U.S. Department of Labor (USDOL)

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…  .

White papers flying on blue sky background.A group that monitors government activities sued the U.S. Department of Labor last year seeking records related to the agency’s position and work on the new overtime rules and the fiduciary rules asserted to a federal judge that the agency was being less than forthcoming with the documents. In response, the Judge stated that he was “concerned” about the agency’s lack of responsiveness. The case is entitled American Oversight v. U.S. Department of Labor and was filed in federal court in the District of Columbia.

In the parties’ joint status report, the group, dubbed American Oversight, stated that it “continues to have concerns about the consistency and sufficiency of the information DOL is providing.’ The group maintains that the DOL has been either dilatory or has given conflicting reports regarding the records search. American Oversight sued the DOL in October. The group requested records related to the rules; they want calendar entries concerning agency meetings on the rules, names of attendees in the meetings and copies of correspondence sent to or received from the DOL relating to the rules.

The DOL has stated in its part of the Report that it will respond to the requests over the next few months. It also asserted that everything related to the new overtime rules has been produced. The group asking for the records states that it is “confused” by some statements in the DOL update. The group stated that “plaintiff believes that the July production deadline is more reasonable…but DOL’s inability to accurately and consistently report out the status of its anticipated productions continues to be of significant concern.”  .

The Executive Director of American Oversight, Austin Evers, charged the agency with “delaying the release of records showing what outside interests influenced decisions to roll back the rules.” He stated that “we filed this lawsuit last October to find out who had a seat at the table, and now more than seven months later, the agency is long on excuses and short on answers. What is the Labor Department so desperate to hide?”

The Takeaway

It should be interesting to see what is in those records and who was at those meetings. That might throw light on the position that the DOL is going to take on the overtime rules. The agency’s delay in producing the information may be related simply to bureaucratic slowness.it something else?

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…

I have done a lot of independent contractor work in New Jersey, defended many such cases, from (numerous) unemployment audits to FLSA class actions. The New Jersey test, the A-B-C test, is well-established and one of the hardest for the putative employer to prevail upon. The test was, just a few years ago, reinforced by the NJ Supreme Court. Now, Governor. Phil Murphy has signed an Executive Order creating a task force to look into this issue of employee misclassification, as the Governor opines that millions and millions of dollars in taxes are being lost because of this practice. My question is—why do it?

New Jersey Silhouette in OrangeThe Task Force on Employee Misclassification will make recommendations on strategies the state will use to deal with the arguably widespread misclassification of employees as independent contractors. The Task Force will look at existing enforcement practices in and will seek to set out best practices to strengthen enforcement in this area, as well as making education outreach.

The Executive Order states that “with some audits suggesting that misclassification deprives New Jersey of over $500 million in tax revenue every year.” The Order is a product of a NJDOL report issued during the transition that contained a section on misclassifying workers. The report referenced a fairly new NJ Supreme Court case on misclassification and USDOL guidance which had “clarified the factors to be examined in determining a worker’s status.” The Report cited some benefits (UI insurance, family leave) that employees receive and independent contractors do not.

The NJDOL audits, in supposedly random fashion, approximately 2% of employers to gauge if these employers are correctly reporting all employees for unemployment and disability insurance purposes. I have handled perhaps fifty (50) such audits and can safely say that the tendency of the agency is to find that most individuals are, in fact, employees.

Under the IRS test, many factors are looked at, with a seeming emphasis on the control factors. Under the New Jersey A-B-C test, the most important factor is whether the individual is in an “independently established business.” This third factor is where, nine of ten times, the putative employer’s defense goes south. However, there has been a recent judicial development (the Garden State Fireworks decision) that might swing the pendulum a little back towards the middle.

The Takeaway

One commentator has said that the classification “disease” affects all industries but asserted that the problem is pervasive in the construction, trucking and landscaping spheres. That may be so but I know that the state of enforcement by the NJDOL is already fairly aggressive and I do not understand the point of the task force being created. If it is to advise that there is “a lot” of misclassification, well, we already know that. Maybe the Task Force will recommend stronger and more aggressive enforcement of the existing laws.

From my vantage point, I thought the agency was already doing that…

Working time cases come in all sizes and shapes. Many of these off-the-clock cases are so-called donning-and-duffing cases involving clothes changing for work and whether it is compensable. The U.S. Department of Labor has weighed in again on this issue. It has filed a lawsuit against a battery company for its alleged failure to pay workers for time spent putting on and then taking off protective clothing before and after their shifts. The company is East Penn Manufacturing Company.

Woman with hand raised in hazmat protective suitThe lawsuit alleges that the company owes back wages for almost 7,000 workers. A DOL official stated, “the Department of Labor is committed to ensuring that employees receive the wages they have earned for all the hours they have worked. The legal action in this case demonstrates the department’s commitment to workers and to leveling the playing field for employers that comply with the law.”

The agency claims that the workers spent time putting on protective clothing before commencing a shift and took more time removing the clothing and then showering before they clocked out. Although this was compensable activity under the law, the department said, the company failed to pay employees for that time. Rather, the allegation is that the workers were paid only for their scheduled hours, notwithstanding when they clocked in or out.

The Takeaway

The basic rule is that if the employee cannot perform their main job without first performing or engaging in the preliminary (or postliminary) activity, then the activity is compensable. Here, the workers could not manufacture the batteries if they did not wear the protective clothing. This scenario need not have happened.

At all…

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?

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
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…