The USDOL is busy again issuing Opinion Letters and has again turned its focus to the issue of inclusion/exclusion of bonuses into the regular rate for purposes of overtime computation.  These Letters are not binding on courts but they operate to evidence the agency’s position on whatever issue is being addressed so they are extremely valuable to employers and practitioners alike.

In the Opinion Letter on bonuses, the agency addressed how employers should calculate employee overtime in a scenario when the employee receives a nondiscretionary bonus that is earned over a period of time and is not connected to a specific pay period.  The Opinion Letter posited a hypothetical where employees will be eligible for a $3,000 bonus upon completion of a ten-week training program, as well as signing up for an extra eight weeks of training.  The hypothetical sets out that the employees worked varying amounts of overtime over that initial ten week period of training.

The Opinion Letter starts by acknowledging that the lump-sum bonus needs to be included in the regular rate of pay, when overtime is computed, over that.  The Opinion Letter indicates that the employer must divide the bonus up in equal components for the ten weeks.  Thus, for each week, the sum of $300 would be “thrown into” the earnings for that week, when the regular rate is determined as each week.  According to the Opinion Letter, each of those allocations “counts equally in fulfilling the criteria for receiving the lump sum bonus.”

The agency (in a footnote) noted that it will be revising its Field Operations Handbook, which is the bible for all field investigators, to “reflect that allocating bonuses equally to each week of the bonus period is the appropriate method for computing overtime pay on bonus earnings that cannot be identified with particular workweeks.”

The Takeaway

One commentator has stated that these Opinion Letters are “a reminder of how these guidance documents normally function and have functioned throughout most of the Wage and Hour Division’s history.  They provide “discrete, largely uncontroversial technical assistance in a way that delivers clarity to both employers and employees.”  He added that “each letter can be very informative, and therefore helpful, for a business or a worker facing the specific situation the letter addresses.”

Agreed…

There have been a host of wage hour cases in the energy industry and I have often commented upon these.  Many concern misclassification issues and another example of this phenomenon has arisen where a class of pipeline inspectors has requested that a federal court approve a settlement amounting to more than $2,000,000 where the theory of the plaintiffs was that the employer misclassified the workers as exempt under the Fair Labor Standards Act.  The case is entitled Ganci v. MBF Inspection Services Inc. and was filed in federal court in the Southern District of Ohio.

The Company supplied inspection services for energy companies, e.g. gas and oil.  There were 120 employees covered in the settlement, which was urged by both sides as a proper resolution of the case.  The employees claimed they worked, on average, sixty (60) hours per week.  The parties, in their brief, stated that “wage and hour trials are complex, expensive, and unpredictable.  Absent this settlement, payment would be uncertain, and would take dramatically longer. Such expense, uncertainty, and complexity strongly favor approval of the settlement.”  The lawyers will walk away with almost $750,000 in fees.

The matter had been conditionally certified under the FLSA in 2016 and as a Rule 23 class in 2017.  The US Magistrate Judge granted preliminary approval to the settlement a few months ago.  The parties believed final approval was warranted.  The parties have exchanged and reviewed thousands of pages of documents and the case itself has been going on for more than four years.

The Takeaway

The simple reality is that inspection work is never going to be exempt work.  It does not matter how skilled or knowledgeable the inspectors are, as this work will never meet the “discretion and independent judgment” element of the administrative exemption, which is (in all likelihood) the only exemption applicable.  Given what would have likely happened at trial, the $2,000,000 was a good settlement.

If that can be believed…

Employers always have difficulty knowing what sums should be included in calculation of the regular rate and many employers unwittingly walk themselves into trouble by not knowing the intricacies of FLSA computation. Well, the USDOL is finally doing something about that. The agency just finalized a rule that allows employers to not include the cash value of many traditional “perks,” such as tuition benefits, cash-outs of accrued leave and certain bonuses.

The new rule makes it easier for employers to “more easily offer perks and benefits to their employees.” The rule will be final in approximately one month. The rule revises the sections of the regulations that deal with statutory exclusions from the regular rate. Currently, there are seven recognized exceptions to the inclusion rule but the revision greatly expands those exclusions to encompass things like payments for unused paid leave, cellphone and travel reimbursement, parking reimbursement, wellness plans and gym use.

