Wall Street Wage Fight

Chances are you've never heard of Mark Thierman. But, then that's not surprising: He's a labor lawyer based in Reno, Nev., of all places. He has settled some pretty big cases, though. In 2002, Thierman took on Starbucks in California, forcing the coffee chain to pay managers and assistant managers overtime, a policy the firm eventually took nationwide. He's fought similar cases against Hollywood Video, Bridgestone/Firestone, Pacific Bell and Foot Locker, to name a few. As a result of Thierman's legal actions, each company settled rather than litigate, paying millions and implementing changes in the way it compensates employees.

And now this labor lawyer — who, for an adult, has an unusually keen interest in Star Wars movies — has set his eyes on Wall Street. Specifically, Thierman reckons your firm may owe you around $30,000, and perhaps more, in unpaid overtime compensation. That's right. If you are now working as a registered rep (or have worked as one in the last few years) and are paid only on the commissions you generate, you are being illegally denied overtime pay in direct violation of federal law, Thierman says. Not only that, but Thierman argues that reps are being forced — illegally — to pay their sales assistants' salaries. And his suits may force broker/dealers to quit charging reps for trading errors.

In short, Mark Thierman — a guy who named his dog Yoda and drives an SUV bearing an Obi-Wan vanity license plate — may actually force firms to change the way registered reps are compensated. By applying a landmark, Depression-era labor law to the brokerage business, he has settled class-action suits against two wirehouse firms in California already. And, in a third case, UBS paid $89 million to settle nationally. UBS won't comment on the settlement, but sources with knowledge of the settlement say that changes to its compensation system “are in the works.”

Thierman is now bringing his legal campaign east, with about 35 more class-action lawsuits, including some in New York, New Jersey and Pennsylvania. The list includes nearly every firm you'd expect, and then some: A.G. Edwards, Bear Stearns, Merrill Lynch, Morgan Stanley, Smith Barney, Edward Jones, Wachovia Securities and Raymond James & Associates. Thierman estimates that the suits represent about 100,000 brokers, past and present.

Thierman's argument, “if correct, would raise serious issues” on compensation practices “at all financial institutions” in the country, says Philip Berkowitz, an employment lawyer who represents financial institutions at Nixon Peabody in New York. Berkowitz disagrees with Thierman's argument; and the brokerage firms deny they're compensation programs are illegal or that they violate the Fair Labor Standards Act of 1938.

The stakes are high, which is why labor lawyers interviewed say settling is often the safest (cheapest) route for firms to take. Indeed, litigating and losing compensation class-action cases, such as Thierman's, can “quickly climb into the hundreds of millions” for one company alone, says Lori Bauer, of law firm Jackson Lewis, which represents management in labor disputes. Federal law stipulates that if the employer is found guilty of withholding overtime “willfully,” the amount owed is automatically doubled. Thierman estimates that, all in, he could collect for his clients as much as $2 billion in back pay and damages if he were to win in court. (He says he'd personally earn about 5 percent to 6 percent of that, after paying other lawyers.)

Like a Doctor? Not

At the heart of this battle is the answer to a seemingly simple question: Are brokers exempt from the Fair Labor Standards Act of 1938 or not? The answer to that is based on various tests. Does your work as a registered rep require you to have “advanced knowledge?” Do you exercise discretion and independent judgment? Do you manage others? Such “white collar” duties are usually enough to exempt workers from The Fair Labor Standards Act. The FLSA, as it is known, was passed by Congress back in 1938 to protect low-paid, unskilled workers from being abused by their employers. It stipulates that non-exempt workers must be paid a weekly salary averaging not less than $455. And it guarantees that such workers receive overtime pay of time-and-a-half of their regular rates of pay for working more than 40 hours a week. The law is complicated, and has been tweaked (badly, some say) over the years in attempt to keep it up-to-date. There are several “exemptions” to the law, (broadly divided in to three types: professional, administrative and executive), and people who make lots of money ($100,000 and up) are among those exempted. Stockbrokers have always been listed as exempt by their employers under the administrative section — disqualifying them from receiving overtime compensation. But Thierman is arguing that stockbrokers are simple salespeople because they work on commission, they do not receive the salary that the FLSA stipulates. If that is true, as far as labor law is concerned, stockbrokers are not the “professionals” they consider themselves to be, Thierman says, but would be regarded as hourly workers. Also as a part of these cases, Thierman argues that deductions for bad trades and sales assistants are illegal under various state and federal wage laws.

