Agreements Where Sales Reps Waived Rights To FLSA Collective Action Invalid, Court Says

Stay informed and ready to meet both everyday challenges and long-term planning and policy-making goals, with focused news, practical information, and strategic insights on all HR-related developments.

 

By Jay-Anne Casuga  

July 30 — A federal district court in Ohio erred in excluding from a Fair Labor Standards Act overtime collective action sales representatives who signed separation agreements that included an invalid waiver of group action, the U.S. Court of Appeals for the Sixth Circuit ruled July 30.

The Sixth Circuit is the first appeals court to address the validity of collective action waivers outside of the arbitration context, according to attorneys representing the employees.

In reversing a lower court's enforcement of the waivers that KeHE Distributors LLC included in its separation agreements, the Sixth Circuit relied on its holding in Boaz v. FedEx Customer Information Services, Inc., 725 F.3d 603, 20 WH Cases2d 1880, 119 FEP Cases 880 (6th Cir. 2013) that employees can't be bound by contractual provisions that limit their rights under the FLSA.

The Sixth Circuit acknowledged that collective action waivers have been found valid by other appeals courts in cases in which those provisions were included in arbitration agreements—based on the strong presumption in favor of arbitration under the Federal Arbitration Act.

“Because no arbitration agreement is present in the case before us, we find no countervailing federal policy that outweighs the policy articulated in the FLSA,” the court said. “The rationale of Boaz is therefore controlling.”

Additionally, the appeals court reversed a ruling for KeHE on the issue of whether its sales representatives fall within the scope of the FLSA's “outside sales employee” exemption.

Attorneys Discuss Potential Impact

Robert A. Bunda and Barbara E. Machin, attorneys with Bunda, Stutz & Dewitt in Perrysburg, Ohio, who represented the sales representatives, told Bloomberg BNA July 30 that they believe the Sixth Circuit correctly decided that a contractual waiver of FLSA rights—outside of the arbitration context—is invalid.

“Frankly, I hope other circuits will look at this decision and say—if there's no competition between the FAA and the FLSA, then perhaps we should take a more critical view of these collective action waivers,” Machin said.

Bunda said the Sixth Circuit's ruling, in conjunction with recent decisions by the U.S. Supreme Court and other appeals courts supporting class and collective action waivers in arbitration agreements, potentially may motivate employers to add arbitration clauses to their other employment agreements.

As a result, he said employees “have to be careful” and should consult an attorney before signing any contracts.

With respect to the exemption issue, Bunda said the Sixth Circuit recognized that the FLSA's outside sales employee exemption may not necessarily apply to sales representatives who perform “nothing more than ministerial or service functions,” as did the employees in the present case.

Cardelle B. Spangler, an attorney with Winston & Strawn in Chicago who represented KeHE, told Bloomberg BNA July 30 that she and her client believe the district court properly classified the sales representatives as FLSA-exempt outside sales employees and that the collective action waivers were valid and enforceable.

“We are reviewing the opinion and considering appropriate next steps,” she said.

Separation Agreements Included Waivers

According to the court, KeHE in February 2012 terminated 69 sales representatives in its Great Lakes region as part of a corporate restructuring.

The company sent the affected employees separation agreements that offered them a $2,000 retention bonus to work through March 17, 2012. In exchange, the employees would have to agree to “release all claims” against KeHE “arising out of [their] employment.”

In addition, the employees would have to agree “not to consent to become[] a member of any class or collective action in a case in which claims are asserted against the Company that are related in any way to [their] employment or the termination of [their] employment with the Company.”

Two sets of sales representatives brought separate FLSA overtime lawsuits against KeHE, and those cases were consolidated.

The U.S. District Court for the Northern District of Ohio ultimately certified a conditional FLSA collective action on behalf of the sales representatives, but excluded from the group action those employees who signed the separation agreements containing the waivers.

The district court also, among other things, ruled for KeHE on the merits of the representatives' FLSA claims, finding they were exempt from overtime pay because they were properly classified as outside sales employees.

Collective Action Waivers Invalid

On appeal, the Sixth Circuit found that the district court should have included in the collective action the sales representatives who signed the separation agreements, despite the collective action waivers.

Those waivers, the court said, impermissibly limited the employees' FLSA rights under its precedent in Boaz, which “implies that a plaintiff's right to participate in a collective action cannot normally be waived” and is “based on the general principle of striking down restrictions on the employees' FLSA rights that would have the effect of granting their employer an unfair advantage over its competitors.”

It added that Boaz recognized that employees can waive their rights to a judicial forum “only if the alternative forum allow[s] for the effective vindication of [the employee's] claim,” and that arbitration is “such a forum.”

Given that KeHE's separation agreements contained no arbitration clauses, the court said the present case is distinguishable from recent rulings in which the Supreme Court and other appeals courts upheld collective action waivers in arbitration agreements, including Walthour v. Chipio Windshield Repair LLC, 745 F.3d 1326, 22 WH Cases2d 310 (11th Cir. 2014), and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).

Boaz therefore controls the result here where arbitration is not part of the waiver provision,” the court said.

The appeals court also said a jury could conclude that the sales representatives, who “provide store support by determining the quantities of KeHE products to be ordered and who write and transmit orders for subsequent delivery in order to maintain proper inventory levels,” didn't actually make KeHE's sales within the meaning of the exemption. They claimed that sales were actually performed by KeHE account managers.

“The fact that the plaintiffs hit the order buttons on their electronic devices, in other words, is not enough to magically transform their jobs from inventory management to ‘sales,' ” the court said.

Even if their “reordering activities” are considered “sales” under the FLSA, the court said a jury may also determine that the representatives' primary duty wasn't “sales.”

To contact the reporter on this story: Jay-Anne B. Casuga in Washington at jcasuga@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://www.bloomberglaw.com/public/document/Thomas_Killion_et_al_v_KeHE_Distributors_Docket_No_1303357_6th_Ci.