It is common understanding that under the Fair Labor Standards Act an employer cannot deduct hours of pay from salaried employees who arrive late, leave early or take a day off.  This understanding is based on the interpretation of decades-old Regulations that permit exemption from entitlement to overtime for executive, administrative and professional workers who are paid a “salary” as that term has been defined by the Act. [1]   Therefore, when a salaried employee is habitually late, leaves early without apparent reason, or provides no explanation for late-notice days off, many employers nonetheless pay the employee their full salary.

New Regulations, effective August 23, 2004[2] modify the rather absolute historical prohibition against “docking” the pay of exempt salaried employees. The purpose of this change in the Regulations is to permit employers to hold salaried employees accountable for their time.[3] The new standards remove many of the rather formidable barriers to the effective discipline of salaried workers who are not “at work”[4] when they should be.

Both the old and new Regulations state the requirement that if an employer is to avoid the obligation to pay time and one-half for hours of work over 40 by employees who qualify as “exempt,”[5] the employer must regularly pay a pre-set amount, regardless of fluctuating work-weeks.  An employee paid on a salary basis is to be paid a set amount that is not subject to reduction because of variations in the amount of work performed.[6]  Pay in a fixed amount is guaranteed, even during slow periods, in return for the employee’s commitment to spend the time necessary to get the work done during busy times.

The law requires compensation when the salaried employee is ready, willing and able to work, even when there is no work to be done. [7] The problem arises when the work is there to be done, and the week should be full, but the employee, for whatever reason, does not put in the time.

The United States Department of Labor has issued numerous Fact Sheets, compliance guides and Advisory Opinions regarding the requirements to pay a salary to exempt employees that mirror the more flexible standards for such deductions in the new Regulations.  The new “pay docking” rules are these:

Deductions from pay are permissible when an exempt employee is absent from work for one or more full days:

·        for “personal reasons” other than sickness or disability; or,

·        if the deduction is made in accord with the express terms of a bona fide sick leave plan.

In addition, an employer may impose an unpaid disciplinary suspension for one or more full days:

·        in “good faith for infractions of safety rules of major significance;” or,

·        for workplace conduct infractions.

If a formal written promulgated plan that provides, for example, 10 days of paid sick leave per year, the new Regulations state that once the employee has exhausted paid sick leave, the employer is not required to pay for continued absences. [8]  That outcome should be made explicit in the Employee Handbook, as should a provision for leave without pay.

These standards provide an adequate basis for dealing with full-day absenteeism that is abusive of leave policy and represents poor performance rather than circumstances that would normally excuse the absence.  The employer’s policy needs to spell out exactly what paid leave is for, how it is used, any paperwork required and must carefully explain the use of vacation time for periods of illness and vice-versa.  The policy must include a policy on carryover of unused leave, cashing out leave and any “use it or loose it” rules, because silence on what happens to unused leave may allow a court to find that it is “vested.”[9]

Unlike full day absenteeism, adjustments in salary for half day absences, coming late and leaving early, continue to be a problem under the FLSA.  These situations call for responses other than docking pay in hourly increments.  The Employee Handbook must include a statement that salaried employees are expected to “work” during specified working hours, such as 8 to 5, and to work a certain number of hours per day.  The Handbook should also state that salaried workers are expected to work longer hours when the work demands that.  “Work” must be defined as being present in the office or, if telecommuting is permitted, immediately available by phone or e-mail..  “Flex” schedules should be in writing with the same stated expectation of presence and availability during specified hours.

The Handbook should also state that if an employee will not be present in the office, his or her whereabouts should be routinely disclosed to a secretary or supervisor.  If these performance criteria are in place, then habitual unexplained absence from the office or non-availability while “working at home” becomes a matter of poor performance. The new Regulations do contemplate “disciplinary deductions”[10] of a full day’s pay, so that step would be appropriate in a well documented case of numerous unexcused part-day absences, especially if that outcome is explained in the Employee Handbook.

In the past, employers have felt that they could not stop paying an absent employee’s salary once leave had been exhausted, and could not reduce pay for chronic absenteeism.  Both of these situations are now clarified, and employers, with proper policies in place, should be in a good position to enforce reasonable work expectations without risking a loss of exemption from the requirement to pay overtime.

Businesses that offer professional services incur greater risk than those that offer tangible goods.  The vendor who provides tangible goods can easily take a security interest in the very property that it sells to a customer. This is often done in store inventory and equipment. It is difficult for you, a provider of professional services, to secure an interest in the “goods” you provide because professional services are not tangible property. The key for the professional service provider is to protect your right to payment as much as possible in other interests or property of your client. This may be an interest in intellectual property, goodwill or other products. The earlier you secure that interest, the more likely you will not suffer a subordination of that interest if your client goes into bankruptcy.

You have an unsecured interest agreement with a client or customer.  You have provided professional services for the client or customer and, as is true for most professional services, have nothing more than the payment agreement to protect your rights.  You are concerned about receiving the full amount of your payment because the client or customer has fallen on hard financial times and it appears as though the debtor is headed towards bankruptcy.

