Featured on Employment Law This Week: The U.S. Supreme Court takes on class action waivers.

In 2012, the National Labor Relations Board (NLRB) ruled that class action waivers in arbitration agreements violate employees’ rights under the National Labor Relations Act (NLRA). The U.S. Court of Appeals for the Second, Fifth, and Eighth Circuits disagreed, finding that these waivers do not violate the NLRA and are enforceable under the Federal Arbitration Act. More recently, the Seventh and Ninth Circuits sided with the NLRB on the issue. The Supreme Court will consider three cases in order to resolve this split, but any resolution could depend on the timing of the hearing. If the case is heard this term, before President Trump’s nominee for the vacancy on the Supreme Court is confirmed, it could end in a 4-4 tie. That would leave the law as it stands, and the split would continue.

Watch the segment below and see our recent blog post by Michael Kun.

Bag Security CheckIn recent years, employers across the country have faced a great many class action and collective action lawsuits in which employees have alleged they are entitled to be paid for the time spent in security screenings before they leave their employers’ premises – but after they have already clocked out for the day.  Retailers have been particularly susceptible to these claims as many require employees to undergo “bag checks” before they depart their stores to ensure that employees are not attempting to carry merchandise out in their bags or coats.

In late 2014, in Integrity Staffing Solutions, Inc. v. Busk, the United States Supreme Court held that time spent in security screenings was not compensable under the federal Fair Labor Standards Act (“FLSA”).

While Busk would seem to leave few circumstances under which employees could bring viable “bag check” claims under the FLSA, it did not put an end to the claims.  Among other things, the compensability of such time under California state law, which defines compensable time differently than the FLSA, remained unaddressed.  Indeed, late last week, Bath & Body Works Inc. reportedly agreed to pay $2.25 million to settle a putative class action asserting claims under the California Labor Code for unpaid work hours that included claims that employees were not paid for time spent in security screenings.  The critical difference between the FLSA and California laws is that California law requires that employees be paid for all time when they are “subject to the control of the employer” or for all time that they are “suffered or permitted to work.” And, not surprisingly, plaintiffs’ lawyers in California have argued that employees are “subject to the control of the employer” and “suffered” to work while they wait for and participate in security screenings.

In many, if not most, security screenings, employees who do not have a bag or a coat are not subject to a screening. They simply leave without being checked.  Under those circumstances, we have always argued that time spent in security screenings is not compensable precisely because the employee can avoid the screening altogether by not bringing a bag or coat.

Earlier this week, in what appears to be the first published opinion on the issue, District Court Judge William Alsup reached that very conclusion.  In Frlekin v. Apple Inc., the Court dismissed a class-action lawsuit brought by Apple store employees seeking compensation under California law for time spent waiting for their bags to be searched before they left the stores where they worked.  Granting summary judgment to Apple, the Court concluded that the time was not “hours worked” because the searches were peripheral to the employees’ job duties and could be avoided if the employees chose not to bring bags to work.

The history of Frlekin largely describes the development of the law on “bag checks” this decade. The Frlekin plaintiffs initially pursued their “bag check” claims under the FLSA and various states laws, including California law.  The FLSA and non-California claims were dismissed following the Supreme Court’s decision in Busk, leaving just the California claims.

On those California claims, the District Court explained that, to prove that they were subject to the control of Apple during the bag checks, the plaintiffs had to show that:

  • Apple restrained their actions during the bag checks; and
  • the plaintiffs could not choose to avoid the activity.

The District Court found that the first element was met because, once a worker wished to leave with a bag, the worker was required to stand in line for the security screening. However, the District Court found that the second element was not met because a plaintiff could choose not to bring bags to work and thereby avoid the “bag check” altogether.  Distinguishing cases cited by the plaintiffs, the District Court further held that “employee choice” is a dispositive element in determining whether an employee is subject to the control of the employer.

The District Court then addressed whether the employees were “suffered or permitted to work” during the time they were awaiting security screenings.  The Court stated that liability arises when an employer knows that someone is performing work for its benefit, and allows that work to proceed.  Therefore, “the touchstone is the failure to prevent work.

On this issue, the District Court then held that time spent waiting for security screenings was not “work” because it had no relationship to plaintiffs’ job responsibilities; the plaintiffs merely waited passively as managers or security guards conducted the searches.  Accordingly, time spent waiting for bag checks was not time during which the plaintiffs were “suffered or permitted to work.”

In light of its conclusions that the time spent in security screenings was not time during which the plaintiffs were “subject to the control” of Apple or “suffered or permitted to work,” the District Court held that the time was not compensable under California law and granted summary judgment to Apple.

While the District Court’s ruling is, of course, a significant victory for Apple and for employers in California, it does not necessarily spell the end of class actions in California alleging that employees are entitled to compensation for time spent in security screenings.

First, the Frlekin plaintiffs are likely to appeal this decision.  It would be surprising if they did not.

