Santa Claus, The Employee

My annual re-post of a very clever article analyzing the FLSA and Jolly Ol' Saint Nick, by Natalie F. Hrubos, an attorney in the Philadelphia office of Duane Morris. The original article can be found here: http://www.duanemorris.com/articles/santa_and_the_FLSA_4698.html

Delivering presents to the well-behaved children all over the world in a single night is hard work. Sure, Santa Claus makes it look easy with his jolly disposition, magical sleigh and team of eight flying reindeer. But does that mean he is any less entitled to compensation? Of course not! Let's just assume that Santa's employer—the North Pole, obviously—is covered by the Fair Labor Standards Act (FLSA). To comply with the law, the North Pole, like any other employer, has to ask itself certain questions.

First, is Santa's position exempt or nonexempt? There's no doubt that Santa works more than 40 hours per week during the holiday season. Think of all the letters pouring in from kids across the globe. Think of how much time it takes to figure out who's been naughty and who's been nice. The guy sees you when you're sleeping. If Santa's nonexempt, the North Pole owes him some serious overtime.

Santa may qualify for one of the FLSA's white-collar exemptions. For instance, Santa likely meets the duties test of the executive exemption if his primary duty is managing the North Pole enterprise: He customarily and regularly directs the work of at least two or more full-time elves, and he has the authority to make employment decisions, such as when to promote someone to lead reindeer. But if it's really Mrs. Claus and the head elf who perform these duties, then Santa likely does not qualify for the executive exemption.

Santa may, however, qualify for the administrative exemption. He probably meets the duties test for this exemption if his primary duty is the performance of office or non-manual work that is directly related to the management of the North Pole or its general business operations and if his work involves the exercise of discretion and independent judgment with respect to matters of significance.

Who goes on what list (naughty or nice) is certainly a matter of significance for the North Pole. But how clean must a child's bedroom be to earn her a spot on the nice list? How often must she share her toys with her siblings? And what if she tells the truth most, but not all, of the time? Santa necessarily uses his discretion and independent judgment when making these determinations.

That said, to qualify for the exemption, Santa's primary duty must be the performance of office or non-manual work. Traveling from house to house, sliding down chimneys and placing presents under Christmas trees would surely be considered nonexempt, manual work. But Santa does that only one night per year. Responding to letters from children could qualify as office work, but is that Santa's primary duty and is it directly related to the running or servicing of the North Pole's business? If either answer is "No," Santa may not qualify for the administrative exemption.

The reality is that even though the North Pole may pay Santa on a salary rather than an hourly basis, that doesn't mean Santa qualifies as exempt from the FLSA. If he doesn't meet the duties test for one of the FLSA exemptions, Santa is nonexempt and must be paid overtime compensation for every hour he works over 40 hours per week.

If Santa's position is nonexempt, then his Christmas Eve responsibilities present a number of additional compensation issues, such as whether the North Pole has to provide and/or pay Santa for his milk-and-cookie breaks; whether Santa is "on the clock" when he's using his iPhone to check in with the head elf; and whether his travel time to and from the North Pole and from house to house is compensable.

In some cases, the law of the North Pole may be more restrictive than the FLSA, and Santa's employer will be required to comply with whichever law is more beneficial to employees. The same is true with state law. For example, if a certain state requires employers to provide meal breaks, an employer is required to comply with the state law even though federal law does not impose such a requirement.

It doesn't take three wise men to figure out that an underpaid Santa Claus could put a real damper on the holiday season. Even if you're not the North Pole, you don't want to be on the wage-and-hour naughty list. Much like Santa, costly wage-and-hour lawsuits keep coming to town, so you may want to consider checking with counsel on how best to review and, if necessary, correct your pay practices. Happy holidays!

Please Note: This Blog is made available by the lawyer publisher for educational purposes only as well as to give information and a general understanding of the law, not to provide specific legal advice. By using this Blog site you understand that there is no attorney client relationship between you and the Law Office of Elizabeth Van Moppes. The Law Office of Elizabeth Van Moppes is not in control of the linked sites and is not responsible for the contents of any linked site. This Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Elizabeth Van Moppes is licensed to practice law in the State of Washington only.

