Employer Cannot Profit From Unclaimed Employee Paychecks

by Jordan Schwartz 

Recently, a client informed me that an employee who had been terminated several months prior had failed to cash his final paycheck, resulting in it becoming expired. 

This client was well aware of its obligations under federal and state law to pay its employees their full wages upon completion of their employment. Thus, the client asked whether, by issuing the check and providing a reasonable time frame for it to be cashed or deposited, it had satisfied its wage payment obligations under applicable law.

As an initial matter, the answer to this question depends on state law, as this issue is not specifically covered by the federal Fair Labor Standards Act. While different state laws contain various nuances, the general law in most states is that the employee is ultimately responsible for converting his paycheck into readily usable funds. If, however, an employee fails to cash or deposit his paycheck after a certain amount of time, the state’s statute of limitation on unclaimed funds may expire, which would result in the employer possessing “unclaimed property.” 

While an employer may initially be excited over this “good fortune,” possessing unclaimed property in the form of unclaimed wages is not as glamorous as it sounds. Indeed, despite the former employee’s delinquency in failing to cash or deposit the paycheck, the employer cannot simply pocket the unclaimed funds. 

Rather, an employer who possesses such unclaimed property typically would be subject to both a number of reporting requirements (including sending written notice to the supposed owner of the unclaimed property) and the obligation to turn over such property to the state. Significant penalties would apply to employers who fail to comply with these requirements.

Thus, if, as an employer, you find yourself in the possession of a former employee’s unclaimed paycheck, it would be prudent to make a reasonable effort to track down and/or locate that employee and reissue the check to make him whole. In so doing, you would avoid any unnecessary involvement with the state treasury department involving the unclaimed funds. 

Moreover, by ensuring payment of a former employee (despite his failure to cash or deposit the prior check that was already issued), you would reduce the risk of legal exposure for failure to pay wages under applicable law. 

Third Circuit Addresses Individual Liability, Joint Employment and Successor Liability Under the FLSA

by Michael D. Thompson

In Thompson v. Real Estate Mortgage Network, the Third Circuit addressed a variety of ways in which a plaintiff could pursue claims against entities that claimed they were not her employer.

The plaintiff was hired as a mortgage underwriter by defendant Security Atlantic Mortgage Company (“SAMC”).  Allegedly in response to an investigation being conducted into SAMC 's mortgage practices, the plaintiff and others were directed to complete job applications for Real Estate Mortgage Network ("REMN"), a “sister company” of SAMC.  The plaintiff completed the application, and subsequently her paychecks were issued by REMN instead of SAMC, and SAMC became "defunct.”

The Plaintiff’s Claims

After leaving REMN, the plaintiff filed a complaint U.S. District Court for New Jersey, alleging that she was misclassified as an exempt employee and unlawfully deprived of overtime. 

The plaintiff sued REMN and SAMC, and also sued two individuals who were co-owners and executives for SAMC (and later became officers of REMN).  The plaintiff contended those individuals were joint employers by virtue of their positions with the defendant companies, and therefore were "personally, jointly and severally liable for the violations” of the FLSA and the New Jersey Wage and Hour Law.

The District Court dismissed the plaintiff's complaint without prejudice pursuant to Rule12(b)(6), and she appealed to the Third Circuit.

Joint Employment

The Third Circuit found that the plaintiff’s allegations were sufficient to state a claim that SAMC and REMN were joint employers under the FLSA based on the “Enterprise test” set forth in In re Enterprise Rent-A-Car Wage & Hour Emp't Prac. Litig., 683 F.3d 462, 467-68 (3d Cir. 2012), which looks to the following non-exhaustive list of factors:

(1)    the alleged employer's authority to hire and fire;

(2)    the alleged employer's authority to promulgate work rules and assignments and to set the employees' conditions of employment (compensation, benefits, and work schedules, including the rate and method of payment);

(3)    the alleged employer's involvement in day-to-day employee supervision, including employee discipline; and

(4)    the alleged employer's actual control of employee records, such as payroll, insurance, or taxes.

The Third Circuit held that the plaintiff had stated a claim for joint employment status by alleging that (i) an employee of REMN trained SAMC employees, (ii) REMN and SAMC were referred to as "sister companies," and (iii) Plaintiff and some other SAMC employees were “abruptly and seamlessly” integrated into REMN's business, and some employees continued to be paid by SAMC even after that integration.

The Third Circuit did not address joint employer status under the New Jersey Wage Hour Law.

Successor Liability

The Third Circuit then concluded that REMN could be liable not only for its own violations, but also for the violations of SAMC as a successor corporation. 

The Third Circuit applied a federal common law standard, which considers (1) continuity in operations and work force of the successor and predecessor employers; (2) notice to the successor-employer of its predecessor's legal obligation; and (3) ability of the predecessor to provide adequate relief directly.

The Third Circuit concluded that the plaintiff had alleged facts sufficient to support such liability, because it contended that all facets of the business at issue, including work in progress, operations, staffing, office space, email addresses and employment conditions remained the same whether plaintiff was an employee of SAMC or REMN. 

The Circuit Court stated that, for the same reasons, the plaintiff could pursue atheory of successor liability under the New Jersey Wage and Hour Law.