If you are a secured creditor, you breathe more easily because you know that the Bankruptcy Code favors secured creditors.  You also know that your interests are superior to unsecured creditors and junior secured lenders.  However, you will not be protected against other secured perfected lenders, even if those lenders secured their interest after you.

If you are an unsecured creditor, you have more reason for concern when a client or customer is headed towards bankruptcy.  Generally (and especially in Chapter 7 petitions), unsecured creditors recover only a fraction of the original amount of the debt or money they are owed, if they recover any at all.  The trustee is considered the champion of the unsecured creditor because he/she will try to exercise the power of a judicial lien holder, as granted by the Bankruptcy Code.  He/she will attempt to amass as much property in the bankruptcy estate to distribute as much as possible to all creditors.  Unfortunately for the unsecured creditor, you will be the last to drink from the bankruptcy estate watering hole.  Often that hole is dry by the time your turn arrives.  Obviously, the more the trustee brings into the estate, the better the chances that the unsecured creditor may receive more of what is owed.

Now, suppose you seek to improve your position by securing that debt with a security agreement to attach the debtor’s property.  The client or customer, wanting in good faith to assist you in securing your interest, agrees to grant you a security interest in their equipment, or maybe even in their intellectual property.  You secure your interest in their property on May 1.  On June 1, the client files a bankruptcy petition.  The next thing you know, you are served with a Complaint in a bankruptcy Adversary Proceeding for an illegal preferential transfer, compliments of the bankruptcy trustee.

At this point, you are bound to ask “why?”  The client/customer already owed you money for your valuable services.  You are not attempting to receive any more under the new arrangement, except that you have improved your priority position if the client ever went into bankruptcy.  Or, so you thought.

The Bankruptcy Code defines a “preferential transfer” as, “a transfer of the debtor’s interest in property to or for the benefit of a creditor, for or on account of an antecedent debt owed by the debtor, made while the debtor is insolvent and within ninety days (one year in the case of an insider) before the filing of the petition, and that enables the transferee to receive more than the creditor would receive in a liquidation case if the transfer had not been made.”  See 11 U.S.C. § 547.  In short, you are an “insider” if you have any “control” of the debtor.  This is usually evident in creditors who are also officers of the debtor business.

The Code broadly defines the term “transfer” to mean, “Every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption.”  See 11 U.S.C. § 101(54).  Remember, a transfer of the debtor’s interest in its property is considered a transfer. 

A debt is antecedent if it existed prior to the filing of the bankruptcy petition by the debtor.  You sought a security interest from the debtor to better protect your interest in the prior unsecured interest agreement.  The debtor is insolvent because it transferred the interest while its liabilities exceeded that of its assets.

Lastly, there is a preferential transfer when the transfer allows the creditor (your client or customer) to receive more than they would under a liquidation case (Chapter 7) if the transfer had not been made.  This determination requires a little math play.  You have possibly improved the amount you will receive under bankruptcy because you changed your status from that of an unsecured creditor to a secured creditor.  In other words, you have gone from receiving a fraction of the debt to the full amount, ahead of all other unsecured creditors.  If this is the case, and assuming the other elements have been satisfied, then the secured interest that you seemingly acquired in anticipation (or not) of bankruptcy will be avoided by the trustee because it is a “preferential transfer.”

When your business offers professional services, you have a diminished ability to protect your right to payment because you do not produce tangible goods.  Therefore, secure an interest in those clients or customers as soon as possible, to the extent practical.  This will protect you if your client is in dire financial straits and declares bankruptcy more than three months (or more than one year if you are an insider) after you secure the interest.  If you do not secure an interest, you may be getting pennies on the dollar down the road.

 

The Fair Debt Collections Practices Act (FDCPA) contains a trap for unwary debt collectors.  The FDCPA requires a debt collector to disclose in the initial written or oral communication with the consumer that the “communication is from a debt collector” who is “attempting to collect a debt and that any information obtained will be used for that purpose.”  15 U.S.C. § 1692e(11).  This is sometimes referred to as the “Mini-Miranda” provision.  Under certain circumstances, you may not realize that you are a “debt collector” who is trying to collect a “debt,” and if you fail to give the Mini-Miranda warning, you are subject to liability.  A debt collector who fails to comply with the FDCPA, including the Mini-Miranda provision, may be liable for, among other things, actual damages, a statutory penalty of not more than $1,000.00, the costs of the action and reasonable attorneys’ fees.  15 U.S.C. § 1692k(a).  This article outlines some of the most recent FDCPA cases dealing with debts and debt collectors that have Mini-Miranda implications. 

I.         What is a Debt?

The FDCPA defines a debt to be any obligation of a consumer to pay money arising out of a transaction primarily for personal, family or household purposes.  See 15 U.S.C. 1692a(5).  Initial communications by a debt collector in an attempt to collect a debt must contain the Mini-Miranda warning.  It is therefore important to determine what types of obligations can be a “debt” under the FDCPA. 

