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Fifth Circuit finds internal audit admissible in overtime lawsuit

Companies often conduct audits to determine whether their employees are properly classified under the FLSA.  If an employee later files an overtime lawsuit, are these audits admissible at trial?  A recent case in the Fifth Circuit shed some light on this issue.  In Novick, et al. v. Shipcom Wireless, Inc., No. 19-20056 (5th Cir. Dec. 7, 2020),  Shipcom, a supply-chain and technology company, was sued by its former workers who claimed that they were misclassified as exempt from overtime pay. Id. The former workers were paid a salary and treated as exempt, which they alleged was in violation of the FLSA unpaid overtime rules that required employers to pay their non-exempt workers time and a half for all hours worked over 40. Id. In 2015 Shipcom had an audit reevaluate whether certain positions within the company were properly classified as exempt or nonexempt. Id. The trainer position, the position that three of the plaintiffs held, was reclassified as nonexempt and all trainers were now to be paid hourly. Due to this change, the trainers who were still at Shipcom were then given backpay equal to their overtime, increased by 5%. However, one trainer who was no longer with Shipcom was not given backpay or interest. 

When the case reached trial, Shipcom wanted to present opening and closing arguments, but that motion was denied. Shipcom then wanted to exclude from the court evidence related to the audit and reclassification saying that the evidence was inadmissible under Fed. R. Evid. 407, 401, 402, and 403. This motion was also denied. The jury found that the plaintiffs were nonexempt under the FLSA and had been misclassified. Id. The jury further found the defendant did not act in good faith on their classifications. Id. Thus, on appeal, the defendant argued the district court’s denial of its motion to open and close and the admission of the audit evidence. Id. 

In a FLSA suit for unpaid overtime, the defendant employer bears the burden of proof to establish that an employee falls under an exemption. Samson v. Apollo Res., Inc., 241 F.3d 629, 636 (5th Cir. 2001). This court had affirmed the decision of a lower court to allow the defendant to open and close when the defendant bore the burden of proof on the remaining disputed issues. See, e.g., John Hancock Mut. Life Ins. Co. v. Dutton, 585 F.2d 1289, 1295-96 (5th Ci. 1978). However, this court made clear that just because a lower court allowed a defendant to open and close in a case did not mean that the trial court abused its discretion in not allowing Shipcom to open or close. For example, in Walker, court allowed the “plaintiff to open and close because it found that following the traditional presentation of evidence model would be more relatable to the jury.” Walker v. Corr. Corp. of Am., No. 4:14-cv-142-SA-SAA, 2016 WL 865295, at *4 (N.D. Miss. Mar. 2, 2016). Thus, this court followed the Walker court stating that Shipcom did not cite to any case where this court has held a trial court’s decision as to which party presents argument first to be an abuse of discretion. Novick, et al. v. Shipcom Wireless, Inc., No. 19-20056 (5th Cir. Dec. 7, 2020).

The second issue on appeal was whether the trial court erred in admitting evidence from its internal audit. Under Rule 407, “[w]hen measures are taken that would have made an earlier injury or harm less likely to occur, evidence of the subsequent measures is not admissible to prove: . . . culpable conduct.” Fed. R. Evid. 407. The trial court correctly held that Rule 407 did not apply to the evidence of Shipcom’s internal audit because of Brazos River Authority v. GE Ionics, Inc., 469 F.3d 416 (5th Cir. 2006). In Brazos River, the lawsuit arose from a sale of the water filters that were allegedly beneath minimum standards of functionality. On appeal, the court found that the district court’s exclusion of several items of evidence under Rule 407 was reversible error. The court focused on the particular language of Rule 407 and constructed the phrase “injury or harm” narrowly and explained that “[t]he admission of evidence of changes made merely to improve a product, as distinguished from remedial measures that make an ‘injury or harm less likely to occur,’ is not barred by the rule.” Id. at 428. 

Thus, the evidence from the internal audit in Novick was analogous to the investigations in Brazos. Novick, et al. v. Shipcom Wireless, Inc., No. 19-20056 (5th Cir. Dec. 7, 2020). The audit contained information that suggested that Shipcom needed to change the classification of several of its employees from exempt to nonexempt, but the audit did not amend the job duties of Shipcom’s employees to fit within the administrative exemptions. Id. Instead, it was up to Shipcom to determine how to classify these employees going forward. Thus, even assuming Shipcom conducted the audit solely to ensure that its employees were properly classified, the audit did not make the “earlier injury or harm less likely to occur,” so, therefore, the audit was not a subsequent remedial measure. Id; Fed. R. Evid. 407. Thus, the court affirmed the district court’s admission of evidence related to the audit over Shipcom’s objections. Novick, et al. v. Shipcom Wireless, Inc., No. 19-20056 (5th Cir. Dec. 7, 2020).

Lastly, the court analyzed Shipcom’s arguments under Rules 401, 402 and 403. The laws state that evidence is relevant if “it has any tendency to make a fact more or less probable than it would be without the evidence.” Fed. R. Evid. 401(a). Irrelevant evidence is inadmissible. Fed. R. Evid. 402. And even relevant evidence may be excluded “if its probative value is substantially outweighed by a danger of . . . unfair prejudice, confusing the issues, [or] misleading the jury. . . .” Fed. R. Evid. 403. 

The court concluded that the evidence related to the audit was relevant to the issue of whether the plaintiffs’ job descriptions fit within the administrative exemption. Novick, et al. v. Shipcom Wireless, Inc., No. 19-20056 (5th Cir. Dec. 7, 2020). Of the exhibits and emails that were challenged by Shipcom, several of them actually discussed the job duties and the decision to reclassify its plaintiffs, which were useful to the jury. Id. Evidence from Shipcom’s internal audit, which reevaluated Shipcom’s classification of its employees by looking at their job descriptions, carried substantial probative value with respect to whether Plaintiffs fell within the administrative exemption to the overtime requirements. Id. As such, the Fifth Circuit concluded that the district court did not abuse its discretion when it allowed Shipcom to introduce evidence of the internal audit and reclassification. 

Are you an oilfield worker who has been denied overtime pay, but unsure if you fall within an exemption? If so, consider speaking with an attorney today. Josh Borsellino is a FLSA attorney that understands how the exemptions work in light of one’s unpaid overtime. He offers free consultations and can be reached at 817.908.9861 or 432.242.7118.