Federal Wage & Hour Laws and Policy

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The Fair Labor Standards Act is eighty years old this month and commentators strongly suggest that the law needs updating in many areas.

cupcake with sparkler against a blue background, illustrating birthday conceptMy colleague Tammy McCutchen stated that a complaint-driven mechanism defense should be engrafted into the FLSA. She stated that “I think employers should get the opportunity to avoid [some liability] by having in place a system of compliance and taking appropriate action based on investigations, just like they have under Title VII and the ADA and the ADEA.”

In this manner, an employee complaint or issue about wages (e.g. overtime) would/could get resolved quickly and cheaply. Ms. McCutchen (a former DOL official) opines that if such a system is in place, that should work to limit employer liability if the employee ultimately sues. Under her theory, with which I concur, the “penalty” for such an employee who did not avail himself of the internal reporting system would be that he/she would not receive liquidated damages.

Another item on the management side wish list is a heartfelt desire to make securing class certification a little more difficult. In a typical FLSA collective action, the Plaintiff(s) first seek so-called conditional certification, fairly easy to secure, and then, later on, the employer can move to de-certify the class.

It should be harder to get over that first hurdle. Nowadays, plaintiffs use a few certifications, sometimes which are identical, and courts seem satisfied with such a meager showing. When a class is conditionally certified, the stakes and legal fees/costs for an employer rise dramatically. This contingency forces many employers into settlements which they might not otherwise have undertaken.

It should be harder, as perhaps with some multi-part test or standard, rather than a few similar sounding certifications.

Another area of concern and one badly in need of updating is the exemption “question.” For example, the outside sales exemptions emanates from a time when most salesmen were door-to-door or were, literally, outside all/most of the time. Nowadays, many sales are made and sales work done from a computer and a telephone, inside the employer’s place of business. Yet, the regulations still require that the salesman be “customarily and regularly” performing outside sales work. That is but one example. In that regard, reasonable people can differ on how exemption law should be applied, but there certainly is a need for more clarity, no matter which side you are on.

The Takeaway

These all sound pretty reasonable and common sensical to me.

Or is it my perspective?

I have blogged about some USDOL initiatives of late and see they are picking up some momentum with further developments coming down the line. The agency is going to revise the manner in which overtime is calculated (maybe to the employer’s benefit) and speak more on the issue (thorny as it is) of inclusion of bonuses in the regular rate.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
There are other forms of “compensation” for employees, such as employee discounts and referral fees. The issue of whether these items are includible in the regular rate may also be opined about.  As I blogged about, the regulatory Agenda specifically stated that it would “clarify, update, and define regular rate requirements.” No other details have been forthcoming.

There is consensus that the new regulations would establish new groups of payment that may be excludible from the regular rate for overtime which businesses would welcome. There are any number of non-economic incentives and “payments” that are not directly amenable to computation and should (or should not) be includible.

Mr. Alexander Passantino, a former Wage-Hour Division Chief has observed that “it would be nice to have more guidance on what you’re talking about there so that we could give clients more advice on that with more certainty. Clients come up with good ideas on how they want to reward employees. It’s just helpful to say, ‘Yeah, that’s going to impact overtime rate,’ or, ‘no, it’s not.’”

The Takeaway

I agree with that sentiment. Employers want to comply with the law and often times have difficulty in properly interpreting what the FLSA does/does not command.  We will see what happens to the definition of the “regular rate” and what items it will/will not include.

I can’t wait…  .

We have experienced a watershed change in the law this week and its ripples will move outward in ever widening circles for years to come. This is, naturally, the decision in Epic Systems Corp. v. Lewis (one of a trio of cases, the others being National Labor Relations Board v. Murphy Oil USA and Ernst & Young LLP v Morris) that dealt with the issue of class action waivers in arbitration agreements. Well, the Supreme Court agreed with the employer and asserted that such waivers are now legal.  As a recent blog in the Epstein Becker Wage & Hour Defense Blog points out, this decision may well have a major effect on pending wage-hour class and collective lawsuits, many of which have been held in abeyance until the Court decided the case. I imagine many employers will now implement these waivers and practitioners will likely be advising clients to do so. I wonder, however, if the case will be the panacea that many commentators are hailing it as.

