Wage and Hour Defense Blog

Wage and Hour Defense Blog

Twenty-One States Allege the New White Collar Salary Thresholds are Unlawful

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A group of 21 states (“the States”) has filed a Complaint in the Eastern District of Texas challenging the new regulations from U.S. Department of Labor that re-define the white collar exemptions to the overtime requirements of the FLSA.  The States argue the DOL overstepped its authority by, among other things, establishing a new minimum salary threshold for those exemptions.

Pursuant to the new regulations from the U.S. Department of Labor, effective December 1, 2016:

  • the salary threshold for the executive, administrative, and professional exemption will effectively double from $23,660 ($455 per week) to $47,476 ($913 per week);
  • “Highly Compensated Employees” (“HCEs”) must earn annual compensation of at least $100,000; and
  • an indexing mechanism will be applied to automatically update the salary threshold and the HCE compensation requirement every three years.

The Complaint challenges each of the new regulations, and seeks declaratory and injunctive relief.

The Salary Threshold Allegedly Violates the FLSA

The Complaint filed by the States points out that the FLSA itself makes no reference any salary threshold, but rather speaks only to the duties of exempt employees.

Specifically, the plain language of 29 U.S.C. §213 states that the FLSA’s overtime requirements do not apply to “any employee employed in a bona fide executive, administrative, or professional capacity…” The Complaint states that the statute “speaks in terms of ‘activities,’ not salary.”

The new salary threshold would take away the exempt status of millions of executive, administrative and professional employees. On that basis, the Complaint alleges that the new regulations violate the FLSA and are an improper exercise of legislative power by an Executive agency.

The Complaint also alleges that the language of the FLSA does not allow for (i) the salary basis test itself, (ii) the distinct compensation threshold for highly compensated employees or (iii) the indexing mechanism in the new regulations that would automatically update the salary threshold.

The Complaint notes that DOL regulations have provided for a salary threshold at some level since 1940, but suggests that the DOL’s authority to do so was never challenged.

The Tenth Amendment Allegedly Precludes Applying the Regulations to the States

The Complaint further alleges that the new salary threshold violates the Tenth Amendment by allowing the Executive Branch to infringe upon state sovereignty and federalism by dictating the wages that States must pay to their own employees.

The Complaint admits that the U.S. Supreme Court has upheld the application of the FLSA to the states, but suggests that the issue should be revisited in light of the new regulations and the burdens they impose on the 21 States seeking relief.

Moreover, the Complaint points to the potential for future abuse through the application of a salary threshold to States. Because “there is apparently no ceiling over which DOL cannot set the salary level,” the DOL could raise the salary threshold however it sees fit.  The Complaint therefore contends that the Executive Branch could “deplete State resources, forcing the States to adopt or acquiesce to federal policies, instead of implementing State policies and priorities.”

The New Regulations Allegedly Violate the APA

The Complaint proceeds to contend that (i) the automatic updates to the salary threshold and HCE compensation requirements violate the notice-and-comment requirements of the federal Administrative Procedure Act and the FLSA’s requirement that the white collar exemptions be “defined and delimited from time to time by regulations of the Secretary ….”; and (ii) the new regulations are arbitrary and capricious in violation of the APA.

More than 50 business groups including the U.S. Chamber of Commerce, the National Association of Manufacturers and the National Retail Federation filed a separate lawsuit in the same court and on the same day.  The business groups also contending the new DOL regulations were implemented in violation of the APA.

The States lawsuit alleges some novel and interesting theories to challenge the Department of Labor’s new regulations, and the District Court’s response to these claims bears watching as the effective date of the new regulations draws near.

Preparing a Benefits Program in Advance of the DOL’s Overtime Rule – Employment Law This Week

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In a “Tip of the Week” segment on Employment Law This Week, Will Hansen, Senior Vice President of Retirement Policy for The ERISA Industry Committee (ERIC), offers some advice on preparing a benefits program in advance of the Department of Labor’s overtime rule:

“The Department of Labor’s Final Rule increasing the overtime exemption threshold to $47,476 dollars will not only have an impact on the wages an employee receives, but also the benefits that they receive. In advance of these changes taking effect on December 1st, it’s important for companies to review their benefit programs. First, they should determine whether there will be any increase or decrease in the overtime wages provided, as well as an increase or decrease in salaried over hourly employees. Next, they should examine the financial impact any change in their workforce will have on the company. . . . Lastly, the company should look at other benefits, such as paid sick leave or commuter transit benefits to see if there will be a change in participation which would have an impact on costs.”

