Financial Services Industry Prime Target For Wage And Hour Claims

The Fair Labor Standards Act ('FLSA' or the 'Act') has been in existence since 1938 and forms the backbone for the basic compensation model used by most businesses. The Act, as well as similar state laws, prescribes the minimum wage and hours standards for all employers covered by the Act. At its most basic level, the Act describes the minimum wage that must be paid to an employee and sets forth the classification of workers exempt from receiving overtime wages for hours worked in excess of forty hours in a given week. The Act is complex in structure and perhaps even more in application. Consequently, and without surprise, the Act has become fertile ground for claims against employers. Indeed, wage and hour litigation, especially class and collective actions, is rapidly becoming one of the largest risks for businesses of all sizes.

Until recently, plaintiffs have lodged FLSA claims against our traditionally labor intensive industries such as retail, manufacturing or food service. Now, the financial services industry (the 'industry') appears to be a target. There is not a specific reason for the targeting of the industry, but one possible reason is that employees in these sectors have a higher salary than those in traditional labor intensive industries. Thus, plaintiffs have the opportunity to bring claims against companies with deep pockets and an ability to pay. Further, these suits appear to have been successful, because of the industry's untraditional and complicated pay structure. Most registered representatives and even managers are not paid a traditional hourly wage or may not receive the guaranteed weekly wage; instead these employees receive wages and commissions based on the products sold, which sometimes requires employees to work in excess of forty hours in a given week. As a result, plaintiffs assert that these employees are not exempt, and thus companies violate FLSA by not paying overtime.

Examples of this targeting include:

Smith Barney, Morgan Stanley and Merrill Lynch paid $98 million, $42.5 million and $37 million, respectively, to settle claims alleging the failure to pay overtime due to the misclassification of its brokers;

Countrywide Financial Corp. paid $40 million to call center 'account executives' to settle similar claims;

Bank of America paid $15 million to settle claims that loan officers had been denied overtime;

State Farm Insurance Co. paid $135 million to settle claims that claims adjusters should have been paid overtime pay;

Prudential Financial, Inc. was recently named in a putative collective action by 'registered representatives' who sold insurance and securities products and were allegedly denied overtime pay and had impermissible deductions taken from their pay;

Wachovia Securities is named in another putative class action by brokers claiming that they were not paid overtime;

The DOL has filed a civil action against Alliance Mortgage Group and Credit Financial Services seeking unpaid wages to loan officers who allegedly did not receive minimum wages.

Faced with this sobering reality, the industry must do a better job analyzing its various compensation structures to ensure their compliance with the Act and state law equivalents. This requires an understanding of the DOL's regulations regarding exemptions from overtime pay (otherwise known as the 'white collar' exemptions). With certain exceptions - generally not applicable to the industry - the Act does not limit the number of hours one may work in any given week. On the other hand, unless the worker is exempt, that worker must receive extra (time and a half) compensation for hours worked in excess of forty for the week. Employees earning certain levels of compensation and those employed in a bona fide executive, administrative or professional capacity (as well as certain highly compensated individuals, outside sales persons and computer systems analysts and programmers) are exempt from the overtime requirements.

Two years ago the DOL issued new regulations redefining exemptions applicable to employees, including executive and administrative employees. These regulations redefined the traditional Salary and Duties Tests, which must be complied with in order to qualify for an exemption. A brief summary of the major changes follows:

Salary Test

Under the new rules, workers earning less than $455 per week ($23,600 per year) are guaranteed overtime protections regardless of their job duties. Section 541.604(a) provides that this may include compensation for commissions or a percentage of the sales or profits 'if the employment arrangement also includes a guarantee of at least $455 each week paid on a salary basis.' Id. This 'additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off.' Id. In addition, the final regulations include an exemption for 'highly compensated' employees who earn at least $100,000 per year and 'customarily and regularly' perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.

