Labor & Employment Blog: Lessons from Epic System's Arbitration Ruling: Classify Employees as Exempt Cautiously:

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  • Labor & Employment Blog
    January
    28
    2020

    Lessons from Epic System's Arbitration Ruling: Classify Employees as Exempt Cautiously

    Jennifer S. Mirus & Brian P. Goodman

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    Even with a recent U.S. Supreme Court victory, Epic Systems Corporation could still be paying hefty damages for misclassifying employees as exempt from overtime – and Epic is not alone. Jennifer Mirus and Brian Goodman discuss properly classifying employees as exempt from overtime in the context of recent rulings.
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    In May 2018, the United States Supreme Court ruled that Epic Systems in Verona, Wisconsin, could force its employees to sign agreements requiring them to pursue claims for unpaid overtime through private arbitration.1 Since the Supreme Court’s decision, several current and former Epic employees filed private arbitrations for back overtime pay.

    The First Arbitration between Epic and Technical Writer

    In the first of the private disputes to be decided, an arbitrator ruled on Dec. 27, 2019, that an Epic technical writer did not qualify as exempt from overtime, and was entitled to back overtime pay pursuant to the federal Fair Labor Standards Act and state law.2

    The ruling focused mainly on the administrative exemption which, as any employment lawyer knows, is amorphous and difficult to apply. The administrative exemption requires that the employee’s primary duty involves the performance of office or nonmanual work directly related to the management or general operations of the employer or the employer’s customers.3

    Jennifer S. Mirus com jmirus boardmanclark Jennifer S. Mirus, U.W. 1993, is co-chairperson of the labor and employment team at Boardman Clark LLP, Madison, where she represents employers in all aspects of employment relations.

    Brian Goodman com bgoodman boardmanclark Brian P. Goodman, U.W. 2016, is a member of the labor and employment team at Boardman Clark LLP, Madison, where he assists employers on a wide range of legal issues.

    Jobs focused on general operations are generally found in functional areas of an entity, such as accounting, finance, budgeting, purchasing and procurement, human resources, public relations, legal and regulatory compliance, computer network and database administration, and other roles critical to internal operations.4

    By contrast, roles focused on the production and sales of the employer’s products are not deemed to focus on general operations of the organization, and thus do not generally qualify for the administrative exemption.

    In the Epic arbitration, the arbitrator rejected Epic’s argument that the technical writer qualified as administratively exempt, finding that the technical writer’s job duties were closely connected to Epic’s software products, and thus the technical writer was a production employee who did not qualify under the administrative exemption.

    Epic is facing more claims for arbitration for back overtime from technical writers and quality assurance staff members.

    Misclassification Affects All Employers

    Epic is not alone in facing legal challenges to its exempt / nonexempt classification practices.

    A lawsuit settled in 2019 against convenience store chain WaWa resulted in the company paying out $1.4 million to misclassified assistant general managers.5

    Overtime lawsuits are likely to continue, and employers in Wisconsin are likely to see more scrutiny paid to their exemption classifications in the wake of a 2019 action by Governor Evers.

    The Governor's Joint Task Force

    On April 15, 2019, Governor Evers created a new Joint Enforcement Task Force on Payroll Fraud and Worker Misclassification regarding employee versus independent contractor status.

    The task force will also address the improper classification of nonexempt employees as exempt from overtime pay. To ensure employers are correctly classifying employees, the new task force seeks to increase coordination and investigative efforts among state agencies. The increased coordination between agencies could lead to increased employer audits.

    The Requirements for the 'White Collar' Exemptions

    The most common exemptions that exempt employees from mandatory overtime pay are called the “white collar” exemptions. The Fair Labor Standards Act (FLSA) identifies three basic requirements for an employee to be exempt from overtime under those exemptions:

    • a salary level requirement;

    • a salary basis requirement; and

    • a primary duty requirement.

    The salary level requirement. To meet the salary level requirement, employees must be paid $684 per week (annualized to $35,568 per year).6 This salary level was set by new regulations that took effect on Jan. 1, 2020. Non-discretionary bonuses, incentives, and commissions that are paid annually or more frequently can count toward satisfying the salary level.7 Employers can also make a year-end “catch up” payment within certain restrictions to ensure an employee meets the salary level requirement for that year.8

    The salary basis requirement. To meet the salary basis requirement, employers must pay employees a predetermined amount of compensation without regard to the quality or quantity of the work performed.9

    There are a few situations when employers can deduct from an employee’s salary.10 For example, an employer can deduct a prorated amount from an employee’s salary if that employee that is absent for one or more full days for personal reasons, and when an employee is absent for one of more full days occasioned by sickness if the employer has a sick leave policy.

