanced features. . . . Technicians who take the class will be compensated for time spent in the class. . . . [However,] Tellabs requires that technicians taking the training class [to] first complete four web-based prerequisite classes. It is expected that the technicians will take the prerequisite classes on their own time at their homes . . . [and] that each prerequisite class will take approximately ten hours to complete.” The question posed was whether the employer was required to pay these technicians for the ten hours spent taking these web-based prerequisite classes from home.

As explained by the DOL, “[t]he FLSA requires than an employer compensate an employee for all hours worked. . . . This rule applies to work performed away from the premises or the job site, including work performed at home. ‘If the employer knows or has reason to believe that the work is being performed, he must count the time as hours worked.” 29 C.F.R. § 785.12.’”

“The Department’s regulations provide that certain training activities need not be treated as hours worked. The general rules for determining the compensability of training time are set forth in 29 C.F.R. §§ 785.27 through 785.32. . . . . As indicated in section 785.27, ‘training programs and similar activities need not be counted as working time if the following four criteria are met’:
a. Attendance is outside of the employee’s regular working hours;
b. Attendance is in fact voluntary;
c. The course, lecture, or meeting is not directly related to the employee’s job; and
d. The employee does not perform any productive work during such attendance.”

The DOL concluded that all but criterion (c) had been met in this situation “because the prerequisite classes are directly related to the technicians’ jobs. Section 785.29 provides that ‘training is directly related to the employee’s job if it is designed to make the employee handle his job more effectively as distinguished from training him for another job, or to a new or additional skill.’ The training classes and the prerequisite classes offer instruction to enable the technicians to perform their present jobs better by giving them greater abilities to use the [Tellabs 5500] network system they are presently using. By making the technicians better able to perform their jobs, the training and the prerequisite classes are directly related to the technicians’ jobs.”

The DOL also noted that none of the available exceptions applied in this situation. For instance, “[s]ection 785.31 states that even if the training is clearly related to an employee’s job, voluntary participation outside of working hours need not be compensated if, for example, the course corresponds to courses offered by independent bona fide institutions of learning. The prerequisite classes, which are focused on learning ways to utilize a particular product, do not appear to correspond to courses offered by bona fide institutions of learning.” Therefore, the DOL opined “that the Company is obligated to compensate technicians for the time they spend at home completing required prerequisite classes in order to take the voluntary but job-related Tellabs training classes.”

In the second opinion letter, the DOL addressed whether “time spent outside normal working hours by city employees studying for city-required training programs, seminars, and classes” constitute compensable hours under the FLSA. FLSA Op. No. 2009-15 (1/15/09). In that letter, the employer city required “certain employees to attend and pass various training programs intended to help the employees become more proficient at their jobs. The city employees attend training during normal work hours. During the training, the instructor informs the employees that they must read and/or study selected material and be prepared to discuss this material during the next class. Employees leave the classroom and go home or to their hotel (if the training is out of town) to study or read the assigned material.”

As indicated above, “[t]he FLSA requires that an employer compensate an employee for all hours worked.” However, under “certain circumstances, time spent by employees of state and local governments attending required training outside of regular working hours is considered to be non-compensable. 29 C.F.R. § 553.226(b). Examples of non-compensable time include time which is required by law for certification of public and private sector employees within a particular governmental jurisdiction (e.g., certification of public and private emergency rescue workers), . . . [or] required for certification of employees of a governmental jurisdiction by law of a higher level of government (e.g., where a State or county law imposes a training obligation on city employees), . . . even if all or part of the costs of the training is borne by the employer. 29 C.F.R. § 553.226(b)(1)-(3).”

Nonetheless, the DOL did not believe that the described training fell “within the regulations governing compensability of training time applicable to employees of state and local governments” and thus turned to FLSA regulations covered training time of private-sector employers [discussed above], “ which are set forth in 29 C.F.R. §§ 785.27 through 785.32.”

Applying the same criteria used in the prior opinion letter, the DOL found that the “time spent participating in the training programs” constituted compensable working hours because criteria (a), (b), and (c) were not satisfied. “Attendance is not voluntary, of course, if it is required by the employer. It is not voluntary in fact if the employee is given to understand or led to believe that his present working conditions or the continuance of his employment would be adversely affected by non-attendance.” 29 C.F.R. § 785.28. Further, “training is directly related to the employee’s job if it is designed to make the employee handle his job more effectively as distinguished from training him for another job, or to a new or additional skill.” 29 C.F.R. § 785.29. As a result, time spent in mandatory training is generally compensable.”