Importantly, the rule also excludes signing and longevity bonuses and some “discretionary bonuses” as well. For example, some of the bonuses now excluded are those given for employee of the month or a bonus for “overcoming challenging or stressful situations.” The new rule is also expected to cut down on litigation.

The agency stated that it could not quantify the value of the new/additional benefits/perks that employers could now provide after the rule goes into effect. One commentator, Tammy McCutchen, stated that the new rule allows businesses to extend perks to their workers and not be afraid that a lawsuit will ensue. She stated that “because the regulations are so old, it really has opened up the door for plaintiffs’ attorneys to file lawsuits alleging that employees earned overtime on a lot of these great modern benefits.” Another commentator decried the fact that the new rule only mandates inclusion in the regular rate if the benefits are “anticipated” or “prearranged,” which places the onus on the employees, said this pro-worker commentator.

The Takeaway

The key is whether the employer is undertaking providing the benefit or perk to circumvent or evade the overtime obligations of the FLSA. In this regard, employer-furnished gym memberships do not seem to be related to work, while tuition benefits could be, depending on the circumstances. The important point is that the agency is adapting an eighty year old law to the realities of the modern workplace and providing more certainty for employers!

As the New Year dawns…

I have long been a fan of the fluctuating work week (FWW) method of paying overtime to non-exempt salaried employees.  This computation yields a half-time calculation, i.e. a lower calculation than dividing the salary by forty and then calculating time and one half of that number.  The Pennsylvania Supreme Court has recently held that this computational method does not apply in Pennsylvania.  Thus, employers in that jurisdiction paying non-exempt employees a salary must use the more generous method of overtime calculation for these workers.  The case is entitled Chevalier v. Gen. Nutrition Ctr., Inc., and issued from the Supreme Court of Pennsylvania.

The FWW method of paying non-exempt employees, codified at 29 CFR 778.114, allows an employer to pay this half-time overtime when employee hours fluctuate from week to week.  There must be an agreement in advance of the work being done that provides that the fixed salary will be straight time pay, without regard for the hours worked and then the overtime is computed at half the regular rate for that particular week, depending on the hours worked in that week.  In that regard, many courts have used this method of calculating overtime in misclassification cases and I know, from considerable experience representing employers in DOL audits (more than 300 of them) that the agencies, state and federal, will undertake this calculation as well.

The class here was a group of non-exempt store managers paid a fixed weekly salary (and commissions).  When they worked overtime, the employer used the FWW method.  The employer computed the “regular rate” by dividing the manager’s fixed weekly salary by the actual number of hours worked, and then paid half-time overtime, after doing the math.  Plaintiff contended this was incorrect under state law.  The Court agreed.

The Court held that the employer could not avail itself of the FWW method, but had to pay these salaried non-exempt employees time and one half of their regular rate for overtime hours.  The Court relied on Pennsylvania state law and regulations that state that each “employee shall be paid for overtime not less than 1-1/2 times the employee’s regular rate of pay for all hours in excess of 40 hours in a workweek.” The Court also concluded that since the state DOL did not adopt the FWW method of overtime payment.  That fact, combined with the import of the state regulations, showed that the FWW method was not allowable under Pennsylvania state law.

The Takeaway

This decision shows the dichotomy or tension between federal and state law.  Under the FLSA, this method of paying overtime is legal (assuming the agreement with the employees has been implemented).  The danger for employers is that they must always examine both federal and state law on any wage-hour issue, especially such an important one as proper overtime payment, when implementing compensation issues.  Compliance with one set of laws does not mean the particular policy is legal under another body of law.

Employers should be guided accordingly…

I love Assistant Manager class actions because it gives a defense lawyer a “golden” opportunity to defeat class certification by asserting that too much individual scrutiny is required to allow a class action to proceed.  A beautiful example of this is a recent Walmart case where a group of Assistant Managers dropped their misclassification lawsuits, after they were unable to secure class certification.  They did, however, arrive at settlements for themselves.  The case is entitled Swank et al. v. Walmart Stores Inc., and was filed in federal court in the Western District of Pennsylvania.

