The controversy over whether employees must arbitrate wage claims continues with full force. A federal judge has just sent to arbitration a claim by an employee that the Company violated the Fair Labor Standards Act by not paying him overtime pay. The Court found that the parties had “clearly and unmistakably” agreed that an arbitrator should decide whether the allegations are arbitrable. The case is entitled Smith v. Kellogg Co. et al., and was filed in federal court in the District of Nevada.

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The district judge granted a motion to compel arbitration. The Court found that the retail sales representative signed an employment agreement that contained a mandatory arbitration clause under the Judicial Arbitration Mediation Services rules, which leave the determination of arbitrability to the arbitrator.

The judge noted several cases involving the issue of whether the sophistication of the parties matters in deciding whether a delegation of arbitrability is clear and unmistakable. The judge, however, referred to language in another decision holding that the parties do not need to be sophisticated to conclude that the incorporation of arbitrator rules “constitutes clear and unmistakable evidence of the parties’ intent” to delegate the decision about arbitrability.” As the Court aptly noted, “… the requisite intent to delegate is present in the continued employment/incentive agreement in the incorporation of the JAMS rules, which delegate the determination of arbitrability to the arbitrator.”

The judge also noted that the Agreement contained a clause telling the employee to consult with an attorney. The document also gave at least 21 days to consider the Agreement prior to signing it and there was, very generously, a seven-day grace period to revoke the decision made previously to agree to the arbitration procedure. The judge concluded that although “ Smith has raised a slight inference of procedural unconscionability [he} has not made a showing of substantive unconscionability as to the delegation provision. Therefore, the delegation provision is enforceable and I grant the motion to compel arbitration.”

The Takeaway

An arbitration provision such as this one is an escape mechanism for the employer in an overtime or FLSA context. It must be drafted properly, with all the procedural safeguards necessary and as may need to vary from state to state but it can preclude federal litigation.

Which is always a much more expensive proposition.

Accurate records are extremely important for employers. The employer must record the employees’ start time, when they took lunch, and when they leave at the end of the day.  That is so employees can be properly paid (for overtime as well) and, significantly, it is for the employer’s protection so workers cannot inflate claims of working hours. The one thing employers must never do is to alter, edit or change those records, especially for any ulterior reason.

Female hotel housekeeping worker with linens and cartAn Orlando hotel found this out the hard way. The hotel has been ordered to pay in excess of $400,000 in back wages and penalties after the U.S. Department of Labor concluded that the Company had, on numerous occasions, altered payroll records to avoid paying overtime. The agency found that the Sheraton Vistana Resort did not accurately record all work hours performed by the employees. The Company assessed $372,183 in back wages for 275 employees and more than $40,000 in penalties for repeat violations of the Fair Labor Standards Act.

The USDOL District Director stated that this resolution “puts these wages into the hands of those who earned them, and demonstrates how the Department of Labor’s enforcement protects workers and levels the playing field for law-abiding employers.” The investigation showed that supervisors directed employees to sign documents authorizing the Company to edit the times employees punched in and out. The supervisors then altered time records to indicate that employees did not work through their lunch breaks, notwithstanding that they did so.

The Company maintained that it has taken steps to ensure future compliance. A spokesperson stated that, “Sheraton Vistana Resort has agreed to pay some housekeeping associates for overtime that may not have been fully paid for a period of two years.  Current procedures prevent any similar underpayments to associates.”

The Takeaway

Keeping accurate records is essential, as it shows the hours employees worked and protects the employer in the sense that employees cannot inflate the hours they worked because the records show otherwise.  This is especially so if the employer directs employees to self-certify that the hours worked are accurate.  This lovely reasoning goes out the window if the employer is actively directing employees not to report hours, to work off-the-clock, or, as here, to “authorize” their supervisors to change their working hours.

A big no-no….

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
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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…

I have blogged about and have long been concerned about working time issues and what constitutes compensable work hours. One of the thorniest of these issues is on-call time and when, if at all, on-call hours become working time. A recent case throws light on this issue, as a Court has held that an Admissions Director for a medical rehabilitation center may be eligible for overtime when she had to work more than forty hours in a week. The case is entitled Butler v. Ciena Health Care Mgt., Inc. and was filed in federal court in the Eastern District of Michigan.