The consequences of all this? “Stockbrokers would be required to keep records of the time they work, including all of their breaks, and be paid by the hour for each overtime hour worked,” said lawyers representing the Securities Industry Association in a prepared statement. Worse, their firms would have to “treat brokers like hourly workers and control the hours they work.”

In an emailed statement, SIA lawyers at Morgan Lewis & Bockius added, “The current wave of broker wage/hour litigation is brought by opportunistic lawyers who are attacking the way stockbrokers have been legally compensated for decades.” They conclude, “It is inconceivable that this would be in the best interest of the vast majority of brokers.” Indeed, a handful of reps contacted on this issue by this magazine reacted quite harshly to the idea that they were not professionals and should receive overtime.

But events already seem to be going Thierman's way. Well, that is to say, Thierman has already settled cases on overtime and unlawful deductions with UBS, Merrill Lynch and Morgan Stanley, who cumulatively ponied up more than $165 million rather than litigate class-action suits in labor-friendly California. (UBS settled nationally.) But that doesn't mean the firms will continue to settle. The SIA appears to be fixing for a fight, saying the suits are “contrary to the very purposes of the law,” which, again, was designed to help the lowest-income workers. The SIA's lawyers further state that, “For decades, regulations and guidance issued by the U.S. Department of Labor have made clear that stockbrokers are exempt from the provisions of the FLSA.” SIA lawyers cite an Opinion Letter from the Labor Department in 1994 and amendments to the law in 2004, which “do not change older versions' application of the exemption to ‘a customer's man in a brokerage house’.”

Costly Settlements?

The complaints based on the FLSA will sound familiar to any rep. Take the case of Linda Garett, a former Morgan Stanley broker. Garett says in her complaint that her firm was illegally deducting from her paycheck in order to pay for, among other things, her sales assistant's salary. Then there is Ken Burns, a former Merrill Lynch stockbroker, who claims he was routinely required to work over 40 hours per week without receiving any overtime compensation. Lastly, there is the case of Joseph Glass, a former UBS stockbroker, who says monetary losses as the result of trading errors were illegally taken out of his pay. (Many plaintiffs contacted declined to be interviewed for this story, some for fear of retribution from their current firms.)

Until Thierman showed up, few lawyers in their right minds would have taken those cases. But Thierman made a “discovery” in the law that has helped him begin a crusade against brokerage firms — and that, in the process, could make him a very rich man. It all began in January 2004, when Thierman was defending a mortgage broker who was being sued by her former firm for taking clients with her when she left, which is illegal in California, Thierman says. After researching his case, Thierman defended the woman by countersuing the mortgage company, charging that under The Fair Labor Standards Act, the mortgage company actually owed her overtime pay. Thierman even acknowledges that he was just looking for something, anything, to help his client, and so he applied the statute to a white-collar employment dispute, a rather unconventional use of the law. The strategy worked, and his client's former firm dramatically reduced the amount they were demanding from her.

The inspiration to apply this law to the securities industry did not come from some ideological fire burning within Thierman, but from a friend's question. In April 2004, Thierman published an article in The California Labor and Employment Law Review explaining why mortgage originators and underwriters are entitled to overtime compensation. After reading the piece, a friend and fellow labor lawyer, who had been approached by reps complaining about pay deductions, asked Thierman if the same theory used for the mortgage company employee case could be applied to stockbrokers. Thierman hadn't thought about it before, but, “I told him, ‘Sure, I don't see why not’,” Thierman recalls. And, voila, just three months later, on July 12, 2004, with Garett as the lead plaintiff, Thierman filed suit against Morgan Stanley in California for illegally withholding overtime pay and docking brokers' pay. The firm settled in March for $42.5 million.