The plaintiffs alleged they were misclassified as exempt.  On the surface, it seemed that there was some superficial appeal to their claims as they were three levels down on the hierarchy of Walmart management personnel, after Store Managers and Co-Managers.  They claimed (as the plaintiffs in these cases usually do) that they spent the overwhelming majority of their time performing non-exempt work, i.e. the same work as their subordinates, worked sixty (60) hours per week and did not receive overtime.  Thus, as a result, they claimed they were making less than the hourly employees.

These employees also claimed that they could not hire or fire and were given no authority to make (or have input into) decisions regarding the operation of the stores.  The cases of these different plaintiffs were consolidated in 2015.  The Judge indicated the Complaints could survive motions to dismiss, but was dubious whether a class could survive as the classes of Assistant Managers had too varied experiences that would allow a class action to proceed.  The plaintiffs asked for reconsideration which was denied and which also brought a rebuke from the Judge for trying a legal argument the plaintiffs had opposed when Walmart sought to do that same thing earlier on in the case.

A Walmart spokesperson observed that “we believe our roles are properly classified under the FLSA and applicable state law, and the court denied class treatment to these plaintiffs earlier this year.  While we deny the plaintiffs’ allegations, we elected to resolve many of the cases with the individual plaintiffs in the best interest of the company. We are glad we could resolve these matters.”

The Takeaway

This case highlights the efficacy of using the individualized defense to defeat class actions.  With any group of these types of employees, who perform subordinate-type work but who also perform and discharge management functions, one size certainly does not fit all.  It is the advocate’s job to highlight this need to look at every single Assistant Manager to see if they fit within the exemption, which is the anathema to a bona fide class action.

Works (almost) every time…

I have blogged numerous times about the strictness of the New Jersey A-B-C test as applied to possible independent contractors.  The prime example of this is the very recent assessment of Uber for $650,000,000 in back-due unemployment contributions.  This incredibly large assessment, certain to be litigated about for years, is a sign to employers, large, small or otherwise, that the State of New Jersey has declared war against any designation of an individual as an “independent contractor.”

Uber will certainly fight this to the hilt, as such an unbelievable assessment is a direct, systemic threat to its business model.  The Company stated that it is “challenging this preliminary but incorrect determination, because drivers are independent contractors in New Jersey and elsewhere.”

Uber can (and will likely) seek an informal meeting with NJDOL officials, with someone titled the Redetermination Auditor to see if it can cut a deal.  The reality is that the DOL will never agree that all (or any) of these individuals are independent contractors and Uber will likely never concede that any of them are employees because that would have nationwide consequences.  Even if the NJDOI agreed to cut the assessments down to nominal, nuisance value amounts, Uber would be compelled to treat all of its New Jersey drivers as statutory employees going forward.  The Company will never voluntarily do that.

A further cruel irony awaits Uber (or any putative employer).  If the Company cannot cut an acceptable deal with the Redetermination Auditor, the case will proceed to trial in the Office of Administrative Law (OAL), before a neutral Administrative Law Judge (ALJ), who is not a DOL employee. Even if the Company completely prevails before the ALJ, the Commissioner of Labor, the head of the agency that the Company has just beaten, then has forty-five days to sustain, modify, or reverse the ALJ decision.  Any bets as to which option the Commissioner would choose?

Uber could then go through the New Jersey courts, starting with the Appellate Division but courts greatly defer to the position (and decision) of a State agency.  Thus, it is very dangerous to take a case to OAL because even if you win, you may well, in the end, lose.

The Takeaway

The end result, potentially, is that Uber has to change its business model or create some indicia of true employment.  As one commentator has put it, there may be born a cadre of individuals known as “dependent contractors where there is some melding of the attributes of employee and independent contractor.

But, for sure, some revenue will flow to the State…

The New Jersey test for independent contractor status under the unemployment laws is already very tough, the very infamous, A-B-C standard.  That is seemingly not enough for this Administration and Commissioner Asaro-Angelo.  The Senate Labor Committee has just passed Senate Bill 4204 which will revise the last two prongs of this tri-partite test, making it even more difficult for a single individual (e.g. a sole proprietor or LLC) to be found to be an “independent contractor.”

The putative employer must prove that all three prongs of the test.  The first prong, the control prong, requires that the individual will be free from control or direction over the manner in which he performs the services; the person must be able to come and go as he pleases, set his own hours, reject work, not report to an office and other similar indicia.  This prong, usually not a problem for a putative employer to meet, has been left unchanged.

