Take That: Filing Bankruptcy to Block Wage and Hour Suits Against Company Executives! But Will This New Tactic Work to Help or Hurt Executives?

The current sluggish economy and lack of economic growth in the United States have wrecked havoc on companies as consumers spend less and less of their disposable income on non-necessities. Restaurants have seen a substantial decline in their patronage causing many of them to file for bankruptcy protection and otherwise shut their doors for good. The interplay between bankruptcy law and lawsuits against the company--pending and potential--will become an increasingly common concern of employers, employees, attorneys, and judges in 2008 and into the future should the economy not improve with enough speed.

Liquidation (so-called Chapter 7 bankruptcy) and rehabilitation of the debtor (Chapters 11, 12, or 13) are the two basic types of bankruptcy proceedings. While Chapter 7 bankruptcies are the most common type, the sale of debtor's assets and distribution pro rata to properly identified creditors often spells the end of a commercial debtor and hinders an individual's credit for ten years. Many companies prefer to attempt rehabilitation, which allows the debtor to use future earnings to pay off creditors under the supervision of a trustee. Either creditors or debtors can initiate bankruptcy.

A crucial part of a bankruptcy is that once filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding and property of the debtor is not allowed to be transferred. Lawsuits against the debtor that have not concluded are subject to an automatic stay.

Buffets Holdings Inc., owner and/or operator of over 600 restaurants nationwide, filed Chapter 11 bankruptcy on January 22, 2008 because of stresses brought on by the poor economy, with listed assets of $964 million in assets against debt of $1.16 billion. Buffets is attempting to rehabilitate itself through additional financing and other corporate changes so as to ultimately regain its profitability as a restaurant chain should it emerge from bankruptcy.

On March 21, 2008, a Buffets employee, James Harris, filed a wage-and-hour suit on behalf of approximately 780 employees of Buffets who held salaried restaurant management positions against three Buffets' executives for failure to pay overtime and provide meal or rest periods required under California law (the specifics of California Wage and Hour Law has been noted previously in this blog). Buffets, the company, was not named. Buffets filed this declaratory action (click here for Buffets' complaint) on April 21, 2008 to stop Harris' suit as a violation of bankruptcy's automatic stay given that Buffets' bylaws require the company to indemnify officers and directors (such as those named as defendants by Harris) to the "fullest extent" allowed under Delaware law. Buffets also requested injunctive relief in its complaint to prevent Harris or any other proposed class member from suing Buffets on the same factual allegations.

This will be a case to watch for employers and employees alike. A ruling for Harris potentially subjects key executives of employers facing bankruptcy to additional liabilities against which he or she may have no means of adequately protecting himself or herself. This would be a good time to review your insurance policies (D&O, EPL, umbrella, and excess) if you are a director or officer or other covered executive of a company. A ruling against Harris has the potential to leave employees without recourse on employment law violations once an employer has filed bankruptcy. With bankruptcy, timing is often everything, so be alert if economic issues are facing you as an employer or your employer if you are an employee if you have potential claims to raise.

Whose Time Is It?

Update to this blog entry (originally published April 16, 2008): The April 21st edition of the National Law Journal includes an article on this topic. See Blackberrys May Spur Overtime Suits (subscription only). More information to come on this topic.

The Wall Street Journal also comments: Are Blackberrys the Next Battleground in Wage-and-Hour Litigation?

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Electronic connections - PDAs, cellular telephones, email, and even the older forms of communication - have blurred the lines between "work" and "nonwork" activities. Demands for round-the-clock availability, whether generated by the employer or born of employee desires, create new issues under federal and state wage-hour laws.

For nonexempt employees, whether salaried or hourly-paid, the question is relatively simple: If an employee is accessing work-related materials from a remote location, that activity is compensable. Although it may be prudent to establish a policy forbidding employees to check e-mail or make business calls outside normal business hours, that's not the end of the problem. If employees feel pressure to stay in touch, the existence of a written prohibition will not preclude employer liability. The no-overtime policy must be enforced, uniformly and vigorously, if there is to be any hope that time spent in electronic communication won't be paid time. The general rule remains that if the employer "suffers or permits" the employee to work, compensation is required, and if that pushes the employee past 40 hours in a work week, overtime pay is necessary. Employer protestations of lack of knowledge are not persuasive when there are retrievable tracks on the company's server or in the cyber-memories of other company-owned equipment, even though an employer's lack- of records results in the employee's guess being accepted.