Female doctor in white uniform writing on clipboard Although her title was “Director,” the employee may not have been an exempt employee, thereby making hours worked above forty to be overtime/compensable hours. The Court found that the employee might not have exercised independent judgment in the performance of her job. She “merely” followed admission guidelines and collected information that her boss then utilized to determine whether to admit a particular patient. In exemption issues, it is the duties performed, not the job title or the position description, that determines exempt status and whether someone is eligible for overtime.

The Court denied the defendant’s summary judgment motion and ordered a trial to determine if the employee was exempt. The Court, however, ruled that the worker was not entitled to compensation for the round-the-clock periods when she was required to be on call. The employee was on call twenty-four hours per day Monday-Friday and every other weekend. Workers will get paid for these on-call hours if they are impeded in the pursuit of their personal activities and personal pursuits.

This employee was home when she was on call and could not demonstrate that simply being in an on-call status had any “onerous impact” on her personal activities. The Court noted that the fact that a fraction of patient referrals came during non-work hours showed the Court that these interruptions were not burdensome.

The Takeaway

The great danger in a case like this is that if the employee is deemed non-exempt, so that overtime hours “matter,” the employer might face significant liability. The cure is to conduct an internal audit of all salaried positions, i.e. those normally classified as exempt and make pure up-and-down calls about exempt status.

Especially with the administrative exemption (as herein)…

I read an interesting post by Daniel Schwartz in the Connecticut Employment Law Blog. It concerned a recent Second Circuit decision that bodes well for employers in the never-ending fight against wage-hour class actions. The case is entitled Rodriguez-Depena v. Parts Authority, Inc. et al. and issued from the Court of Appeals for the Second Circuit.

Auto parts store shelvesThe Court therein ruled that the arbitration clause set forth in the employment agreement precluded the federal action.  Dan noted that the “clear logic” of the decision will be hard to overlook and I believe he is quite right. The Court relied upon an earlier decision that held that age discrimination claims could not be brought in court if a valid arbitration policy was in place.

The Court also examined the issue of whether the required judicial oversight of FLSA settlements would be a bar to arbitration of these claims. The Court held that it did not, as the guarantee of the fairness of a settlement of a claim filed in court did not mean that this right provided an ironclad right to file suit in court.

Dan notes that this “federal endorsement of arbitration provisions” will allow employers to adopt these provisions and provide themselves with another defense. It also provides yet another stratagem to be utilized in the early stages of a FLSA class action case.

The Takeaway

Maybe employers should consider utilizing such mandatory arbitration provisions. Arbitration is a much cheaper and faster litigation mechanism. I am a big advocate of taking the easiest way out of a class action federal court FLSA case and these kinds of provisions may be another weapon in that early dismissal arsenal.

Well done, Dan…

A class of equipment operators and trainees has asked a federal court to approve a $1.35 million settlement of their FLSA class action lawsuit alleging the Company did not fairly pay them their wages and used a gimmick to avoid doing so.  The case is entitled Elliott v. Schlumberger Technology Corp. et al., and was filed in federal court in the District of North Dakota.

The plaintiffs alleged that the Company violated the law by paying them under the “fluctuating workweek” method.   Interestingly (or maybe not so much), the settlement talks took place after U.S. District Judge Ralph R. Erickson granted the Company’s motion to decertify the class.   The Judge ruled that there was insufficient evidence to show that the workers were similarly situated. There are 138 people in the class.

The plaintiffs alleged that the Company paid equipment operators and trainees by the fluctuating-workweek (FWW) method.  That method allows employers to pay workers overtime at a half-time, as opposed to time and one-half, but certain conditions must be met.  The workers claimed that in order to validly use this method, the employees must be paid on a fixed salary, which they were not.

The Court had conditionally certified a collective class of equipment operators, trainees and other similar employees who were employed at the Company plant in Williston, North Dakota, and to whom the Company applied the fluctuating workweek method for at least one week during the three years preceding the lawsuit.

The Takeaway

This case presents a valuable lesson.  Attempted use of the FWW method of payment must have the employees receiving a fixed salary and an agreement, in advance of the work, that the employees understand what the payment arrangements and overtime protocols are going to be.  This allows the employer to pay half time for overtime instead of time and one-half.  Without these two requirements being met, any attempt to use the FWW method is doomed to failure.  Put differently, the FWW method can be the employer’s best friend, if done right.