The fun begins with Prong B.  The revision would toughen up this prong by requiring that the “individual’s service is outside the usual course of the business for which that service is performed.” Thus, even if the contractor performed all of his duties away from the employer’s place of business (which today would meet the prong), the B prong would still not be satisfied if the contractor was in the same business or field as the putative employer.  Thus, a lawyer who was free lancing for a law firm would not be outside the “usual business” of his putative employer.

The third prong has always been the toughest to meet.  Of the 100 or so independent contractor audits (most under this test) I have defended, most go south for the employer on the third prong because making that showing is numerical, and based on the magical 30% of income from sources other than the (audited) employer.  The revision here mandates that this other income must be derived from a trade or business/profession “of the same nature as that involved in the work performed.”  Before this, an individual could show they had their own business independent of the putative employer but now they would have to be operating in the same field of endeavor as the type of services they are providing to the particular employer.  For example, the lawyer in the above example who was engaged by a college to teach Evidence would not be providing lawyer-like services to the college.

Lastly, there is some potentially troubling language that states that even if an individual meets the new A-B-C test, that person would still be an employee “unless and until” the Commissioner finds otherwise.  This might mean that the Commissioner (or his designee) needs to assert/affirm that a certain individual was in fact an independent contractor, even if the employer proved, in a lawsuit, that the person met the new test.  This seems to be to be an almost nonsensical interpretation of the statute but who knows?

The Takeaway

This law would, beyond dispute, make New Jersey the toughest State to prove independent contractor status.  I believe the bill will pass, probably with ease.  If so, as I harp on all the time, it behooves all employers to conduct internal audits of their independent contractors, the agreements evidencing those relationships, and most importantly, if the conditions “on the ground” would satisfy the new draconian standards.

Ounce of prevention, you know…

It is fairly easy for a plaintiff to get conditional certification in a FLSA class action case, but that is not the end of the story.  The next step, much harder, is fending off the defendant’s anticipated motion to stop the class from receiving final certification.  It is even more difficult to withstand that defendant’s challenge when the Judge that approved conditional certification indicates getting final certification will be a lot harder.  A recent example of this is an exemption misclassification case that just settled.  The case is entitled Porter v. Merrill Lynch Pierce Fenner & Smith Inc., and was filed in federal court in the District of New Jersey.

The employees are supervision analysts employed on an electronic communication review team in Pennington, New Jersey, there were more than fifty (50) class members.  These workers were classified as exempt.  The plaintiff’s lawyers (including Mitchell Schley, Esq., a law school classmate) calculated the possible damages as exceeding one million dollars (including liquidated damages) and noted that the plaintiffs could have recovered a maximum wage award of $533,000.

The motion to the Court advised that “by reaching a mutually acceptable settlement prior to class and collective action certification briefing, depositions, dispositive motions, possibly a trial, and possibly appeals, the parties have reduced their risks and avoided significant expense and delay.”  The papers continued by asserting that “the maximum settlement amount also represents a fair value in light of the attendant risks of litigation, even though a greater recovery may be possible if Porter were 100% successful in every phase of the litigation, including possible appeals,” according to the brief.

The plaintiff alleged that she and the others were non-exempt and then reclassified as exempt in 2011.  The employees reviewed all emails sent/received by financial advisers, especially those kicked out by the computers that utilized certain criteria to determine emails warranting closer inspection.  Early in the case, the Judge found that they had presented a “requisite factual nexus between her situation and the situation of other employees sufficient to determine that they are similarly situated.”  The Company had, however, presented evidence that the email reviewers had more significant responsibilities than the plaintiff and that they were exempt.  Thus, the Judge warned that obtaining final certification would be tougher, a clear sign that the case was going south.

The Takeaway

The plaintiff was well advised to settle here, as it was evident that final certification might not be granted.  This is an interesting twist on the usual course of these cases, meaning that once conditional certification is granted the case usually (and quickly) settles.  Here, a deep-pocket defendant which had the funds to fight to final certification coupled with perhaps a pretty good case on the merits turned the tables on the plaintiffs.

