Second Circuit Rules FLSA Collective Action and State-Law Class Action May Be Brought in the Same Case

Posted on October 19, 2011 by Michael D. Billok

At one point in the Hitchhiker’s Guide to the Galaxy series by British author Douglas Adams, Arthur Dent finds himself confronted by a door that will not open unless he can demonstrate a high degree of intelligence. When Dent somehow manages to possess both tea and no tea at the same time, the door opens, noting that Dent must be quite a philosopher to overcome the inherent contradiction of holding and not holding an item at once.

A recent decision by the Second Circuit is reminiscent of Dent’s feat. In Shahriar v. Smith & Wollensky, the Second Circuit Court of Appeals was confronted with the question of whether plaintiffs could simultaneously maintain a collective action under the Fair Labor Standards Act, as well as a class action based on state-law claims under Rule 23 of the Federal Rules of Civil Procedure. If you are wondering why that poses an issue, in a collective action potential plaintiff class members are not in unless they affirmatively opt in, whereas the plaintiffs in Rule 23 class actions are in unless they affirmatively opt out. As a result, the same person could be both a plaintiff and not a plaintiff in the same action; out of the collective action because she did not opt in, but in the class action because she did not opt out.
 

Despite the many potential consequences of permitting both participation and non-participation by the same person in a single action, the Second Circuit found that there is no inherent conflict in a federal court allowing both a collective FLSA action and a Rule 23 class action asserting parallel state law claims. The defendant argued that permitting a state law opt-out class action to proceed concurrently with the FLSA opt-in collective action would be inconsistent with the opt-in scheme created by Congress. The Second Circuit rejected that argument and found no inconsistency, concluding that nothing in the language of the FLSA or its legislative history indicated a Congressional intent to preclude concurrent class actions on state law claims, and that other circuits had reached the same conclusion. Another factor may have also influenced the Court’s decision. Earlier in the opinion, the Court stated that the potential FLSA plaintiffs may decide not to take the step of affirmatively opting into the collective action out of fear of retaliation, but that the same risk is not posed by participation in an opt-out class action.
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Second Circuit Finds Pharmaceutical Sales Reps Not Exempt Under FLSA

Posted on July 16, 2010 by Katherine A. Ritts

On July 6, 2010, the Second Circuit Court of Appeals held that pharmaceutical sales representatives employed by Novartis Pharmaceuticals Corp. (“Novartis”) are not exempt from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”) as either “outside sales” or “administrative” employees. In so doing, the Court determined that the Secretary of Labor’s interpretations of the regulations promulgated under the FLSA defining “outside sales” and “administrative” employees, as set forth in the Secretary’s amicus brief , were entitled to “controlling” deference.

The Second Circuit rejected Novartis’ argument that its sales reps “made sales” within the meaning of the “outside sales” regulations because the reps only promoted a drug to a physician. They could not lawfully take an order for its purchase or obtain a binding commitment from the physician to prescribe the drug to a patient. While the sales reps provided physicians with free samples, Novartis sold its drugs to wholesalers, which then sold them to pharmacies, and the pharmacies ultimately sold the drugs to the patients who had prescriptions for them. Accordingly, since the sales reps did not “make sales,” they were not “outside salespeople” within the meaning of the FLSA and the regulations.
 

The Court also agreed with the Secretary of Labor that the sales reps were not “administrative” employees under the FLSA because the marketing skills “gained and/or honed” through Novartis training sessions did not demonstrate that the sales reps were “sufficiently allowed to exercise either discretion or independent judgment in the performance of their primary duties.”

Writing for the Court, Judge Amalya L. Kearse acknowledged that a number of federal district courts have held that pharmaceutical sales reps are exempt under the outside sales and/or administrative exemptions, but responded that “[t]hose cases are, of course, not binding on us, and their reasoning does not persuade us that the Secretary’s interpretations of the regulations should be disregarded.” Judge Kearse added, “[t]o the extent that the pharmaceuticals industry wishes to have the concept of ‘sales’ expanded to include the promotional activities at issue here, it should direct its efforts to Congress, not the courts.”
 
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Make Sure Your Unpaid Interns Are Not Employees

Posted on May 6, 2010 by Joanmarie M. Dowling

As summer nears, employers may be asked by college students about unpaid internship opportunities. Unpaid internships frequently benefit both the employer and the student. The student gains real-life experience, resume enhancement, networking opportunities, and perhaps a step toward a paid position after graduation. The employer has a low cost opportunity to evaluate a potential applicant. But employers must exercise caution in the way the internship program is set up and in the functions the intern performs.

The U.S. Department of Labor (“DOL”) recently issued a new Fact Sheet reminding employers that unpaid interns may be “employees” under the Fair Labor Standards Act (“FLSA”), the federal minimum wage and overtime law. For employers considering unpaid internships, the key question is whether the unpaid intern is “suffered or permitted” to work within the meaning of the FLSA. DOL stresses that in the “for-profit” sector, internships will most often be viewed as employment. However, there is a narrow exception for training programs. DOL has identified six criteria which must exist to satisfy the exception:
 

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
     
  2. The internship experience is for the benefit of the intern;
     
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
     
  4. The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded;
     
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
     
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
     

In determining whether an intern is really an employee, DOL distinguishes those experiences that are similar to an educational environment from those that are not. If the program is structured around a classroom or academic experience, the student gets educational credit, or the experience provides skills that could be used in multiple employment settings the intern is less likely to be deemed an employee. If, however, the business is dependent on the intern’s work or the intern is performing productive work, the intern is more likely to be deemed an employee – even if the intern may receive some benefits (e.g., developing a new skill or improving work habits).


Another key consideration is workforce displacement. According to DOL, an intern is an employee if the employer would have employed additional workers or would have required existing employees to work additional hours but for taking on the intern.

A determination that an unpaid intern is, in fact, an employee can have consequences beyond minimum wage and overtime obligations. Discrimination laws, worker’s compensation coverage, state and federal tax laws, employee benefits and unemployment insurance coverage are all implicated in the event of a misclassification. Because the impact of a potential misclassification is so significant, before accepting any unpaid interns an employer, in particular, a for-profit employer, should, at a minimum, take the following steps:

  1. Provide an agreement or letter making it clear there is no pay and no guaranteed job in the future;
     
  2. Adopt a policy that sets up strict supervision of the internship program and the intern and assigns a mentor;
     
  3. Train supervisors and managers regarding the limits of what interns are permitted to do;
     
  4. Ensure the primary benefit of the internship is for the student, not the employer -- minimize assigning the same duties given to regular employees, and do not use interns to displace any employees;
     
  5. Arrange for a structured program of internal and, if possible, external instruction; and
     
  6. If possible, formalize arrangements with the intern’s college or university, and ensure that the work is being done for college credit.
     
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