    Therefore, if an employee has used all of his/her paid sick leave and is absent for another full day (and has performed no work – such as checking email), the employer can make a prorated deduction from the employee’s salary for the missed day of work.

    As another example, prorated deductions can also be made when employees are given unpaid disciplinary suspensions of one or more full days for infractions of conduct rules.

    The primary duties requirement. Finally, employers must ensure the employee meets the primary duties requirement for one of the "white collar" exceptions.

    The term “primary duty” under federal law means the principal, main, major, or most important duty that an employee performs.11

    Executive employees are generally required to have a primary duty of managing the enterprise, must regularly direct the work of two or more employees, and have the authority to hire or fire other employees or their suggestions or recommendations regarding such employment actions have to be given particular weight.12

    Administrative employees are generally required to have a primary duty involving the performance of nonmanual work directly related to the business operations of the employer or the employer’s customers. That primary duty must also include the exercise of discretion and independent judgment with respect to matters of significance.13

    Professional employees are generally required to have a primary duty involving the performance of work requiring knowledge of an advanced type in a field acquired by a prolonged course of specialized intellectual instruction.14

    Wisconsin’s Overtime Exemptions

    Wisconsin has its own overtime exemption laws applicable to most employers. When such state laws provide greater protection to employees than the FLSA, employers must follow the state laws.

    In Wisconsin, to qualify as exempt from overtime pay, most employees must not devote more than 20% of their hours of work in a workweek to activities that are not directly and closely related to the performance of exempt work. (The standard is not more than 40% in a retail or service industry).15 Therefore, in most industries, employers must be able to prove that at least 80% of an employee’s work is exempt work or directly and closely related to that exempt work.

    Ongoing and Diligent Attention Required

    Day-to-day duties rather than job titles and job descriptions determine whether an employee is properly classified under one of these “white collar” exceptions. Job descriptions will generally be reviewed if there is a claim of exemption misclassification, and therefore it is important that employers maintain up-to-date job descriptions that sufficiently and accurately reflect the exempt duties held by the position.

    It is critical that exemption classifications be periodically reevaluated, because workforce restructurings, reductions in force, and the natural evolution of positions cause day-to-day job duties to change.

    In the case of the large WaWa settlement, the assistant general managers claimed that on a day-to-day basis, they performed the same duties as hourly workers. While WaWa did not admit any fault in the settlement, the significant dollar amount of the settlement clearly reflected the risk that WaWa foresaw in defending the case.

    The first Epic private arbitration, ongoing cases around the country, and the possibility of increased audits remind us that overtime exemptions demand ongoing and diligent attention.

    Don’t miss the February Labor and Employment Law CLE luncheon where LIRC Chairperson Michael Gillick will be speaking on "How to Dazzle the Labor Industry Review Commission." For more information and registration, please see Dazzle the Commission.

    Endnotes

    1 Epic Sys. Corp. v. Lewis, 138 S.Ct. 1612 (2018).

    2 Emily Harris vs. Epic Systems (AAA case no. 01-18-0002-6762).

    3 29 C.F.R. § 541.200(a)(2).

    4 29 C.F.R. § 541.201(b).

    5 Joint Stipulation of Settlement and Release at 3, Gervasio v. Wawa Inc., No. 17-cv-245, 2018 WL 385189 (D.N.J. Jan. 11, 2018).

    6 29 C.F.R. § 541.600.

    7 29 C.F.R. § 541.602(a)(3).

    8 29 C.F.R. § 541.602(a)(3)(i), (ii).

    9 29 C.F.R. § 541.602(a).

    10 See 29 C.F.R. § 541.602(b).

    11 29 C.F.R. § 541.700.

    12 29 C.F.R. § 541.100.

    13 29 C.F.R. § 541.200.

    14 29 C.F.R. § 541.300.

    15 Wis. Admin. Code DWD § 274.04.





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