Free Brief in Support of Motion - District Court of Colorado - Colorado

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UNITED STATES DISTRICT COURT DISTRICT OF COLORADO CASE NO. 03-cv-02485 MSK-PAC Camille Melonakis-Kurz, individually and on behalf of other similarly situated employees, Plaintiffs, v. Heartland Home Finance, Inc., Defendant. LEGAL ANALYSIS IN SUPPORT OF PLAINTIFFS' AMENDED MOTION FOR SUMMARY JUDGMENT (ORAL ARGUMENT REQUESTED)1 ______________________________________________________________________________ COME NOW Plaintiff Camille Melonakis-Kurz, individually and on behalf of other similarly situated employees ("Plaintiffs"), who move for summary judgment on claims in the Complaint pursuant to Fed. R. Civ. P. 56. By way of this amended motion for partial summary judgment, 2 Plaintiffs are asking for this Court to rule in their favor on the following issues that can be determined as a matter of law on the undisputed facts: a. Plaintiffs are not subject to the administrative exemption and are therefore eligible for overtime compensation; b. Because Defendant willfully violated the law when it failed to pay its loan officers for their overtime hours worked, a three year statute of limitations applies; and

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In accordance with this Court's standards for summary judgment relating to lengthy legal arguments, Plaintiffs' have set forth their legal argument apart from their facts section. 2 Plaintiffs are aware that this Court disfavors motions for partial summary judgment. However, Plaintiffs bring this motion because a ruling on these issues of liability for over 900 Plaintiffs will significantly reduce the scope of evidence to be presented at trial.

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c. Because Defendant cannot prove it acted in good faith and that it had reasonable grounds for believing that its actions did not violate the FLSA, full liquidated damages apply. Once these items are determined as a matter of law, the only issue remaining for trial will be to determine how many overtime hours Plaintiffs worked and therefore, how much overtime pay they should receive. CLAIMS AND DEFENSES UPON WHICH JUDGMENT IS SOUGHT I. Plaintiffs are entitled to Summary Judgment on their Fair Labor Standards Act claim. The Federal Fair Labor Standards Act ("FLSA") requires employers to pay its employees one and one half times their "regular rate" for each hour worked in excess of 40 hours per week. 29 U.S.C. § 207(a)(1). There are certain exemptions to this rule, and if an employer fails to compensate its employees for overtime hours worked, it bears the burden of demonstrating that the employee falls under one of these exemptions. Mitchell v. Kentucky Finance Co., 359 U.S. 290, 291 (1959); Donovan v. United Video, Inc., 725 F.2d 577, 581 (10th Cir.1984); Schoenhals v. Cockrum, 647 F.2d 1080, 1081 (10th Cir.1981). The scope of the exemptions is interpreted narrowly against the employer. Hagadorn v. M.F. Smith & Associates, Inc., 172 F.3d 878, (Colo. 1999); Spradling v. City of Tulsa, 95 F.3d 1492, 1495 (10th Cir.1996); Aaron v. City of Wichita, 54 F.3d 652, 657 (10th Cir.1995); Brennan v. Dillion, 483 F.2d 1334, 1338 (10th Cir.1973) (citations omitted). A. Burden of Proof and Elements-The "Administrative" Exemption Does Not Apply.

Plaintiffs are not "administrative" employees as a matter of law. In order to enjoy this exemption, Defendant has the burden of "plainly and unmistakably" proving that:

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(1) Plaintiffs were compensated on a salary or fee basis at a rate of not less than $250 per week prior to August 23, 2004, and $455 per week after August 23, 2004;3 (2) Plaintiffs' primary duties were the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and (3) Plaintiffs exercised discretion and independent judgment with respect to matters of significance. 29 C.F.R. §§ 541.2(2003), 541.200(a)(2004); Hagadorn, 172 F.3d 878 (10th Cir. 1999). Based on the undisputed facts, Defendant cannot meet all three required elements. 1. Element 1-Plaintiffs do not meet the salary basis test.