If not, it is the employer’s worst enemy…

I always look for the easiest way out of a FLSA lawsuit. I use the word “easiest” in the most generic sense, as no magic bullet defense is truly easy. However, there are times when you catch lightning in a bottle, i.e. the jurisdictional defense. In a recent case, the Company was able to use this defense/shield to dismiss a FLSA overtime suit. The case is entitled Zheng v. Best Food In Town, LLC et al and was filed in federal court in the District of New Jersey. The plaintiff alleged violations of the Fair Labor Standards Act (“FLSA”) and the New Jersey Wage and Hour Law (“NJWHL”).

Cooks in restaurant kitchenThe plaintiff alleged that he was a salaried employee and worked as a kitchen helper for Defendants with a fixed lump sum per month compensation. His duties included washing and cutting vegetables, frying and cooking rice, preparing meat, and cleaning. He separated employment in May 2015. The plaintiff alleged that his employer engaged in a widespread pattern and practice of not paying a class of employees proper minimum wage and overtime compensation.

The Court noted that to sustain a suit under the FLSA, an employee must work for an enterprise or business that “has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person.” 29 U.S.C. § 203(s)(1)(a). This enterprise must have annual gross sales or business “not less than $500,000.” Id.

On this point, the Company submitted individual and corporate tax returns to support the argument that the business did not reach this threshold. These documents included tax returns from 2013, 2014, and 2015; Defendants’ gross corporate annual revenue ranged from $385,420 to $428,856. The plaintiff countered by asserting that these income tax records did not account for all of Best Food In Town’s sales. The Court observed that, thus, the Plaintiff’s only evidence to rebut these documents was “an assertion of tax fraud.”

The Court concluded that this lack of evidence was fatal. In a summary judgment proceeding, the non-moving party must make some showing of evidence from which a reasonable jury might return a verdict in his favor. All the Plaintiff did here was make an assertion. That did not and could not carry the day. Thus, the Court ruled that the FLSA did not apply to the Company and dismissed the Complaint.

The Takeaway

How quick and effective! No jurisdiction because the dollar threshold was not met and the case is dismissed, early on. This will certainly not work in every case, but the moral of the story remains the same. Defense counsel should explore the possibility of a sure-fire, quick, easy way out. If you don’t look, you don’t find.

Always look…

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
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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…

In every FLSA class action I have defended (as well as every demand letter I have seen on this subject) the plaintiff’s lawyer always alleges that the violations were “willful.” It does not matter what the facts are. No, they say, the violations are “always” willful. The violations rarely, in fact, are. Now, the Third Circuit has given defense practitioners some added ammunition to beat back these allegations. The case is entitled Souryavong v. Lackawanna Cty. and issued from the Third Circuit Court of Appeals.

Courthouse pillarsThe Court made clear that to allege that the employer acted only “unreasonably” is insufficient and that a degree of “actual awareness is necessary.” The Court held that this is so even if the employer produces insufficient evidence of good faith. The Court explained “a jury question on willfulness is present when [an employer] is well aware of the FLSA’s structures, sets up a bureaucracy to classify pay and benefits and properly calculate overtime, and then despite all that allows a misclassification of a monthly payment to continue for nine years.”

The Court explained that for a plaintiff (or class) to prevail, the plaintiff “must put forward at least some evidence of the employer’s awareness of a violation of the FLSA overtime mandate.”  In other words, even if the employer cannot produce sufficient evidence of good faith, the plaintiff must prove that the employer intentionally violated applicable laws.

The Court noted that it was a truism that the employer must establish good faith, but it remained the plaintiff’s burden to show intentionality, i.e. that the employer either actually knew that it was violating the law or acted with reckless disregard.

The Takeaway

Employers must do everything possible to comply with the law. Employers should address potential wage-hour violations in a prompt manner and effect the appropriate remedies.  This will blunt the effect of any allegations of willfulness. We recommend that employers regularly conduct wage and hour audits to make sure that employees are properly classified as either exempt or non-exempt and that non-exempt employees are paid overtime in accordance with the law. In addition, such an audit will include an overview and analysis of all of the employer’s compensation and wage-hour practices.

That’s the cure for willfulness…