Employment Law

In This Issue


Exempt or Nonexempt, That is The Question

Employers who believe in multitasking could be facing unpaid overtime suits from managers after the California Court of Appeal ruled that a grocery store manager could not simultaneously perform both exempt and nonexempt tasks.

Although Linda Heyen was a manager at the grocery chain and classified as an exempt employee, she alleged that she spent the majority of her time performing nonexempt work like helping out at the cash register, stocking shelves, and doing bookkeeping. She filed suit under state law seeking unpaid overtime.

A trial court awarded her $26,184.60, plus interest. But Safeway appealed, arguing that the court should have considered that Heyen was performing her exempt work concurrently with her nonexempt tasks. For example, while ringing up customers in the checkout line, Heyen was still able to monitor the store as part of her managerial duties.

The court disagreed. Affirming judgment for the employee, the court said that a trier of fact must determine the “primary purpose” of the work being performed in order to correctly classify it on the exempt or nonexempt side of the ledger.

“Although there is some intuitive appeal to Safeway’s contention, it is unsupported by California law,” the court said. Wage Order 7 references regulations issued pursuant to the Fair Labor Standards Act, which “look to the supervisor’s reason or purpose for undertaking the task. If a task is performed because it is ‘helpful in supervising the employees or contribute[s] to the smooth functioning of the department for which [the supervisors] are responsible,’ the work is exempt; if not, it is nonexempt.”

The relevant regulations do not support the “multi-tasking” approach advocated by Safeway, nor had prior case law recognized a “hybrid category” of simultaneous exempt and nonexempt work. The court also found no merit to Safeway’s argument that the primary purpose test is “both vague and unworkable” because jurors will have to “peer into the mind” of the manager to decide which function was top of mind.

Jurors will not need to look into anyone’s mind, the court said. Rather, consistent with the federal regulations incorporated into Wage Order 7, fact finders will be asked to determine “the objective purpose” of a manager’s actions.

As an alternative argument, Safeway argued that the trial court failed to account for the company’s “reasonable expectations” about the work Heyen performed – i.e., whether Heyen performed nonexempt work because she chose to, not because Safeway expected her to.

Again the court declined to follow the chain’s argument. A trial court must inquire “into the realistic requirements of the job,” looking at how the employee actually spends his or her time as well as whether the employee’s practice diverges from the employer’s reasonable expectations.

The trial court found that Safeway stressed the importance of “superior service” to its employees, including a rule that if three customers were in a checkout line, another register must be opened. To keep the checkout lines as short as company policy required, Heyen had to perform nonexempt work like ringing up customers herself. Other testimony documented a need for Heyen to perform nonexempt bookkeeping work because Safeway budgeted too few hours for the bookkeepers hired.

“Considered together, all of this testimony is substantial evidence that Heyen’s practice of doing significant amounts of nonexempt work did not ‘diverge[] from [Safeway’s] realistic expectations,’” the court concluded.

Because the trial court found that Heyen spent more than 50 percent of her time performing nonexempt tasks, the appellate court upheld her award.

To read the decision in Heyen v. Safeway Inc., click here.

Why it matters: The Heyen decision clarifies for California employers the need to evaluate the “primary purpose” of tasks performed by employees in order to correctly classify workers as exempt or nonexempt. The court rejected the concept of multi-tasking or concurrently performing both exempt and nonexempt tasks, so employers may need to take a closer look at the work being performed by managerial employees before facing similar claims of unpaid overtime.

back to top

State Laws Limit Use of Credit Information, Criminal Records

States continue to place additional restrictions on employers, with new laws in Colorado and Delaware focusing on limiting the use of credit checks and criminal background reviews.

Effective July 1, employers in Colorado may only require an employee to consent to a credit check for three enumerated reasons: (1) the employer is a bank or financial institution; (2) the report is required by law; or (3) the report is “substantially related to the employee’s current or potential job,” the employer has a bona fide purpose, and it is disclosed in writing to the employee.

The phrase “substantially related to the employee’s current or potential job” means the information contained in the credit report is related to the position because it involves executive or management personnel or the professional staff for such positions. In addition, the position must involve at least one of the following factors: setting the direction or control of a business, division, unit, or an agency of the business; a fiduciary responsibility to the employer; access to customers’, employees’, or the employer’s personal or financial information, other than information customarily provided in a retail transaction; the authority to issue payments, collect debts, or enter into contracts; or contracts with defense, intelligence, national security, or space agencies of the federal government.

Further protections for employees are provided under the statute if the employer chooses to obtain and use credit information. Employers may provide the individual with the opportunity to explain any eyebrow-raising circumstances found in his or her credit report that “may not reflect money management skills” but instead, an issue outside of an individual’s control like an error in credit information or an act of identity theft. And if the employer does decide to rely upon information in the report and takes an adverse employment action, the employer must disclose this fact to the individual and also the specific data upon which the employer relied, in writing.

