Going for Broke(rs)
Freight brokers are appropriately concerned following the Southern District of Ohio’s recent decision in Hendricks v. Total Quality Logistics, LLC, et al. In Hendricks, the Court found that Total Quality Logistics (TQL) violated the Fair Labor Standards Act (FLSA) and Ohio law by misclassifying its Logistics Account Executive Trainees (LAET) and Junior Logistics Account Executives (Junior LAE) as exempt under the FLSA’s administrative exemption. TQL and its owner is now potentially on the hook for hundreds of millions in unpaid overtime, liquidated damages, and attorneys’ fees. Hendricks is a stark reminder of the costs of misclassification.
Generally speaking, the FLSA requires employers to compensate employees at 1.5x their regular rate for all hours worked over 40 per workweek. Three noteworthy exemptions from this rule are the executive, professional, and administrative exemptions. Establishing whether an exemption applies rests on the employer, who must show the job meets the salary basis test, the salary threshold test (currently, $684/week), and the primary duties test.
The central issue in Hendricks was whether TQL’s LAETs and Junior LAEs met the primary duties test for the administrative exemption. TQL maintained that LAETs and Junior LAEs were entrepreneurs who ran their own businesses by selecting industries and customers, prospecting, exercising discretion and independent judgment in covering and building loads and negotiating rates. However, according to the Court, TQL “largely overstated these responsibilities.” Rejecting TQL’s arguments, the Court noted that the “primary duties” of LAETs and Junior LAEs (1) did not include “office or non-manual work directly related to the management or general business operations of the employer or the employer's customers”; or (2) “the exercise of discretion and independent judgment with respect to matters of significance.” Because TQL could not establish the administrative exemption applied or establish any affirmative defense to liability, it is liable for damages under the FLSA. Making matters even worse for TQL’s CEO, Kenneth Oaks, the Court found him individually liable as an “employer.”
Beyond liability concerns, the Hendricks decision accentuates how quickly damages can multiply under the FLSA. Willful violations are subject to a three-year statute of limitations, rather than the standard two-year period (increasing the look-back period by 50%). While the Court determined TQL’s conduct was not willful (on procedural grounds), in a clear warning to the industry, the Court noted that TQL’s knowledge of overtime claims brought against a major competitor, C.H. Robinson, and its discussions with other companies in the logistics industry on the topic, could support a finding that TQL had actual knowledge that it might be in violation of the FLSA.
The Court likewise addressed the FLSA’s liquidated damages rule, which doubles the amount of damages for an FLSA violation unless the employer proves it acted reasonably and in good faith. TQL’s supposed “good faith” efforts included two audits and consultation with trade associations and competitors. The Court held this was insufficient, and faulted TQL for not talking to “attorneys or government officials” or establishing the credentials of its auditors.
Perhaps the most important takeaway from Hendricks is what it could cost TQL. In 2011, TQL employed approximately 1,033 LAETs. LAETs were paid a salary of approximately $35,000, worked 60 hours per week, and took calls “24/7/365” (nights, weekends, and holidays). The math roughly works out as follows:
- 1033 employees – estimated number of LAETs from year to year.
- 20 hours – estimated number of overtime hours per week.
- 783 weeks – total number of workweeks between September 21, 2008 (two years before the date of filing) and September 26, 2023 (the date of the Hendricks decision)
- $12.42 - estimated regular rate for $35,000, annually ($745 weekly / 60 hours = $12.42)
- $12.42 (regular rate) X 0.50 hours = $6.21 (amount owed per overtime hour)
- 20 overtime hours X $6.21 = $124.20 (overtime owed per week)
- 1033 employees x 783 weeks = 808,839 (total class workweeks)
- 808,839 weeks x $124.20 = $100,457,803.8 (total overtime )
- $100,457,803.8 x 2 (liquidated damages) = $200,915,607.6 (total potential damages)
These estimates, which do not account for Junior LAEs employed by TQL (~272 in 2011), defense costs, plaintiffs’ costs and attorneys’ fees, or statutory interest, demonstrate that the time for identifying and correcting potential misclassification issues is now. Indeed, the cost of inactivity may be measured in the millions. Given the attention this issue is receiving on a national scale and the Department of Labor’s proposed changes to the white collar exemptions, employers should remain vigilant in monitoring legal developments impacting their industry and consult with qualified counsel for FLSA compliance concerns.
Vorys will continue to monitor this issue and report on any changes affecting the Hendricks decision, including potential appellate activity. Contact your Vorys lawyer if you have questions about Hendricks or any other wage and hour issues.