One court has determined that a municipal lien for water services is such a “debt.”  See Piper v. Portnoff Law Associates, 274 F.Supp.2d 681 (E.D. Pa. 2003).  In Piper, the defendant law firm notified the plaintiff of a municipal lien, which arose out of an obligation to pay money for water services, against the plaintiff’s property.  In the letters notifying plaintiff of the lien, the law firm did not identify itself as a debt collector and did not give the Mini-Miranda warning.  On these facts, the Court granted summary judgment in the plaintiff’s favor.  Id. at 690.  The Court disagreed with the defendant’s argument that the FDCPA’s disclosure requirements did not apply because the letters did not concern the collection of a “debt” against the plaintiff as an individual, but the enforcement of a municipal lien against a property.  While a property lien may not meet the definition of debt under the FDCPA, the lien arose from consumption of water in a household, which was for personal or household purposes.  Id. at 687. 

II.         Who is a Debt Collector?

The FDCPA defines a debt collector, subject to certain exclusions, as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.  See 15 U.S.C. 1692a (6). As we have learned, the FDCPA’s Mini-Miranda requires “debt collectors” to identify themselves as such.  If a party is not a debt collector, it need not provide the Mini-Miranda warning.  Courts are frequently asked to resolve disputes over whether a party is, in fact, a debt collector.  Below are examples of situations where a party might erroneously believe they are not a debt collector under the FDCPA.

        A.        Collecting Debts on Another’s Behalf

A creditor is not a “debt collector” under the FDCPA.  See Stafford v. Cross Country Bank, 262 F.Supp.2d 520 (E.D. Ky 2003).  In Stafford, the defendant bank issued a credit card to a third party who had fraudulently applied for it under the plaintiff’s name.  When debt accumulated on the card and the bank did not receive payment, it contacted the plaintiff with numerous letters and phone calls.  On these facts, the Court, citing legislative history and prior case law, held that the defendant bank was not a debt collector under the FDCPA and therefore any initial communications with the debtor need not contain Mini-Miranda.  Id. at 794.     

Those who attempt to collect debts on behalf of government entities are debt collectors under the FDCPA.  See Piper v. Portnoff Law Associates, 262 F.Supp.2d 520 (E.D.Pa. 2003).  In Piper, the defendant law firm attempted to collect payment for a municipal bill on behalf of the city.   The defendant argued that it was not subject to the FDCPA because the definition of “debt collector” excludes government officers or employees.  The Court disagreed and held the firm to be a debt collector, reasoning that the government employee exemption “does not extend to those who are merely in a contractual relationship with the government.”  Id. at 527.  Therefore, the law firm’s failure to give the debtor the Mini-Miranda warning in its initial communication violated the FDCPA. 

            B.         Collecting Your Own Debts

Generally, a party who attempts to collect its own debts is not a debt collector under the FDCPA.  For example, a hospital, which sought to collect patient’s debt, could not be “debt collector” under the FDCPA because the debt the hospital sought to collect was owed to the hospital, rather than to another.  See Bleich v. Revenue Maximization Group, 239 F.Supp.2d 262 (E.D.N.Y. 2002).  In Bleich, the plaintiff sued a hospital when it attempted to collect from the plaintiff a debt the plaintiff claimed she paid.  The Court held that the hospital was not a debt collector under the FDCPA, finding that “by its terms, the FDCPA limits its reach to those collecting the debts ‘of another’ and does not restrict the activities of creditors seeking to collect their own debts.”  Id. at 264.  Because the FDCPA did not apply, the defendant’s initial communication with the debtor need not contain the Mini-Miranda warning. 

One court has found that a radiologist who signed a physician’s lien in an attempt to collect a debt from a former clinic patient was not a “debt collector” under the FDCPA because the radiologist was not in the debt collection business.   See Kang v. Eisenstein, 962 F.Supp 112 (N.D.Ill. 1997).  In Kang, the plaintiff underwent three MRIs following a car accident in which he was involved.  After the plaintiff failed to pay for the MRIs, the defendant doctor signed a physician’s lien in an attempt to collect.  The Court held that the doctor was not a debt collector under the FDCPA.  Id. at 114.  Therefore, the defendant need not give the Mini-Miranda warning in his initial communication to the plaintiff. 

III.       Conclusion

As you can see, when determining whether the FDCPA governs your efforts to collect a debt, it is critical to know your terms.  You may be a debt collector without knowing it, and subject yourself to liability if you fail to give the Mini-Miranda warning.  Understanding how courts have defined “debt and “debt collector” is an important first step.  The cases cited in this article are all trial level decisions, and there is a dearth of appellate decisions on these issues.  Nonetheless, these cases give you an idea of how courts view who is a “debt collector” collecting a “debt.”  If you are one, give your debtor the Mini-Miranda warning, or face potential liability under the FDCPA.