New Overtime Rules Bring Suits

Confusion, raised awareness behind increased litigation

Tresa Baldas

The National Law Journal

03-17-2005

The government's recent attempt to reduce overtime lawsuits has thrown the doors wide open for still more litigation, according to labor attorneys across the country who argue that the 7-month-old federal overtime laws are roiling the workplace.

Many plaintiffs' lawyers say that the new overtime rules -- which went into effect last August and which defined more narrowly who is eligible for overtime -- heightened awareness among many employees who did not know of their overtime rights before, and are now either seeking legal advice or filing suit.

More than that, they assert, the new rules made the gray areas of overtime law even grayer, further confusing employees and employers alike and making the potential for litigation even stronger.

"The new law is sort of the Anita Hill of the overtime world because it raised awareness," said employment lawyer J. Derek Braziel of Edwards & George in Dallas, which is currently handling as many as 100 overtime lawsuits, roughly a third of which were filed after the new rules took effect.

"I've been getting more calls from people trying to find out what my overtime rights are. ... We've gotten as high as 200 calls a month."

On the flipside, lawyers representing companies say they've also been flooded with calls from clients who are unsure about how the new rules affect them.

According to the Department of Labor, 1.3 million employees are now eligible for overtime who weren't before. But at the same time, labor groups argue that as many as 6 million stand to lose their overtime rights.

Meanwhile, lawyers say, many employers are scrambling to get it right and avoid getting sued.

"I think the regulations provided in some cases a wake-up call to companies that may not have thought very much about examining or re-examining their [job] classifications for many years," said employment attorney Joseph Baumgarten of New York's Proskauer Rose, which is defending companies in more than a dozen overtime class actions. He said his office has seen more overtime lawsuits since the new rules took effect, but he doesn't know how many.

On a national scale, he said, "My own subjective opinion is that, in general, there is even more litigation over the last six or eight months being filed."

Like plaintiffs' attorneys, Baumgarten believes an increase in publicity of the overtime issue has increased awareness among workers and has, consequently, triggered litigation.

"It has the inevitable effect of people scratching their heads and saying, 'Why am I not being paid overtime?'" he said. "Someone may have gone along for years and years and years and thought, 'I'm a professional employee and I don't get overtime.' And then they start reading the newspapers and say, 'Am I eligible?' They never questioned it before."

CATALYST FOR COMPLIANCE

At issue are the Labor Department's changes to the Fair Labor Standards Act, which marked the first major overhaul of the federal overtime law in more than 50 years.

The new regulations were designed to modernize pay minimums for salaried personnel and clarify standards that determined how employees are classified exempt and nonexempt from overtime benefits.

The new rules made many changes, which include:

The salary threshold for those eligible for overtime has increased almost threefold, from $8,060 to $23,660 annually. That means anyone earning less than $23,660 automatically qualifies for overtime pay.

Highly compensated employees who earn $100,000 per year or more are exempt from overtime pay.

The new regulations stress that job titles no longer matter, but job duties do when determining if someone is exempt from overtime.

The U.S. assistant secretary of labor for employment standards, Victoria A. Lipnick, an attorney who oversaw the regulatory changes, called the new rules, "a catalyst for compliance."

"It's caused literally every company in the country to look at their work force and look at their job descriptions and make sure they are properly paying their people ... that in and of itself helps reduce litigation," said Lipnick. She said she believes that "it's a little premature" to determine if the new rules have sparked more lawsuits.

Lipnick also defended the clarity of the new regulations. When she heard that lawyers were criticizing the new rules as being too confusing, she said, "You gotta be kidding me. ... The interpretation section in the old regulations was so extraordinarily circular and so gray that the notion that the new regs don't clean that up is just absurd to me. I just don't think it washes."

MIDDLE EARNERS

Attorneys say that employees most affected by the new regulations are white-collar workers who earn between $23,660 and $100,000. They're the ones stuck between the two groups who automatically qualify and those who don't.

Lawyers also note that the new guidelines will also carry more weight in states that do not have state statutes that regulate overtime pay. Currently, 18 states, including Alaska, California, Colorado, Connecticut, Illinois and New Jersey, have labor laws that supersede the federal overtime guidelines and are more helpful to employees.

New lawsuits are more likely in those states, they say, because of the confusion between state and federal mandates.