However, “[t]ime spent in outside study is not compensable if the studying is not required by the employer. See Wage and Hour Opinion Letter September 27, 1984 . . . (“Time spent in reading or studying at home would not be compensable hours of work if time is allotted during regular working hours but some employees voluntarily do extra work at home on their own to bolster their ability.”); Wage and Hour Opinion Letter July 17, 1980 . . . (time spent studying after regular working hours, in connection with a training program, is not compensable because the excess study is not required by the employer); Wage and Hour Opinion Letter July 27, 1971 . . . (supplemental after hours reading assignments that are not supervised or tested, and are not necessary to pass the final examination are primarily for the employee’s benefit and may be excluded from compensable hours of work).”

“When completion of homework is a requirement of a compensable training class, however, time spent completing assignments for such training is compensable. Mandatory homework is addressed in Wage and Hour Opinion Letter September 9, 1970 . . . which states,
[t]he employee’s participation in the program, both with respect to classroom work and . . . practice at home, is not voluntary . . . if . . . attendance is required for the continuance of . . . employment and if such . . . practice at home is necessary to qualify under the program. In such a case the time spent in classroom training as well as the time devoted to . . . practice at home would be considered as compensable hours of work which the employer may not disregard in determining the employee’s compensation.

“Therefore, the time spent outside the classroom and after normal work hours completing required assignments, such as the required reading and studying of materials that [are] describe[d], is compensable hours worked.” Nonetheless, the employer could “establish a specific amount of time to be spent completing assignments outside the classroom and after normal work hours.” The DOL “noted in 29 C.F.R. § 785.13:

[I]t is the duty of the management to exercise its control and see that the work is not performed if it does not want it to be performed. It cannot sit back and accept the benefits without compensating for them. The mere promulgation of a rule against such work is not enough. Management has the power to enforce the rule and must make every effort to do so.

“If employees spend more time completing the assignment than allowed by the city, the time may be compensable. See 29 C.F.R. § 785.12. The city could control the study time by allowing the employees a realistic time to complete their reading and study assignment within the class period or within the normal work day. See Wage and Hour Opinion Letter September 27, 1984 .” In other words, the employer must do more than promulgate rules or directions about the amount of study time which will be permitted; it must actively enforce that rule before it will be given weight by the DOL.

In the third letter opinion, the DOL addressed whether “time spent by child care center employees in State-mandated training programs, offered by the employer and required of the employee as a condition of maintaining her State certificate, is hours worked under the” FLSA. In that situation, the employer operates pre-schools and child care “facilities in several states.” “The facilities are licensed by the State and State-certified child care teachers and assistants staff the facilities.” The employer provided “in-service training or continuing education after regular business hours at day care centers in those states that require employees to take such training in order for the employees to maintain their state certification. The courses correspond to those offered by independent bona fide institutions of learning. Attendance at the training is voluntary and employees do not perform work during the training. The teachers and assistants may also attend training offered by other organizations that meet the state mandated training requirements.”

As discussed in the first two letter opinions, the DOL concluded that the employer met all of the criteria, except for criterion (c) because the training was job related. However, unlike the employer discussed in the first letter opinion, this employer fell within the exception:

With respect to criterion (c), 29 C.F.R. § 785.31 provides an exception from the requirement that the training not be directly related to the employee’s job where the training is for the benefit of the employee and corresponds to courses offered by independent bona fide institutions of learning. Voluntary attendance of such training by the employee outside normal working hours would not be hours worked even though the training is clearly related to the employee’s job. . . . . In the child care industry, [the DOL] regard[s] child care training to be for the benefit of the employees when it provides instruction of general applicability that enables an individual to gain or continue employment with any child care service provider. . . . Here, the courses correspond to those offered by bona fide institutions of learning and qualify the employees to gain employment with any child care service provider.

Therefore, the DOL opined “that the time spent by employees voluntarily attending in-service training or continuing education required by the State and provided at your client’s day care center is not hours worked under the FLSA. This is true even if the State requires that individuals may only be employed by the employer if they meet the in-service or continuing education requirements, so long as the State does not require the employer to provide the training.”