Second, the decision is not binding on other courts, and in particular is not binding on California state courts.

Third, the decision will not be helpful to those employers who require all employees to undergo screenings regardless of whether they brought a bag or a coat.

For these reasons, it is too early to declare “bag check” lawsuits dead.

But, based on this decision, plaintiffs’ lawyers may think twice about bringing “bag check” class actions, and employers that have security screenings similar to Apple’s can take comfort that the first court to address the practice in a published decision has found that time spent in “bag checks” is not compensable time.

In Jones-Turner v. Yellow Enterprise Systems, LLC, the Sixth Circuit recently upheld summary judgment in favor of an ambulance company in a collective action filed by three EMTs, finding that the plaintiffs’ meal and rest breaks were not compensable under the Fair Labor Standards Act (“FLSA”) and Kentucky law.  The Court analyzed whether the ambulance company’s policy of having “on-call” lunch periods required EMTs to be compensated for that time.

According to the “on-call” lunch period policy, EMTs in the field were not allotted a specific time period for lunch but were instructed to take advantage of down time between ambulance runs to eat a meal.  The EMT crews  were required to radio the dispatcher to request a lunch break.  During their lunch break, the crews were subject to various restrictions.  For instance, the crews had to eat within one mile of an assigned stand-by location.  If the crews were out of their unit, they had to maintain radio contact, they were expected to answer the radio after the first call and they were subject to any available run.  If an employee was unable to take a lunch break due to call volume, the company required the employee to submit a missed lunch form.

The Court noted that there did not appear to be any evidence that employees were frequently interrupted by radio contact.  Likewise, there was no evidence that crews could only eat in their ambulances.  To the contrary, the evidence showed that they could leave the ambulance so long as they maintained radio contact.   The Court explained that it may have reached a different conclusion if EMTs were required to stay in their ambulances or if they had to drive or perform other duties.

The decision is helpful to employers as it clarifies that merely carrying a radio or monitoring a radio during lunch does not result in the meal period being compensable under the FLSA.  Although employers must be careful that they do not require employees to perform work during their meal periods, being subject to an emergency call does not transform meal periods into compensable time under the FLSA.

Our colleague Stuart M. Gerson at Epstein Becker Green wrote a new blog post that discusses the Supreme Court’s recent Dart decision: “Supreme Court Lowers the Bar for Class Action Removal.”

Following is an excerpt:

On December 15, 2014, the Supreme Court of the United States decided Dart Cherokee Basin Operating Co. v. Owens, a class action removal case.

 In short, the Dart case is welcome news to employers. Standards for removing a case from state to federal court have been an abiding point of concern for employers faced with “home town” class actions. In more recent times, this problem has become a point of interest to employers in health care and other industries that are beset by cybersecurity and data breach cases originating in state courts but calling for the application of federal privacy standards. Dart should help them substantially.

 Read the full post here.

By Jill Barbarino

On October 28 a three-member majority of the National Labor Relations Board in Murphy Oil revisited and reaffirmed its position that employers violate the National Labor Relations Act (the “Act”) by requiring employees covered by the Act (virtually allnonsupervisory and non-managerial employees of most private sector employees, whether unionized or not) to waive, as a condition of their employment, participation in class or collective actions.

As previously reported in an Act Now Advisory, in 2012 the NLRB held in D.R. Horton that the home builder unlawfully interfered with employees’ Section 7 right to engage in concerted activity by requiring them to sign an arbitration agreement prohibiting class or collective claims in any judicial or arbitral forum.  As we have also previously reported, however, on December 3, 2013, the Fifth Circuit rejected the NLRB’s position and held that the Act does not prohibit employers from requiring employees to sign class or collective action waivers.  The Second Circuit and the Eighth Circuit have likewise rejected the Board’s position.

Notwithstanding having “no illusions” that the Board’s decision would be the “last word on the subject”, in a 59-page decision, it reiterated and endorsed its prior position and addressed its critics head on, including the two lengthy dissents from Members Harry Johnson and Philip Miscimarra.

The Decision

Murphy Oil is the owner and operator of over 1,000 retail fueling stations.  Prior to March 6, 2012, Murphy Oil required all job applicants and current employees to execute a “Binding Arbitration Agreement and Waiver of Jury Trial,” which provided in pertinent part that all disputes related to an individual’s employment shall be resolved by binding arbitration and that the parties to the agreement “waive their right to commence or be a party to any group, class or collective action claim in arbitration or any other forum.”  The Charging Party, Sheila Hobson, signed this Agreement when she applied for employment in 2008.  Two years later, Hobson filed a collective action pursuant to the Fair Labor Standards Act alleging that Murphy Oil failed to pay her and others for work-related activities performed off the clock.  Murphy Oil moved to compel arbitration and to dismiss the FLSA claims based on the plaintiffs having signed the Agreement.  Hobson, thereafter, filed an unfair labor practice charge and the NLRB’s General Counsel issued a complaint, alleging that Murphy Oil had violated Section 8(a)(1) of the Act.