Individual Liability

In regard to the individual defendants, the Third Circuit cited to case law under the FLSA and FMLA providing that an individual may be subject to liability when he or she exercises "supervisory authority over the complaining employee and was responsible in whole or part for the alleged violation" while acting in the employer's interest.  An individual supervisor has adequate authority over the complaining employee when the supervisor "independently exercises control over the work situation."

For purposes of Rule 12(b)(6), the plaintiff satisfied these requirements by alleging that the individual defendants made decisions concerning “day-to-day operations, hiring, firing, promotions, personnel matters, work schedules, pay policies, and compensation," and were consulted when personnel issues arose at SAMC.   The Third Circuit did not address individual liability under the New Jersey Wage Hour Law.

In light of the foregoing, the Third Circuit reversed and remanded the case to the District Court.

Why Should Employers Have To Pay Overtime To Employees Who Only Worked Overtime Because They Played Fantasty Football Or Shopped Online During Regular Hours?

 By Michael Kun

At virtually every point in time, we have thought of ourselves as being technologically advanced. 

Older readers of this blog will recall the first time they ever saw a calculator.  It was the size of a paperback novel, it cost more than $100, and it was spectacular.  It was unfathomable that anyone would ever design anything more advanced.  Now, you can get a calculator at the checkout stand of your local supermarket for about $2.  And you will probably raise a few eyebrows if you buy one, if only because most people have no need for calculators.  They are built right into most laptop computers, tablets and smartphones – devices that only science fiction writers could possibly have dreamed of.

As a result of all of these technological advances, many employees work in front of a computer screen, and most have tiny computers in their shirt pockets, briefcases or purses at all times. 

In other words, most employees are no more than inches away from the internet, from email and from a phone at any moment during their working days. 

And employees cannot resist the temptation of those devices.  (How long was it after the introduction of the Blackberry before the first person referred to it as a “Crackberry”?)

How often have you been at a store, only to find the sales clerk off in a corner on a personal call on his or her smartphone, or checking emails?

How many times have you walked past a co-worker’s desk as he or she hurries to change the screen so you won’t see the fantasy football standings, or the webpage for a bookstore, or a social media site, or a lengthy exchange of emails with friends?  (Full disclosure: had you walked into my office 5 minutes ago, my browser was open to www.espn.com.  Specifically, the major league baseball page.)

Some employers have tried to minimize time spent in these activities by putting up firewalls on their computers.  What has this done?  It has led to discontented employees, who have just turned to using their smartphones for such activities.

Some employers have tried to put an end to time spent on smartphones at work.   What has been the result?  More discontent from employees, who take their smartphones to the restrooms or hallway.  While I personally can only attest to what I have observed in men’s rooms, I have little doubt that women’s rooms are quite similar -- people having personal telephone calls, often about exceedingly private matters, or clicking away on their smartphones, while others try to remain quiet or wait patiently to use the restroom for its intended purpose.  (I won’t comment on how downright weird it is for you to be talking to someone while you’re in the restroom other than to say that any time I get a call from someone and hear a flush in the background, everything he or she has just said immediately loses 20% of its value.  And I become much more cautious about discussing anything confidential with them when I know they are on a smartphone.)

While most employers try to minimize such personal activities, few have been able to stop it entirely.  And most understand the serious morale issues that would follow were they to try. 

Like it or not, employees are going to continue to use some work time each day on personal emails and calls, and on social media or the internet.

They’re going to continue to shop online when no one is looking.

They’re going to play fantasy football or fantasy baseball while they’re on the clock. 

They’re going to check their social media sites to see if someone has posted a new picture of a cat or shared the most recent “Which member of One Direction are you?” quiz.  (Full disclosure:  apparently, I am Harry.  Fuller disclosure: with a soon to be eight-year-old daughter, I know all of One Direction’s songs far too well and can actually name all of the band’s members – first and last names.  And feel free to quiz me on Taylor Swift or anything on the Disney Channel or Nickelodeon.)

Most employers understand all of this and, within reason, tolerate it.  It is a part of doing business in the second decade of the twenty-first century.

But it also raises a wage-hour issue that few employers think about:  if an employee has to work an additional hour of overtime because he spent an hour of the workday dealing with his fantasy football team, why should the employer have to pay for that time – and at an overtime rate, to boot?

 Why?

If you say, “Because the employee was on the employer’s premises,” try again.  An employer doesn’t have to pay an employee for all of the time he was on its premises.  If the law were otherwise, employees could grant themselves significant raises just by showing up for work a few hours early each day and reading the newspaper in the break room or taking a nap in a nice warm corner at the end of each day. 

And if you say, “The employer should have to pay because it didn’t catch the employee playing fantasy football, or shopping, or whatever,” ask yourself if that is what you really want – management standing over an employee’s shoulder all day or otherwise monitoring the employee’s ever workday activity to make sure the employee is not taking advantage.  You don’t want Big Brother in the workplace.  Don’t pretend you do. (A personal note: if you believe the reference to “Big Brother” relates to a TV show by that name, I’d encourage you to pick up the seminal George Orwell novel 1984, wherein the phrase was born.)