U.S. Supreme Court Building, Washington, D.C.The vote was 5-4, with new Justice Neil Gorsuch writing the decision. The bottom line is that class action waivers are permissible under the Federal Arbitration Act and are not illegal under the National Labor Relations Act. This resolves a conflict in the federal appellate courts as many of these tribunals had held that such waivers were illegal.

As the Epstein Becker post points out, the decision “is an unqualified victory for employers, particularly those who already have such arbitration agreements in place.” As wage hour class actions abound and defending them is so very expensive (e.g. due to the fee shifting potential), a “reasonable” employer might be well-advised to implement such agreements and force their employees, individually, into arbitrations over their wage-hour claims.

But let’s not, those on the management side, start toasting each other with expensive champagne just yet. In many states, the employer has to pay all costs associated with the arbitration, including the arbitrator’s fees. So, as the post mentions, clever plaintiff lawyers can start filing dozens, if not hundreds of individual arbitration cases, which will cause employer costs to skyrocket and maybe then force employers to settle cases that they pushed into arbitration for the very reason of trying to cut costs of litigation.

The Takeaway

I hail this decision too, but the practical implications will take some time to play themselves out. The thought of defending dozens and dozens of individual arbitrations, each likely based on the same theory will likely yield gargantuan legal fees and expenses (e.g. arbitrator fees) for the employer. At that point, wouldn’t an employer want to aggregate these individual claims for efficiency and to save money?

Isn’t that a class action?

The Trump Administration has issued its regulatory agenda, which is a semi-annual statement of the short- and long-term policy plans of government agencies. The DOL is at the forefront of these changes to come. The agency stated that it will revise the definition of “regular rate,” the number that forms the basis for overtime computations this coming September.

A former lobbyist for the Chamber of Commerce applauded the DOL proposed initiative on the regular rate and called it “huge.” The Fair Labor Standards Act mandates that employers calculate the regular rate for overtime purposes and there are many scenarios in which bonuses and other incentives are required to be included when determining what the regular rate is for a particular week. If these bonuses and other incentives did not need to be included, that would be a watershed development in how overtime is calculated and would reduce employer overtime liability significantly.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
I have handled FLSA class actions where a client, through inadvertence, did not include small bonus amounts for employees and the end result was a major class action that we eventually settled but it was a real problem. The point is that many employers, good faith, well-intentioned employers, are simply unaware of these rules though they are certainly not trying to “stiff” their employees.

Another proposal in the agenda, rather controversial, is to expand apprenticeship and job opportunities minors under eighteen by softening the rules that forbid minors from working in so-called “hazardous” occupations or working around machinery that is prohibited. One advocate for workers agreed with the goal of increasing work chances for young people but urged the agency “to proceed with caution.” The advocate stated that “the DOL has a responsibility to safeguard the health and well-being of all workers, especially children.”

The Takeaway

The regular rate revision or change excites me from an “intellectual” side and, more germanely, from a practitioner’s perspective. That entire issue is very misunderstood by the employer community and can often lead to major liability. On a weekly basis, the tiny amounts generated from an employer’s failure to include bonus monies is negligible. However, when those tiny amounts of money are combined for a class of employees over two (or three) years, then the liability may become astronomical.

Maybe this new proposal is the right fix…

The U.S. Department of Labor has announced a new self-audit program that allows employers to avoid litigation by “turning themselves in.” This is drawing some praise but there are a number of issues that remain unaddressed, much less answered.  This new program, dubbed the Payroll Audit Independent Determination (“PAID”) program allows employers to pay back wages to workers for accidental overtime and minimum wage violations. The employer will therefore be able to avoid penalties/fines and litigation costs. The program will be re-evaluated after six months.

Auditor examining documentsSeveral issues remain. For example, the agency stated that the employees would have a choice of whether to accept the payment of back wages due. If they agree, they will sign a standard agency release that would deprive them of being able to sue over “the identified violations and time period for which the employer is paying the back wages.” However, what happens if employees have state law wage claims, which they often bring in conjunction with their FLSA claims?