"I think that there are going to be a lot of employers who try in good faith to navigate between the state and federal laws, but create technical problems for themselves by following one set of laws and not following the other, and that's going to create lawsuits, said Michael Sullivan, a principal in the labor and employment practice group at Chicago's Goldberg Kohn.

Sullivan noted that in Illinois, which has stricter overtime rules favoring employees, employers were baffled when the new regulations took effect.

"I can't tell you how much confusion this created for Illinois employers. They scratched their head and came to us and said, 'There are all these changes and you're telling us we can't make these changes,'" said Sullivan, whose firm has handled about a half-dozen overtime class actions in the last year.

THE 'DUTIES TEST'

With regard to the federal rules, lawyers expect legal challenges to a new "duties test," which aims to determine what kind of work an employee performs every day to see if he or she qualifies for overtime.

For example, under the new managerial exemption, more emphasis is being placed on whether or not managers can hire, fire or promote -- which could make them ineligible for overtime.

Employees with dual roles, such as supervisors who also engage in day-to-day work with regular workers, are also being more closely scrutinized.

Plaintiffs' attorneys say these tests create confusion and will likely lead to litigation.

"There are people who do not hire or fire who are going to be able to argue that they are not managers," said California attorney James Finberg, a class action litigation specialist who has handled about a half-dozen overtime class actions in the last two years.

"These regulations are not going to stop overtime litigation,"Finberg said. "The only thing that's going to stop litigation is companies correctly classifying their employees."

Most recently, Finberg, a partner at Lieff Cabraser Heimann & Bernstein of San Francisco, filed an overtime class action against Wells Fargo & Co. on behalf of 6,000 members who alleged that the bank had improperly classified them as exempt so as to avoid paying them overtime.

He said that the plaintiffs, who have titles such as "business systems analyst" and "consultant," argue that they do not exercise independent judgment or discretion, but that they do mostly day-to-day production work, and therefore are entitled to overtime. Gerlach v. Wells Fargo, No. 05-0585 BZ (N.D. Calif.).

"Our people have very detailed guidelines and they don't get to make a lot of decisions. They just follow instructions," said Finberg, who is also president of the Bar Association of San Francisco.

Attorney Nancy Pritikin, of San Francisco-based Littler Mendelson, who is representing Wells Fargo in Gerlach, declined comment.

Meanwhile, Finberg said he is expecting a $53 million judgment to be entered on March 26 in a multidistrict overtime litigation case in Oregon against Farmers Insurance. In re Farmers Insurance Exchange Claims Representatives' Overtime Pay Litigation, MDL No. 1439 (D. Ore.).

Finberg also settled a case in September against Allied Insurance Exchange for $8 million. Cuckman v. Allied, No. C-02-5800SI (N.D. Calif.).

He also settled a case last year for $11 million against Longs Drug Stores Corp. for alleged misclassification of managers and assistant managers. Goddard v. Longs Drug Stores, No. RG04141291 (Alameda Co., Calif., Super. Ct.).

A MONEY MATTER?

It's those kinds of lucrative settlements that are driving the overtime lawsuit trend, argue employers' attorneys, who allege that plaintiffs' attorneys have shifted their focus from dwindling discrimination suits to booming overtime suits.

"A number of plaintiffs' attorneys have had to look elsewhere and they've looked to overtime. It simply gave them a more visible target," said Norman Davis, an employment law specialist at Miami-based Steel Hector & Davis, which is currently defending several companies in overtime lawsuits.

"I don't think the new regs are all that profound," Davis said. "The changes have been relatively minor. What they did is they made the overtime issue much more visible, and I think for that reason we've seen a rise in overtime lawsuits."

There are no current statistics on the number of overtime suits filed since the new rules took effect.

MORE CLASS ACTIONS

According to the Administrative Office of the U.S. Courts, the number of overtime class actions involving violations of federal overtime rules for white-collar workers has grown over the last four years, from 73 in 2000 to 138 in 2004, a nearly 100 percent increase.

And the number will continue to go up so long as it continues to be lucrative for plaintiffs' lawyers, said Sandra McCandless, an employment law partner with Sonnenschein Nath & Rosenthal in San Francisco and chair-elect of the American Bar Association's Section of Tort Trial & Insurance Practice.

"This area of the law, which while dry and not the jazziest, is lucrative for plaintiffs' attorneys. And this is the reason why companies need to pay attention to all of these rules," said McCandless, noting that the smaller and less-sophisticated companies are not up to speed on federal overtime rules.