Some measure of relief might - the emphasis is intentional - be buried in a January decision of the US Court of Appeals for the Second Circuit, Chao v. Gotham Registry, Inc. (see link: http://www.wcsr.com/resources/pdfs/flsa041608.pdf). The employer was a staffing service which furnished healthcare professionals who usually worked with no supervision or observation by the employer; the only record of time worked came from the professional employees themselves. (Note that the nurses employed by Gotham had been treated as independent contractors until 1992, when USDOL forced a consent decree under which overtime compensation had to be paid to them; use of the word "professional" here is, therefore, not meant to connote that the nurses were exempt salaried personnel.) This time around, two of the three appellate judges on the panel said that Gotham had violated the law again because it didn't do enough; instead, they suggested a variety of enforcement mechanisms to prevent the nurses from working overtime: keeping an "informal tally" and making reassignments, disciplining violators up to and including discharge, and refusing to pay unauthorized overtime. That's right - as Chief Judge Jacobs pointed out in a persuasive dissenting opinion, the employer could satisfy its obligation not to "suffer or permit" unauthorized overtime by violating its obligation to pay for time worked. The only saving grace for Gotham Registry was that it was not found in contempt of the 1992 consent decree. So if one wants to travel close to the brink of the abyss, try this one out and see how well the Department of Labor or the plaintiffs' bar reacts - just say no pay.

Returning to the electronic communications arena, consider the implications of the technological revolution on the exempt white-collar employee. The general rule is, of course, that exemption means the employee can (must) work as many or as few hours in a week as the employer requires (or as the employee wishes, if that's greater than what the employer demands), and that compensation will not vary based on the time worked. Leaving aside the various processes which can vary that model and afford additional compensation to the employee, let's look at the situations in which the employer can legally dock the pay: full days of absence due to personal reasons other than sickness or disability, and full-day absences due to illness in excess of those allowed under a bona fide plan. These exceptions contemplate the employee's performing no work at all that day; part-day absences aren't subject to docking. (The subject of bona fide plans based on hours or part days is far beyond this discussion.) What happens if the exempt employee is taking a personal unpaid day, or has exhausted the bank of sick days and is therefore unpaid? If the employer makes electronic contact, or the employee does so, can the exemption be lost? Is it even possible that an employee could game the system to destroy exempt status and become eligible for overtime pay? Stay tuned as this saga plays on; you may even be able to access it electronically.

Bitter Former Employees Sue The Hershey Company, Finding No Sweetness in Lack of Overtime Pay

The Hershey Company has been sued by former sales representatives in federal district court in the Northern District of California, who allege that they were misclassified and deprived of their overtime pay. The lawsuit alleges that Hershey executives purposefully misclassified the employees in the same manner as the same executives had when at Nabisco Inc. Nabisco paid $5 million to its affected employees after the Department of Labor took action against the company for alleged misclassification of sales representatives. Clearly, Hershey sales representatives are hoping for a similar result in their efforts.

Plaintiffs describe their job duties as merchandising, as opposed to selling products or services. "Merchandising" could be considered a non-exempt position as opposed to strictly sales work, which is not generally eligible for overtime compensation under California or federal law. Hershey's "realigned" its sale force in 2003 and the plaintiffs assert that Hershey's should have known that these changes would require the workers be classified as non-exempt. The DOL's handbook on overtime, can be found by clicking here.

The plaintiffs seek injunctive relief, damages, attorneys' fees and costs and propose a nationwide class of all salespersons employed by Hershey from January 1, 2004 through the present, with a subclass for all California employees of the same class.

The complaint in Campanelli v. The Hershey Company, Case No. CV-08-1862 filed in the United States District Court for the Northern District of California, can be read by clicking here. Employers involved in sales and merchandising should review either themselves or with the aid of counsel the job descriptions for their sales and/or merchandising employees and ensure that they have complied with the FLSA in classifying their employees.

Troubles Continue for Starbucks

For the past few years, Starbucks has contended with large wage and hour class action lawsuits filed by managers alleging they were misclassified as executives exempt from overtime under the FLSA. Now, as reported a few weeks ago, Starbucks' FLSA troubles continue with new wage and hour cases alleging violations of tip sharing regulations. Since the California settlement was reported, new cases have been filed in Massachusetts, Minnesota, and New York. Like the California action filed by Jou Chou, these cases allege that Starbucks' policy of splitting tip pools among baristas and shift supervisors violates applicable laws. The plaintiffs in each action seek to represent thousands of individuals and claim multi-millions of dollars in back wages. We intend to follow these cases on our blog and will keep you posted.

More attacks on overtime practices of mortgage and loan companies

Both the mortgage lender employees of Fidelity Direct Mortgage Corp. and the retail loan officers of a subsidiary of American International Group, Inc. have fired shots at their former or current employers in April for allegedly failing to pay the employees overtime for their extra hours.

On April 2, 2008, Charles Bazier, a former Fidelity employee, filed a FLSA suit in federal district court in southern Florida alleging that he and other employees were not paid overtime for hours since March 2005. The complaint asserts these claims for a class of all similarly situated Fidelity employees in Florida and seeks payment of all overtime, including interest, liquidated damages and attorneys' fees. The case is similar to those filed against Countrywide Home Loans, Inc. in October, and against First United Mortgage Service Corp. in November. Bazier's complaint can be read by clicking here.