One commentator has stated that it is an open question whether such a release would cover state law claims. If the program only releases FLSA claims, the employee could still theoretically sue under state law. If it required employees to release all legal claims, including state claims, then the benefit to the employer is greater as is the incentive to engage with PAID.

There remains the issue of whether employees will participate. Under this program, the employer would pay the wages, but would not pay liquidated damages, i.e. double wages, for the violations. This would perhaps “rob” employees of the chance to secure a greater payout because if the employee won in a lawsuit, he would (in all likelihood) receive the liquidated damages. Significantly, the agency itself does not go after liquidated damages in all cases.

Another uncertainty revolves around existing litigation that may be in the picture. Under the PAID program, an employer cannot participate if the Company is already being sued or is under current DOL investigation. Importantly, the employer cannot use the program to remedy the same potential violations more than once. What happens if an employer reports a violation and while the agency is working things out, the worker(s) file a lawsuit? It is far from clear whether the lawsuit could proceed because the DOL has already taken primary jurisdiction. The agency might need to address this issue when/if it clarifies the initial policy.

The Takeaway

I am not sure if this program will be popular with the business community because employers would be inviting the DOL in to examine perhaps all of their compensation practices. Employers might find themselves leery of (forever?) being on the agency’s radar. The better approach might be to fix noticed or discovered problems internally and self-correct, meaning that workers are paid any back due wages.

Why walk yourself into a problem?

I have blogged many times about the rash of intern cases that have popped up over the last few years. Now maybe there will be a consistent, uniform test for determining whether interns are really statutory “employees.” The US Department of Labor has endorsed such a test. The agency is approving the so-called “primary beneficiary” standard.

Students/interns sitting at a table with laptops talking
Copyright: bialasiewicz / 123RF Stock Photo

The agency has endorsed a seven-part test for determining intern status. This was set forth in the Second Circuit decision in the 2015 ruling in Glatt v. Fox Searchlight Pictures Inc. That test analyzes the “economic reality” of interns’ relationship with the putative employer to ascertain who is the primary beneficiary of the relationship. This test has been applied in a number of cases and industries of industries, where courts have found that, as the primary beneficiaries of these internships, the individuals are not employees under the FLSA and therefore cannot file claims for misclassification and wage violations.

The agency noted that four federal appellate courts have rejected the six-part DOL test set forth almost a decade ago. The agency issued a statement asserting that the “Department of Labor today clarified that going forward, the department will conform to these appellate court rulings by using the same ‘primary beneficiary’ test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.”

Under the “old” test, an intern is an employee unless all of the six factors were satisfied. These included whether the intern displaced a regular employee and whether the employer derived any “immediate advantage” from the intern’s work. The updated test now restates the seven non-exhaustive factors that constituted the Glatt test. Those include: 1) whether there’ exists a clear understanding that no expectation of compensation exists; 2) whether interns receive training similar to what they would receive in an educational environment; and, 3) to what extent the internship is tied to a formal education program. The agency specifically noted that the primary beneficiary standard is “flexible,” and that determinations on intern-employee status hinge upon the unique circumstances of each case.

The Takeaway

I believe this is a better, fairer, more realistic test. Is it, as I postulated, “definitive guidance?”We will see…

There has not been much litigation over the HCE, the so-called Highly Compensated Employee exemption under the FLSA. Recently, an interesting case explored the issue of whether commission payments can form the entirety of the required salary. In Pierce v. Wyndham Vacation Resorts, Inc., a federal court interpreted this exemption to determine this issue. The case was filed in federal court in the Eastern District of Tennessee.

Dollar signs
Copyright: sergo / 123RF Stock Photo

The court observed that the regulation allowed a highly compensated employee to be paid on a salary or a fee basis. The Court looked at related regulations and found that the highly compensated administrative or professional employees could be compensated on a salary or fee basis to comply with the exemption, but held that a highly compensated executive had to be paid on a salary basis, as the fee type of compensation did not apply to the executive exemption. Thus, the Court held that an exempt executive had to receive a salary of $455 per week, but that other forms of compensation could help satisfy the requirements of the highly compensated employee exemption.