Insomniacs can read these letter opinions in full at http://www.dol.gov/esa/whd/opinion/FLSA/2009/2009_01_15_13_FLSA.htm, http://http://www.dol.gov/esa/whd/opinion/FLSA/2009/2009_01_15_15_FLSA.htm.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.

EEOC Announces $50,000 Settlement with Auto Parts Retailer Over Failure to Hire Applicant with Cerebral Palsy Who Successfully Completed Internship.

Yesterday, the EEOC announced that it had reached a settlement with an auto parts retailer – Advance Stores Company, Inc. – where the store agreed to pay $50,000 and “to provide training on an annual basis to all of its managers, supervisors, and employees in its Norton, Va., store; post an employee notice regarding this settlement; and report any allegations of disability discrimination by job applicants at the company’s Norton location to the EEOC.” According to the allegations made in the EEOC’s lawsuit, the store violated the Americans With Disabilities Act when it refused to hire an applicant for a part-time sales position “because he has cerebral palsy. . . . The EEOC said that [the applicant] had successfully completed an internship as a salesperson at Advance Auto’s Staunton, Va., store through a training program in which he participated. The EEOC further charged that despite Sanders’ qualifications and experience obtained through the internship, Advance Auto did not hire him but did hire at least one other person who was less qualified than Sanders.” (EEOC v. Advance Stores Company, Inc. d/b/a Advance Auto Parts, Civil Action 02-08CV00011).

Insomniacs can read the full press release at http://www.eeoc.gov/press/3-9-09.html.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.

DOL Releases New FLSA Opinions from Bush Era Including Letters Addressing Mandatory Use of Vacation or PTO During Temporary Shutdowns

On Friday, March 6, the Wage and Hour Division of the federal Department of Labor announced that it would be posting on its website 36 Administrator opinion letters (as well as and four Non-Administrator opinion letters) that were signed prior the January 21 Obama inauguration. Half of the posted Administrator opinion letters (which are designated with asterisk on the website) were not mailed before the inauguration and are, therefore, being withdrawn for further consideration by the Obama administration (even though they are being made available to the public for review on the website). This site will publish further details about some of the 18 Administrator letters which were both signed and mailed before the Obama inauguration. Today, this will include describing two of the Opinion Letters which address employers mandating use of vacation or Paid Time Off (PTO) during a temporary shutdown or closure of operations as a cost-savings measure during this recession.

In the first letter (FLSA Op. Ltr. 2009-2), the DOL addressed whether an employer “may require exempt employees to use accrued vacation time during a plant shutdown of less than a workweek without violating the salary basis test and thereby affecting their exempt status. The DOL indicated that this practice was permissible and had been approved as early as 2005:

Since employers are not required under the FLSA to provide any vacation time to employees, there is no prohibition on an employer giving vacation time and later requiring that such vacation time be taken on a specific day(s). Therefore, a private employer may direct exempt staff to take vacation or debit their leave bank account . . . , whether for a full or partial day’s absence, provided the employees receive in payment an amount equal to their guaranteed salary.

Wage and Hour Opinion Letter FLSA2005-41 (Oct. 24, 2005); see also 29 C.F.R. §§ 541.600, 541.602(a); 69 Fed. Reg. 22,122, 22,178 (Apr. 23, 2004) (“[E]mployers, without affecting their employees’ exempt status, may take deductions from accrued leave accounts.”). Therefore, the DOL opined “that the employer may require exempt employees to use accrued vacation time for any absence, including one resulting from a plant shutdown, without affecting their exempt status, provided that employees receive a payment in an amount equal to their guaranteed salary.” Notably, however, if “an exempt employee . . . has no accrued [vacation] benefits . . . or has a negative balance . . . [the employee must] still must receive the employee’s guaranteed salary for any absence(s) occasioned by the employer or the operating requirements of the business.” Wage and Hour Opinion Letter FLSA2005-41. In other words, exempt employees are entitled to be paid an amount equal to their full salary for every workweek in which they perform any compensable work (even just a few hours), and that payment may come from their accrued vacation/PTO bank or the employer’s payroll. Thus, if an employer wishes to avoid paying exempt salaries, the exempt employees must be furloughed in full week increments.