In order to satisfy the first requirement of the "administrative" exemption, Defendant must show that Plaintiffs were compensated on a salary or fee basis at a rate of not less than $250 per week. 29 C.F.R. §§ 541.2(e)(2)(2003), 541.118(2003), 541.212(2003), 541.213 (2003). Beginning on August 23, 2004, that salary requirement rose to $455 per week. 29 C.F.R. § 541.200(1)(2004). circumstances: An employee will be considered to be paid "on a salary basis" within the meaning of the regulations if under his employment agreement he regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of his compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed . . . . This salary or fee cannot be subject to reduction, except in certain

The Code of Federal Regulations relating to the FLSA was revised and the new regulations took effect August 23, 2004. See Ex. 22. Even so, the only applicable difference with respect to the administrative exemption is the rise in the salary basis from $250 per week to $455 per week. Cf. 29 C.F.R. §§ 541.2 (2003) and 541.200 (2004); see Department of Labor Opinion Letter dated August 19, 2005 (Ex. 22). 3

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29 C.F.R. §§ 541.118(a)(2003), 541.602(a)(2004). Defendant does not meet the salary basis test during any time frame at issue in this case. a. Prior to July 31, 2002. It is undisputed that Defendant does not meet the salary basis test prior to July 31, 2002. During this timeframe, Plaintiffs did not receive a salary, but rather, were paid solely on a commission basis. Defendant concedes that there were many pay periods during which Plaintiffs did not receive any compensation because they did not sell any loans to earn commissions. As such, Plaintiffs pay was based on the quality and quantity of their work and therefore, was not a "predetermined" amount each pay period, which is clearly a violation of the "salary basis" requirements. b. From July 31, 2002 to August 23, 2004. From July 31, 2002 to August 23, 2004, Defendant does not meet the salary basis test, which at that time required $250 per week, for two reasons. First, because Defendant paid Plaintiffs their draw bi-monthly in the form of 24 checks during the year, they only received $230.76 per week.4 This does not meet the $250 per week requirement. Second, payroll records produced by Defendant show that the draw was subject to reduction which is in violation of the salary basis requirement. Plaintiff sent Defendant an interrogatory on this issue and Defendant failed to specifically identify and explain each instance of docking.5 This unexplained practice of docking fails to meet the salary basis requirements that compensation cannot be subject to reduction because of variations in the quality or quantity of the work performed. See 29 C.F.R. §§ 541.118(a)(2003), 541.602(a)(2004).
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$500 *2=$1,000 per month*12 months divided by 52 weeks equals $230.76 per week. Ex. 12; Ex. 13; Fisher Aff. at ¶¶4-5. 4

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c. After August 23, 2004. It is also undisputed that Defendant does not meet the salary basis test after August 23, 2004, which requires no less than $455 per week, because it only paid $500 bi-monthly. See 29 C.F.R. § 541.200 (a)(1)(2004). 2. Element 2-Plaintiffs' primary duties were not directly related to Defendant's management policies or general business operation. If the Court decides that Defendant met the salary basis test, it must then look to see if the second and third elements for the administrative exemption are met. 29 C.F.R. §§ 541.2(2003), 541.200(a)(2004); Hagadorn, 172 F.3d 878 at 2-3. The second element requires the defendant to prove that the employee's primary duty is office or non-manual work that is directly related to management policies or the general business operations of the employer or the employer's customers. Id. Activities are "directly related to the management policies or general business operations" if they are "relat[ed] to the administrative operation of the business" as distinguished from "production" or "sales." 29 C.F.R. §§ 541.205(a)(2003), 541.201(b). In making this determination, the courts typically use the "administrative/productive work dichotomy" described in the Department of Labor's Regulations. See Martin v. Cooper Electric Supply Co., 940 F.2d 896, 901 (3rd Cir. 1991) (citing, 29 C.F.R. § 541.205(a)). Using this analysis, the administrative duties of "running the business" are juxtaposed with "production" activities that involve "the day-to-day carrying out of the business' affairs." Bratt v. County of Los Angeles, 912 F.2d 1066, 1070 (9th Cir. 1990). The "administrative operations" of a business include work performed by employees "engaged in `servicing' a business such as, advising the management, planning, negotiating, representing the