Individuals alleging a violation of the law can file a complaint with the Colorado Division of Labor. Penalties of up to $2,500 can be awarded against the employer.

In Delaware, lawmakers have proposed similar limits on employers with the introduction of a bill that would prevent public employers from conducting a check of both criminal and credit records until a conditional offer of employment has been made. In addition, felony convictions more than 10 years old and misdemeanor convictions more than 5 years old would be excluded from consideration.

The preamble to the legislation notes that the incarceration rate in the United States has tripled since 1980 and “it is in the interest of the entire community that persons reentering society after incarceration become productive members of society, and the ability of these persons to obtain employment is key to their productivity.”

If a public employer chooses to rescind the employment offer based on the information uncovered, the proposed law would require consideration of multiple factors, like the nature of the crime and its relationship to the duties of the position; evidence of rehabilitation, whether the prospective job offers an opportunity for the commission of a similar offense, the likelihood of recurrence; and how much time has elapsed since the offense(s).

Exemptions from the law include police departments, the Department of Corrections, and other positions where state or federal law requires a background check.

To read Colorado’s new law, click here.

To read Delaware’s proposed legislation, click here

Why it matters: The legislative efforts in both states reflect a growing national trend. With its restrictions on credit checks, Colorado joins eight other states with similar laws: California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont, and Washington. And Delaware would join nine other states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, and New Mexico) if it passes its limitations on criminal and credit record checks.

back to top

Employers Face Changes to Workplace Wellness Programs

Jointly issued rules from the U.S. Departments of Health and Human Services, Labor, and the Treasury seek to provide guidance to employers offering workplace wellness programs that incentivize employees to improve their health.

While praising the value of wellness programs – which the Departments said can promote health and prevent disease – the regulations set forth changes like increased rewards and alternatives to allow all employees a chance to receive rewards in outcome-based plans.

“The final regulations also reorganize the presentation of the steps a plan or issuer must take to ensure a wellness program: is reasonably designed to promote health or prevent disease; has a reasonable chance of improving the health of, or preventing disease in, participating individuals; is not overly burdensome; is not a subterfuge for discriminating based on a health factor; and is not highly suspect in the method chosen to promote health or prevent disease,” according to the regulations.

Specifically, the regulations allow employers to offer larger rewards to employees who achieve success under the program. Regulations issued in 2006 pursuant to the Health Insurance Portability and Accountability Act limited the size of a reward to 20 percent of the cost of employee-only coverage under the plan. The new regulations increase the maximum possible reward to 30 percent, and smoking-related wellness programs were raised to 50 percent.

But employers must also offer “reasonable alternative standards” for outcome-based programs under the new regulations. Outcome-based or health-contingent wellness programs offer a reward to employees who reach a specified target, such as achieving a certain blood pressure goal or body-mass index. Under the old regulations, an employee who did not reach the target did not receive the reward.

Employees must now be rewarded for completing an alternative, the departments said. For example, if a program offers a reward for tobacco-free employees, the program must recognize “a cycle of failure and renewed effort.” For plans with an outcome-based standard, this might mean offering an educational seminar for smokers in year one and implementing a new nicotine replacement therapy in year two, the regulations suggested. The alternatives are intended to ensure that the program truly seeks to improve employees’ health and not operate as a means to reduce benefits based on health status, the Departments noted.

“The intention of the Departments in these final regulations is that, regardless of the type of wellness program, every individual participating in the program should be able to receive the full amount of any reward or incentive, regardless of any health factor.”

A similar system should be used for other outcome-based standards, the Departments said, including weight management. So if a plan provides a walking program as a reasonable alternative standard to a running program but it is not medically advisable for an individual to complete the walking program, the plan should provide a reasonable alternative standard to the walking program, the Departments said.

To read the new regulations, click here.

Why it matters: Employers who utilize outcome-based wellness programs as part of their health plans should carefully review the new regulations to ensure compliance before the regulations take effect for plan years beginning on or after Jan. 1, 2014. However, an open question remains for employers: Do wellness programs run afoul of federal statutes like the Americans with Disabilities Act (which has a general prohibition on asking disability-related questions unrelated to a job) and the Genetic Information Non-Disclosure Act (under which employers are forbidden from asking about an employee’s family medical history)? Because the Equal Employment Opportunity Commission didn’t participate in the Departments’ regulations, the question remains unanswered.

back to top

SOX: More Than Just Shareholder Fraud

The Sarbanes-Oxley Act protects whistleblowers who report company misconduct other than just fraud against shareholders, the 10th U.S. Circuit Court of Appeals recently held.

