Mike’s Analysis of Quirky Question # 169: Independent Contractor or Employee?
[Readers: Set forth below is the analysis of my Seattle partner, Mike Droke, of Quirky Question # 169, which focuses on the classification of workers as independent contractors vs. employees and the significant consequences associated with an erroneous classification. If you have any questions about Mike's analysis, do not hesitate to contact him at droke.michael@dorsey.com or 206.903.8709. Additional information regarding Mike is available at: http://www.dorsey.com/droke_michael/.
We hope you find this analysis helpful. Regards, Roy]
Quirky Question # 169: Our company is located in Washington. To limit costs, we turned to use independent contractors in order to avoid paying benefits, limit overhead, and increase flexibility. But when can someone we hired as an “independent contractor” and for whom we expressly retained no “right to control” nonetheless be deemed an employee, exposing the company to unplanned risks under Federal and some state laws?
Mike’s Analysis: In some circumstances there may be advantages for businesses to hire independent contractors rather than employees, including avoidance of taxes under the Federal Insurance Contributions Act (“FICA”) and Federal Unemployment Tax Act (“FUTA”), ADEA and ADA compliance, contributions to pension plans, unemployment insurance, health insurance, employee “headcount,” and workers’ compensation insurance. It may reduce expenses associated with employees by relieving the employer of the duty to comply with certain record keeping statutes. Read more
California Wage and Hour Issues, Quirky Question # 128
[Readers: Our "First Wednesday" of the month provides us another West Coast Quirky Question. This inquiry was posed to my colleague, Joel O'Malley, who works out of our Minneapolis office but who is licensed in both Minnesota and California. If you have any questions about Joel's analysis, don't hesitate to contact him at 612.492.6727, or via email at O'Malley.Joel@dorsey.com. Additional information regarding Joel is available at: http://www.dorsey.com/omalley_joel/. Regards, Roy]
Quirky Question # 128:
I work for a California employer with nonexempt retail employees who earn commissions on their sales. We have been sued for failing to provide our employees with meal and rest breaks. I understand the company may be liable to each employee for one hour of pay when a break was not provided. The class action complaint against us, however, alleges the one hour of pay is based on each employee’s rate after incorporating his/her earned commissions, and that for days in which a missed meal and rest break occurred, the employee is owed two hours of pay. Is that correct?
Joel’s Analysis:
California wage and hour litigation is a growth industry right now. Like you, employers are more frequently becoming defendants in class actions alleging violations of California’s complicated and restrictive wage and hour laws. Notwithstanding the volume of litigation, however, many fundamental questions about how California’s Labor Code applies remain unanswered. You present two such questions. While California courts have largely yet to provide direct answers to your questions, an analysis of the Labor Code and the relevant cases that do exist provides a good indication of where courts might come down.
Let’s first tackle the question about double recovery for meal and rest period violations. The complaint against you alleges your employees are entitled to one hour of wages for each meal period violation and, in addition, one hour of wages for each rest break violation, even when those violations occur on the same day. There does not appear to be any direct support under California state law for this request. To the contrary, the statutory language and assumptions made by the courts appears to support an argument that only one hour of pay is due for each day, regardless the violations.
The controlling statute regarding the provision of meal and rest periods in California provides, in relevant part:
If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.
Cal. Labor Code § 226.7(b) (emphasis added). The statute suggests the one hour of additional wages is calculated not by counting the number of meal period violations and number of rest period violations; rather, it is calculated by counting the number of work days on which some violation occurs. Thus, under the terms of the statute, multiple violations in a single day (e.g., being denied both a morning and afternoon rest period, or both a rest period and a meal period) arguably should result in only one additional hour of compensation for the employee.
California courts, however, have not expressly endorsed this conclusion. But, the California Supreme Court appears to accept this analysis. In Murphy v. Kenneth Cole Prods., Inc., 40 Cal. 4th 1094, 1112 (2007), the court determined that the one hour of pay provided in § 226.7(b) constituted a wage, not a penalty, for purposes of determining the applicable statute of limitations. As part of its discussion, the court summarized the defendant’s argument that the additional hour of pay was a penalty “because it is imposed without reference to actual damage, since an hour of pay is owed whether the employee has missed an unpaid 30-minute meal period, two paid 10-minute rest periods, or some combination thereof.” Id. at 1112. The Murphy court did not question the foundation for the defendant’s argument; rather, it held the statute establishes a set amount of compensation because damages are obscure and difficult to prove. Id. at 1113-14.