View the segment below and see Michael Kun’s recent post on the overtime exemption rule.

Time Is Running Out for Employers to Make Important Decisions to Comply with New DOL Overtime Exemption Rule

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Time Is Running Out for Employers to Make Important Decisions to Comply with New DOL Overtime Exemption RuleIn May, the Department of Labor (“DOL”) announced its final rule to increase the minimum salary for white collar exemptions.  With little more than two months to go before that new rule takes effect on December 1, 2016, employers still have time to decide how to address those otherwise exempt employees whose current salaries would not satisfy the new rule by either increasing their salaries or converting them to non-exempt status.

But some of those decisions may not be easy ones.  And they may create some unexpected challenges, both financially and operationally.

New Salary Thresholds

Effective December 1, 2016, the salary threshold for the executive, administrative, and professional exemption will effectively double, increasing from $23,660 ($455 per week) to $47,476 ($913 per week).

The total annual compensation requirement for “highly compensated employees” subject to a minimal duties test will also increase from $100,000 to $134,004. The salary basis test will be amended to allow employers to use non-discretionary bonuses and incentive payments, such as commissions, to satisfy up to 10 percent of the salary threshold.  And the salary threshold for the white collar exemptions will automatically update every three years to “ensure that they continue to provide useful and effective tests for exemption.”

Impact Upon Compensation Structures

For otherwise exempt employees whose compensation already satisfy the new minimum salaries, nothing need be done to comply with the new DOL rule.  But that does not mean that those employees will not be affected by the new rule.

If employers are raising the salaries of other employees to comply with the new thresholds, it could create operational or morale issues for those whose salaries are not being adjusted.

Take, for instance, an otherwise exempt senior manager who currently earns $48,000 per year.  Her salary need not be adjusted to comply with the new rule.

But if she is higher in the  organizational hierarchy than a manager who currently earns $36,000 per year, and if that lower-level manager is given a salary increase to meet the new $47,476 threshold, it is not difficult to see how there could be an issue with the senior manager.  The senior manager would now earn only a little more each year than the manager who falls beneath her in the hierarchy.

If the employer then adjusts her salary – and everyone else’s – to maintain its compensation structure, the impact of increasing the salary of a single manager to comply with the new rule will not be just the amount of the increase in his salary to meet the new threshold; it will be the increases in all of the salaries that it triggers.

That is but one example.  It is not difficult to conceive of situations where complying with the rule by only addressing the compensation of those who fall below the threshold would result in a lower level employee leapfrogging over a higher level employee in terms of compensation, or where it results in unwanted salary compression.

And that is to say nothing of the impact that salary shifts could have upon any analysis of whether the new compensation structure adversely affects individuals in protected categories.  In the example above, the female senior manager who is now being paid only several hundred dollars per year more than the lower-level male manager might well raise a concern about gender discrimination if her salary is not also adjusted.

Impact of Increasing Salaries

For otherwise exempt employees who currently do not earn enough to satisfy the new minimum salary thresholds, employers have two choices: increase the salary to satisfy the new threshold or convert the employee to non-exempt status.

Some of those decisions may be relatively simple, particularly when viewed in a vacuum, but some may be more difficult.

If an otherwise exempt employee currently earns a salary of $47,000 per year, the employer may have an easy decision to give the employee a raise of at least $476 to satisfy the new threshold.

And if any employee currently earns $24,000 per year, an employer may have an easy decision to convert the employee to non-exempt status rather than give the employee a raise of more than $20,000.

But what about the employee earning $40,000 per year?  Should that employee be given a raise of more than $7,000 or should she be converted to non-exempt status?  It is not difficult to see how one employer would choose to give an employee a $7,000 raise while another would choose to convert that employee to non-exempt status.

And what if the amount of an increase seems small, but it would have a large impact because of the number of employees affected?  A salary increase of $5,000 for a single employee to meet the new salary threshold may not have a substantial impact upon many employers.  But what if the employer would need to give that $5,000 increase to 500 employees across the country to maintain their exempt status?  Suddenly, maintaining the exemption would carry a $2,500,000 price tag.  And that is not a one-time cost; it is an annual one that would likely increase as the salary threshold is updated.

Impact of Reclassifying an Employee As Non-Exempt

If an employer decides to convert an employee to non-exempt status, it faces a new challenge – setting the employee’s hourly rate.

