Labor and Employment Update - Fall 2007

INDIVIDUAL OFFICERS MAY BE LIABLE FOR A CORPORATION’S FLSA VIOLATIONS

Recently, the First Circuit Court of Appeals held that under certain circumstances, a corporate officer may be held personally liable for the company’s wage payment violations of the Fair Labor Standards Act (“the FLSA”). In Chao v. Hotel Oasis, Inc., the Court held that a corporate officer may be personally liable because the FLSA defines “employer” as any person acting directly or indirectly in the interest of an employer in relation to an employee. The First Circuit interpreted this definition to mean that a single organization may have multiple “employers” that are responsible for ensuring compliance with the FLSA.  The Court considers several factors when it determines whether an “employer,” or corporate officer, may be liable for a FLSA violation.  Among these considerations are the corporate officer’s role in the corporation’s non-compliance with the FLSA and his/her ownership interest in the organization and control over the corporation’s operations, financial affairs or compensation practices. 

In Chao, the Department of Labor filed a complaint against a hotel and its president alleging that they violated the FLSA by paying less than minimum wage; not paying employees for attending non-work hour meetings; not paying employees for training; and not properly paying for overtime work.  Without analyzing the president’s ownership interest in the hotel, the Court held that the president, because he caused the hotel’s FLSA violations and had ultimate control over the hotel’s day-to-day operations including, hiring, setting wages, and setting employee schedules, was jointly and severally liable with the hotel for the FLSA violations.  The Court did not address the hotel president’s ownership interest because neither party raised that issue and because the president’s personal responsibility for the violations outweighed the Court’s ownership consideration. 

If a corporate officer has significant control over his/her company’s day-to-day operations, as mentioned above, then he/she must determine whether the company’s wage payment practices comply with the FLSA.  Corporate officers may also be personally liable under state law for their company’s wage payment violations.  Therefore, corporate officers should also ensure that their company’s wage payment program complies with applicable state regulations.

NEW YORK STATUTE REQUIRES WRITTEN AGREEMENTS
FOR COMMISSIONED EMPLOYEES

As of October 16, 2007, New York employers are required to obtain and maintain written employment agreements with their commission salespersons. Specifically, the terms of employment between an employer and a commission salesperson must be in writing and signed by both the employer and the commission salesperson.  In addition, the written agreement must be kept on file by the employer for at least three years and made available to the commissioner upon request. 

In order to comply with the law, the written agreement between employer and commission salesperson must include:

(i) a description of how wages, salary, drawing account, commissions and all other monies earned and payable will be calculated;

(ii) the frequency of reconciliation, if the agreement provides for a recoverable draw; and

(iii) details regarding the payment of wages, salary, drawing account, commissions and all other monies earned and payable in the case of termination of employment.  

If an employer cannot produce such a written agreement upon the request of a commissioner, it will be presumed that the terms of employment presented by the commissioned salesperson are the agreed terms of employment.

This amendment should help avoid some of the issues that arise in all jurisdictions concerning payment of commissions such as:

1.            When does the commission vest?;

2.            Is it truly a vested commission or is it a draw with a reconciliation?; and

3.            Does the company’s commission plan comply with the state wage payment laws.

Most states provide tremendous flexibility regarding the structure of the commission plan.  However, disputes routinely arise about the exact specifics of the plan because they have not been effectively communicated to the salesperson. 

Because an employer’s failure to obtain and maintain such agreements may result in the presumption that the commission salesperson’s presentation of employment terms is the correct one, employers – – particularly in New York – – should create a form employment agreement to be used with all commission salespersons and make clear to the salespersons that execution of the document is necessary for the hiring and/or retention of their employment with the company.

NEW VERSION OF I-9 FORM ISSUED

The United States Citizenship and Immigration Services (“USCIS”) division of the federal government recently issued a new version of the I-9 form used by employers to verify an employee’s eligibility to work in the United States.  The most significant change to the form is that several documents (including the Certificate of U.S. Citizenship (N-560 or N-570), Certificate of Naturalization (N-550 or N-570), Alien Registration Receipt Card (I-151), Reentry Permit (I-327), and Refugee Travel Document (I-571)) are no longer acceptable documentation for proof of both identity and employment eligibility under “List A” of the I-9 form.  The reason for the change was an attempt to comply with certain changes in federal law designed to eliminate reliance on forms for which there were no adequate controls to prevent counterfeiting.  Other announced changes include:
 

• One new document being added to “List A” Documents:  Unexpired Employment Authorization Document (I-766)’
• Instructions regarding Section 1 of the Form I-9 now indicate that the employee is not required to provide his/her Social Security number in Section 1 of the form, unless he/she is employed by an employer who participates in E-Verify; and
• Employers may now sign and retain their I-9 forms electronically, per instructions on page 2 of the new I-9 Form.