The Court went on to explicate that even if the fee form of compensation applied to exempt executives, the Court held that the commissions paid to the plaintiffs were not a fee basis type of compensation. The Court stated explicitly that the Company’s argument was “illogical.” In that regard, the Court reasoned that if a commission could be considered a “fee basis,” “there would be no need for the Department of Labor to include the work ‘commission’ in the second sentence of the regulation” as an acceptable form of additional compensation to reach the $100,000 annual threshold.” Moreover, there was no showing that the commission paid to the plaintiffs were akin to a fee, as the commissions were founded on sales made and were linked to the results of the job.

The Court then examined a USDOL Opinion Letter in which employees were paid commissions but they also received a guaranteed salary. In this case, the employees did not receive any salary but were paid entirely by commissions. Therefore, they failed to satisfy the requirements of the highly compensated employee exemption.

The Takeaway

This is an unusual case but with a very valuable lesson. When deciding whether to classify an employee as exempt under the HCE exemption, a component of the aggregate compensation paid must be “pure” salary.  Even if that salary is the statutory minimum of $455 per week. The failure of the employer to do so in this case means that these employees, some making hundreds of thousands of dollars per year, will be entitled to overtime!

How is that for the law of unintended consequences?

I recently blogged about this possibility and now it has come to fruition. The House of Representatives has passed a proposal to walk back the Obama USDOL initiative to expand the doctrine of joint employer status/liability for violations of labor law. The vote was 242-181 and followed (mostly) party lines. The new law would amend the National Labor Relations Act and the Fair Labor Standards Act to state that one entity would be jointly liable for another entity’s labor law violations if that first entity had “direct control” of the second entity’s employees.

U.S. Capitol Building
Copyright: mesutdogan / 123RF Stock Photo

The National Labor Relations Board applied this direct control standard until 2015, when it changed the law in the now famous (or infamous) Browning-Ferris Industries decision. That case held that entities are joint employers under the NLRA when one of them has “indirect or potential control” over the other company’s workers. The USDOL issued guidance that tracked this decision (although the new Labor Secretary rescinded it a few months ago). The D.C. Circuit is now reviewing that case.

The main criticism of the Obama policies and case law was that companies would not enter into agreements with other entities or businesses due to concern over liability. Rep. Bradley Byrne, R-Ala., the bill’s sponsor, stated that these Obama policies have caused “deep uncertainty among job creators.” He asked “what does it mean to have ‘indirect or potential control’ over an employee?” I practiced labor and employment law for decades and I do not know what that means, so I can only imagine the confusion Main Street businesses have faced.”

The fact that the DOL has rescinded its guidance does not change the fact that the tenets in it are still being used and applied. There has been a dramatic increase in the number of lawsuits where joint employer allegations are raised. One management side attorney observes, “every time I’m faced with a wage and hour lawsuit where there’s a temporary agency involved, it’s a sure bet it’s not only going to be the temp agency that’s named as a defendant.”

The opposition takes the view that this law would allow large companies such as franchisors to shield themselves from liability for labor law violations. Representative Mark Takano, D-California, stated “workers and local businesses are on the losing end of today’s vote. The winners are the large corporations and their lobbyists and trade associations who already enjoy outsized power over the economy and the workplace, and whose contributions line the campaign coffers of the House members who voted for this bill.”

The Takeaway

This is a far tougher standard for an agency, whether NLRB or USDOL, to meet, in order to establish a joint employer relationship. I have myself seen, in many cases; these agencies take a very expansive view of this doctrine. This puts tremendous pressure on the entities involved to either litigate to the hilt or settle perhaps on unfavorable terms.

This is one body of law that could do with a little coming back to the middle…

I remember with fondness the Sonny & Cher song, “The Beat Goes On.” That song could be easily applied to the saga of the USDOL overtime rule, which continues. Although the proposed rule has been shot down by the Fifth Circuit, the USDOL will now request that the Fifth Circuit reverse a Texas federal court order blocking the new rule. That new rule would have doubled the salary threshold for employees to be exempt.