Andrea Brown sued Lockheed Martin alleging she was constructively discharged for making an ethics complaint about the company’s vice president of communications. According to Brown, the VP used a company-sponsored pen pal program to have sexual relationships with soldiers and send sex toys to soldiers stationed in Iraq. In addition, the VP purchased a laptop for one soldier and traveled to welcome-home ceremonies for soldiers on the pretext of business, while actually taking them to expensive hotels to have sex. Concerned that such expenses were being passed on to Lockheed’s customers – including the government – Brown reported her concerns.

But after she reported the misconduct, Brown was demoted, received poor performance reviews, and was instructed to use an office that doubled as a storage room. After taking a medical leave, she provided Lockheed with a notice of forced termination and filed a complaint with the Occupational Safety and Health Administration alleging violations of Sarbanes-Oxley.

OSHA denied her complaint, but an administrative law judge found for Brown after a two-day trial, awarding reinstatement, back pay, medical expenses, and non-economic compensatory damages in the amount of $75,000. The Department of Labor Administrative Review Board affirmed the findings.

On Lockheed’s appeal, the 10th Circuit also affirmed, finding that an allegation of shareholder fraud is not the only category of employer conduct covered by Sarbanes-Oxley.

Lockheed argued that Brown’s complaint failed to trigger the protections of the Act because it sounded in mail or wire fraud and not fraud against shareholders. But “[t]his interpretation of the statute is incorrect,” the panel said.

“The plain, unambiguous text of §1514A(a)(1) establishes six categories of employer conduct against which an employee is protected from retaliation of reporting: violations of 18 U.S.C. §1341 (mail fraud), §1343 (wire fraud), §1344 (bank fraud), §1348 (securities fraud), any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders,” the court explained.

Because the statute lists various federal laws, “Lockheed’s reading of the statute would render their enumeration. . . wholly superfluous,” the court said. “Congress could have accomplished the more limited purpose attributed to it by Lockheed by limiting whistleblower protection under Sarbanes-Oxley only to an employee who reports conduct ‘the employee reasonably believes constitutes a violation of any provision of federal law relating to fraud against shareholders.’ Because Congress did not so phrase the statute, the proper interpretation of §1514A(a) gives each phrase distinct meaning and holds a claimant who reports violations of 18 U.S.C. §§1341, 1343, 1344, or 1348 need not also establish such violations relate to fraud against shareholders to be protected from retaliation under the Act.”

Further, the court deferred to the Board’s interpretation of the Act, which recognized Brown’s claims. The three-judge panel dismissed Lockheed’s contention that deference was not required because the Board’s stance changed from a previously expressed position. “Because the Board’s interpretation of Section 806 is based on a permissible construction of the statute, we hold an employee complaint need not specifically relate to shareholder fraud to be actionable under the Act,” the court concluded.

Rounding out its analysis, the panel said Brown met all of the other elements required to establish a prima facie claim under Sarbanes-Oxley’s whistleblower protection provisions.

Brown subjectively believed the VP committed fraud – even if she didn’t use that word in her complaint to HR – and her belief was objectively reasonable, the court said.

Noting “the litany of adverse circumstances Brown faced following her ethics complaint,” a reasonable person would see resignation as her only option under these circumstances. “Prior to making an ethics complaint, Brown held a leadership position, had her own office, and received consistently high performance ratings,” the court said. After her complaint, Brown received lower performance ratings, lost her title, office, and supervisory responsibilities, and was told she was one of two employees considered for a layoff, “kept in a constant state of uncertainty as to whether she would continue to have a job and, if so, what her job would be.”

Finally, the court said Brown’s protected activity was a contributing factor in the unfavorable personnel action. Shortly after the conclusion of the investigation against the VP, “the cascade of difficulties which culminated in Brown’s constructive termination” began, the court said. In addition to temporal proximity, the court applied the cat’s paw theory of liability to a new supervisor who relied upon the VP for input in personnel matters.

Upholding the ruling for Brown, the 10th Circuit remanded for a quantification of damages, particularly in light of the fact that an appropriate position at Lockheed no longer exists.

To read the decision in Lockheed Martin Corp. v. Administrative Review Board, click here

Why it matters: The 10th Circuit’s broad interpretation of Sarbanes-Oxley’s whistleblower protections is bad news for employers hoping for a narrower reading of the Act. Lockheed sought to contain whistleblowers’ claims to shareholder fraud, not more generalized fraud, but an administrative law judge, the Administrative Review Board of the Department of Labor, and the 10th Circuit have now all taken a contrary position. The decision serves as a warning to employers about the potential breadth in how courts will interpret the law.

back to top



pursuant to New York DR 2-101(f)

© 2024 Manatt, Phelps & Phillips, LLP.

All rights reserved