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July 05, 2016 Top Story

Jury to Consider Classification of Distributors for Overtime Pay

Ruling on release of overtime is one of first impression

Erin Louise Palmer

A class action lawsuit challenging the classification of distributors of a company’s products as independent contractors, which limits their right to overtime pay under federal and state law, may go forward to trial. In Rehberg v. Flowers Baking Company of Jamestown, the district court denied the company’s motion for summary judgment, concluding the company presented insufficient evidence its distributors were independent contractors. Section leaders recognize the importance of a company’s control over its distributors in determining whether they are independent contractors.

Overtime Pay under the FLSA and NCWHA

The Fair Labor Standards Act (FLSA) and the North Carolina Wage and Hour Act (NCWHA) require time-and-a-half pay for work over 40 hours per week. The FLSA’s overtime rules, however, do not apply to an employee who is an “outside salesman.”

Although the FLSA does not define outside salesman, Department of Labor regulations define the term based on two criteria. First, an outside salesman’s “primary duty” is making sales or filling orders for which the client or customer will pay consideration. Second, an outside salesman is customarily and regularly engaged away from the employer’s place of business in performing that primary duty. The regulations define primary duty as “the principal, main, major or most important duty that the employee performs.”

Distributors Claim Improper Classification as Independent Contractors

The defendants in Rehberg are Flowers Foods and an operating subsidiary that produces and distributes the baked goods. The plaintiffs are a group of distributors of Flowers’ products classified under a “distributor agreement” as independent contractors.

Among their job duties, the distributors delivered Flowers’ products to customers, restocked shelves with fresh products, removed stale products, and made sales of Flowers’ products to account customers. Both Flowers and the distributors dispute whether the distributors’ primary duty was making sales of Flowers’ products.

On September 11, 2012, the distributors filed a class action lawsuit in the U.S. District Court for the Western District of North Carolina alleging Flowers misclassified them as independent contractors. The distributors alleged they were entitled to certain benefits given to employees under the FLSA and the NCWHA, including time-and-a-half pay for work over 40 hours per week.

Flowers denied the distributors were entitled to overtime pay under the FLSA. According to Flowers, the distributors were outside salesmen paid based on their sales of products and the distributors regularly determined what products to order for their customers. The distributors pointed to the prominent role of the national sales team in determining what products they would sell and how they would sell those products.

District Court Recognizes Lack of Precedent

The district court recognized the lack of any case law discussing whether NCWHA claims can be released in light of public policy concerns. However, the district court found that various provisions of the NCWHA, as well as its stated purpose of addressing the “wage levels of employees, hours of labor, [and] payment of earned wages” for the general welfare of the people, indicated that employers should not be permitted to contract around proper payment of their employees. Citing a provision providing that a release of claims entered in exchange for less than what an employee is owed is unenforceable, the district court concluded that employers in North Carolina should not be able to require their employees to waive wage and hour claims through general releases, either under federal or state law.

In considering whether the distributors were outside salesmen excluded from overtime pay requirements under the FLSA, the district court discussed whether distributors’ primary duty was making sales. The distributors did not appear to dispute they sometimes made sales as part of their job responsibilities. But, the district court questioned whether Flowers could prove by clear and convincing evidence that sales were “the principal, main, major or most important duty that the employee performs.”

“As with many independent contractor misclassification cases, the pivotal issue in this case is the amount of control Flowers exercised over the distributors,” notes Trish Higgins, Sacramento, CA, chair of the Wage and Hour Subcommittee of the ABA Section of Litigation’s Employment & Labor Relations Committee. Here, the district court denied summary judgment because Flowers failed to present sufficient evidence the distributors’ primary duty was sales. While Flowers emphasized the distributors received training on how to increase sales, the district court recognized the “significant sales done by the national sales team.” The district court also noted conflicting information regarding the proportion of the distributors’ income directly attributable to sales and whether the company or the distributors controlled the amount of products delivered.

Section leaders emphasize the importance of defining and monitoring the roles of independent contractors. “Companies have to keep in mind that every rule or policy controlling the way someone works gives the appearance of an employer-employee relationship,” warns Teresa R. Bult, Nashville, TN, cochair of the Section of Litigation’s Employment & Labor Relations Committee. “It is important to avoid creating any unnecessary supervision or policies that direct how work will be done,” adds Bult. “Companies should document the respective roles and responsibilities of the company and the independent contractor, as well as ensure that the actual day-to-day practices are consistent with that documentation,” says Higgins.

Erin Louise Palmer is an associate editor for Litigation News.

Keywords: Fair Labor Standards Act, FLSA, independent contractor, employment law, Wage and Hour Act

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