Santa and the FLSA

Reposting a very clever and important article written by Natalie F. Hrubos, an attorney in the Philadelphia office of Duane Morris. The original article can be found here: http://www.duanemorris.com/articles/santa_and_the_FLSA_4698.html

 

Delivering presents to the well-behaved children all over the world in a single night is hard work. Sure, Santa Claus makes it look easy with his jolly disposition, magical sleigh and team of nine flying reindeer. But does that mean he is any less entitled to compensation? Of course not! Let's just assume that Santa's employer—the North Pole, obviously—is covered by the Fair Labor Standards Act (FLSA). To comply with the law, the North Pole, like any other employer, has to ask itself certain questions.

First, is Santa's position exempt or nonexempt? There's no doubt that Santa works more than 40 hours per week during the holiday season. Think of all the letters pouring in from kids across the globe. Think of how much time it takes to figure out who's been naughty and who's been nice. The guy sees you when you're sleeping. If Santa's nonexempt, the North Pole owes him some serious overtime.

Santa may qualify for one of the FLSA's white-collar exemptions. For instance, Santa likely meets the duties test of the executive exemption if his primary duty is managing the North Pole enterprise: He customarily and regularly directs the work of at least two or more full-time elves, and he has the authority to make employment decisions, such as when to promote someone to lead reindeer. But if it's really Mrs. Claus and the head elf who perform these duties, then Santa likely does not qualify for the executive exemption.

Santa may, however, qualify for the administrative exemption. He probably meets the duties test for this exemption if his primary duty is the performance of office or non-manual work that is directly related to the management of the North Pole or its general business operations and if his work involves the exercise of discretion and independent judgment with respect to matters of significance.

Who goes on what list (naughty or nice) is certainly a matter of significance for the North Pole. But how clean must a child's bedroom be to earn her a spot on the nice list? How often must she share her toys with her siblings? And what if she tells the truth most, but not all, of the time? Santa necessarily uses his discretion and independent judgment when making these determinations.

That said, to qualify for the exemption, Santa's primary duty must be the performance of office or non-manual work. Traveling from house to house, sliding down chimneys and placing presents under Christmas trees would surely be considered nonexempt, manual work. But Santa does that only one night per year. Responding to letters from children could qualify as office work, but is that Santa's primary duty and is it directly related to the running or servicing of the North Pole's business? If either answer is "No," Santa may not qualify for the administrative exemption.

The reality is that even though the North Pole may pay Santa on a salary rather than an hourly basis, that doesn't mean Santa qualifies as exempt from the FLSA. If he doesn't meet the duties test for one of the FLSA exemptions, Santa is nonexempt and must be paid overtime compensation for every hour he works over 40 hours per week.

If Santa's position is nonexempt, then his Christmas Eve responsibilities present a number of additional compensation issues, such as whether the North Pole has to provide and/or pay Santa for his milk-and-cookie breaks; whether Santa is "on the clock" when he's using his iPhone to check in with the head elf; and whether his travel time to and from the North Pole and from house to house is compensable.

In some cases, the law of the North Pole may be more restrictive than the FLSA, and Santa's employer will be required to comply with whichever law is more beneficial to employees. The same is true with state law. For example, if a certain state requires employers to provide meal breaks, an employer is required to comply with the state law even though federal law does not impose such a requirement.

It doesn't take three wise men to figure out that an underpaid Santa Claus could put a real damper on the holiday season. Even if you're not the North Pole, you don?t want to be on the wage-and-hour naughty list. Much like Santa, costly wage-and-hour lawsuits keep coming to town, so you may want to consider checking with counsel on how best to review and, if necessary, correct your pay practices. Happy holidays!

Please Note: This Blog is made available by the lawyer publisher for educational purposes only as well as to give information and a general understanding of the law, not to provide specific legal advice. By using this Blog site you understand that there is no attorney client relationship between you and the Law Office of Elizabeth Van Moppes. The Law Office of Elizabeth Van Moppes is not in control of the linked sites and is not responsible for the contents of any linked site. This Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Elizabeth Van Moppes is licensed to practice law in the State of Washington only.