On April 4, 2008, Wilmington Finance Inc.'s (a subsidiary of AIG) lost its attempt to decertify a class in a federal district case pending in the Eastern District of Pennsylvania. Judge Norma Shapiro ruled that class treatment of the overtime claims of the plaintiffs, all retail loan officers (past and present) of Wilmington Finance Inc., was "appropriate and desirable" rejecting Wilmington Finance's claims that necessary individual factual determinations would render the case unmanageable. The judge was not persuaded to decertify the class because some plaintiffs admitted to working overtime without their managers' approval. While many of the mortgage broker and other financial industry employee suits have focused on misclassification as the FLSA problem, the Wilmington Finance plaintiffs challenge their employer's record keeping or lack thereof. The judge's ruling to permit class treatment to stand against Wilmington Finance can be read by clicking here.

Lack of records can prove an insurmountable obstacle for employers in FLSA cases and these cases remind employers and their counsel to review timekeeping policies and procedures, as well as document retention protocols, to avoid being hit with a lawsuit that the employer cannot fully defend. Similarly, these cases remind financial sector employers that a thorough review of job descriptions, overtime policies, and other FLSA compliance points could identify and de-fuse problem situations in advance of litigation.

How Sweet It Is

For a circular journey through the court system, consider Chandler v. The Cheesecake Factory. On February 16, 2006, Christopher Michael Chandler sued his employer, The Cheesecake Factory, in the Superior Court of Durham County (NC), claiming to represent both himself and "other similarly situated persons." At issue was the employer's tip pooling policy, which Chandler claimed violated the North Carolina Wage and Hour Act and its regulations pertinent to the subject. On March 24, the employer filed a notice of removal to the US District Court for the Middle District of North Carolina, on the basis that the Fair Labor Standards Act preempted the state regulations since the state statute exempts employees whose employment is covered by the FLSA. Chandler filed a motion to remand on April 3, then amended his complaint the next day to narrow the issues to those governed only by the state's tip pooling regulations. Magistrate Judge Wallace Dixon remanded the case on July 5, saying, "even if Defendant has a valid defense to Plaintiff's state law claim, which requires reference to federal law, this does not mean that Plaintiff's claims 'arise under' the Constitution or the laws of the United States."

Once the case got back to Durham Superior, the employer's motion to dismiss, which had traveled back from federal court with the rest of the file, had to be re-filed; the renewed motion was dated August 7, 2006. Seven months later, Superior Court Judge Ripley Rand denied Chandler's motion for class certification and dismissed the complaint because plaintiff's employment was exempt from state law coverage. Plaintiff appealed.

On March 18, 2008 - more than two years after the suit began, and nearly a year after the trial court's dismissal - a three-judge panel of the North Carolina Court of Appeals rendered an unpublished decision in favor of The Cheesecake Factory. Rejecting plaintiff's highly-technical arguments as semantic quibbles, the court concluded that if the employment relationship was governed by the FLSA and the state tip pooling regulation depended on a state law which was preempted by the FLSA, the facts of the case didn't matter - the state court had no ability to proceed further. See this link for a full-text version.

This seemingly straightforward result - uncomplicated by other issues regarding tipped employees which grow out of differences in the North Carolina and federal minimum wages, a topic well beyond this discussion - was reached only after more than two years in three courts, and substantial expenditures for defense. As we keep saying, there's gotta be a better way!

No April Fool's

Today's posting features two quite-different items, neither of which involves litigation (yet):

The US Department of Labor has published three more opinion letters (2008-1, 2008-2, and 2008-5NA). the second and third are of interest only to public-sector employers, since they deal with employees who substitute shifts and "fire protection and law enforcement personnel performing occasional or sporadic" civilian duties. However, Opinion 2008-1 concludes that purchasing agents for a motor home manufacturer qualify for the administrative exemption, and the reasoning is instructive. The link - www.dol.gov/esa/whd/opinion/opinion.htm - leads you to the DOL website, a very useful resource which you should bookmark; free e-mail subscriptions are also available.

The other news comes from California, where three bills are pending in the legislature which would, if enacted, slow the rush toward a complete abdication of the state's wage and hour laws to the plaintiffs' bar. The most ambitious (and, therefore, least likely to receive serious consideration) is SB 1192, a measure designed to overturn the decision in Murphy v. Kenneth Cole Productions. Murphy, you may recall, dealt with the issue of employees who missed their required meal breaks and were therefore eligible to receive triple back pay plus attorneys' fees. SB 1192 would replace that remedy with a civil penalty only, and would afford the complaining employee only one year, not three, to file suit. Plaintiffs' attorneys are aghast, fearing that the Golden State may not prove as lucrative for them as it has in the past. For a more detailed discussion, see http://employment.law360.com/Secure/printview.aspx?id=51380 (subscription required).