If the employer “reverse engineers” an hourly rate by just taking the employee’s salary and assuming the employee works 52 weeks a year and 40 hours each week, it will result in the employee earning the same amount as before so long as she does not work any overtime.  The employee will earn more than she did before if she works any overtime at all.  And if she works a significant amount of overtime, the reclassification to non-exempt status could result in the employee earning significantly more than she earned before as an exempt employee.  If she worked 10 hours of overtime a week, she would effectively receive a 37% increase in compensation as a result of her reclassification.

But calculating the employee’s new hourly rate based on an expectation that she will work more overtime than is realistic would result in the employee earning less than she did before.  If, for instance, the employer calculated an hourly rate by assuming that the employee would work 10 hours of overtime each week, and if she worked less than that, she would earn less annually than she did before – perhaps significantly less. That, of course, could lead to a severe morale issue – or to the unwanted departure of a valued employee.

In calculating the new hourly rate for employees they are reclassifying, employers should be careful to do so based upon realistic expectations of the overtime each of those employees will work such that it does not end up paying them significantly more – or significantly less – than they intend.

Whatever employers decide to do, the December 1, 2016, deadline is getting closer each day.

A Plaintiff’s ATM & Cell Phone Records May Be Discoverable When There Is a Particularized Showing of Relevance

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Michael D. Thompson

Michael D. Thompson

In Gonzalez v. Allied Concrete Industries, Inc., thirteen construction laborers filed suit in the Eastern District of New York.  The plaintiffs claimed they worked in excess of forty hours per week, but were not paid overtime in violation of the Fair Labor Standards Act and the New York Labor Law.

To obtain information regarding the plaintiffs’ activities during hours they claimed to have been working, the defendants sought an order compelling discovery of their ATM and cell phone records.

ATM Receipts

The defendants asserted that records of the plaintiffs’ ATM transactions were likely to lead to the discovery of admissible evidence because they could reveal each plaintiff’s “whereabouts and activities during hours they claim to have been working.” The defendants relied in large part on Caputi v. Topper Realty Corp., a 2015 case decided by the same court.  In Caputi, a plaintiff asserting overtime claims was ordered to produce “a sampling of records of her ATM transactions” for the time period in question.

In denying the defendants’ motion, the Court acknowledged the ruling in Caputi.  However, the Court concluded that the discovery of ATM records was allowed in that case because the Caputi defendants stated that witnesses would testify that the plaintiff attended prolonged lunches during the workweek and withdrew cash from ATMs for that purpose.

Conversely, in Allied Concrete, the Court concluded that the defendants had not shown any “evidentiary nexus between the en masse discovery sought and a good faith basis to believe that such discovery material is both relevant and proportional to the needs of the case.”

Cell Phone Records

The defendants in Allied Concrete also sought the release of the plaintiffs’ cell phone records in order to determine whether the plaintiffs “engaged in personal activities such as non-work related telephone calls, extended telephone calls, [and] frequent text messaging” during times they claimed to have been working.

The defendants cited to Caputi and to Perry v. The Margolin & Weinreb Law Group, another Eastern District of New York case from 2015.  In both cases, the plaintiffs asserting wage hour claims were ordered to produce cell phone records based on testimony that they had made personal telephone calls during the workday.  Allied Concrete had not obtained any such testimony.  Accordingly, the Court stated that the defendants’ speculation that the cell phone records might contain relevant evidence did not warrant a “wholesale intrusion into the private affairs” of the plaintiffs.

Employers, therefore, should be aware that electronic evidence of an employee’s activities may be discoverable in FLSA cases – provided that there is a sufficient basis for seeking the discovery.

U.S. District Court Holds That an Employer May Retain Tips If It Takes No Tip Credit

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Julie Badel

Julie Badel

Addressing an unusual set of facts, the U.S. District Court for the Northern District of Georgia has dismissed a suit challenging an employer’s practice of retaining tips that customers give to valets. The plaintiff in Malivuk v. Ameripark, No. 1:15:cv-2570 WSD (N.D. Ga. 2016), alleged that she was promised an hourly wage plus tips but that her employer, who provided valet parking services, retained a portion of the tips.

The defendant moved to dismiss the case because the plaintiff did not allege that the company took a tip credit against the minimum wage or in any other way did not pay the minimum wage. The court agreed and dismissed the case, relying on section 203(m) of the FLSA, which provides that an employer must pay a cash wage but if that wage is less than the federal minimum wage, it can make up the difference with the employee’s tips.  If the cash wages plus the tips are not sufficient to amount to the minimum wage, the employer must increase the cash wages so the employee is paid the minimum.