The Wage Game

I confess to being a fan of the old sitcom Roseanne. One of my favorite episodes involves her approach to paying the family’s bills. She sends the water company a check made out to the electric company and vice versa. She sends in a check to the landlord but “forgets” to sign it. She sends the phone bill without a check in it but doesn’t seal it, so they will think it just fell out. You get the idea. ”This will buy us another month,” she tells Dan, her husband.
Of late, and often out of necessity, many small businesses are playing a similar game. Their own clients are behind in paying and so they themselves can pay only the most immediate bills. There are obvious risks here but many businesses are unaware of how perilous this sitution can be if the invoices that go unpaid are employee wages or benefits.

Last week, I had a call from a law school classmate whose corporate client was being sued by two employees who had allegedly agreed to work for free for some undefined period of time until the company’s clients paid their invoices. Nothing was in writing, just a conference room agreement. Employment law is not my colleague’s forte and he wanted me to clarify his reading of the statute. Unfortunately, he understood it all too well.

Washington State has a statute, RCW 49.52, focused on the “willful withholding of wages.” It entitles any employee to double damages plus attorney fees when his employer “willfully” withholds any portion of his wages. The presumption is that such witholding is always willful and “willful” is defined as “knowing and intentional, … neither accidental nor as a result of bona fide dispute.” Double damages and fees may only be avoided where lack of payment was due to carelessness (rather than being volitional), or where a “bona fide” dispute existed regarding the payment of wages. Schilling v. Radio Holdings, Inc., 136 Wn.2d 152, 160-61 (1998).

Financial inability to pay is also insufficient to prevent a finding of willfulness and avoid double damages. Id.

Further, company officers and senior managers can be held personally liable for these sums if the company’s coffers are empty. The statute specifically includes “[a]ny employer and any officer, vice principal or agent of any employer who shall violate any of the provisions” of RCW 49.52.
Even bankruptcy won’t save you. In 2009, the Washington State Supreme Court held that corporate officers and senior managers (eg., the CEO and the CFO) continue to face personal liability for unpaid wages, even when the corporation is liquidated in bankruptcy court. The Court reasoned that prior to bankruptcy, the officers controlled the payment of wages. Thus, it was appropriate for them to be personally liable. Further, because the officers controlled how the corporation’s money was used, and made such decisions as whether to file for bankruptcy or close the business and pay debts, the Court held that the choice not to pay wages was willful and intentional. See Morgan v. Kingen, 166 Wash.2d 526, 535 (2009).

Can Employers, Officers and Senior Managers Do Anything to Protect Against Liability for Unpaid Wages, Penalties and Fees?

So, when things are so bad that the company doors will close unless employees forego some or all of their salary, how does an employer handle the situation? Well, the statute does allow for “authorized withholding” such that an employer can “withhold or divert any portion of an employee’s wages when … [the] deduction has been expressly authorized in writing in advance by the employee for a lawful purpose accruing to the benefit of such employee … [as long as the] employer derives no financial benefit from such deduction and the same is openly, clearly and in due course recorded in the employer’s books.” RCW 49.52.060.

My suggestion is that the writing be as specific as possible and that a new agreement be entered into for every pay period in which the employer is asking the employee to agree to the withholding. Further, I find that there is a great deal of good will incurred when there is full disclosure to the employees and when the senior officers and managers themselves are also entering into such an agreement with the company. Nothing goes over more poorly than when the sacrificing employees find out the company president is still buying a new yacht with his annual bonus.

Some additional thoughts:

1. Train those responsible for payroll functions to make sure that paychecks are timely issued, particularly when an employee is resigning or being terminated, or when the company is downsizing.
2. Adopt a policy requiring employees to promptly report any problems with paychecks.
3. Unless a bona fide dispute exists over the payment, promptly correct any payroll problems by paying the employee to avoid liability for penalties and attorney’s fees. (As an aside, the bona fide dispute agrument is limited and usually only successful with discretionary bonuses or commissions or the like.)
4. Carefully evaluate whether the company’s current insurance policies would provide a defense if the company or its officers and managers were sued for failure to timely pay wages. If the company has no coverage, consider whether to purchase such coverage.
5. If the company is having financial difficulties, consider whether the company’s governing documents (such as articles or bylaws) address whether the company is responsible for defending and indemnifying managers who are sued personally for failing to pay wages.