The California Supreme Court recently reaffirmed this assumption. In Arias v. Superior Court, 46 Cal. 4th 969, 987 (2009), the court cited Murphy for the proposition that the remedy for a § 226.7 violation is “one additional hour of pay.” Federal courts also appear to be in agreement. See Thomas v. Home Depot USA Inc., 527 F. Supp. 2d 1003, 1008 (N.D. Cal. 2007) (stating that Labor Code § 226.7 “provides for an additional hour of pay for each day that an employer fails to provide an employee a meal or rest period”); Corder v. Houston’s Rests., Inc., 424 F. Supp. 2d 1205, 1207 (C.D. Cal. 2006) (stating that “the plain wording of [§ 226.7] is clear that an employer is liable per work day, rather than per break not provided”).
There is some contrary authority, though upon close analysis, it does not appear sound. In a federal decision from the Central District of California, Marlo v. United Parcel Service, Inc., 2009 WL 1258491, at *6-7 (C.D. Cal. May 5, 2009), the court held that one hour of pay was due both for rest break and meal break violations, even when those violations occurred on the same work day. The court’s sole reason for its holding was that liability per work day rather that per violation would create the incentive for employers to require an employee who has missed a ten-minute morning rest break to also miss the lunch period. The court then went on to hold that, under its interpretation, “if more than one rest period violation occurs in a single work day but no meal period violations occur, [an employee] may only recover one additional hour of pay for all of the rest period violations combined; likewise, if more than one meal period violation occurs in a single work day but no rest period violations occur on that day, [an employee] may only recover one additional hour of pay for all of the meal period violations combined.” Id. at *7.
Strangely, this holding is directly contrary to the rationale the court used to justify its per violation rather that per work day interpretation. That is, if an employer would be encouraged to require an employee who has missed a ten-minute morning rest break also to miss the lunch period, the employer would have just as much incentive to force that employee to miss subsequent rest periods. But under the court’s rule, two missed rest periods results in one additional hour of pay. Based on this analytical flaw, I would argue a plaintiff’s attorney would have a difficult time relying on Marlo over the other authorities cited above to request multiple hours of wages for days on which meal and rest periods were not provided.
So, let’s assume one additional hour of pay is owed for each work day a violation occurs. Your next question, to which we now turn, asks what rate of pay applies to this additional hour of pay. The complaint against you claims the hour of pay must include not only the employee’s straight time hourly compensation, but also a pro-rated amount accounting for the employee’s other earnings during the relevant pay period, including commissions, bonuses, and spiffs. The claim essentially is that the additional hour of pay should be based on the employee’s “regular rate of pay,” the rate used for calculation of overtime compensation. Like your other question, there is little direct authority on point. I believe, however, a good argument can be made that the straight time rate, not the regular rate, should be used.
Again, the meal and rest period statute provides, in relevant part:
If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.
Cal. Labor Code § 226.7(b) (emphasis added).
The statute does not define “regular rate of compensation.” Plaintiff appears to believe the “regular rate of pay” definition used for purposes of calculating overtime premium pay, see Labor Code § 510(a), which may include certain bonuses or commissions, also applies to the “regular rate of compensation” used to determine meal and rest break violation compensation. I do not believe this is supportable.
Although “regular rate of pay” is not defined in the Labor Code, it is a defined term by adoption of the Federal “regular rate” definition found at 29 U.S.C. § 207(e). See DLSE Enforcement Manual § 49.1.2. The California Legislature chose not to use that same term for purposes of meal and rest break violations. One must assume the Legislature chooses the words in its enactments with purpose, and the fact “regular rate of compensation” is different than the defined term “regular rate of pay” must mean something.
The difference between the phrases flows from the different purposes of overtime premium pay, on one hand, and compensation due for meal or rest break violations, on the other. For the former, the money is designed to pay an employee for time spent working longer than a statutory maximum; the premium pay is based directly on the money the employee actually earned during the actual work time. See Murphy, 40 Cal. 4th 1109 (overtime’s “central purpose is to compensate employees for their time”). For the latter, however, the award is designed to compensate an employee for time the employee had a right not to work. See id. at 1103-04. Because it is meant to compensate non-working time, the compensation is not tied to any tangible money the employee actually earned during that time – because there is no corresponding time worked.