In its ruling, the court declined to follow a recent Ninth Circuit case, Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.23d 1080 (9th Cir. 2016), that upheld a DOL regulation that most courts have rejected.  This regulation, 29 C.F.R. §531.52, provides that tips are the property of the employee, whether or not the employer takes a tip credit.  The Ameripark court reasoned that if Congress wanted to articulate the principal that tips are the property of the employee, absent a valid tip pool, it could have done so without reference to the tip credit, and it concluded that the DOL regulation violates the plain language of section 203(m).

Conclusion

Although it would seem that employers in industries where employees customarily receive tips normally take a tip credit unless otherwise prohibited by state or local laws, Ameripark suggests that if an employer does not take a tip credit, it may retain a portion of the employees’ tips—at least in the jurisdiction of this federal court.  Of course, other courts may hold to the contrary.  Employers considering adopting such an approach would be wise to review whether the courts in their jurisdictions have weighed in on this subject, or whether such a practice could give rise to other types of claims.  And while the practice might be attractive to employers in some industries where employees receive significant tips, restaurant employers in particular might find it hard to recruit and retain servers to work once they are told that the restaurant will be keeping a portion of the tips.

Chicago City Council Approves Paid Sick Leave – Employment Law This Week

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Featured on Employment Law This Week: Employers in the city of Chicago will soon be required to offer up to 40 hours of paid sick leave a year.

The City Council unanimously approved the paid sick leave ordinance, which will apply to all individuals and businesses with at least one employee. Chicago will now join more than two dozen other U.S. cities that require employers to provide paid sick leave. The mayor is expected to sign the ordinance, which is scheduled to go into effect July 1, 2017.

View the episode below or read more about this ordnance in an Epstein Becker Green Act Now Advisory by Julie Badel and Mark M. Trapp.

 

U.S. Supreme Court Declines to Review DOL Home Care Rule

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Our colleagues Denise Merna Dadika and Brian W. Steinbach, attorneys in the Employment, Labor & Workforce Management practice at Epstein Becker Green, have a post on the Health Employment and Labor blog that will be of interest to many of our readers: “U.S. Supreme Court Declines to Review DOL Home Care Rule”

Following is an excerpt:

On Monday, June 27, 2016, the U.S. Supreme Court declined to review a D.C. Circuit Court of Appeals decision upholding the new U.S. Department of Labor’s (DOL) requirement that home care providers pay the federal minimum wage and overtime to home care workers. …

The U.S. Supreme Court’s decision not to grant review ends any hope that home care providers had that the implementation of the new regulation might be reversed

Read the full post here.

Washington, DC, Increases Minimum Wage to $15 – and Tipped Minimum Wage to $5.00 – by July 1, 2020

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Sign - Minimum Wage Increase AheadAs anticipated in our posting on June 9, 2016, on June 21, 2016, the Washington, DC, Council unanimously passed on second reading the Fair Shot Minimum Wage Amendment Act of 2016, without substantive amendment. As discussed in our prior posting, this bill increases the District of Columbia minimum wage – already set to increase to $11.50 on July 1, 2016 – by additional annual increments until it reaches $15.00 on July 1, 2020. It also increases the tipped minimum wage in annual increments starting July 1, 2017 from the existing $2.77 to $5.00 on July 1, 2020. Both rates will increase in subsequent years based on increases in the cost of living.

Mayor Bowser is expected to sign the bill soon. The bill will then be subject to a Congressional review period that, due to scheduled recesses, may not be complete until the end of 2016. Consequently, the Council also passed identical emergency legislation that will become effective upon the mayor’s approval for 90 days, and likely will then be renewed until the review period has passed. So, as a practical matter the law will take effect almost immediately.

Notably, similar measures raising the minimum wage to $20.00 in by July 1, 2020, in both suburban Montgomery County  and the City of Baltimore, are pending and at present appear likely to pass later this year.

Cities of Santa Monica, Pasadena, and San Diego Pass New Minimum Wage and Paid Sick Leave Laws

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Kevin Sullivan

Kevin Sullivan

The cities of Santa Monica, Pasadena, and San Diego have each recently passed ordinances increasing the minimum wage effective July 1, 2016. And two of them have passed ordinances providing for paid sick leave beyond that required by California state law.

Santa Monica

The City of Santa Monica has passed a new ordinance providing for a city-wide minimum wage of $10.50 beginning July 1, 2016, $12.00 beginning July 1, 2017, and $13.25 beginning July 1, 2018, $14.25 beginning July 1, 2019, $15.00 beginning July 1, 2020 for most businesses with 26 or more employees. There is a one-year lag for most businesses with 25 or fewer employees – i.e., the $10.50 minimum wage begins July 1, 2017.