Please Note: This Blog is made available by the lawyer publisher for educational purposes only as well as to give information and a general understanding of the law, not to provide specific legal advice. By using this Blog site you understand that there is no attorney client relationship between you and the Law Office of Elizabeth Van Moppes. The Law Office of Elizabeth Van Moppes is not in control of the linked sites and is not responsible for the contents of any linked site. This Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Elizabeth Van Moppes is licensed to practice law in the State of Washington only.

The Definition of Independent Contractor in Washington State Is In The Wind...

The Washington State Court of Appeals has tackled a case of first impression in their decision on a 2004 case, Anfinson v. FedEx. The issue involves the definition of an “independent contractor” under the State’s Minimum Wage Act (MWA).

In 2004, a class action lawsuit was filed against FedEx in King County Superior Court alleging that FedEx misclassified 320 pick-up and delivery drivers as independent contractors. These drivers worked for the FedEx Home Delivery and FedEx Ground divisions between December 2001 and December 2004. After a four week trial in March, 2009, the jury returned a verdict for FedEx, finding that the drivers were independent contractors. The drivers appealed and, on December 20, 2010, the Court of Appeals issued a 40-page decision reversing the judgment against the drivers and remanding the case back to the trial court for further proceedings. The Appeals Court found that several of the key jury instructions were legally wrong.

Specifically, the Court held that the Fair Labor Standards Act (FLSA) ”economic realities” test applies because the Washington MWA is modeled on the FLSA. The specific “economic realities” test that the Court of Appeals used is the 6-factor test used by the majority of federal circuits, which includes the degree of the alleged employer’s “right of control” over the alleged employee as merely one of the 6 factors, not the most important factor.

The Court expressly rejected the use of Washington tort law for purposes of determining whether someone is an “employee” under Washington’s MWA. It stated that ”the purpose of the distinction between an employee and an independent contractor is … substantially different in these two areas of law. While the common law ‘right to control’ test was developed to define an employer’s liability for injuries caused by his employee, the purpose of the MWA is to provide remedial protections to workers.”

The Court also addressed several other instructional issues, including how one proves liability to a class under the Washington MWA, and whether the commonality standard used at the class certification has any remaining relevance at the trial phase. In short, FedEx’s victory was reversed and the case is being remanded for a new trial. The entire decision can be read here: http://case.lawmemo.com/wa/anfinson.pdf

It is expected that FedEx will seek review of this decision by the Washington Supreme Court. Stay tuned…

Please Note: This Blog is made available by the lawyer publisher for educational purposes only as well as to give information and a general understanding of the law, not to provide specific legal advice. By using this Blog site you understand that there is no attorney client relationship between you and the Law Office of Elizabeth Van Moppes. The Law Office of Elizabeth Van Moppes is not in control of the linked sites and is not responsible for the contents of any linked site. This Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Elizabeth Van Moppes is licensed to practice law in the State of Washington only.

Officers & Senior Managers Liable for Unpaid Wages

Employers in Washington who fail to timely pay wages to an employee are liable for statutory penalties equal to twice the unpaid wages plus attorney’s fees. Even when an employer seeks bankruptcy protection, officers and senior managers remain personally liable for the unpaid wages, statutory penalties and attorney’s fees. This rule was recently reaffirmed by the Washington State Supreme Court and the Ninth Circuit Court of Appeals in two separate cases involving bankrupt employers. In light of the current downturn in the economy, these cases are a timely reminder of the personal risks that officers and senior managers face.

Both Washington’s Minimum Wage Act (MWA) and its federal counterpart, the Fair Labor Standards Act (FLSA), provide for penalties and attorney’s fees when an employer fails to timely pay wages to its employees. These same penalties apply equally to officers and senior managers with control over payment of wages. The recent cases illustrate how officers and managers working for insolvent companies may expose themselves to personal liability.

Under state law, it is a misdemeanor for an employer to “willfully” deprive an employee of any part of his wages, and/or pay any employee a lower wage than the wage such employer is obligated to pay by statute, ordinance or contract. RCW 49.52.050. Under the MWA, an employee who has willfully been deprived of wages may sue for the unpaid wages and double the unpaid wages and reasonable attorney’s fees. RCW 49.52.070. Double damages and fees may be avoided where lack of payment when the deprivation is careless versus intentional. They can also be avoided when there is a “bona fide” dispute regarding the payment of wages. Schilling v. Radio Holdings, Inc., 136 Wn.2d 152, 160-61 (1998). Willfulness may be found when the refusal to pay is “volitional,” even if it is not malicious. Id. at 159-60.