I admit this is a technical distinction, but one I think is valid. Thus, I would argue that any violations for meal or rest breaks should be compensated based on the employee’s straight time rate of compensation, not to include additional forms of pay that may be earned during actual work time, such as the commissions your retail employees may earn.
In the end, what your questions seem to highlight is the need for defense counsel to craft thoughtful arguments in what remains a heavily litigated, though as yet unsettled, area of law.
Wage and Hour Cases in the Ninth Circuit
Wage and Hour Cases in the Ninth Circuit
By: Mandana Massoumi and Carllene Placide
Wage and hour class actions comprise approximately one third of all class action litigation. The Ninth Circuit Court of Appeals has taken note as during the past six months, a number of significant wage and hour cases were decided by the court. Most of these cases involved class allegations where the court considered issues related to employee classification, off-the-clock work and individual liability. These recent decisions provide guidance to employers defending against these claims, particularly since the court seems to have heightened the scrutiny applied to these class actions.
A. Preemptive Strike on Class Certification Permissible: On July 7, 2009, the Ninth Circuit published In re: Wells Fargo Home Mortgage, 571 F.3d 953 (2009) and Vinole v. Countrywide Home Loans, Inc., 571 F.3d 935 (2009); each favorable for employers defending against wage and hour class actions. In Vinole, the Ninth Circuit affirmed a preemptive decertification motion. Plaintiffs sought to represent a proposed class of Countrywide external home loan consultants whom they alleged were misclassified as “exempt” outside sales employees.
Countrywide preempted plaintiffs’ class certification motion by filing a motion to deny certification pursuant to Federal Rule of Civil Procedure 23. The district court granted Countrywide’s motion. On appeal, the Ninth Circuit considered whether the district court abused its discretion by granting the motion to decertify the class action prior to plaintiffs’ motion for class certification and pretrial deadlines, and whether the court could otherwise deny class certification. The 9th Circuit affirmed and found as follows:
“First, no rule or decisional authority prohibited Countrywide from filing its motion to deny certification before Plaintiffs filed their motion to certify, and Plaintiffs had ample time to prepare and present their certification argument. Second, the district court did not abuse its discretion by denying certification under Rule 23 (b)(3) because the record supports its conclusion that individual issues predominate over common issues.”
As to the timing of the motion for decertification, the Ninth Circuit held that Rule 23 requires the certification issue be resolved at an “early practicable time,” and the “plain language of Rule 23(c)(1)(A) alone defeats Plaintiffs’ argument that there is some sort of ‘per se rule’ that precludes defense motions to deny certification….”
The appellate court also affirmed the district court’s opinion that the outside salesperson exemption precluded certification. The court found such analysis would require an individualized inquiry and held:
“We decline to adopt such an approach because-as set forth in greater length in our opinion In re Wells Fargo we hold that a district court abuses its discretion in relying on an internal uniform exemption policy to the near exclusion of other factors relevant to the predominance inquiry. See In re Wells Fargo Home Mortgage Overtime Pay Litig., No. 08-15355, slip. op. at 8335-36. As we stated there, focusing on a uniform exemption policy alone does little to further the purpose of Rule 23(b)(3)’s predominance inquiry, which requires an assessment of the relationship between individual and common issues.”
B. Reliance on a Uniform Policy Insufficient: In re: Wells Fargo Home Mortgage (referenced in Vinole), also involved class allegations premised on misclassification claims. There, the lower court granted plaintiffs’ motion for class certification and certified a class of loan specialists. The Ninth Circuit vacated the lower court’s decision and found the district court abused its discretion by relying almost exclusively on the existence of a uniform policy which classified the loan specialists as exempt. It held:
“In short, Wells Fargo’s uniform exemption policy says little about the main concern in the predominance inquiry: the balance between individual and common issues. As such, we hold that the district court abused its discretion in relying on that policy to the near exclusion of other factors relevant to the predominance inquiry.”
Both decisions provide guidance for employers defending against wage and hour class actions. Vinole provides opportunity for a preemptive dispositive motion even before the plaintiffs’ motion for class certification. In re: Wells Fargo further offers a great defense to employers defending against class allegations premised solely on the mere existence of uniform employment policies. Notably, both decisions demonstrate increased scrutiny by the appellate court in evaluating class allegations, particularly those based on misclassification claims.
