Court Report

By Margaret M. Clark and Maria Greco Danaher Apr 1, 2003
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HR Magazine, April 2003​​'Window of corrections' FLSA ruling; employees may not share arbitration costs; more.

Court Sides With Employer On FLSA 'Corrections'

[Moore v. Hannon Food Services Inc., 5th Cir., No. 01-60844, Jan. 20, 2003]

An employer was entitled to use the “window of corrections” under the Fair Labor Standards Act (FLSA) to make up for improper deductions of managers’ salaries, thereby preserving the managers’ overtime-exempt status, ruled the 5th U.S. Circuit Court of Appeals.

The ruling puts the 5th Circuit at odds with four others—the 2nd, 6th, 7th and 9th—that have held that an employer cannot apply the window of corrections to a pattern or policy of illegal deductions. Outcomes in the 3rd and 11th circuits are more in line with the 5th.

To be exempt from the FLSA’s overtime pay requirements, an employer’s “executives” must be paid on a salary basis. Making pay deductions based on the quality or quantity of a manager’s work is inconsistent with paying that person on a salary basis and, therefore, compromises the employee’s exempt status.

A Department of Labor (DOL) regulation—the so-called “window of corrections”—allows an employer to reimburse an employee and maintain that employee’s exemption if the deduction was “inadvertent, or is made for reasons other than lack of work.”

Over a period of four months, Hannon Food Services deducted pay from its managers’ weekly salaries to make up for cash register shortages. When advised by its lawyer to stop the practice, Hannon did so promptly and resumed its prior practice of making the deductions from the managers’ monthly bonuses.

The store managers sued Hannon, alleging violations of the FLSA. Hannon gave back the total deductions plus interest. The trial court nevertheless ruled for the plaintiffs as a matter of law and ordered Hannon to pay them four months of back overtime pay for the period when they had lost their exemption.

On appeal, the 5th Circuit agreed with Hannon that the trial court should have applied the window of corrections based on the language of the regulation. The Secretary of Labor had taken the position in other cases that the window of corrections cannot be applied to a practice of impermissible deductions to achieve retroactive compliance. The court, however, said that because the regulation is unambiguous, (“reimbursements may be made at any time to preserve the window of correction”), the Secretary’s interpretation required no particular deference.

By Margaret M. Clark, J.D., SPHR, senior legal editor for HR Magazine.

Arbitration Cost-Splitting Provisions Are Unenforceable

[Morrison v. Circuit City Stores, 6th Cir., No. 99-4099, Jan. 30, 2003. Shankle v. Pep Boys—Manny, Moe & Jack Inc., No. 99-5897, Jan. 30, 2003.]

Forcing employees to engage in arbitration—and to share the costs of that process—may not be legally enforceable, according to the 6th U.S. Circuit Court of Appeals.

Both Circuit City and Pep Boys required prospective employees to sign arbitration agreements with cost-sharing provisions.

A trial court granted Circuit City’s motion to dismiss manager Lillian Morrison’s race and sex discrimination lawsuit and to compel arbitration. But, when mechanic Mark Shankle sued Pep Boys to collect severance pay, a different trial court stopped the arbitration because the cost-splitting provision was invalid and the agreement unenforceable.

On appeal, the 6th Circuit found both arbitration agreements’ cost-splitting provisions to be invalid, although severable from the rest of each agreement. Accordingly, the court upheld both arbitration agreements, minus the offending provision.

The court stated that employees must be given the chance—before arbitration begins—to argue that the costs of the process are steep enough to deter them (and “similarly-situated individuals”) from pursuing their federal statutory rights through this medium.

The 6th Circuit judges also ruled that courts should define the class of “similarly situated employees” by job description and socioeconomic background, and should consider how typical arbitration costs would affect this group.

Some circuits (such as the 10th, 11th and the District of Columbia Circuit) have suggested that cost-splitting provisions are per se invalid, the court noted. Others have adopted a case-by-case approach, although one limited to the circumstances of the particular plaintiff.

By Maria Greco Danaher of the law firm of Dickie, McCamey & Chilcote in Pittsburgh.

Court OKs Cutback on Benefit Granted Post-Retirement

[Board of Trustees of the Sheet Metal Workers’ Nat’l Pension Fund v. Commissioner, 4th Cir., No. 02-1273, Jan. 31, 2003.]

To remain qualified for tax-favored status, an ERISA retirement plan may not eliminate or reduce a participant’s “accrued benefit.”

A national multi-employer defined benefit pension plan first included a COLA benefit in 1991. The plan trustees later learned that the cost of the COLA had been underestimated and that continuing to pay it would have an adverse financial impact on the plan. Accordingly, they amended the plan to eliminate the COLA for plan participants who had retired before the COLA had been added to the plan.

The Internal Revenue Service (IRS) determined that the COLA had become an accrued benefit and that its elimination violated the anti-cutback rule. The Tax Court did not support the IRS interpretation, but instead concluded that “ERISA was meant to protect only retirement benefits ‘stockpiled’ during an employe[e]’s tenure on the job.”

The 4th Circuit upheld the Tax Court decision, reasoning that ERISA gives wide latitude to plans in defining what counts as an “accrued benefit.” The anti-cutback rule ensures that “benefits promised will be benefits paid,” the court said. Employees who retired before 1991 never were promised a COLA benefit by the plan in existence during their service. The COLA did not accumulate during their service so as to become part of their legitimate expectations at retirement.

It was a gratuitous benefit that could be withdrawn without impairing the promised benefit, the court concluded.

By Margaret M. Clark, J.D., SPHR, senior legal editor for HR Magazine.

Home Office ‘Rarely’ A Reasonable Accommodation

[Rauen v. U.S. Tobacco Mfg. Ltd. Partnership, 7th Cir., No. 01-3973, Feb. 10, 2003.]

An employee was not entitled to work entirely from a home office as an accommodation under the Americans with Disabilities Act (ADA) because the central components of her job required her to work on the employer’s site, ruled the 7th U.S. Circuit Court of Appeals.

Beverly Rauen was employed as a software engineer by United States Tobacco (UST). Her primary duties involved monitoring contractors’ work at one of the employer’s facilities. During the late 1990s, Rauen suffered successive bouts of rectal and breast cancer. During each period of illness she went on short- and long-term disability leave and ultimately returned to work in January 1999.

Upon her return to work, Rauen asked to work from a home office because her sickness and treatments caused her extreme fatigue and required very frequent restroom use as well as ostomy care.

UST offered to let her work from home most days, but to come into the office one day per week. Rauen rejected this and other proposed accommodations.

Rauen continued to work full-time, filed a charge of disability discrimination with the Equal Employment Opportunity Commission (EEOC) and, ultimately, filed suit against UST. The trial court dismissed the case, finding that, because Rauen could perform the essential functions of her job without accommodation, she was not entitled to any accommodation at all.

The 7th Circuit declined to decide the question of whether any accommodation is reasonable for a person who can perform all the functions of her job. Rather, the court more narrowly ruled that Rauen’s specific requested accommodation was not the “very extraordinary” case where a home office would be reasonable. Her main duties required “teamwork, interaction and coordination of the type that requires being in the work place,” the court said. That she could perform all the essential functions of her job without accommodation further tipped the balance away from the reasonableness of her request.

By Margaret M. Clark, J.D., SPHR, senior legal editor for HR Magazine.

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