A recent decision illustrates the dangers of even a modest wage-hour claim under Washington law. A $12,000 overtime dispute turned into a bill for over $500,000 before the costs of appeal. According to the decision, an employee was incorrectly classified as an "administrative" employee exempt from Washington's overtime requirements. He was awarded $12,000 for his unpaid overtime. That amount was doubled because the employer did not prove that there was a "bona fide dispute" about the improper classification - making the failure to pay a "willful withholding" entitling the employee to double damages. The employer was also ordered to pay the employee's attorney fees, which amounted to nearly $500,000. The employer appealed and lost again. It was ordered to pay the additional attorney fees and costs the employee incurred on appeal. And, of course, it has to pay its own attorney fees and cost.
Andrew Fiori worked for PPG Industries ("PPG") as a territorial manager responsible for promoting the sales of Olympic brand paints and stains at 11 large home improvement retail stores. PPG classified Fiori as an "administrative employee" who is considered exempt from Washington's overtime laws. Fiori worked only about 40 weeks before PPG discharged him. He then sued for overtime compensation, contending that he had been misclassified as an exempt employee.
The trial court ruled that Fiori had in fact been misclassified and that he was entitled to overtime compensation. After the court decided how his overtime pay should be calculated, the parties stipulated that the overtime compensation that Fiori should have received totaled a little more than $12,000. The court then determined that PPG's failure to pay Fiori overtime was "willful" under Washington law, entitling him to double damages. Therefore the court entered judgment against PPG for approximately $24,400. Because Fiori won his case, PPG was also required to pay his reasonable attorneys' fees and costs. Because the case included extensive wranglings, including an unsuccessful effort by PPG to move the case to federal court, the court determined that PPG should pay Fiori almost $600,000 in attorneys' fees and costs - many times more than the overtime pay at issue, even after it was doubled!
PPG appealed to the Washington Court of Appeals and lost again. Fiori v. PPG Indus., Inc., No. 66956-7 (Wash. Ct. App. July 2, 2012). Because Fiori won his case on appeal, PPG was ordered to pay the additional attorneys' fees and costs that he incurred on appeal.
How could a "territorial manager" be a nonexempt employee?
Washington's minimum wage law generally requires that all employees receive overtime compensation if they work more than 40 hours in a week. There are a number of exceptions to this general requirement, one of which applies to "administrative employees." An administrative employee, as defined by regulation, is one who satisfies three requirements: (1) he or she is compensated on a salary basis of not less than $250 per week (The corresponding exemption under the federal Fair Labor Standards Act requires an employee to be paid at least $455 a week), (2) his or her "primary duty consists of the performance of office or non-manual work directly related to management policies or general business operations of his [or her] employer or his [or her] employer's customers," and (3) his or her work "includes work requiring the exercise of discretion and independent judgment." Exemptions such as the administrative exemption are construed narrowly, and the employer has the obligation to prove that the employee satisfies the pertinent requirements.
In Fiori's case, the parties agreed that he had been paid on a salary basis and therefore only the second two requirements were in question. So what were Fiori's work duties? As noted above, Fiori was responsible for servicing 11 stores, nine in Washington and two in Oregon. He was required to service two stores each day, for four hours each, and to visit each of his 11 stores at least three times a month. Therefore, he spent many hours on the road. He was also required to review and respond to email and voice mail messages and submit various reports. When he was at one of his assigned stores, he spent the vast majority of his time performing manual labor and making individual retail sales to the store's customers and contractors. During a typical four-hour store visit, he spent approximately two hours managing the "chip rack" (where paint color samples are displayed) and another hour down-stocking and rotating stock (building displays of and stocking shelves with Olympic products). Because Fiori wore an Olympic shirt and badge during his store visits, customers would frequently ask him questions, assuming he was an employee of the store. Fiori also spent time at the contractor desk, helping contractors find products. His job's focus, according to Fiori, was to drive sales, and he worked to ensure that the Olympic displays looked good and racks were stocked so that they looked the way the store wanted them to.
With these facts in mind, the court of appeals first looked at the second requirement of the administrative exemption - that Fiori's "primary duty consists of the performance of office or non-manual work directly related to management policies or general business operations." This requirement has two elements: the employee's work must be "office or non-manual work," and that work must be "directly related to management policies or general business operations." The court concluded that Fiori's work did not satisfy either element. He spent most of his time doing manual labor and his support of retail sales did not involve management policies or general business operations. The court noted that Fiori did not participate in the development of PPG advertising or promotional campaigns, and he did not work with PPG's financial department to prepare budgets and cost estimates. He had no authority to mark down prices or change the promotional materials without the approval of the store manager. He certainly did not have the authority to formulate management policies or operating procedures. Instead, he simply performed manual labor and individual retail sales. PPG argued that Fiori's primary duty was "promoting sales" - a duty that can satisfy the administrative exemption. The court rejected that argument, pointing out that the exempt duty of "promoting sales" is a much higher level activity than simply performing normal merchandising and retail sales activities.