C. Pharmaceutical Sales Reps, Certification of Issues to California Supreme Court: D’Este v. Bayer Corporation, 565 F.3d 1119 (9th Cir. 2009) involved yet another wage and hour case alleging misclassification of employees. Plaintiff moved to certify a putative class of pharmaceutical sales representatives classified as exempt. The district court granted summary judgment in favor of Bayer, finding that D’Este was exempt under California’s outside sales exemption and declined to decide whether D’Este also was exempt under California’s Administrative exemption. On appeal the case was consolidated with two other nearly identical cases pending before the Ninth Circuit, Barnick v. Wyeth, 07-56684 and Menes v. Roche, 08-55286.
Due to limited existing authority regarding state law issues, the Ninth Circuit requested the California Supreme Court exercise its discretion to decide certified questions involving classification of pharmaceutical sales representatives s under California’s outside sales person or administrative exemptions. As such, the California Supreme Court can now exercise its discretion to offer the requested clarification, critical to employers seeking further guidance on employee classification issues.
D. Commuting Time and Related Activities: In Rutti v. Lojack Corporation, Inc., 578 F.3d 1084 (2009), the Ninth Circuit attempted to define activities that qualify as compensable time. Plaintiff alleged class claims under the Fair Labor Standards Action (FLSA), seeking recovery on behalf of a putative class of nationwide technicians. Plaintiff sought compensation for the time spent commuting to worksites in company vehicles and for time spent on preliminary and postliminary activities performed at their homes. Lojack moved for summary judgment and the district court granted the motion, holding that plaintiff’s commute was not compensable and the preliminary and postliminary activities were not compensable because they “either were not integral to Rutti’s principal activities or consumed a de minimis amount of time.” The 9th Circuit affirmed in part and vacated the lower court’s decision as follows:
“We affirm the district court’s denial of compensation for Rutti’s commute and for his preliminary activities. However, we vacate the district court’s grant of summary judgment on Rutti’s postliminary activity of required daily portable data transmissions, and remand the matter to the district court for further proceedings consistent with this opinion.”
First, the Court concluded “the district court properly held that Rutti is not entitled to compensation for the time spent commuting to and from his job sites in a vehicle provided by Lojack under either 29 U.S.C. [Section] 254(a)(2) or California law.” The court found that even Lojack’s requirement of using the company vehicle and restrictions placed on the use of the company vehicle did not trigger an obligation to compensate Rutti’s commute under the Employee Commuting Flexibility Act or California law.
Second, the Ninth Circuit also considered whether Rutti’s off-the-clock claims were viable, and if he was entitled to compensation for activities he engaged in for Lojack before traveling to his first jobsite and after returning home from his last job. The court found Rutti’s morning “preliminary” activities (“receiving, mapping and prioritizing jobs and routes for assignments”), to the extent that they are both distinct from his commute (which is not compensable) and related to his principal activities, appear to be de minimis, and thus, not compensable.” However, the postliminary activities, including time spent sending a PDT transmission to Lojack using a modem (after getting home) were compensable. The court applied the three-prong test: “the practical administrative difficulty of recording the additional time;” “the aggregate amount of compensable time;” and “the regularity of the additional work.” Using this test, and based on the facts before it, the court found “the grant of summary judgment in favor of Lojack on Rutti’s claim for the transmission must be vacated.” Rutti reemphasizes that regular commuting time need not be paid under the FLSA or California Labor Code. The decision also attempts to discern whether “preliminary” and “postliminary” work is compensable or can qualify as de minimus; serving as further reminder to employers to closely monitor pre- and post-work activities, which could qualify as compensable time.
E. Potential Managerial Liability Under the FLSA: In Boucher v. Shaw, 572 F.3d 1087 (9th Cir. 2009), former employees of the Castaways Hotel, Casino and Bowling Center (Castaways) sued the Castaways’ individual managers for unpaid wages under state and federal law. The issue was whether the individual Castaways’ managers could be held liable for unpaid wages under the FLSA.
On June 26, 2003, Castaways filed for Chapter 11 bankruptcy protection. In January 2004, the former employees were discharged. On February 10, 2004, Castaways’ Chapter 11 petition was converted to a Chapter 7 liquidation and the company ceased operations. The former employees’ claims consisted of unpaid wages and accrued vacation and holiday pay. The individual Castaways’ managers named as defendants were the Chairman and Chief Executive Officer, who owned 70 percent of the company, the labor and employment professional (L&E Professional), who owned 30 percent of the company, and the Chief Financial Officer. The former employees alleged that the named individual managers had custody or control over them, their employment or their place of employment at the time the wages were due, and thus, could be individually liable.