Practically speaking, this hypothetical – the employee who works an hour of overtime because he spent an hour on the clock playing fantasy football – speaks to the need for management to try to minimize such personal activities in a way that does not hurt employee morale.  The time spent on such entirely personal activities is costly, particularly where it leads to unnecessary overtime at overtime rates.  Every time the employee who makes $20 per hour spends an hour engaged in such personal activities, the employer has effectively paid him or her $20 for doing so.  And if they have to work an hour of overtime because they spent an hour playing fantasy football, that costs the employer an additional $30 – time-and-a-half of the employee’s regular rate. 

In other words, the employer has just paid the employee $30 to play fantasy football.  Or to shop.  Or to check Facebook. 

Where this really hits employers is in litigation.

We have written many times in this blog about the prevalence of wage-hour class actions and collective actions.  Many of them contend that employees were not paid for all of the time they worked.  Many claim that employees performed a few minutes of work before their shifts began, or after they ended.  They seek to be paid for an additional 10 minutes per day, or 15, or 20, or more.  And they seek statutory penalties.  And, always, attorney’s fees. 

But what if that same employee who contends he was shortchanged by 10 minutes of pay per day spent 30 minutes each day on social media, or shopping, or playing fantasy football, or exchanging personal emails?

Isn’t there something so clearly wrong about an employee who has been paid for engaging in personal activities turning around and seeking additional compensation under such circumstances?

Hasn’t that employee already been overpaid

Having had the pleasure of representing a great many companies in the defense of wage-hour class actions, I am always pleasantly surprised to see that most employers take a very realistic approach to the workplace, that they understand that employees probably spend some time engaging in these activities.

And I am often unpleasantly surprised to see how much time the people who sue spend in such activities, and how they believe it is their right to do so and to be paid for it – and to seek more money on top of it.

The employee who made thousands of personal telephone calls while on the clock still thinks she is entitled to more pay for a few minutes she claims she worked at the end of her shift.

The employee who regularly napped while being paid still thinks he should be paid more.

The employee who has his ugly fantasy football championship trophy on his desk forgets that his employer not only paid him for much of the time he spent earning that trophy, but had to pay him for overtime, too, because he didn’t get his work done during the business day. 

The employee who has box after box of merchandise shipped to the workplace thinks he is not only entitled to be paid for the time he spent online, but for more time.

In the litigation context, shouldn’t the time employees spend in personal activities be weighed against the additional time for which the employee is seeking recovery?

If an employee contends he or she was not paid for 6 minutes of off-the-clock work each day, but the employer can show that he or she spent 30 minutes a day engaged in personal activities, shouldn’t that employee recover nothing?

Very generally speaking, the courts haven’t weighed in on this issue yet. 

But someday, perhaps soon, they will.

And if they begin subtracting the time spent on personal activities on their smartphones or laptops from an employee’s claim the he or she was not paid for all of the time worked, they are likely going to find that many of the employees claiming they were underpaid were actually overpaid. 

That just makes sense, doesn’t it?

In this way, perhaps technology will meet its match in something that has been around for centuries – logic. 

Be Careful You Don't Make Your Vendor's Employees Your Employees

 By Michael Kun

              You run a supermarket.  You contract with a janitorial company to come in every night to clean the aisles after you close.

               You run an ad agency.  You retain a contractor to handle your mailroom.

               You run a law firm.  You bring in a company to update the books in your law library.

               You run a hotel.  You contract with a van service to shuttle your guests to and from the airport. 

               Whatever business you are in, you are bound to enter into contracts with vendors to provide a variety of services. 

               And, except where they subcontract that work out, each of those vendors uses its employees to fulfill its contract with you. 

               You may recognize the vendor’s employees from seeing them in your workplace.  You may even know a few by name and say hello to them, or ask them about their weekend. 

               You didn’t hire them, you don’t pay them, you don’t supervise them.  Yet, when they file suit against your vendor claiming they were not paid for all of the time they worked, or that they were not paid overtime, or they were not otherwise treated in compliance with the law, don’t be surprised to see that they (and their lawyers) sue your company, too, contending that you are their “joint employer.”  And that you are responsible for paying them the wages they claim they were not paid.  Penalties, too.  And don’t forget attorney’s fees.

               Yes, the person who you occasionally wave to in the hallway or exchange holiday greetings with is now claiming that you are his employer.

               The “joint employer” theory is by no means a new one.  It has been used by plaintiffs and their lawyers for years to bring more – often “deep pocket” -- defendants into lawsuits and leverage larger settlements than they might otherwise be able to obtain from their actual employers. 

               The little company that employs them may not have much money.  But the companies it contracts with?  Your company?  That may be very different, and therein lies the appeal of suing you. 

               While the tests for whether a company is a “joint employer” vary in different jurisdictions and under different laws, they all essentially turn on one element – control.  Do you control the individual’s work or the manner in which it is performed --or are you merely (and appropriately) concerned with the end result? 

               Directing an individual which aisles to clean or how to do so is dangerous; reporting a concern to the vendor about the quality of the work performed is not.  The former goes to the manner in which the work is done; the latter, to the end result.

               In order to best position yourself to avoid or defend a claim that a vendor’s employees are also your employees, you should review your contracts and your relationships with your vendors.  And you should take steps to ensure that the relationships are focused on the end result alone.  Ideally, among other things, you would be able to do the following:

1)      Your contract with the vendor should provide very clearly that the persons the vendor hires are its employees, that it is obligated to pay them in compliance with the law and to otherwise comply with the law as it relates to them, and that you are interested in the end result alone.

