Alleged Misclassification of Stock Brokers Leads To Large Settlement

Calvin House
August 15, 2005 — 2,391 views  
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A recent announcement that Merrill Lynch has proposed to settle a class action overtime lawsuit on behalf of its stockbrokers for $37 million emphasizes the high stakes that accompany classification decisions. If San Francisco federal judge Maxine M. Chesney approves the settlement on September 9, up to 3,000 brokers will share the settlement with their lawyers, earning payments of $10,000 to $15,000 each.

Federal and state wage and hour laws require employers to pay their employees at least time and a half for all hours worked in excess of 40 in a work week, unless they can prove that the employees are exempt from those laws. Some states, such as California (where the lawsuit was brought), provide greater overtime benefits. To avoid claims for unpaid overtime, employers must apply the sometimes perplexing regulations and interpretations of those regulations adopted by the federal Department of Labor and state wage and hour authorities.

Employers often run into trouble when they classify officer workers who earn a salary as exempt without paying close enough attention to the duty requirements for the white collar exemptions that appear in the regulations. In general, the regulations require that exempt employees perform high level work that involves the exercise of discretion and independent judgment.

The Merrill Lynch case involved claims to two possible exemptions:
(1) Although the firm claimed the brokers were exempt as administrative employees, there were questions as to whether their duties constituted office work related to management or general business operations, and involved the exercise of sufficient discretion and independent judgment. The Department of Labor’s new FairPay regulations say that “an employee whose primary duty is selling financial products does not qualify for the administrative exemption.” 29 CFR § 541.203.

(2) Although the firm claimed the brokers were exempt as commissioned employees in a retail or service establishment, the courts and the Department have long taken the position that financial companies do not qualify as such establishments.

Other financial services firms have been targeted by plaintiff class action attorneys on similar grounds, including Countrywide Home Loans, Morgan Stanley, UBS and the Smith Barney unit of Citigroup. Any financial services firm that has classified brokers and sales employees as exempt should carefully re-evaluate their status in light of the state and federal overtime exemption rules.

Calvin House

Gutierrez, Preciado & House, LLP