Duties Tests/The 'White Collar' Exemption

Executive Employees

An exempt executive's primary duty 'is management of the enterprise in which the employee is employed' or the management of a recognized department or subdivision of the enterprise, directs the works of at least two or more other employees, and has the authority to 'hire or fire' other employees or makes recommendations as to the 'hiring, firing, advancement, promotion or any other change of status.'

Administrative Employees

An administrative employee's primary duty must be 'the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customer' and the employee must exercise 'discretion and independent judgment with respect to matters of significance.'1

The regulations include illustrations detailing how insurance claims adjusters and financial services employees may satisfy the test. Insurance claims adjusters' duties should include: activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims, determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation. 29 C.F.R.541.203(a).2

Financial services employees' duties should include: work such as collecting and analyzing information regarding the customer's income, assets, investments or debts; determining which financial products best meet the customer's needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer's financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption. Id. at541.203(b); see also DOL Fact Sheet #17M.3

Best Practices For Reducing Risk

In order to reduce risk and exposure under FLSA, companies should examine (1) the salaries paid to and the classifications for employees, including their representatives, claims and computer personnel, and call-center employees, and (2) whether the particular job duties qualify for an exemption. Thereafter, a company should develop and implement best practices in order to reduce any potential exposure.

For instance a company should determine whether employees classified as administrative receive at least $455 a week and perform duties that include the following:

Collecting and analyzing a customer's financial information;

Determining which financial products best meet the customer's needs;

Advising the customer regarding different financial products;

Marketing, servicing or promoting the employer's financial products; and

Training staff and managing the affairs of a particular office.

If persons perform these duties they should qualify as administrative employees. See September 8, 2006 DOL Opinion Letter (depending on a financial services employees' duties, they should qualify 'as exempt administrative employees, even if they are involved in some selling to consumers').4 This examination may reveal that a certain employee only sells financial products which may necessitate a change in the employee's duties in order to be classified as exempt.

Further, a company needs to determine if an employee classified as exempt receives the guaranteed minimum weekly salary. If the employee does not, a company should consider implementing similar policies as those implemented by several brokerage companies in connection with the above-mentioned settlements. These policies provide for a monthly base-pay system that ensures that brokers receive the minimum weekly salary, regardless of the sales generated and commissions earned.5 These changes came before a recent court's finding that draws received by brokers did not qualify as guaranteed salary and plaintiffs' duties failed to qualify for an exemption. See Takacs v. A.G. Edwards & Sons, Inc. , No. 04-CV-1852, 2006 WL 2297616 (S.D. Cal. Aug. 2, 2006) (decided under older regulations).

Finally, in determining whether to change particular business practices, a company should determine whether there are other business considerations or unintended consequences that may result, such as additional fiduciary obligations associated with greater employee duties or additional costs associated with a guaranteed salary. Based on these considerations, a company may decide not to change a particular employee's classification. Regardless of the path chosen, being proactive and undertaking a risk assessment of compensation systems would be the best measure to heading-off a wage and hour claims.

1 This test is substantially the same as the older rule. See September 8, 2006 Opinion Letter, 2006 WL 2792445.
2 See also August 26, 2005 Opinion Letter, FLSA 2005-25 (distinguishing between insurance claims adjusters who follow guidelines and exercise discretion). FLSA litigation involving claims adjusters has decreased with the exception of a number of pending cases under the old regulations.
3 This article does not cover possible exemptions under Subpart D (professional employees), Subpart E (computer employees) and Subpart F (outside sales persons).
4 The DOL acknowledged that pre-2004 cases holding that financial services employees qualify as exempt remain good law . See Hogan v. Allstate Ins. Co ., 361 F.3d 621 (11th Cir. 2004); Reich v. John Alden Life Ins. Co., 126 F.3d 1 (1st Cir. 1997); Wilshin v. Allstate Ins. Co . , 212 F. Supp. 2d 1360 (M.D. Ga. 2002).
5 Evelyn Juan, Smith Barney guarantees monthly minimum pay to brokers ,, June 16, 2006.

Published November 1, 2006.