2)      Don’t be involved in any way in the vendor’s hiring of its employees.  That’s their responsibility. 

3)      Don’t be involved in any way in the vendor’s paying of its employees.  That’s their responsibility. 

4)      Don’t be involved in any way in disciplining the vendor’s employees.  If there are concerns, report them to the vendor and let the vendor address them. 

5)      Don’t be involved in any way in the vendor’s termination of its employees. 

6)      Don’t supervise or direct the vendor’s employees.  That should come from the vendor. 

7)      Don’t give the vendor’s employees clothing or badges with your company’s name or logo on it.  And if the vendor gives its employees such items, tell it to stop. 

8)      Don’t give the vendor’s employees business cards with your company’s name or logo on them, or anything else that would identify thems as doing anything other than working for a vendor that provides services to you.

9)      Don’t give the vendor or its employees any tools with which to perform work.  No computers, no pencils, no pads, no mops, no brooms, no hammers or nails. 

10)   Don’t give the vendor’s employees offices or desks. 

11)   Don’t keep files on the vendor’s employees. No personnel files.  No logs of who worked when. 

12)   Don’t include the vendor’s employees in meetings with your employees.  Remember, they’re not your employees.  Don’t treat them like they are. 

13)   Don’t require your vendor to use specific employees. 

         This is not to suggest that you should stop saying hello to the vendor’s employees when you see them, or asking how their weekend was.  But if you want to talk about the quality of the services they are performing, talk with the vendor, not its employees. 

         Taking such steps may not prevent you from being sued under a “joint employer” theory, but it should enable you to make a strong argument that the theory does not apply to you.  And depending on the vendors you use and the number of persons they employ, that could be worth a small fortune.

Are You Sure You Want Your Employees Accessing Work-Related Emails After Hours?

by Michael Kun

The workplace used to be a lot easier to manage.  That’s because the workplace used to be, well, the workplace.

Employees went to work, they worked, and they went home.  And when they went home, they were usually done working for the day, unless they got an emergency phone call from the boss. 

There was the workplace, and there was home, and (with those rare exceptions) never the twain shall meet.

For better or worse, those days are long gone.

First, there was the answering machine at home. 

Then, the cellphone.

Now, few are those employees who do not have a device connecting them to work in their shirt pockets or their purses.  I’m speaking, of course, about smartphones. 

A great many employees, particularly those in engaged in non-manual labor, have workplace email addresses. 

And, more and more, employers allow their employees to send and receive emails from their workplace email addresses through their smartphones. 

And, more and more, employees are sending and receiving emails after-hours on those smartphones.

As employment lawyers, we have long warned clients and prospective clients that it was only a matter of time before non-exempt employees – and their lawyers – started filing suits contending that they were entitled to be paid for the additional time they spent after-hours reviewing and responding to work-related emails.  And, whenever those lawsuits would be filed, we anticipated that they would be filed as class actions or collective actions. 

Well, that day apparently has come.

 Although there have been more than a few lawsuits filed over the years alleging that non-exempt employees were entitled to be paid for the time spent “off the clock” dealing with work-related emails, those claims are more prevalent now than ever. 

Perhaps recognizing that the time spent on after-hours emails might be sporadic or that it might be only a few minutes on many occasions – which would create an argument that such time is non-compensable, de minimis time – employees and their attorneys are not simply filing suit over email time.  Instead, they are filing suit over all alleged “off the clock” time, including not only time spent on emails, but also time spent booting up computers at the beginning of the day and shutting them down at the end, as well as other, similar activities. 

Checking emails after hours may only take 5 or 6 minutes a day, they argue, but when you add it to the other “off the clock” time, it is significant.  And, they argue, they are entitled to be paid for all of that time.

Fifteen minutes a day, they argue, adds up for one employee.  Multiply it by an entire workforce, and the potential exposure could be significant.

There are a number of ways employers can address this phenomenon:

(1)   Employers can reassess their needs and determine whether it would be wise to prevent employees from receiving work-related emails anywhere other than at work.  In other words, they can determine whether to prevent employees from even accessing emails to and from their work email addresses on their smartphones (or on their home computers, laptops or tablets).  If there is an emergency after hours, you can contact them the old-fashioned way – pick up the phone and call them. 

(2)   Should employers decide not to cut off email access outside of the workplace, they – and management employees in particular – can address how often and under what circumstances they send emails to employees after hours.  When you send an email to an employee at 10:00 pm, you may well intend that he or she not look at it until the morning.  But you know your employees are likely to do the same thing you do when their smartphones buzz to let them know they have received new emails – they are going to check.  Yes, that may be a reflex.  But the employee will not know if it is an emergency until he or she opens your email. 

(3)   If employers are not going to cut off access to emails, they should consider revising their time reporting systems to allow employees to report time spent dealing with after-hours emails.  At the very least, that would help to cut off exposure on an “off the clock” claim.  And should employees report significant time spent after hours engaged in such conduct, the employer can then reconsider (1) and (2). 

Supreme Court Declines to Review CEO's Personal Liability

By Aaron Olsen

The United States Supreme Court declined to review the Second Circuit’s decision in Irizarry v. Catsimatidis, in which the Court of Appeals affirmed the District Court’s decision holding a CEO personally liable for violations of the Fair Labor Standards Act (FLSA).