The circuit court ruled that individual managers can be “employers” under the FLSA and thus, liable for unpaid wages. The court held that where an individual exercises control over the nature and structure of the employment relationship, or economic control over the relationship, that individual is an employer within the meaning of the Act and is subject to liability. The Chairman/CEO and the L&E Professional owned the company, and, together with the CFO, all three individual managers had control and custody of the employees, their employment and place of employment. Thus, the court found that the individual managers were properly classified as “Employers” under the FLSA and liable for the claims of unpaid wages. Further, the court found that the company’s bankruptcy had no effect on the claims against the individual managers.
This decision provides an expansive interpretation of the FLSA concepts to effectuate its broad remedial purposes. Under the FLSA, individual managers who hold a majority ownership or controlling ownership in the company, and who also oversee the day-to-day employment operations of the company, and make decisions that affect the employees, their employment and place of employment, may be held individually liable for unpaid wages. In order to limit such risk of liability, employers should limit a majority owner or controlling owner’s control over the day-to-day operations of the company and/or decision making that affects the workforce’s employment and place of employment.
California Wage and Hour Issues, Quirky Question # 107
Quirky Question # 107:
I keep hearing about companies getting hit with class action lawsuits under California’s tough wage and hour laws. As I understand it, when a company treats its employees the same under a single policy, it is much more likely to have a class action certified against it. Our company’s policy is to treat as exempt from overtime its outside sales representatives.
Does this count as a uniform policy, and does it open us up to a lawsuit? Would we be better off treating some of the sales representatives as exempt and others non-exempt, based on some differences in job duties that already exist or we could implement?
[Readers: As mentioned last week, Quirky Question # 107 was posed to my colleagues in our Southern California office. The analysis below was prepared by Joel O’Malley. Joel recently transferred from our Minneapolis office to our Irvine, CA office. Joel can be reached at omalley.joel@dorsey.com or via phone at 949.932.3602. Do not hesitate to contact Joel if you have any questions regarding the analysis below. Regards, Roy]
Joel’s Analysis:
What you hear is indeed happening. Wage and hour cases are proliferating. Federal cases have tripled in the last decade. California’s onerous wage and hour laws make potential violations by employers even more likely here, and, thereby, increase the threat of class actions in California. So, your question is both timely and important.
First, a little background. Federal and state wage and hour laws place a number of requirements on employers with respect to hourly employees, most importantly, the duty to pay overtime compensation. Certain employees may be classified as salaried and exempt from these requirements. The law offers a number of exemption classifications based on employee duties, including, among others, administrative, learned professional, executive, outside salesperson, and inside commissioned salesperson (generally applicable only to employers in the retail or mercantile industries). Except for the salesperson classifications, the exemptions also require certain salary requirements. When an employee is misclassified as exempt under one of these classifications, the employee may sue the employer to recover past wages and penalties, including for overtime hours that were worked but not properly compensated. When a group of employees are misclassified, rather than individual lawsuits, representative employees may be permitted to bring a class action lawsuit against their employer on behalf of all similarly situated employees. Damages from these wage and hour class actions (as well as attorneys’ fees) can accumulate quickly, which may explain the substantial growth in these kinds of lawsuits.
You are also correct that when an employer treats employees under a common policy, the common issues created by that policy can predominate over issues pertaining to individual employees and create the risk for a lawsuit to be certified as a class action.
It is important to note the difference, however, between an employer’s policy of classifying a group of employees as exempt from wage and hour laws, and other policies that are applied uniformly across a group of employees. Regarding the former, for many types of exemption classifications (including that of ‘outside salesperson’), a policy of classifying a group of employees as exempt does not necessarily increase an employer’s risk of becoming a victim of a certified class action. Regarding the latter, a policy governing the working hours or duties of a group of employees certainly may increase an employer’s risk, depending, of course, on the policy at issue.
A recent opinion by the Ninth Circuit Court of Appeals, In re Wells Fargo Home Mortgage Overtime Pay Litigation, — F.3d —, 2009 WL 1927711 (9th Cir. 2009), demonstrates this dichotomy. The case arose from Wells Fargo’s appeal of a district court order certifying a class of Wells Fargo “home mortgage consultants” for the purpose of determining whether they had been misclassified by Wells Fargo as exempt from overtime requirements.
