Fair Labor Standards Act (FLSA)

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…

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
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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 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…

It is well-established that short rest breaks, so-called coffee breaks, are compensable under the Fair Labor Standards Act. In a variation on this age-old theme, in a unique set of circumstances, the Third Circuit has affirmed that employers must pay for breaks of up to twenty (20) minutes. In this case, the Company did not pay sales workers who logged off of their computers for more than a minute and a half. The case is entitled U.S. Department of Labor v. American Future Systems Inc. et al., and issued from the Third Circuit Court of Appeals.

Cup of coffee sitting on tableThe Court held that the FLSA mandates that employers compensate employees for all rest breaks of twenty minutes or less. The Court rejected the Company’s argument that courts should assess the compensability of break times depending on whether the particular break was intended to benefit the employer or the employee. The Company argued that if the break benefited the employee, then no compensation would be due.

The Court disagreed, concluding that this would be “contrary to the regulatory scheme and case law,” and would be “burdensome and unworkable.” The Court stated “employers would have to analyze each break every employee takes to determine whether it primarily benefited the employee or employer. This would not only be ‘an undesirable regulatory intrusion in the workplace with the potential to seriously disrupt many employer-employee relationships, but it would also be difficult, if not impossible, to implement in all workplace settings.”

The workers were paid an hourly wage and were given bonuses based on sales per hour when they were logged onto their computers. Before 2009, the Company’s policy was to give workers two 15-minute breaks each day. It then changed the policy to cut out paid breaks but employees were able to log off of their computers at any time, but the Company only paid them for the time that they were logged on. The Company denominated this as “flex time.” The Company only paid workers if they were logged off for less than 90 seconds, including time spent on bathroom or coffee breaks.

The Third Circuit held that this violated the spirit of the FLSA. Employees had to choose between going to the bathroom or getting paid “unless the employee can sprint from computer to bathroom, relieve him or herself while there, and then sprint back to his or her computer in less than 90 seconds.”

The Takeaway

This is an employee friendly decision but it makes sense if one is strictly analyzing the FLSA, both plain language and intent. The statute protects employees from having their wages withheld when they take short breaks to visit the bathroom, stretch their legs, get a cup of coffee, or simply clear their head after a difficult stretch of work. The Court is really looking towards the general well-being of the employees.

Probably a good thing…

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…

I have written a number of times about law firms that have been sued in FLSA actions. Another example. Employees have sued two Florida personal injury law firms, alleging that they were misclassified and not properly paid proper overtime wages in violation of the Fair Labor Standards Act. In fact, there are two class actions filed. The cases are entitled Durrett v. Disparti Law Group PA et al and Hinkle v. Jodat Law Group PA. et al. Both cases were filed in federal court in the Middle District of Florida.

Law books and justice scales
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The employees at issue in the Disparti suit are case managers; these are the same kind of employees whose status is at issue in the Jodat case.  The employees claim that their duties are non-exempt. The Durrett plaintiff alleged, “in most if not all work-weeks, plaintiff was paid for 40 hours but was not compensated time and half for hours worked over 40.” She alleged that the “defendant would pay plaintiff straight time by personal check for all hours over 40 in a workweek. This disguised method of compensation was implemented to circumvent the FLSA’s requirement for overtime compensation.”

The plaintiffs claim that the founders of the firm knew of these illegal payment practices and have named both of them as individual defendants. The suit also alleges that sometimes the defendant gave Durrett compensatory time and failed to pay Hinkle for her time spent delivering mail between the offices, although she asserted this was a routine part of her duties.  Hinkle claimed that the “defendants were able to avoid paying overtime by not paying plaintiff travel time when she would transport firm mail between office locations.

The women employees claim all they did was manage cases, keep clients informed of status of their cases, order supplies and organize files.  Ms. Durrett made a very (potentially) damaging allegation, i.e., that she was ordered to clock out and then keep working, many times in excess of fifty (50) hours per week. Naturally, the employees claim the violations were willful and that there are many other workers at these two firms with similar claims.

The Takeaway

Law firms, or doctor offices, are not immune to FLSA lawsuits, particularly on misclassification grounds. It is always the employer’s obligation to classify employees properly. It sounds like the employees at issue do mainly ministerial tasks, run-of-the-mill tasks that do not smack of exemption. Unless the plaintiffs (and possible opt-ins), supervise workers so they might possibly fit within the executive exemption, the only realistic possibility is the administrative exemption.

The grayest and toughest of the white-collar exemptions for the employer to prove…

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
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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.

In the movie “Grease,” there is a song entitled “Beauty School Dropout,” sung by Frankie Avalon. Well, in a legal version of that number, the Seventh Circuit has affirmed that beauty school students have, sort of, dropped out of the FLSA as they are not considered employees. The case is entitled Hollins v. Regency Corp., and issued from the Seventh Circuit Court of Appeals.

Hairdresser cutting young woman's hairThe decision affirmed a lower court decision, holding that a cosmetology student who worked at the beauty school’s salon was not an employee of the school. This employer, a cosmetology school, requires that students complete 1,500 hours of classroom and hands-on work. They do this by working in the school’s salon; the customers pay discounted prices. Significantly, the students are not paid, but they do receive credit of hours towards their license as well as academic credit.

The named plaintiff alleged that her hours were compensable under the FLSA and she brought a collective action; the lower court denied the motion for conditional class certification as moot, as the court granted the employer’s motion for summary judgment on the “employee” issue.

The Seventh Circuit looked at the “primary beneficiary” test and determined that under those standards, the workers were not employees. The right approach was that taken by the lower court, which examined the “particular relationship and program.” What was also important was that the work (of serving the public) was required to attain the professional license in cosmetology. The court found that the students were paying the school “for the opportunity to receive both classroom instruction and supervised practical experience.”

It was also probative to the Court that the main business operations were centered on providing an education, not operating “actual” beauty salons. Thus, the Seventh Circuit ruled, “that the fact that students pay not just for the classroom time but also for the practical-training time is fundamentally inconsistent” with the notion that the students were employees.

The Takeaway

There has always been controversy over whether students at these types of schools are FLSA employees. It seems that when students are engaged in the usual and typical jobs and tasks that students engage in when they are pursuing a degree (of any kind), that is not “work.” Perhaps, even though the students here lost, others may try the same tactics, albeit in different jurisdictions.

If the tasks at issue are claimed or argued to be not connected to attaining a degree, maybe these cases would have better prospects of succeeding and giving some unlucky employer a real “haircut.”