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The words “I’m calling my lawyer” as famously spoken on the big screen are intended to inspire fear and trepidation. They often do; particularly where one side in litigation has a disproportionally strong legal position on a critical issue. The threat of litigation is certainly a motivating factor in pre-suit settlement discussion. Even before lawyers get involved in a dispute, the parties have often drawn their respective battle lines and prepared for the standoff.
Sometimes litigation is absolutely necessary. Where one party to a dispute unreasonably believes a legal position is infallible or is deluded by the grandeur of potential recovery, a third party, arbitrator, judge or jury may be necessary to convince that party otherwise. An inability to assess risk often results in a failure to completely evaluate ramifications. In such cases, litigation is inevitable and the best available alternative.
Under any circumstances, the parties must consider the impact of litigation. In business, that impact is not only the expenditure associated with legal fees, but also the distraction litigation brings to the business. Instead of pursuing the next lead, deal or development, the business can be dedicated to the completion of discovery, attendance at deposition or preparation for trial.
A couple of practical considerations:
First, involvement in litigation invites intrusion into a business’s management, internal affairs and financial information. Selecting appropriate individuals within your company who will be involved on a day to day basis and who have knowledge of the facts of the dispute can be a massive undertaking in and of itself, as the demands of producing needed information, data and research will inevitably interfere with that person or persons performing their normal duties and responsibilities for the business. More importantly, in some cases, litigation results in exposure or threatened exposure of otherwise secret information. Customer relationships can be impacted, particularly if those customers are forced to respond to subpoenas. It is critical under such circumstances that business owners and managers make sure a plan is in place to manage internal and external communication.
Other sensitive information may also be revealed. In a classic case of “I did not realize that was important”, clients often omit material facts which may not bear directly on their claim but which may be implicitly revealed. Tax issues are a prime example of such material facts. Any time money changes hands, the manner in which such proceeds are recorded will be addressed in litigation and to the extent either party has sought an unsupportable tax advantage, that act or omission will be revealed.
Undoubtedly, the party sued will seek retaliation and file counterclaims. For example, a contractor performs work for a homeowner which the homeowner fails to pay for. Contractor sues, only to have the homeowner raise counterclaims based on the Unfair Trade Practices and Consumer Protection law which provides for triple damages and attorney fees which can potentially dwarf the original claim. Now the contractor spends more defending the claim for treble damages than in pursuit of the recovery.
Finally, there is the issue of cost. Litigation is expensive. At the end of the day, the parties must consider the cost of a particular course of action and whether the potential for recovery is simply outweighed by that cost.
So before embarking down the road of litigation, be certain it is a path you wish to follow. Be sure to consider the impacts, both intended and incidental, to ongoing business operations. Be sure your house is in order and that the skeletons in the closets are not subject to reanimation. Finally, be confident in the analysis that money spent in litigation is a good investment.
Reprinted with permission from the January 18, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
In a recent decision, the Pennsylvania Superior Court complicated the already tricky business of paying nonexempt employees on an hourly basis for Pennsylvania employers. In Chevalier v. Hiller, the Court found that a “fluctuating workweek” overtime calculation method, approved by federal regulation, violates Pennsylvania’s Minimum Wage Act, 43 P.S. §333.101 et seq. (“PMWA”). The Superior Court reversed the trial court’s grant of summary judgment in favor of the employees, in a comprehensive opinion that requires Pennsylvania employers to review carefully their overtime calculation methods.
The employees in this case were managers at various levels for GNC. GNC calculated their overtime pay using the “fluctuating work week method.” Under this method, in an example provided by the Superior Court, overtime was calculated as follows: employees were paid $1000 a week regardless of the number of hours worked in a week. In one week, the example goes, the employee worked 50 hours. GNC thus calculated the employees “regular rate” at $20 an hour. GNC then paid the employee an additional $10 an hour for the ten hours over 40, resulting in $1100 in wages for the 50 hour week.
The employees argued that this method was improper under the PMWA, and the trial court agreed. The trial court opined that the rate instead should have been calculated using the “forty hour” method. Under this method, the regular rate is determined by dividing the weekly salary of $1000 by forty hours, to produce a rate of $25 an hour. Then, the additional ten hours over forty worked should have been paid at time and a half for an additional $375, resulting in $1375 in wages for the 50 hour week. Notably, had the Superior Court agreed with the trial court, the cost of paying nonexempt employees on a salary basis would have increased exponentially.
Instead, the Superior Court disagreed with the trial court and found that the regular rate was properly calculated using the “fluctuating workweek method,” that is, that the employer’s calculation of the regular rate by dividing the employee’s salary in a given week by the number of hours the employee actually worked did not violate the PMWA.
However, the Superior Court found that GNC’s method of paying for the overtime hours violated the PMWA. The Superior Court found that PMWA required the payment of an overtime premium of 1 and ½ times the employee’s regular rate for all hours in excess of forty in a work week. Accordingly, using the fifty hour example set forth above, that employee should have received $200 in overtime.
The Superior Court began its analysis by noting the purpose of the PMWA, which mirrors the language of the FLSA, “to protect employees who do not have real bargaining power.” The Court noted that no Pennsylvania appellate court had evaluated the propriety of the fluctuating workweek method under the PMWA, but that some federal courts had addressed the PMWA’s overtime requirements. In those cases, the federal courts agreed with the conclusion of the Superior Court regarding the premium due, but did not address the appropriate method for calculating the regular rate.
The Superior Court’s holding imposes a different requirement than the federal Fair Labor Standards Act. Under the FLSA, and cases interpreting it, an employer is free to use the fluctuating work week method, and to pay a premium of one-half the hourly rate for hours over forty in a workweek, on the theory that the regular rate for those hours is captured in the salary. While the Superior Court found that the PMWA permitted a calculation of the regular rate, consistent with the FLSA, using the fluctuating workweek method, the Superior Court found that Pennsylvania law would not permit a premium of only ½ that regular rate.
Instead, the Superior Court found that the applicable regulations required the payment of one and one-half times the regular rate for hours over forty in a workweek. The applicable regulations require that “each employee shall be paid for overtime not less than 1-1/2 times the employee’s regular rate of pay for all hours in excess of 40 hours in a work week.” 24 Pa. Code § 231.41. The regulations do permit the payment of half the regular rate only for employees who are paid a flat sum for a day’s work. 34 Pa. Code § 231.43(b). Finally, another regulation permits employer and employee to come to an agreement as to the “basis rate” for payment of work in excess of the maximum workweek, but only if the employer uses a multiplier of one and one-half. In other words, the Superior Court found, in all instances where the regulations address the appropriate multiplier, the regulations required the payment of one and one-half times the regular rate. The Court pointed out that the Department of Labor did not adopt the federal regulation that expressly permits the payment of half the regular rate as the overtime premium, although it could have done so. The Court found the decision not to adopt that federal regulation was a deliberate reflection of the purpose to protect employees.
The Superior Court’s decision creates a dilemma for Pennsylvania employers using the fluctuating workweek method. Pennsylvania employers currently paying an overtime premium of half the hourly rate for hours over forty in a workweek to nonexempt, salaried employees, are complying with federal, but not Pennsylvania law. Employers will need to evaluate their overtime calculation policies and review whether paying nonexempt employees on a salary basis continues to make economic sense.
Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on employment, commercial litigation, and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com
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