If the employer is unable to pay wages, the employee can also recover the wages, double damages and fees from any officer or manager of the employer who exercises control over the direct payment of the wages and acts pursuant to that authority when failing to pay wages. Ellerman v. Centerpoint Prepress, Inc., 143 Wn.2d 514 (2001). Both the employer and individual manager are liable for double damages and fees if found to have willfully withheld wages. The financial inability to pay wages is not a defense. Schilling, at 166.

In Morgan v. Kingen, 210 P.3d 995 (Wash. 2009), the Washington State Supreme Court reaffirmed that officers continue to face personal liability for unpaid wages under Washington’s MWA, even when the corporation is liquidated in bankruptcy court. The officers there sought to avoid personal liability for unpaid wages based on the conversion of the employer’s Chapter 11 reorganization to a Chapter 7 liquidation. Rejecting this defense, the Court ruled that the Chapter 7 liquidation of the corporation did not provide the officers a means to escape personal liability. The Court reasoned that prior to converting to a Chapter 7 liquidation, the officers controlled the payment of wages. Thus, it was appropriate for them to be held personally liable. Further, since the officers controlled how the corporation’s money was used, and made decisions such as whether to file for bankruptcy or close the business and pay debts, the Court held that the choice not to pay wages was willful and intentional by those officers.

The Ninth Circuit Court of Appeals recently reached a similar result under the Fair Labor Standards Act, which applies to employers engaged in interstate commerce. Boucher v. Shaw, 2009 WL 2217517 (9th Cir. 2009). Under the FLSA, an employer is liable for unpaid wages and an additional amount for liquidated damages, as well as attorney’s fees. Under the FLSA, individual managers who exercise “control over the nature and structure of the employment relationship” or “economic control” over the relationship may be personally liable. See Lambert v. Ackerly, 180 F.2d 997, 1011-12 (9th Cir. 1999).

In Boucher, the Ninth Circuit Court of Appeals ruled that a corporation’s managers can be held personally liable under FSLA for wages that a corporation failed to pay to employees before filing for bankruptcy. Like in Boucher, the managers argued that their duty to pay employees ended when the business’s Chapter 11 bankruptcy reorganization was converted to a Chapter 7 liquidation. In rejecting this argument, the Ninth Circuit held that the U.S. Bankruptcy Code’s automatic stay of claims against the bankrupt entity did not extend to the separate claims against the managers, but instead only to those claims against the debtor corporation. The result would be the same whether in Chapter 11 or Chapter 7, according to the Court. Further, imposing personal liability would not undermine the Bankruptcy Code’s automatic stay intended to preserve the estate’s assets, because the corporation’s assets were not affected by the independent claims against the managers. Significantly, the Court noted that if the managers’ liability were to affect the property of the bankruptcy estate, by virtue of the corporation’s agreement to indemnify or by payment of the liability from a director’s and officer’s insurance policy, it might be necessary for the employees seeking wages to proceed against the non-debtor party through the bankruptcy proceedings.

The Lesson: So how do employers, officers and managers protect themselves from liability for unpaid wages? Of utmost importance is ensuring that those responsible for payroll functions to issue paychecks in a timely manner, particularly when an employee is resigning or being terminated, or when the company is downsizing. In the absence of a bona fide dispute over the obligation to pay the employee, promptly correct any payroll problems by paying the employee to avoid liability for penalties and attorney’s fees. Finally, if the company is having financial difficulties, consider whether the company’s governing documents (such as articles or bylaws) address whether the company is responsible for defending and indemnifying managers who are sued personally for failing to pay wages.

Please Note: This Blog is made available by the lawyer publisher for educational purposes only as well as to give information and a general understanding of the law, not to provide specific legal advice. By using this Blog site you understand that there is no attorney client relationship between you and the Law Office of Elizabeth Van Moppes. The Law Office of Elizabeth Van Moppes is not in control of the linked sites and is not responsible for the contents of any linked site. This Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Elizabeth Van Moppes is licensed to practice law in the State of Washington only.