Merrill Lynch settled a similar suit, coughing up $37 million last summer to Ken Burns and the class of brokers he represented. And, in February 2006, UBS chose to settle nationally rather than go state-by-state and agreed to pay $89 million to its brokers, including Joseph Glass. Most named firms are facing between two and five separate class-action suits regarding overtime.

Nixon Peabody's Berkowitz disagrees with Thierman's view that stockbrokers are necessarily covered by the FLSA. Via email to Rep. editors, Berkowitz says, “The idea that stockbrokers and other financial professionals are equivalent to factory workers is ridiculous.” Further, Berkowitz says that the FLSA regulations were amended in 2004 to provide an explicit exemption for financial-services employees. Berkowitz says the FLSA's administrative exemption “specifically applies to employees in the financial industry whose work includes analyzing customer information and determining which financial products meet the customer's needs and circumstances.” However, it does not appear to exempt financial employees whose primary duty is simply selling financial products without undertaking any customer analysis.

Why aren't reps exempt under the so-called “highly compensated” employees standard? It's “the one stickler,” Berkowitz says: To be qualified for that, “stockbrokers need to receive their compensation on a salary basis at a rate of at least $455 per week.” “If the stockbroker is compensated solely on a commission basis, then the exemptions probably don't apply. But not all of the compensation needs to be in the form of a salary. To meet the ‘highly compensated’ exemption, the compensation can be a combination of salary and nondiscretionary commissions or bonuses.”

No doubt some jaws drop at the thought of giving reps overtime pay that is usually associated with hourly wager earners, such as assembly-line workers. Reps themselves are even shocked by the idea. One broker at Morgan Stanley, says, “Overtime for brokers seems ludicrous to me. Our jobs are very entrepreneurial; if you work very hard for very long hours you can make a lot of money. It's just not a nine-to-five job.”

A Smith Barney broker says the long hours are a “right of passage” in the industry. “Working 60 hours is not all that unusual. It's just the way things are. New guys are doing cold calls and working 60 or 70 hours a week, and the established brokers are working 10 hours and vacationing in Jamaica. It's an accepted thing.”

A Wachovia rep echoes the same response but, on hearing Merrill's settlement, adds, “It made me say, ‘We have to rewrite something or get the industry to help change the law’.” This is a broker saying this.

Thierman, the Apostate

Amazingly, it's a legal argument that no one had applied to stockbrokers until now (the argument has been used by journalists seeking overtime pay and others, too). And it's just as amazing that it was Mark Thierman who happened to expose the “injustice.” Twenty-two years after graduating with a law degree from Harvard, Thierman, 54, practiced labor law — for management. “I call it working for the ‘dark side’,” he says. But in 1996, Thierman made the switch to the employee side of labor law, when his wife, an actuary employed by Pacific Bell, was affected by a labor issue. He won the case against Pacific Bell, and would eventually win more million-dollar cases. “Employment labor law is just as fun as management-side law — and you don't get shot at by workers in the picket line,” he jokes.

He seems to be enjoying the change in sides. He works from a home office, keeping track of his cases with erasable white-boards that are filled to capacity with a list of color-coded case names. He seems at ease, not wound tight like many lawyers with so much on the line. Perhaps it is the confidence he has in his argument — or maybe it's the peaceful valley of the Sierra Nevada Mountains that surrounds his home. Even his black Labrador, Yoda, rests calmly in the corner of his book-cased office. Thierman says he gets to the office at around 10 a.m., answers emails and voicemails, has lunch (“lunch is very important,” he says), takes a nap and then begins his “real” workday. “But I'm also usually awake until two or three in the morning doing my work,” he says.

Except for two houses within walking distance of each other on his three acres of land in Reno and the Harvard and New York University degrees hanging on his wall behind his desk, nothing about Thierman shouts “big-time labor lawyer.” His bookcases are filled with the typical law reference books, family photos and some Star Wars memorabilia, including a life-sized cardboard cutout of Darth Vader that hangs behind his door. His modest appearance is mirrored in his self-deprecating answers to questions, like how he managed to apply a law that no one thought applied to reps: “Maybe I'm just stupid enough to test stuff that everyone else sees as standard. My defense lawyer friends say, ‘Mark, this is crazy but you're right.’”