As with your company, Wells Fargo designated all of its home mortgage consultants as being exempt. After it was sued for wrongly classifying these employees as exempt, and in response to the plaintiffs’ argument that the class’s exempt status created common issues making class treatment appropriate, Wells Fargo claimed – despite the fact it had uniformly treated the employees as exempt outside salespersons – that a class could not be certified because of individual issues surrounding each home mortgage consultant’s daily schedule and duties.
The Ninth Circuit held the employer’s decision to treat all members of a given job title as exempt from overtime was relevant to whether those employees could be treated as a class for purposes of the litigation, but did not warrant the great weight accorded this fact by the district court. The Court of Appeals recognized that, notwithstanding a uniform exemption classification, other issues regarding individual variations in putative class member duties and activities may not be susceptible to common proof. The court remanded the case to the district court to reconsider the class certification issue in light of the individual employees’ varying duties.
The existence of such varying duties may be demonstrated by reviewing the requirements for the outside salesperson exemption. Further, an analysis of how employees classified as outside salespersons spend their working time also may provide a compelling argument to defeat class certification.
For the outside salesperson exemption to apply under California law, an employee must regularly work more than half the working time away from the employer’s place of business performing sales. See IWC Wage Order 7-2001(2)(J).
In the relatively recent California state court decision of Walsh v. IKON Office Solutions, Inc., 148 Cal. App. 4th 1440 (2007), the court affirmed a trial court’s decertification of a class of account manager employees based on the defendant’s affirmative defense that the employees were properly classified as outside salespersons and, therefore, exempt from California’s overtime laws. The defendant presented evidence that the account managers’ tasks varied based on, among other things, territory, number of customers and job orders, amount of time spent outside the office, time spent engaged in sales activities, and “the personal approach of each account manager to the job and customers.” Id. The court held these variations were directly material to whether the outside salesperson exemption applied to any individual putative class member, opining:
[T]he time they spent outside the office in sales, whether outside activities such as pick-ups and drop-offs were used as part of their selling activities, and factors such as orders, CSR’s, sales appointments, and other individual circumstances would affect whether any particular subclass member did, in fact, “customarily and regularly” spend over 50 percent of his or her time outside the office on sales activity.
Id. at 1456. The same individual inquiries into putative class member duties may be present, to varying degrees, under other exemptions from wage and hour laws. In sum, then, classifying a group of employees as exempt is relevant to whether the group can be certified as a class, but it does not, in itself, predetermine the outcome of the certification decision.
That should be contrasted with other uniform policies applied across a group of employees that may demonstrate commonality and raise the risk of class actions. Returning to the outside salesperson exemption, the Ninth Circuit in Wells Fargo explored a hypothetical employer policy that employees be required to be at their desks for 80 percent of their workdays. 2009 WL 1927711, at *4. Such a uniform workplace rule – unlike an exemption classification – certainly would provide a common issue about whether employees are spending at least half their time outside of the office performing sales.
With these guidelines in mind, your idea to classify some of your sales representatives as exempt and others as non-exempt may be a good idea, as long as there are clear distinctions between the groups in job duties and how employees actually spend their days which necessitate the different classifications. One possibility is classifying as non-exempt your sales representatives who are new and still learning the job. Once these individuals’ sales skills and activities are documented (measured perhaps at a 6-month initial review), they could be reclassified as exempt. Another possibility, assuming your business is in the retail or mercantile industries, is to move some employees (again, based on specific work-related criteria) to commission-based compensation. This would allow these employees possibly to meet the tests for both outside salespersons and inside commissioned salespersons. The commission payments would also provide a nondiscriminatory objective means of evaluating employees, blunting any possible claims that employees have been the victim of illegal discrimination based on a protected characteristic (age, gender, race, etc.). In making these differentiated classifications, it would be important to have detailed job descriptions and to use employee performance appraisals to highlight the differences between positions.
Of course, reclassifying employees from exempt to non-exempt has its risks. The mere event of reclassifying employees tends to trigger the idea for litigation in some employees’ minds, and generally creates the risk of later claims based on the notion that employees were previously misclassified and are now owed wages and penalties for those prior time periods. Finally, for whatever reason, employees seem to attach status to being salaried rather than hourly, so reclassifying one portion but not another portion of generally similar employees may create personnel conflicts. You should be cognizant of these potential individual problems as you make these organizational decisions.
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