According to a press release by the USCIS dated November 7, 2007, employers are permitted to implement the new I-9 form (with a form revision date of 6/5/07) immediately, although there will be an official 30-day “transition” period once the form is published in the Federal Register.

In addition, employers should be aware that the USCIS has also issued a new version of the Handbook for Employers (form M-274), which provides instructions on how to complete the I-9 Form.  The new form and revised handbook both may be found on the www.uscis.gov website (under “For Employers”).

ENFORCEABILITY OF TUITION REIMBURSEMENT AGREEMENTS – DECISION GIVES EMPLOYERS REASON TO SEEK REPAYMENT

Recently, the Superior Court of New Jersey upheld a tuition reimbursement agreement and ordered an employee to pay $15,000 to her former employer.  In Rhodia, Inc. v. Jones, Defendant Adrian Jones worked as an intern for Rhodia after graduating from high school and continuing while she pursued a business degree.  Prior to Jones’s graduation from college, Rhodia made an offer of employment in its finance department “commensurate with your skills and at a level of pay appropriate to the position upon completion of your MBA degree” that included a tuition payment agreement.  In exchange for its offer to pay the tuition for the remaining three years necessary for Jones to obtain her MBA, Rhodia required that Jones (1) maintain a 3.0 or better grade point average, (2) rejoin Rhodia during summer internship programs, (3) complete the MBA program, and (4) commence active employment with Rhodia upon graduation.

The letter agreement also included the following reimbursement provision: (1) if Jones continued her employment with Rhodia for thirty months after receiving her MBA she would have no repayment obligation; (2) if Jones voluntarily terminated her employment with Rhodia within twelve months she would have to reimburse the tuition payments in full; (3) if Jones voluntarily terminated her employment with Rhodia after twelve months, but within thirty months, she would have to reimburse one-half of the tuition payments; and (4) if Rhodia decided to terminate her employment for any reason other than for cause, Jones would have no repayment obligation.  However, nothing in the agreement alleged to create a contract of employment between Rhodia and Jones nor provide any legal guarantee of continued employment or level of compensation with the company.  Jones signed the agreement.  

After making the requisite tuition payments, Rhodia made Jones a formal offer of employment as a credit analyst with a starting salary of $44,000, to commence after her graduation.  Jones responded the next day by requesting a base salary between $49,000 to $53,000, an amount she claimed to be more commensurate with her experience with Rhodia and her educational background.  Although Rhodia refused to adjust the starting salary, Jones formerly accepted the credit analyst position three days after it was offered to her.

Jones began her employment as a credit analyst in June 2004.  On August 26, 2005, Jones submitted her resignation letter stating that she accepted a position with another company for an annual salary of $53,500.  Based on the letter agreement, Rhodia demanded partial reimbursement of the tuition payments.  Jones rejected this demand, and Rhodia filed its complaint.

In her defense, Jones claimed that Rhodia breached the agreement by failing to hire her at “a position commensurate with her skills and at a level of pay appropriate to the position.” Jones counterclaimed for the difference between the $44,000 salary she was paid by Rhodia and the $60,000 she receives in her new job. 

After hearing testimony and receiving evidence, the Court rejected Jones’ arguments that she never accepted the offer for employment as a credit analyst at a salary of $44,000, and that the job and salary offered by Rhodia was below the appropriate level of pay or job for an MBA graduate immediately out of school.  The Judge found the testimony from Rhodia’s witnesses to be credible and persuasive, including the fact that Rhodia used their own matrix to develop salary levels.  Accordingly, the Judge ordered repayment of the tuition in accordance with the agreement plus interest at 6.5 percent.

Reimbursement agreements with employees can be tricky.  State laws protect employees’ wages and generally prohibit deductions from paychecks.  If any employer wants to have such a policy, it must be clearly worded and reasonable. 

For example, deductions from an employees’ paycheck for failing to return their keys at the termination of employment, would generally not be enforceable – – regardless of whether there is a written agreement or not.

The Labor and Employment Group represents and counsels employers in all aspects of the employment relationship, including EEO litigation, union avoidance, negotiations, arbitrations, executive compensation, corporate transactions, and non-competition/non-solicitation agreements, as well as compliance with federal and state laws such as the Family and Medical Leave Act, the Americans with Disabilities Act, the Health Insurance Portability and Accountability Act, the Fair Labor Standards Act and the Occupational Safety and Health Act.

This document is published for the purpose of informing clients and friends of Klehr Harrison about developments in the areas of labor, employment and benefits, and should not be construed as providing legal advice on any specific matter. For more information about this publication or Klehr Harrison, contact Charles A. Ercole, Chair of the Labor and Employment Group, at (215) 569-4282 or visit the firm’s Web site at www.klehr.com