By way of background, in July 2013, the United States Court of Appeals for the Second Circuit affirmed the District Court’s decision that the CEO of a supermarket chain could be held personally liable for damages in Irizarry v. Catsimatidis.  The District Court had granted summary judgment in favor of plaintiffs in the class action case and held that plaintiffs were entitled to liquidated damages on their claims concerning reduction of hours, withholding of overtime, misclassification as exempt employees, and retaliation. The parties entered into a settlement agreement. However, the corporate defendants later defaulted on their obligations under the agreement. Plaintiffs then moved for partial summary judgment on the CEO’s personal liability as an employer. 

Individual liability under the FLSA turns on whether an employment relationship exists between the employee and the purported employer, the individual defendant.  The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee….” 29 U.S.C. § 203(d). An “employee” is defined as “any individual employed by an employer.” 29 U.S.C. § 203(e)(1). Quoting from the U.S. Supreme Court’s decision Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947), the Court of Appeals in Irizarry stated that the FLSA contains “no definition that solves problems as to the limits of the employer-employee relationship under the Act.”

The District Court reasoned that the CEO hired managerial employees, signed all paychecks to the class members, had the power to close or sell the stores, routinely reviewed financial reports, worked at the corporate office and generally presided over the day to day operations of the company. The District Court concluded that there was no area of the store which was not subject to the CEO’s control, whether or not he chose to exercise it, and therefore the CEO had “operational control” and could held liable as an employer.

The CEO argued that he was a high-level employee who made symbolic or, at most, general corporate decisions that only affected the plaintiffs through an attenuated chain of causation.  

The Court of Appeals noted that it had previously set forth four factors to determine the “economic reality” of an employment relationship: (i) whether the alleged employer had the power to hire and fire the employees, (ii) supervised and controlled employee work schedules or conditions of employment, (iii) determined the rate and method of payment, and (iv) maintained employment records. However, the Second Circuit also stated that it had examined different indicia of “operational control” in other cases, with the intent of assessing whether a defendant exercised functional control over a worker.

The Court of Appeals concluded, in what it described as a “close case,” that there was no evidence that the CEO was responsible for the FLSA violations, or that he ever directly managed or otherwise interacted with the plaintiffs. Nevertheless, the CEO was an “employer” for the purposes of the FLSA because his control over the hiring of managerial employees, and his overall financial control of the company meant that he possessed “operational control” over the plaintiffs’ employment

The potential to be held personally liable for violations of the FLSA understandably creates concern for CEOs – especially those of medium-sized companies that have a large enough number of employees to create significant exposure but not enough resources for the Company to pay for a large judgment that may come from losing a class-action.
 

California Supreme Court Agrees To Clarify Suitable Seating Law

By Michael Kun

We have written several times in this blog about California’s unusual – and unusually vague – “suitable seating” law, which requires some employers to provide some employees with suitable seating if the nature of their work reasonably permits it.  The previously obscure law has become the subject of numerous class actions in California.  And parties and the courts have struggled to interpret a vague law that has little legislative history and even less interpretive case law. 

As we wrote most recently in January, the Ninth Circuit essentially threw up its hands and asked the California Supreme Court to clarify whether the term “nature of the work” refers to individual tasks that an employee performs during the day, or whether it should be read “holistically” to cover a full range of duties. It also asked the California Supreme Court to clarify whether an employer's business judgment should be considered in determining whether the nature of the work “reasonably permits” the use of a seat, as well as the physical layout of the workplace and the employee’s physical characteristics.  Finally, it asked the California Supreme Court to clarify whether the employee must prove what would constitute a “suitable seat” to prevail.

After some speculation that the California Supreme Court might decline to answer these questions, it has now agreed to do so.

While the briefing and argument process will take time, employers in California should finally have much-needed guidance on this obscure law, allowing them to alter their practices as necessary and avoid these class actions. 

As for those “suitable seating” class actions already pending, one would expect that many of them will be stayed until the California Supreme Court renders its decision.

President Obama's Direction To Revise Overtime Regulations May Ultimately Have Little Real Impact

by Michael Kun

Much has been made of President Obama’s March 13, 2014 presidential memorandum directing the Secretary of Labor to update the Fair Labor Standards Act (“FLSA”) regulations to expand overtime protection to more employees.  At this time, it is only speculation about what the resulting changes will be.  But some of that speculation leads to the conclusion that the changes may ultimately have little impact for most employers and most employees.

One of the articulated goals in the presidential memorandum  is to simplify overtime rules to make them easier for both employers and employees to understand.  Given how complicated the analysis of various overtime exemptions can be, both employers and employees alike should agree that such a general goal is an admirable one.  Whether they will both agree that the simplifications themselves are fair seems unlikely, particularly if those simplifications restrict the exemptions such that employees who currently fall within one or more overtime exemption will no longer do so.

Of course, only time will tell how the Secretary of Labor proposes amending the regulations.  That said, early speculation is that the relatively low weekly compensation threshold that is a criterion of most of the overtime exemptions – requiring that the individual be paid at least $455 per week – will be increased.   

But if that is the only change, one has to ask if it will have any meaningful practical impact.

While many years ago it may have been the case that many exempt employees were being paid $455 per week, that would not appear to be the case any longer.  Presumably, few persons treated as exempt are paid $455 per week – and many are paid four or five times that, if not more.