The court also concluded that Fiori did not satisfy the third requirement - that his work required the exercise of discretion and independent judgment. PPG argued that Fiori met this requirement because he was not "scripted" in his interactions with customers or the store's employees and he could develop his own strategy to promote sales and determine how to best allocate his time. The court disagreed, again pointing out that Fiori did not develop PPG's promotional messaging, was not permitted to alter promotional materials, did not have authority to formulate policy or operating procedures, and did not have the authority to negotiate on behalf of or bind PPG in financial matters. Therefore, Fiori did not exercise the sort of discretion and independent judgment that is required to meet the administrative exemption.
Accordingly, Fiori was entitled to overtime compensation for those weeks when he worked more than 40 hours.
So how should Fiori's overtime have been computed?
Similar to the Fair Labor Standards Act, Washington's Minimum Wage Act requires nonexempt employees to be paid not less than one and one-half times their "regular rate" for each hour worked over 40 in a week. For a normal hourly employee who receives no other compensation, the overtime rate is simple: one and one-half times the hourly wage. Fiori, however, was paid a fixed salary that did not vary by the number of hours he worked each week. How should his overtime pay have been calculated? PPG argued that it should have been calculated under the "fluctuating workweek" method - a compensation arrangement that is permissible under both federal and state law. The fluctuating workweek method of compensation is based on the understanding that an employee's work hours will fluctuate from week to week and that the weekly salary is intended to compensate him or her for all of those hours. If the parties have a clear understanding on those points, the employee's "regular rate" is determined by dividing his weekly salary by the total number of hours worked in a particular week. Because the weekly salary is intended to compensate the employee for the straight time portion of his pay for overtime hours, he or she is entitled to be paid only an additional one-half the regular rate for each overtime hour. Therefore, according to PPG, Fiori was only entitled to half time for his overtime hours.
Fiori strongly disagreed, arguing that his weekly salary should be divided by 40 hours to determine his "regular rate" and that he was entitled to be paid an additional one and one-half times that rate for his overtime hours. The court of appeals agreed with Fiori. Although the court noted that fluctuating workweek agreements are permissible in Washington if they satisfy certain requirements, the fluctuating workweek approach was not applicable here. Because a valid fluctuating workweek agreement contemplates the contemporaneous payment of additional compensation for overtime as worked, this did not apply as Fiori had been misclassified as an exempt employee. The court also noted that guidance from the Washington State Department of Labor and Industries says that a weekly salary is presumed to compensate an employee for only 40 hours a week unless there is a clear understanding specifying the number of hours for which the salary is intended to cover. Because PPG did not establish "a specified number" of hours that the salary was intended to cover, the 40-hour presumption controlled. (This presumption was strengthened by the fact that Fiori's hiring paperwork indicated that he would be working 40 hours per week.)
Why double damages?
Under Washington law, if an employer willfully withholds wages owed to an employee, the employee is entitled to double damages. The standard of willfulness is relatively low - the failure to pay must simply be intentional. However, if a bona fide dispute exists over the payment, the failure to pay is not willful. A bona fide dispute is a "fairly debatable dispute" over whether the amount in question must be paid.
PPG argued that Fiori had the burden of proof on the willfulness issue and to prevail he had to prove that PPG did not have a genuine belief that it had properly classified him. The court of appeals disagreed, stating that requiring employees to prove a negative based on facts not within their knowledge would subvert the remedial purpose of the Minimum Wage Act. Rather, once Fiori proved that PPG knew what it was doing and intentionally treated him as an exempt employee, the willfulness standard was satisfied unless PPG could prove that a bona fide dispute existed as to whether Fiori had been properly classified. PPG, however, did not offer any evidence about the facts it had considered regarding Fiori's classification. Therefore, there was no evidence to establish that there was a bona fide dispute over the propriety of Fiori's classification. Thus, PPG did not carry its burden. Also, the court thought it was significant that PPG had earlier called territorial managers "retail sales representatives." This job title change suggested PPG was intentionally trying to evade the overtime requirements. For these reasons, double damages were appropriate.
How are attorneys' fees to be calculated?
When a prevailing party is entitled to recover attorney fees, the normal approach is to multiply a reasonable hourly rate by the reasonable number of hours incurred in obtaining the successful result. In exceptional cases, an even greater amount can be awarded if the normal calculation does not adequately account for the high-risk nature of the case. The trial court thought that this was an appropriate case to award more attorneys' fees and therefore increased them by 25%. The court of appeals disagreed, reducing the fee award to the normal amount which was still nearly $480,000.
PPG objected to this amount for a number of reasons, including that it was disproportionate to the damages award. The court of appeals rejected this argument noting that although a relevant consideration, proportionality is not a conclusive factor.
Because Fiori prevailed on appeal, he will be entitled to be awarded additional attorneys' fees and costs incurred on the appeal.
Takeaways
There are several takeaways for employers in this case.
- First, relatively modest wage-and-overtime claims can end up
being very expensive once the costs of the defense are included,
particularly if you lose and have to pay the employee's
attorneys' fees and costs as well as your own.
- Second, the administrative exemption is the most difficult of
all of the exemptions to apply and it is often misapplied.
- Third, it will be challenging to apply a fluctuating workweek
method of overtime compensation in a misclassification case.
If you want to adopt that method going forward, be sure you have a
clear understanding with your employee that satisfies those
requirements.
- Fourth, if you cannot establish a good-faith basis to believe that you have classified your employees properly, you are likely to get hit with double damages.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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