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company, purchasing, promoting sales, and business research and control." 29 C.F.R. § 541.205(b) (2003); see 29 C.F.R. 541.201(b)(2004). Conversely, employees whose primary function is to produce the commodity that the enterprise exists to produce or market are engaged in "productive" activity and are not exempt. Reich v. Chicago Title Ins. Co., 853 F.Supp. 1325, 1330 (D. Kan. 1994). For example, when the employer's business is the sale of certain products, then the selling of those products is production, and not "administrative." See e.g. Martin, 940 F.2d at 903; see also, Reich v. State of New York, 3 F.3d 581, 587-88 (2nd Cir. 1993); Chicago Title, 853 F. Supp. at 1330; Dalheim v. KDFW-TV, 706 F.Supp. 493, 507 (N.D. Texas 1988); Hodgson v. Penn Packing Co., 335 F. Supp. 1015, 1020-21 (E.D. Penn. 1971). A case directly on point with the case at hand is Casas v. Conseco Finance Corp., 2002 WL 507059 (D. Minn. 2002).6 In that case, the court determined that loan officers were

production workers rather than administrative employees. Id. at *9. The court explained that Conseco's primary business purpose was to design, create and sell loans. Id. at *1. As loan officers making direct contact with customers, it was the plaintiffs' primary duty to sell lending products on a day-to-day basis. Id. at *9. Those plaintiffs were responsible for soliciting, selling and processing loans as well as identifying, modifying and structuring the loan to fit a customer's financial needs. Id. The court concluded that these duties established that the plaintiffs were primarily involved with the day-to day carrying out of the business rather than the running of the business itself or determining its overall course or policies. Id. (citing Bratt, 912 F.2d. at 1070).

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Ex. 20. 6

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This case is virtually identical to Conseco.

Defendant, like Conseco, is a finance

company engaged in the business of selling mortgages. Defendant's loan officers are required to use guidelines and standard operating procedures to try to match the customer's needs with a loan product, and obtain information to complete a standard loan application. Plaintiffs have no authority to approve a loan, and if the loan is approved by underwriting, the loan officers at times attend the closing to answer questions if they arise. Similarly, Plaintiffs' performance was measured according to their sales production. See id. at *9 (explaining since loan officers' performance was measured largely according to sales production, they were sales rather than administrative workers). There is no doubt Plaintiffs worked in a production capacity, that is, their primary duties were to produce, or in other words, sell loans. See 29 C.F.R. 541.203(b)(2004)(an employee "in the financial services industry" whose primary duty is selling financial products does not qualify for the administrative exemption); see also Preamble, Department of Labor: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees; Final Rule, 69 Fed. Reg. pp. 22415-22416 (Apr. 23, 2004) (agreeing with the Conseco court that employees whose primary duty is inside sales cannot qualify as exempt administrative employees").7 In addition, there is no evidence that Plaintiffs participated in any duties relating to the administrative operation of the business. To the contrary, Defendant's organization is divided into "administrative" and "sales," and Plaintiffs worked within the sales division under the direction of a "sales manager." Because their duties show that they are primarily involved with the "day-to day carrying out of the business" of mortgage loan sales

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Ex. 21. 7

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rather than "the running of the business itself or determining its overall course or policies, they are clearly production workers rather than administrative employees. See id. at *9; see also Simpson v. ConAgra Inc., 820 P.2d 1187 (Colo. Ct. App. 1991)(holding sales work is nonexempt); Martin, 940 F.2d 896 (holding inside salespersons were not administrative employees). 3. Element 3-Plaintiffs did not exercise discretion and independent judgment in performing their job duties.