For the sake of argument, let’s assume that the only change to the regulations is to increase the weekly threshold to $700.

Employees who are paid at $700 or more per week would not be affected. 

But how about those who are paid less than $700 per week? 

An employer could simply raise that employee’s weekly salary to $700. 

But what about the employer who does not want to pay that employee $700 per week – or who cannot afford to do so?  What if that employer can only afford to pay that employee $600 per week?

The answer is simple: the employer could merely convert the employee from a salaried, exempt position to an hourly, non-exempt position, and then reverse engineer his hourly rate such that he makes $600 per week.  If the employee is expected to work 60 hours in a week and the employer can only afford to pay him $600, the employer would simply assign the employee an hourly rate of $8.57 per hour.  (The employee would be paid 40 hours at that hourly rate, and 20 hours at time-and-a-half of that rate, equaling $600.) 

The only real impact would be in those situations where the amount an employer wishes to a pay an employee currently treated as exempt would translate to an hourly rate below the minimum wage, which would then require the employer to increase the hourly rate to pay the employee the minimum wage. 

How often would that be the case?

Probably, not often.

So, if the only change to the regulations is to increase the weekly compensation threshold, the change truly will have little impact. 

And if there are more sweeping changes, such as changes to the duties that would qualify for the exemption, that, too would appear to have little realistic impact.  Any employees who no longer qualified for an exemption would merely be transitioned to hourly, non-exempt positions, with their compensation reverse engineered so that they would be earning the same amount each week as they were earning as exempt employees.  

President Seeks Increase to Salary Threshold for Exempt Status

By Brian Steinbach

True to its word, the Obama administration is continuing its effort to do administratively what it cannot achieve legislatively.

While efforts to increase the minimum wage to $10.10 per hour are mired in the Congress, the administration on March 13 announced that it has instructed the Secretary of Labor to “update” and “simplify” the regulations defining who is considered an exempt employee not entitled to overtime pay. These regulations were most recently overhauled in 2004.

“Regulations regarding exemptions … for executive, administrative, and professional employees (often referred to as "white collar" exemptions) have not kept up with our modern economy.”  - Barack Obama

Regulations "for executive, administrative, and professional employees (often referred to as 'white collar' exemptions) have not kept up with our modern economy.”                Barack Obama

The announcement makes it clear that the goal is to significantly narrow the number of individuals who qualify as exempt. A major target of the proposed revisions is the current $455-per-week salary threshold for executive, administrative and professional employees. That threshold is roughly equivalent to $11.38 per hour for a forty-hour week – not much more than the $10.10 minimum wage that the administration seeks, and which it claims is the equivalent of $561 in today’s dollars.

While many exempt employees already make far more than this amount, in some industries – particularly retail and restaurants – front-line managers who currently qualify as executive or administrative employees may not earn much more than this amount, so even a relatively modest increase could cause them to no longer be exempt.

Another likely target may be changing the portion of the definition of an executive employee that currently requires only that the “primary duty” be managing, to a requirement that a fixed percentage of work be devoted to managerial tasks. Again, this is particularly likely to affect the retail and restaurant industry, where managers frequently step in and handle nonexempt tasks when needed.

Fortunately, the regulatory process likely will last at least 18 months, if not longer, and there will be ample opportunity to comment on whatever specific proposed changes the Department of Labor makes, as well as for the Congress to weigh in. In the meantime, this is a good opportunity for employers to review their classifications to make sure exempt individuals are properly classified, and in particular look at how much time they are spending on exempt activities.

California District Court Confirms That Employees Need Not Be Paid For De Minimis Time

by Michael Kun

We have written frequently in this blog about the great many wage-hour class actions filed against employers doing business in California.   Those lawsuits often allege that a class of employees performed work off-the-clock, and that the employees are not only entitled to compensation for that time, but to a slew of penalties that often dwarf the amount of alleged damages. 

Depending on the nature of an employer’s business, a plaintiff might allege that employees were not paid for the couple minutes it might take to “boot up” a computer in the morning, or for waiting to punch in their time cards.  Or a plaintiff might contend that an employer has a time-rounding policy that somehow shortchanges employees by a minute or two of pay each day.

In defending these cases, employers often argue that not only must individualized inquiries be conducted to determine whether, when and how long an employee allegedly worked off-the-clock, but whether the employee was engaged in personal activities during some or all of that time.  Those are issues that go to whether a class should be certified.

On the merits, employers often argue that such time is non-compensable in any event as de minimis time – time that is so small that it need not be compensated.

The de minimis doctrine has been recognized by the United States Supreme Court for decades, and a variety of decisions have held that as much as 10 minutes per day is de minimis, non-compensable time. 

In a decision that is likely to be cited by employers defending against off-the-clock class action claims in California, United States District Court Judge Gary Feess has granted summary judgment to Starbucks in a class action lawsuit alleging that employees were entitled to be compensated for the minute or two that they may have spent locking up or engaged in other activities after they punched out.  Relying upon the de minimis doctrine, Judge Feess held that such time is not compensable as a matter of law.

The decision is, of course, a positive development for employers who have been besieged by wage-hour class actions in California.  While one would hope that plaintiffs’ counsel would refrain in the future from filing suit seeking compensation for such small amounts of time, the decision should bolster employers’ efforts to obtain the same result that Starbucks obtained – a confirmation that they are not required to pay employees for every moment those employees are on their premises. 