Non-profit corporations may apply for a deferral if they meet certain requirements.

Effective January 1, 2017, there are also new paid sick leave requirements, with accrual limits as follows:

  • 1, 2017: 32 hours for small businesses (25 or fewer employees); 40 hours for larger businesses (26 or more employees)
  • 1, 2018: 40 hours for small businesses; 72 hours for larger businesses
  • Accrual rate is one hour for every 30 hours worked
  • Employees can carry over accrued sick leave annually (calendar year, fiscal year, or hiring date) up to the accrual cap
  • Employers can provide sick leave at the start of the year as a whole rather than by accrual, as long as this provides leave consistent with the required accrual amounts
  • Other sick leave plans will comply if equal to or more generous than the ordinance
  • Sick leave use follows California State guidelines.

Here are links to Santa Monica’s fact sheet of the new ordinance and the new ordinance itself.

Pasadena

Effective July 1, 2016, the minimum wage for hours worked within the geographic boundaries of the City of Pasadena will $10.50. The minimum wage will be $12.00 beginning July 1, 2017, and $13.25 effective July 1, 2018.

The Pasadena ordinance also requires that employers give a written notice of employees’ rights under the new ordinance to current employees and new employees at the time of hire.

Like Santa Monica’s ordinance, non-profit corporations may apply for a deferral concerning the Pasadena ordinance if they meet certain requirements.

Here is a link to the Pasadena ordinance that has specific details on the new requirements.

San Diego

The City of San Diego passed its own ordinance increasing the minimum wage to $10.50 (essentially, effective immediately) and $11.50 effective January 1, 2017 for each hour worked within the geographic boundaries of San Diego. Non-profit corporations may apply for a deferral for the San Diego ordinance if they meet certain requirements.

The new ordinance also provides for paid sick leave beyond state requirements: Employers must provide an employee with one hour of earned sick leave for every thirty hours worked by the employee within the geographic boundaries of the City of San Diego, but employers are not required to provide an employee with earned sick leave in less than one-hour increments for a fraction of an hour worked. Earned sick leave must be compensated at the same hourly rate or other measure of compensation as the employee earns from his or her employment at the time the employee uses the earned sick leave.

Additionally, employees may determine how much earned sick leave they need to use, provided that employers may set a reasonable minimum increment for the use of earned sick leave not to exceed two hours. Employers may limit an employee’s use of earned sick leave to forty hours in a “Benefit Year” (which is defined as a “regular and consecutive twelve-month period, as determined by the employer”), but employers must allow employees to continue to accrue earned sick leave based on the formula above. Unused earned sick leave must be carried over to the following Benefit Year.

Here is a link to the San Diego ordinance that has specific details on the new requirements.

Washington, D.C. Prepares to Increase Minimum Wage to $15 — and Tipped Minimum Wage to $5.00 — by July 1, 2020

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Washington, D.C. is poised to join California and New York by raising its minimum wage to $15.00 per hour.

Sign - Minimum Wage Increase AheadOn June 7, 2016, the D.C. Council, with support of Mayor Muriel Bowser, unanimously passed on first reading the Fair Shot Minimum Wage Amendment Act of 2016 . The bill will continue to raise the District of Columbia minimum wage – currently $10.50, but previously set to increase to $11.50 on July 1, 2016 – in additional annual increments until it reaches $15.00 by July 1, 2020. Beginning on July 1, 2021, the minimum wage will increase further based on the increase in the Consumer Price Index for All Urban Consumers for the Washington Metropolitan Statistical Area.

Notably, the bill will also increase the tipped minimum wage from the existing $2.77 per hour, where it has been since 2005, in annual increments of 56 cents (55 cents in 2020) to $5.00 on July 1, 2020, again with annual indexing in successive years. This increase in the tipped minimum wage represents a compromise between advocates who sought to eliminate any lower minimum wage for tipped employees, or to at least set a higher rate of half the minimum wage as Mayor Bowser originally proposed, and significant portions of the restaurant industry that resisted any increase at all.

The law also contains special provisions for government contractors that currently are covered by D.C.’s Living Wage Act, which generally require them to pay the minimum wage if it becomes higher that the living wage (currently $13.85, but also subject to annual adjustment). In addition, for the first time, District employees are covered by the D.C. minimum wage law.

The bill still faces a second vote, likely either on June 21 or 28, 2016, at which time it is possible there may be some amendments. After Mayor Bowser signs the bill, it is subject to a Congressional review period, but is expected to take full effect well in advance of the 2017 increases.

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