Insomniacs can read the full opinion letter at http://www.dol.gov/esa/whd/opinion/FLSA/2009/2009_01_14_02_FLSA.htm.

In contrast to the employer which mandated the use of vacation/PTO during brief plant shutdowns, the next employer sought clarification about whether it could “occasionally reduc[e] the hours worked by exempt employees due to short-term business needs (e.g., low patient census). In such cases, the employer [proposed to] offer[] “voluntary time off” (VTO) [on a first-come-first-served basis], where employees may, at their option, use paid annual, personal, or vacation leave, but continue to accrue employment benefits. . . . If there [were] insufficient volunteers for VTO, the employer [would] require[] “mandatory time off” (MTO) under a seniority-based rotational method. Exempt employees required to take MTO [could] use accrued paid leave or take unpaid MTO. If the employee elect[ed] not to use accrued paid leave or [did] not have sufficient accrued paid leave to cover the VTO or MTO, the employer [would] deduct[] the amount equal to the VTO or MTO from the employee’s salary, if it is shorter than one workweek. . . . [T]he employer does not pay [any] salary for [any] pay period [where the unpaid VTO or MTO lasts an entire workweek]. Salaried exempt employees may take VTO or be assigned MTO in one-day increments.”

The DOL noted that under 29 C.F.R. § 541.602(a), “[a]n employee will be considered to be paid on a 'salary basis' . . . if the employee regularly receives each pay period . . . a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. . . . An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” (emphasis added).

According to the DOL, “salary deductions due to a reduction of hours worked for short-term business needs do not comply with § 541.602(a) because they result from 'the operating requirements of the business.' 29 C.F.R. § 541.602(a). Thus, '[i]f the employee is ready, willing and able to work, deductions may not be made for time when work is not available.' Id . Deductions from the fixed salary based on short-term business needs are different from a reduction in salary corresponding to a reduction in hours in the normal scheduled work week, which is permissible if it is a bona fide reduction not designed to circumvent the salary basis requirement, and does not bring the salary below the applicable minimum salary. See Field Operations Handbook § 22b00; Wage and Hour Opinion Letter FLSA2004-5 (June 25, 2004) (“[R]ecurrent changes in the normal scheduled workweek . . . more likely would appear to be designed to circumvent the salary basis requirement.”). Unlike a salary reduction that reflects a reduction in the normal scheduled work week and is not designed to circumvent the salary basis requirement, deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis requirement is intended to preclude. Therefore, in this instance, salary deductions due to MTO lasting less than a workweek violate the salary basis requirement and may cause the loss of exempt status. The employer is not, however, required to pay the salary for MTO of a full workweek. See 29 C.F.R. § 541.602(a) (“Exempt employees need not be paid for any workweek in which they perform no work.”).” (italics added).

Of course, as already discussed above, “[f]or employees on MTO, the 'employer[], without affecting [the] employees’ exempt status, may take deductions from accrued leave accounts' [i.e., vacation or PTO] provided employees receive their guaranteed salary.” In short, for MTO, as long as the employer pays an amount equal to the employee’s full salary, the employer may make deductions from the MTO employee’s accrued vacation and/or PTO bank without jeopardizing the employee’s exempt status. The employer may not, however, reduce the MTO employee’s salary if s/he has not accrued vacation or PTO.

The DOL also reminded the employer that “[s]ection 541.602(b)(1) states that ‘[d]eductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons.' Salary deductions, therefore, may be made when exempt employees voluntarily take time off for personal reasons, other than sickness or disability, for one or more full days. For instance, an exempt employee paid $500 per week on a salary basis may take VTO for personal reasons for four days in a workweek and receive one fifth of the salary. The employee’s decision to take VTO, however, must be completely voluntary and not “occasioned by the employer or by the operating requirements of the business.” 29 C.F.R. § 541.602(a).” (emphasis added). Therefore, if the employee’s decision to take VTO is entirely voluntary and is not the result of pressure from the employer based on business conditions, the employer may – in addition to taking deductions from the employee’s accrued vacation and/or PTO bank – also make deductions from salary in full-day increments if the employee does not have any accrued vacation or PTO.

Insomniacs can read this opinion letter in full at http://www.dol.gov/esa/whd/opinion/FLSA/2009/2009_01_15_14_FLSA.htm.