Supreme Court To Decide Whether Employees Must Be Paid for Time Spent in Security Screenings

By John Fullerton

The U.S. Supreme Court has agreed to resolve a split among the federal circuits regarding whether time spent in security screenings is compensable under the Fair Labor Standards Act (FLSA), as amended in 1947 by the Portal-to-Portal Act.  The outcome of the case, Integrity Staffing Solutions v. Busk, could have a significant economic impact on employers who require employees to submit to security searches before or after they begin their workday if employers are required to pay for the time employees spend doing so.

The case arises from claims filed by two former employees of Integrity Staffing Solutions, which provides warehouse space and staffing to clients.  At the end of each shift, after clocking out, the employees were required to pass through a security clearance (including removal of wallets, keys and belts and passing through a metal detector) designed to prevent employee theft of goods, for which they waited upwards of 25 minutes without pay.

The issue is whether such security screenings are “integral and indispensable” to the employee’s principal work activities.  The Portal-to-Portal amendments to the FLSA preclude compensation for activities that are “preliminary” or “postliminary” to the “principal activity or activities,” unless those activities are “integral and indispensable” to those principal activities.  The applicable test is whether the activity is “necessary” to the principal work and done for the employer’s benefit.  Under this standard, for example, time spent donning and doffing protective gear in a meat packing plant has been found “integral and indispensable,” while time spent at work dressing in required uniforms that could be donned at home instead has been found not to be “integral and indispensable.” 

The district court dismissed the complaint based on decisions of the Second and Eleventh Circuits in 2007 that held that preliminary security screenings at the beginning of the workday were not compensable.  The Ninth Circuit reversed, finding that the complaint on its face, by alleging that “the security screenings are necessary to employees’ primary work as warehouse employees and done for Integrity’s benefit,” stated a “plausible claim for relief” under the FLSA sufficient to withstand a motion to dismiss.  The Ninth Circuit also found relevant the distinction between the preliminary screenings required in the Second and Eleventh Circuit cases, which in the former case applied to everyone who entered a nuclear power plant, and in the latter were mandated by Federal Aviation Administration rules, and the postliminary screening at issue in this case.  We see a compelling argument, however, that a security check at the end of the workday for employees with access to millions of dollars of merchandise is neither “necessary” to the work they perform (certainly not in the same sense as wearing protective gear when working with sharp knives all day) nor solely for the employer’s benefit, as prevention of theft is a public concern that benefits everyone in numerous ways.

Because of relative ease in which an individual claim under the FLSA can be elevated to a collective action involving hundreds or even thousands of employees provided they are “similarly situated” to the lead plaintiff, the stakes are high for employers.  As stated in the brief on behalf of several amici in favor of Integrity, including the U.S. Chamber of Commerce, “the Ninth Circuit’s decision has created nationwide legal uncertainty and enormous potential financial liability for thousands of employers.”  (Petition at 11).  The case will not be decided until the next Supreme Court term that begins in October 2014.

New York Federal District Court Awards Undocumented Immigrants FLSA Damages

by Robert S. Groban, Jr.

On December 19, 2013, the U.S. District Court for the Southern District of New York denied the defendant’s motion for discovery regarding the plaintiffs’ immigration status in Colon v. Major Perry St., Inc., No. 1:12-cv 03788 (S.D.N.Y. 2013).

In Colon, several workers, some of whom are undocumented aliens, sued under the Fair Labor Standards Act (“FLSA”) to recover minimum and overtime wages that the employer refused to pay. The defendant argued that under the Second Circuit’s decision in Palma v. NLRB, 723 F.3d 176 (2nd Cir. 2013), the plaintiffs were barred from collecting back pay under the FLSA if they were here illegally. In Palma, the Second Circuit held that the workers, who were undocumented aliens at the time they were fired, were precluded from collecting back pay under the National Labor Relations Act.

The district court explained that the text of the FLSA made clear that its provisions were “unambiguously” intended to apply to undocumented workers by defining the term “employee” as “any individual employed by the employer.” The court further noted that the FLSA focuses on back pay as a remedy to ensure that employers don’t gain an advantage by violating immigration laws. If this were not the case, then employers would be exempt from wage and hour standards for undocumented employees. Applying the FLSA to undocumented workers, the court found, furthers the purpose of the Immigration and Reform Control Act—to punish employers for employing undocumented workers.

This case serves as another critical reminder to employers that unauthorized aliens are covered under the FLSA’s definitions of an “employee” and, thus, are entitled to the statutory mandated wages for work performed. In other words, employers that hire unauthorized aliens still must comply with federal labor and employment laws.

Read more from our recent Immigration Alert.

New Minimum Wage for Government Contractors May Have Minimal Impact

by Michael D. Thompson

President Obama announced in his State of the Union address that he will issue an executive order increasing the minimum wage for employees of federal contractors to $10.10 per hour. The executive order is undoubtedly a prelude to a push for Congressional support of an increase in the Fair Labor Standards Act minimum wage of $10.10 per hour.

“If you cook our troops’ meals or wash their dishes, you should not have to live in poverty,” President Obama said. 

According to the Obama administration, the increase would affect more than 2 million employees. 