Without regard to Defendant's failure to meet either of the first two elements of the administrative exemption, Defendant cannot meet the third because Plaintiffs did not exercise discretion and independent judgment in performing their duties. "Discretion and independent judgment" implies the "authority or power to make an independent choice, free from immediate direction or supervision and with respect to matters of significance." 29 C.F.R. §§ 541.202(a)(2004), 541.207 (a)(2003)(citing Walling v. Sterling Ice Co., 69 F. Supp. 669 (D. Colo. 1947), reversed on other grounds, 165 F. 2d 265 (10th Cir. 1947). The regulations provide: An employee who merely applies his knowledge in following prescribed procedures or determining which procedure to follow, or who determines whether specified standards are met or whether an object falls into one or another of a number of definite grades, classes, or other categories, with or without the use of testing or measuring devices, is not exercising discretion and independent judgment within the meaning of § 541.2. This is true even if there is some leeway in reaching a conclusion, as when an acceptable standard includes a range or a tolerance above or below a specific standard. 29 C.F.R. § 541.207(c)(1) (2003); see 29 C.F.R. § 541.202(e)(2004). Defendant's job description requires that Plaintiffs follow prescribed procedures. It requires them to "maintain loan files in compliance with policies and procedures set forth by the

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Company (all forms to be completed and in stacking order, approval or denial letters sent, etc.), follow all policies and procedures set forth by the Company, and not make any representations or commitments on behalf of the Company." Moreover, according to Flynn, "the job duties of a loan officer are to follow the manager's instructions on a day-to-day basis." While performing their jobs, Plaintiffs were involved in nothing more than matching an applicant's borrowing needs to pre-established product guidelines. There is no evidence that Plaintiffs had authority to establish or expand the limits of these standards or procedures. See United States Cartridge Co. v. Powell, 185 F.2d 67, 72 (8th Cir. 1950) modified, 186 F.2d 611 (8th Cir. 1951)(employees who determined whether specifications were met but who had no role in preparation of specifications are not exempt). Nor could they bind the company to a transaction without review by a manager and formal approval from an underwriting department. The court in Conseco found that loan officers lacked the discretion and independent judgment necessary to qualify for the exemption. 2002 WL 507059 at *9. It explained that the decisions the loan officers in that case were allowed to make concerning whether to proceed with an application, which lending product to suggest, negotiating pricing by adding closing points and taking other customer circumstances into account when selling the loan, were all governed by pre-existing established standing operating procedures and guidelines and subject to approval by underwriting. Id. at *10. The court found that the plaintiffs were using skills in applying techniques, procedures or specific standards rather than exercising the kind of independent judgment and discretion within the meaning of the regulations to qualify under the administrative exemption. Id.. Similarly, because Plaintiffs in this case were not exercising the discretion and

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independent judgment required by the regulations, they do not meet this element of the administrative exemption. B. Burden of Proof and Elements- Plaintiffs are Entitled to Summary Judgment That Defendant's Conduct Was Willful.

In general, a two year statute of limitations governs FLSA claims. Claeys v. Gandalf Ltd., 303 F.Supp.3d 890, 893 (2004) (citing 29 U.S.C. § 255(a)). However, in the case of "willful" violations, claims are governed by a three-year statute of limitations. Id. In order to establish a "willful" violation, a plaintiff must demonstrate that the employer either knew or showed reckless disregard for whether its conduct violated the FLSA. 29 C.F.R. § 578.3(c); McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133, 108 S.Ct. 1677, 100 L.Ed.2d 115 (1988) (citations omitted). Whether or not an employer willfully violated the FLSA is a determination to be made by the court. See Cunningham v. Gibson Elec. Co., Inc., 43 F.Supp.2d 965, 977 (N.D. 1999). This Court should grant summary judgment on the issue of willful for four reasons. First, Defendant classified loan officers as non-exempt and therefore knew they should be paid for overtime hours worked. Second, Defendant ignored the Department of Labor's findings that Defendant's loan officers should be paid for overtime hours worked. See e.g. Herman v. Palo Group Foster Home, Inc., 183 F.3d 468, 474 (6th Cir. 1999); Dole v. Elliott Travel & Tours, Inc., 942 F.2d 962, 967 (6th Cir. 1991); Brock v. Superior Care, Inc., 840 F.2d 1054, 1062 (2d Cir. 1988); Hodgson v. Cactus Craft of Arizona, 481 F.2d 464, 467 (9th Cir. 1973); Brennan v. S & M Enterprises, 362 F.Supp. 595, 600 (D.C.D.C. 1973). Third, Defendant had a practice of

falsifying loan officers' timesheets. See Brennan v. General Motors Acceptance Corp., 482 F.2d 825, 827-829 (5th Cir. 1973)(company willfully violated the law because lower level managers