If employers shorten an exempt employee’s workweek, the employer could argue that a reduction in salary is permissible. The DOL has approved such realities since at least 1988. (“[W]e have consistently taken the position that a bona fide reduction in an employee’s salary does not preclude salary basis payment as long as the reduction is not designed to circumvent the requirement that the employees be paid their full salary in any week in which they perform work. . . . Consistent with this position, we have stated that a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment.“).

However, there are risks with this as reflected in last October’s decision in Archuleta v. Wal-Mart Stores, Inc. 543 F.3d 1226 (10th Cir. 2008). In that case, Wal-Mart shortened some pharmacists’ workweek during the slow periods each year (i.e., summer) and correspondingly shortened their salary. More problematic, however, was that some store managers informally reduced the workweeks of some pharmacists in order to save money. The District Court entered summary judgment for the employer, but the Court of Appeals reversed as to two plaintiffs in October on the grounds that it was a factual issue whether the store managers were as attempting to evade those two employee’s exempt status by basing their “salary” on hours worked.

The Court of Appeals had earlier held that “an employer could prospectively change its employees’ salaries without defeating the exemption for professionals . . . unless the purported ‘salary’ becomes a sham—the functional equivalent of hourly wages. . . . “If . . . the salary changes are so frequent as to make the salary the functional equivalent of an hourly wage, [the court] will treat the ‘salary’ as a sham and deny the employer the FLSA exemption for professional employees.”

According to the court’s opinion:

“in response to Plaintiffs’ theory—that Wal-Mart prospectively changed their base hours, on which their salary was calculated, with such frequency so as to make them, in effect, hourly employees—Wal-Mart presented a report summarizing the number of times it changed Plaintiffs’ base hours during the time period relevant to this case. That report indicated that 75% of the 573 Plaintiffs, or 432, did not experience any change in their base hours.8 Of the Plaintiffs who did experience a change in their base hours, 99 Plaintiffs, or just over 17%, experienced only one such change. Twenty-four Plaintiffs, or 4.2%, experienced two changes. But “the average length” of time “over which those two changes occurred was four years and seven months,” and the “average time between those two changes was 11.3 months. The shortest time between those two changes was eight weeks (for two pharmacists).” Aplt. App. at 269. Two such changes during this time frame are not sufficient to defeat an otherwise valid exemption. . . .
.
Wal-Mart’s report indicated that it had changed the base hours for eight Plaintiffs three times during the relevant time period. But “[t]he average length” of time over which these changes occurred “was four years and five months,” and “[t]he average length of time between those changes was 10.3 months.” Aplt. App. at 270. “The shortest time between those changes was six weeks (for one pharmacist).”

In addition, two Plaintiffs experienced four changes in their base hours. “[T]he average length” of time over which these four changes occurred, however, “was four years and six months,” and “[th]e average time between those four changes was 7.8 months. The shortest time in between those changes was ten weeks (for one pharmacist).” Id. For that one pharmacist, the report indicated that, after employing that pharmacist from August 29, 1993 through February 5, 1998, Wal-Mart changed the pharmacist’s base hours on January 6, 1995; January 5, 1996; March 15, 1996; and October 26, 1997. “For the other pharmacist who experienced four base hour changes during his relevant period (four years and eight months), the time between each of those changes was 12 weeks or longer.” Id. at 271. We conclude that the frequency of these prospective changes was not sufficient to create a factual dispute as to whether Wal-Mart was, in fact, treating these pharmacists as hourly employees.

However, “there were many other instances in which Wal-Mart ‘informally’ or verbally changed a pharmacist’s base hours. In support of this allegation, Plaintiffs offered the affidavits of twenty-one plaintiff-pharmacists. Only eight of these twenty-one pharmacists specifically mentioned experiencing one or, at most, two changes in their base hours. This evidence is insufficient to create a factual dispute as to whether Wal-Mart was treating these pharmacists as hourly, rather than salaried, employees.”

Insomniacs can read the court’s full opinion at http://www.ca10.uscourts.gov/opinions/07/07-1065.pdf. Insomniacs can review the index of all of the 2009 FLSA opinion letters at http://www.dol.gov/esa/whd/opinion/flsa.htm.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.