Many of those employees, however, are already paid in excess of $10.10 per hour under statutes such as the Service Contract Act and the Davis-Bacon Act. Those acts require certain federal contractors and subcontractors to pay workers no less than the locally prevailing wages and fringe benefits for similar projects in the area.

Accordingly, as the President’s remarks might suggest, the impact of the wage increase is generally limited to employees in food service, cleaning/maintenance and laundry occupations. For example, at Fort Bragg (the nation’s largest military base), dishwashers earn only $7.87 per hour and would be impacted by the increase in the minimum wage, but cooks already earn from $10.41 to $12.40 per hour. Similarly, occupations such as receptionist, refuse collector and school crossing guard are already compensated in excess of $10.10 per hour.

Indeed, of the 392 occupations receiving standard Service Contract Act wage determinations for Cumberland County, North Carolina (the headquarters of Fort Bragg), only 26 -- or 6.6% -- have been paid at rates below the new minimum wage.

Supreme Court: CBA May Provide Time Spent Donning & Doffing Protective Gear is Not Compensable

by Stuart M. Gerson

On January 27, 2014, the United States Supreme Court resolved a long-standing and hotly-contested issue of importance to unions, when it held that time spent donning and doffing required protective gear was not compensable under the Fair Labor Standards Act and the terms of a collective bargaining agreement.   Sandifer v. United States Steel Corp., No. 12–417. 

The plaintiffs had filed a putative collective action under the FLSA, seeking back pay for time spent donning and doffing pieces of protective gear that they were required to wear because of hazards in the workplace.

U. S. Steel contended that this donning-and-doffing time, which would otherwise be compensable under the FLSA, was not compensable based on a provision in the collective bargaining agreement with the petitioners’ union.  The Supreme Court stated that the “validity of that provision depends, in turn, upon the applicability of 29 U. S. C. §203(o) to the time at issue.”

Under §203(o), which was added to the FLSA in 1949, a labor union and an employer may agree (in a collective-bargaining agreement) on whether “time spent in changing clothes . . . at the beginning or end of each workday” will be compensable.  (Emphasis added.)

In Sandifer, both the District Court and the Seventh Circuit had sided with the employer.  The Supreme Court agreed, holding that the time the workers spent donning and doffing their protective gear was not compensable by operation of the collective bargaining agreement and §203(o). 

The Supreme Court’s ruling turned on whether the donning and doffing of protective gear qualified as “changing clothes” under §203(o).

In determining that donning and doffing protective gear qualifies as “changing clothes,” the Court held that “[d]ictionaries from the era of §203(o)’s enactment indicate that ‘clothes’ denotes items that are both designed and used to cover the body and are commonly regarded as articles of dress… That is what we hold to be the meaning of the word as used in §203(o).” 

The Supreme Court then stated: “We see no basis for the proposition that the unmodified term ‘clothes’ somehow omits protective clothing.”

The Court further held that “time spent in changing clothes” includes any time spent in “altering dress.”

Accordingly, The Supreme Court held that whether one completely puts on different clothes in the workplace, or put a uniform over what he was wearing, the time spent on such activities may be non-compensable under the terms of a collective bargaining agreement.

This has been a matter of considerable interest to manufacturing labor unions and so it is notable that the decision of the Court was unanimous (though Sotomayor, J., disagreed with one footnote). 

Unionized employers ranging from hospitals and hotels and restaurants to manufacturers will be interested in the holding in the Sandifer case, and should consider its impact in future collective bargaining negotiations.

California "Daily Overtime" Inapplicable Under Collective Bargaining Agreement

By Aaron Olsen and Michael Kun

In California, employers typically must pay overtime to non-exempt employees at a rate of one and one-half times their regular rates of pay not only when those employees work more than 40 hours in a week, but also when they work more than eight hours in a day.  That requirement is known as “daily overtime.”  (And employers must pay “double time” when non-exempt employees work more than 12 hours in a day.  But that is a different issue, for a different day.)

In a new decision issued on January 22, 2014, the California Court of Appeal has just confirmed an important exemption to “daily overtime” where employees are covered by collective bargaining agreements, awarding summary judgment to the employer and shutting down the plaintiffs’ attempt to read the exemption in a manner that would negate it.

A section of the California Labor Code – Labor Code 514 – provides an exemption from “daily overtime” for employees covered by a collective bargaining agreement whereby they receive at least 30% more than the state minimum wage and premium pay for “overtime.”  Not “daily overtime,” but “overtime.”  The plaintiffs nevertheless argued that employees covered by a qualified collective bargaining agreement must still receive some amount of premium compensation for “daily overtime.”

The California Court of Appeals summarily rejected this argument, explaining that employees covered by qualified collective bargaining agreements are not entitled to premium pay for “daily overtime,” but are only entitled to premium pay for “overtime,” as defined by the employer and union.  There, the employer and union had defined “overtime” as time worked beyond 40 hours in a week or 12 hours in a day.  And that, the Court concluded, was all the “overtime” the plaintiffs could get. 

The confirmation of this important exemption – and the ability of an employer and union to define “overtime” for the purposes of Labor Code section 514 -- is a welcome development for employers who face claims like those brought by the plaintiffs.  Barring California Supreme Court review and reversal, it would seem to shut down the argument to negate the exemption in future cases, including class actions.