It's Not Just About the Overtime

The overtime aspect of these suits are certainly getting the most attention, but what reps involved in the cases are most frustrated with is not the hours they weren't paid for (in most cases, they had no idea they were entitled to overtime). Instead, it's the deductions from gross earnings that they seek relief from. “What brings brokers in are the little things at work that really annoy the heck out of them. The guys don't come because they worked overtime. The brokers hate things like the trading errors they are charged for,” Thierman says. Trading errors occur when a broker executes an incorrect order for a client. If money is lost upon correction of the error, it is charged to the broker. The average wirehouse saves up to $10 million each year by passing trading error costs onto reps, according to Thierman.

That practice, according to Steven Miller, a securities lawyer in Encino, Calif., who is involved in the overtime settlement with UBS, is wrong. Miller, a former lawyer-turned-A.G. Edwards rep who has since returned to law, says he experienced firsthand the deductions from pay as the result of trading errors. “It didn't sit well with me that when I made a trading error I had to take the financial responsibility. When you're an employer you have to take some responsibility,” he says. Miller says his frustration with the pay deductions spurred his decision to go back into law and go after firms with similar practices.

Another all-too-familiar deduction firms make applies to the salaries of sales assistants. A lead plaintiff in a pending overtime case in New York, who says he was surprised that overtime pay even applied to him, says his primary reason for joining the suit was the sales assistant deduction he had taken out of his earnings each month. The assistant, whom he shared with other reps, was assigned to him by the firm and his salary was being paid for out of the brokers' earnings. Each rep decided how much to give the assistant, which resulted in a bidding war among reps and poor service for those paying less. He says the assistant provided him with “horrendous” service and that he spent “30 percent of my time double-checking his work because there were so many mistakes.” On one occasion, the sales assistant insulted and yelled at him in front of others in the office. “After you set the amount you'll give the sales assistant, you don't really have the power to lower it,” he says.

Whether the sales assistant is good or bad, Thierman says, funding his/her salary is yet one more illegal deduction. “You can't charge an employee for another employee's pay. This is not a commune,” Thierman argues. He concedes that in some states, not including labor-friendly California where these cases have originated, such deductions are lawful with certain limitations.

The sales assistant deduction appears to be a small price to pay for some current reps though. “It's a mystery in this business that sales assistants can't stick around unless we, as advisors, subsidize their pay,” says one wirehouse broker. “But it's one of those ‘roll your eyes, whatever’ deductions.”

Thierman is coupling those “whatever” deductions with his black-and-white argument for overtime and not letting Wall Street turn a blind eye to them again. He says firms will have to change their compensation methods, and, perhaps, pay reps based on their assets under management, or somehow meet the guaranteed salary minimum needed to exempt brokers from overtime.

Brokerage houses are saying very little about the future of compensation, but are standing firm by their current method. A statement from Morgan Stanley after it settled for $42.5 million said: “We believe financial advisors are exempt professionals under the law and should not be paid on an hourly basis or be forced to keep track of their work time.” A spokesperson for Smith Barney, which faces at least two suits, said in a statement, “We believe this suit to be without merit. Smith Barney is committed to fairness in its employment practices and to compliance with all laws, including those related to compensation.”

Although labor laws outside of California might tend to be slightly less friendly, Thierman is fairly confident he will be successful as long as brokers are not guaranteed a salary (nor a draw, payment Merrill Lynch gives its brokers, which can be taken back if the broker does not meet certain numbers) that meets the FLSA minimum of $455 per week. “If we ever get past the salary issue, it will be a tough case to win for both sides, because then you have to go in and define what the role of stockbroker really is — does he advise or does he sell?” That debate, which is all too common to this industry, will be one to watch.

The Cost Template

How much will your firm owe you in back pay? Thierman estimates each rep is personally owed $30,600 in overtime, or a firm with 10,000 brokers would owe a cumulative $306 million. Here is his calculation method — for both Federal and the state of California — where he has settled with two firms based on this method.

The White-Collar Exemption

Both the duties and salary test must be passed in order for an individual to be exempt from FLSA overtime laws — plaintiffs lawyers argue that reps are not exempt since they do not receive a salary. Reps who are primarily fee-based are probably exempt, says Thierman.