But, with that said, plaintiffs still got a pretty good deal…

 

Many industries and businesses are seasonal and I have been often approached with a client question to the effect of whether the client can change the exempt status of workers, depending on the season.  This occurs, for example, in the case of an employee who is the Head Coach of an athletic team for a college, when that particular season is over.  Can the status be changed (and compensation reduced) so as to lower labor costs?  The answer is, under the Fair Labor Standards Act, an employer is able to do so.

Head Coaches, who are salaried at $455 or more per week (the current salary threshold), are considered exempt employees under the executive exemption of FLSA/state law.  During the off-season, they may engage in some recruiting activities or other preparatory work, but the number of hours they work is considerably lower than what they work during the season.  By still paying the agreed-upon salary, a College is spending money needlessly, given the work produced during the off-season which stresses the labor budget.

The issue of whether an employee is exempt is a week to week analysis.  For example, if an otherwise exempt employee performs an inordinate amount of non-exempt work in a particular week, the exemption will be lost for that week and the employee would be due overtime if he worked in excess of forty hours in that week.  If, in the following week, the employee performs exempt work the requisite amount of time, the exemption is re-gained.

It is possible to re-classify, in this example, the Head Coaches (or other employees) as non-exempt employees during the off-season, by paying them on an hourly basis and, naturally, paying them time and one-half overtime should they (by chance) work in excess of forty hours in any particular week.  Importantly, this seasonal switch will not jeopardize their exempt status when the sports season gets underway, provided they are switched back to a salaried status and perform the exempt work they had been doing previously.  Wage Hour Opinion Letter No. 93 (November 11, 1970).

As indicated in this Opinion Letter, however, “recurrent changes in an employee’s status may lead to an across-the-board denial of the exemption.”  In other words, a seasonal change in status is acceptable and will not impact the overall exempt status of employees, but frequent changes, (e.g. monthly) might have such an adverse impact.  Accord Wage-Hour Opinion Letter (November 29, 1968) (approving change in compensation from salaried to hourly and back again to account for seasonal variations in work flow, provided notice was given to the employees of the proposed changes and when they would take effect).

The Takeaway

So, it is possible to change the status of Head Coaches or other employees to account for seasonal swings in their work hours, provided that such changes are not done frequently.  The employer need not be tied to or imprisoned by the “yoke” of exempt status.

Tis’ the season…

I like how the USDOL is moving along with proposals and plans that assist employers in running their businesses, compensating their employees fairly, and, importantly, not running afoul of the Fair Labor Standards Act (FLSA).  The agency has now proposed a rule that would allow employers to use the so-called “fluctuating workweek” formula for overtime computation to account for the bonuses of the workers.

The agency has issued a notice of proposed rulemaking on this matter.  If implemented, it would do away with an Obama-implemented regulation that tried to stop employers from transferring, in essence, a big chunk of employee base salaries into bonuses.  There will be thirty days for comment, after which the agency will issue its decision, accepting or rejecting the comments and the suggestions therein.

Cheryl Stanton, the Administrator, thought highly of the fluctuating workweek initiative.  She asserted that regulations have resulted in employers’ “uncertainty regarding their ability to provide bonus pay for workers with fluctuating workweeks.”  She added that “this proposed rule will provide much-needed clarity for job creators who are looking for new ways to better compensate their workers.”

This method of computing overtime allows for basically a half-time method of calculation for each week, depending on the number of hours worked, which may fluctuate.  It allows employers to pay overtime hours at “reduced” rates provided that the employees receive a base salary, without regard to the number of hours worked in that particular week.  For example, an employee salaried at $500 per week and who worked forty-five (45) hours would receive the base salary of $500 plus five hours at half their regular rate for that week (the computations yields $11.11) for total pay of $527.78.

Courts administering the fluctuating workweek structure have disagreed about whether employers should be allowed to pay workers overtime, the DOL said in its proposed rule.  The agency stated that it is no longer concerned that employers will seek to “nickel and dime” their employees by using this method to dilute bonuses.  The agency observed that one study opined that bonuses make up “a relatively small portion” of total pay for workers.  Thus, the recommendation from the DOL was to permit employers to pay bonuses as long as they became a component of the computation of the regular rate.

The Takeaway

This is good news for employers.  It clears things up and allows employers to use a favorable method of computing overtime for bonus eligible employees at the same time complying with the FLSA.  I believe most States will defer to this interpretation.

And courts will as well…