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pressured their employees to falsify their timesheets); Cunningham., 43 F.Supp.2d at 975-77 (in applying three year statute for willful violations, the court explained that knowledge of a supervisor is imputed to the employer); Majchrzak v. Chrysler Credit Corp., 537 F.Supp. 33, 38 Mich. 1981)(finding willful because lower level management did not allow employee to record all overtime hours worked.); Marshall v. Sam Dell's Dodge Corp., 451 F.Supp. 294, 304-05 (N.D.N.Y. 1978)(finding willful where employer had practice of maintaining inaccurate time records). Finally, several loan officers complained to management about not being paid for their overtime hours worked and not being allowed to record their accurate hours. Based upon the overwhelming evidence, this Court should find that Defendant's violations were willful as a matter of law. C. Burden of Proof and Elements- Plaintiffs are Entitled to Liquidated Damages.

The FLSA provides that an employer who violates the Act by failing to pay compensable wages is ordinarily liable for the unpaid wages and "an additional equal amount as liquidated damages." United Transp. Union Local 1745 v. City of Albuquerque, 178 F.3d 1109, 1112 n. 2 (10th Cir.1999) (quoting 29 U.S.C. § 216(b)). Only if an employer "shows to the satisfaction of the court that the act or omission giving rise to such action was in good faith and that he had reasonable grounds for believing that his act or omission was not a violation of the FLSA," may the Court deny and award of liquidated damages; "[i]n the absence of such a showing the district court has no discretion to mitigate an employer's statutory liability for liquidated damages." 29 U.S.C. § 260; Renfro v. City of Emporia, Kan., 948 F.2d 1529, 1540-1541 (Kan. 1991) (citing Doty v. Elias, 733 F.2d 720, 725 (10th Cir.1984)); see also Sinclair v. Automobile Club of Oklahoma, Inc., 733 F.2d 726, 730 (10th Cir.1984)); Crenshaw v. Quarles Drilling Corp., 798

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F.2d 1345, 1351 (10th Cir.1986). Since liquidated damages are to be awarded by the court, this issue is not presented to the jury. Brock, 840 F.2d at 1063. For the same reasons stated above relating to Defendant's violations being willful, this Court should award Plaintiffs liquidated damages. Defendant's actions show that it did not act in good faith, and therefore Defendant cannot assert it had reasonable grounds for believing its failure to compensate its loan officers appropriately did not violate the FLSA. See Ackley v. Dept. of Corrections of State of Kan., 844 F.Supp. 680, 688-89 (D. Kan. 1994)(holding that the defendant failed to provide evidence of good faith defense). CONCLUSION Based on Defendant's own records it is clear Plaintiffs worked overtime hours. Even so, Defendant admits that it did not pay Plaintiffs overtime compensation. With respect to the administrative exemption, Defendant cannot meet its burden of proving it meets all the requirements to claim this exemption applies. With respect to the issues of willful and liquidated damages, these issues should be decided by the Court as a matter of law. Dated: 01/27/06 NICHOLS KASTER & ANDERSON, PLLP s/Michele R. Fisher Donald H. Nichols, MN Bar No. 78918 Paul J. Lukas, MN Bar No. 22084X Michele R. Fisher, MN Bar No. 303069 Jill M. Novak, MN Bar No. 343456 4600 IDS Center 80 South 8th Street Minneapolis, MN 55402 Telephone (612) 256-3200 Fax (612) 215-6870 ATTORNEYS FOR PLAINTIFFS

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