The DOL has stated that it would request that the appellate court hold the appeal in abeyance “while the Department of Labor undertakes further rulemaking to determine what the salary level should be.” The agency, however, gave no details at all in the simple appeal notice. The cases are entitled State of Nevada et al. v. U.S. Department of Labor and Plano Chamber of Commerce et al v. R. Alexander Acosta, both filed in federal court in the Eastern District of Texas.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
There is another case on this issue pending. The Fifth Circuit is simultaneously considering the government’s appeal of a preliminary injunction Judge Mazzant issued in November 2016, which stopped the rule from taking effect, but a few days before it would have been implemented. The Obama DOL appealed the ruling before the new Administration took over.

The District Court Judge, Amos Mazzant, had concluded that the USDOL exceeded its authority when it doubled the salary requirement for exempt status. The Judge stated that the DOL “exceeded its authority” by “creat[ing] a final rule that makes overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.” The Obama DOL immediately appealed and although the Trump DOL initially followed up on the appeal, with the goal of having the Fifth Circuit affirm its power to set salary levels, the agency then requested that the Fifth Circuit dismiss the appeal prior to the grant of summary judgment.

One commentator observed “the appeal] is less about appealing Judge Mazzant’s decision to strike down the overtime regulations that had been proposed under President Obama’s administration and more about preserving the concept that the Department of Labor has the authority to modify the overtime rule to begin with.”

There is an expectation that the DOL will propose lifting the salary level to $30-35,000 per year. This would be what the 2004 level would now be, considering inflation. The Labor Secretary has given no indication of what the agency will do. He has, however, in the past, stated he might want to raise the salary level in that area.

The DOL issued a request for information in the summer, asking for public opinions on the manner in which the rule should be changed. Approximately 165,000 comments were submitted on different elements of any salary test, e.g. what level to set salary, whether geography should play a role.

The Takeaway

I believe the DOL has the authority to set salary levels, as it has done many times through the decades. The level that the agency chose, however, was unreasonable and would have been bad for business. I am also intrigued by the concept of making allowances for differences in salary level based on geography.

I think that makes good sense…

There have been so many cases involving employees in the financial services industries and their exempt status or lack thereof. In another variation on this theme, Provident Savings Bank is seeking review by the US Supreme Court of a Ninth Circuit decision that gave new life to allegations that its mortgage underwriters are non-exempt and entitled to overtime. The bank asserts that these employees are exempt under USDOL regulations, i.e. the administrative regulations. The case is entitled Provident Savings Bank, FSB v. Gina McKeen-Chaplin, et al. and has been submitted to the U.S. Supreme Court.

Banking and Financial Services
Copyright: sashkin7 / 123RF Stock Photo

The bank had defended the lawsuit by asserting that these workers did qualify as exempt administrative employees because their duties involved the “servicing” and “running” of the bank’s business by analyzing and evaluating whether the bank should risk money by rendering loans to certain borrowers. The petition states “nothing in the FLSA’s text or purpose justifies interpreting the ‘administrative’ exemption with a heavy thumb on the scale against the employer. Perhaps for that reason, this court has pointedly refused to apply the canon in recent FLSA cases.”

The Ninth Circuit concluded that the job functions of these workers, i.e. reviewing loan applications using guidelines set down by the bank and investors, were not the back office functions relating to management or general business operations that the exemption requires. The named plaintiff had appealed a lower court decision that granted summary judgment to the Bank.

The district court had first granted conditional certification but then threw the case out because it concluded that the underwriters fit within the administrative employee exemption because major, primary functions included “quality control.”  That is one of the functions enumerated in the regulations as work related to the management or general business operations of the bank.

The Takeaway

This case highlights the confusion in the regulations concerning the financial services industry. If these workers are “simply” using established guidelines and standards to make decisions, well, that is not “discretion and independent judgment.” Although quality control is certainly a back-office type business function, this particular exemption still requires employees to use discretion.

That is where these kinds of cases usually go south for the employer.