Collective Action Waiver Not Permitted in Separation Agreement Outside of Arbitration Context: Sixth Circuit | Practical Law

Collective Action Waiver Not Permitted in Separation Agreement Outside of Arbitration Context: Sixth Circuit | Practical Law

This wage and hour update discusses Killion et al. v. KeHE Distributors, LLC, in which the US Court of Appeals for the Sixth Circuit reversed the district court's order excluding a group of employees from a collective action under the Fair Labor Standards Act (FLSA). The employees had signed a separation agreement with a clause waiving their right to participate in any collective action against the employer. The Sixth Circuit held that employees cannot waive their right to participate in an FLSA collective action where the release agreement does not contain an arbitration clause. The Sixth Circuit also held that the district court erred in granting summary judgment for KeHE on the issue of plaintiffs' exemption from the FLSA's minimum wage and overtime compensation requirements under the outside sales exemption.

Collective Action Waiver Not Permitted in Separation Agreement Outside of Arbitration Context: Sixth Circuit

by Practical Law Labor & Employment
Published on 06 Aug 2014 • USA (National/Federal)
This wage and hour update discusses Killion et al. v. KeHE Distributors, LLC, in which the US Court of Appeals for the Sixth Circuit reversed the district court's order excluding a group of employees from a collective action under the Fair Labor Standards Act (FLSA). The employees had signed a separation agreement with a clause waiving their right to participate in any collective action against the employer. The Sixth Circuit held that employees cannot waive their right to participate in an FLSA collective action where the release agreement does not contain an arbitration clause. The Sixth Circuit also held that the district court erred in granting summary judgment for KeHE on the issue of plaintiffs' exemption from the FLSA's minimum wage and overtime compensation requirements under the outside sales exemption.
On July 30, 2014, in Killion et al. v. KeHE Distributors, LLC, the US Court of Appeals for the Sixth Circuit reversed the district court's order excluding a group of employees from a collective action under the FLSA. The employees had signed a separation agreement with a clause waiving their right to participate in any collective action against the employer. The Sixth Circuit held that:
  • Employees cannot waive their FLSA collective action rights where the release agreement does not contain an arbitration clause.
  • The district court erred in granting summary judgment for KeHE on the issue of plaintiffs' exemption from the FLSA's minimum wage and overtime compensation requirements under the outside sales exemption.
(No. 13-4340, (6th Cir. July 30, 2014).)

Background

KeHE is a distributor of specialty ethnic and health foods to retailers. The plaintiffs are current and former KeHE sales representatives who provided promotional services to several large chain customers of KeHE. KeHE classified the sales representatives as exempt under the FLSA's outside sales exemption (29 U.S.C. § 213(a)(1)).
In February 2012, KeHE discharged 69 sales representatives and provided separation agreements requiring the employees to:
  • Release all claims against KeHE arising out of their employment with the company.
  • Waive their right to become a member of a class or collective action against the employer related to their employment or termination from the company.
In March 2012, after consolidating lawsuits by several employees claiming that KeHE failed to pay overtime in violation of the FLSA, two of the plaintiffs moved to:
  • Certify a collective action that would include all sales representatives employed in the previous three years.
  • Void the collective action waivers for employees who signed the separation agreements.
The district court:
  • Allowed employees who had modified their agreement by removing the waiver clause to join the collective action.
  • Refused to void the language waiving collective action rights for those who had not modified their agreement.
  • Conditionally certified an FLSA collective action of KeHE sales representatives who, since March 1, 2009, spent most of their work time doing promotional work for certain KeHE chain customers.
The district court denied plaintiffs' motion for reconsideration of the order enforcing the collective action waivers and the plaintiffs appealed. While the interlocutory appeal was pending, the district court granted summary judgment to KeHE, concluding that application of the FLSA's outside sales exemption was proper.
The plaintiffs appealed to the Sixth Circuit, contending that the district court erred by:
  • Enforcing the collective action waiver for those who signed the unmodified separation agreement.
  • Granting summary judgment for KeHE on the exemption issue.

Outcome

The Sixth Circuit reversed the district court on both orders.
Reversing the district court's exclusion from the FLSA collective action those employees who signed the waivers, the Sixth Circuit found that:
  • An employee's right to participate in an FLSA collective action cannot normally be waived, according to the court's decision in Boaz v. FedEx Customer Information Services, Inc. In Boaz, the court held that an employee is not bound by a contract that limits or waives his substantive or procedural rights under the FLSA (725 F.3d 603, 605-06 (6th Cir. 2013)).
  • Requiring an employee to litigate individually, rather than as part of a collective action, gives an employer the same type of competitive advantage rejected in Boaz.
  • An employee can waive his right to a judicial forum if the agreement provides an alternative forum, such as arbitration, but the agreement plaintiffs signed did not do so (Boaz, 725 F.3d at 606-07).
  • Cases in other circuits enforcing agreements to arbitrate FLSA claims on an individual basis do not apply where no arbitration clause exists.
  • No other circuit appears to have directly addressed the validity of an FLSA collective action waiver outside of the arbitration context.
Reversing summary judgment on the outside sales exemption issue, the Sixth Circuit noted that the two key issues are whether:
  • The employee makes sales.
  • The employee's "primary duty" is making sales.
The Supreme Court clarified the requirements of the outside sales exemption in Christopher v. SmithKline Beecham Corp., holding that:
  • The FLSA regulations define an outside salesman as an employee whose primary duty is to make sales and who is customarily away from the employer's place of business to perform this duty (29 C.F.R. § 541.500).
  • Promotion work is performed by employees who make sales. Promotion work incidental to an employee's own sales is exempt outside sales work, but promotion work related to sales made by someone else is not. (29 C.F.R. § 541.503.)
(132 S.Ct 2156, 2162-63 (2012).)
The FLSA regulations also provide that drivers who deliver and sell products may only be exempt outside sales employees if their primary duty is making sales, a determination that requires consideration of nine factors, including sales training and method of compensation (29 C.F.R. § 541.504).
In KeHE, the Sixth Circuit concluded that the district court erred in determining, as a matter of law, that the plaintiffs make sales. The court also found that whether making sales is plaintiffs' primary duty was likewise unsuitable for summary judgment. In reaching its conclusion, the court found that:
  • Plaintiffs are one of four sets of employees involved in selling KeHE products.
  • KeHE account managers control the volume of plaintiffs' orders.
  • Plaintiffs spend a vast majority of their time stocking and cleaning shelves.
  • Plaintiffs' compensation is largely based on stocking shelves.
  • Plaintiffs' promotional work may help the sales of other employees, instead of plaintiffs' own sales.
  • Christopher is distinguishable because it dealt with non-binding commitments in the unique regulatory environment of pharmaceuticals (132 S.Ct at 2171-72).
  • The district court had not considered the "drivers who sell" regulation.
The court found that these questions should be considered by a jury and required reversal of summary judgment in KeHE's favor.

Practical Implications

The Sixth Circuit noted that no other circuit court had previously addressed the validity of an FLSA collective action waiver in a separation agreement outside of the arbitration context. The court held that although agreements allowing employees to waive their right to participate in FLSA collective actions are permitted when the agreement provides an alternative forum such as arbitration, an employee cannot be forced to waive either substantive or procedural FLSA rights outside of the arbitration context.
The court also provided guidance on the application of the FLSA's outside sales exemption, including consideration of the "drivers who sell" regulation, 29 C.F.R. § 541.504. According to the court, proper consideration of the exemption requirements raised fact questions that made the case unsuitable for summary judgment. The court also emphasized that FLSA exemptions are construed narrowly against the employer.