At the heart of the dispute between the Board and its critics is the interpretation of Section 7 and 8(a)(1) of the Act as well as the application of the Federal Arbitration Act (“FAA”) and Supreme Court jurisprudence interpreting same.

Section 8(a)(1) of the Act states that it “shall be an unfair labor practice for an employer . . . to interfere with, restrain, or coerce employees” in the exercise of their Section 7 rights.  Section 7 of the Act states that employees shall have the right to “engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection[.]”  

The Supreme Court, on the other hand, in CompuCredit Corp. v. Greenwood, 132 S.Ct. 665, 673 (2012), held that where there is no specific “contrary congressional command” as to whether a claim can be arbitrated, the FAA “requires the arbitration agreement to be enforced according to its terms.”   The CompuCredit decision, however, only addressed the enforcement of an arbitration clause that barred access to courts, not a waiver of class or collection actions.  Moreover, the CompuCredit decision was not an employment-related dispute and did not involve the NLRA.  Thus, the specific issue at play in D.R. Horton and Murphy Oil remains unaddressed by the Supreme Court.

The Board’s rationale for upholding D.R. Horton is as follows:

(1)   Section 7 of the Act grants employees the  substantive right to act “concertedly for mutual aid or protection” and mandatory arbitration agreements that bar an employee’s ability to bring join, class, or collective workplace claims restrict this substantive right.

(2)   The conclusion that mandatory class action waivers are unlawful under the Act does not conflict with the FAA or its underlying policies because:

(a)    such a finding treats arbitration agreements no less favorably than any other private contract that conflicts with federal law;

(b)   Section 7 rights are substantive, which means that they cannot be waived under the FAA like procedural rights found in other statutes;

(c)    the “savings clause” in the FAA affirmatively provides that an arbitration agreement’s conflict with federal law is grounds for invalidating an agreement;

(d)   if there is a direct conflict between the NLRA and the FAA, the Norris-LaGuardia Act – which prevents private agreements that are inconsistent with the statutory policy of protecting employees’ rights to engage in concerted activity – requires the FAA to yield to the NLRA as necessary to accommodate Section 7 rights.

The Board criticized the Fifth Circuit’s decision for, among other things, giving too little weight to the “crucial point” that “the Board, like the courts, must carefully accommodate both the NLRA and the FAA” and not treat the FAA and its policies as “sweeping far more broadly than the statute or the Supreme Court’s decisions warrant.”

As to Member Johnson’s argument in his dissent that “there was no such thing as a class or collective action in any modern sense when the Act was passed in 1935” the Board majority found this point to be irrelevant because the language of “Section 7 is general and broad.”  As an example, the Board stated that the pursuit of unionization is “obviously protected” through the use of “modern communication technologies such as social media . . . regardless of whether workers during the Depression had access to Facebook.”

The Board also stated that contrary to the suggestion in Member Miscimarra’s dissent, it has not taken the position that the Act creates a guarantee to class certification or the equivalent; it does, however, create a right to “pursue joint, class or collective claims if and as available, without the interference of an employer-imposed restraint.”

What Does This Mean for Employers

After Murphy Oil, it is clear that the Board’s position and the position of at least some federal courts on this issue remain at odds.  If employers require employees covered by the Act to sign class action waivers, they should be aware that it could take significant time and money to ultimately have such an agreement upheld in federal court.  Clearly the last word on this issue will come only when the Supreme Court, as it is likely to do, considers the issue.  Until then employers that require such waivers should recognize that challenges through unfair labor practice charges will remain a fact of life.

By Michael Kun

Much has already been written about last week’s California Supreme Court decision in Duran v. U.S. Bank Nat’l Ass’n, a greatly anticipated ruling that will have a substantial impact upon wage-hour class actions in California for years to come.  Much more will be written about the decision as attorneys digest it, as parties rely on it in litigation, and as the courts attempt to apply it.

In a lengthy and unanimous opinion, the California Supreme Court affirmed the Court of Appeal’s decision to reverse a $15 million trial award in favor of a class of employees who claimed they had been misclassified as exempt, and to decertify the class.  How the$15 million award had been obtained in the first place has been the subject of much discussion and more than a bit of ridicule.  In short, the trial court had tried the case by essentially pulling names from a hat to determine which class members would be able to testify at trial, with the defendant precluded from presenting evidence as to other employees.  The California Supreme Court described this approach as a “miscarriage of justice.”   It then discussed in great length whether, when and how statistical sampling could be used in these cases, among other things.

Already, both the plaintiffs’ bar and the defense bar are claiming that the Supreme Court’s decision is a victory for them.

Because the Supreme Court did not foreclose the possibility that statistical evidence could be used to establish liability in these types of cases – instead, it recognized that “[s]tatistical sampling may provide an appropriate means of proving liability and damages in some wage and hour class actions” —  the plaintiffs’ bar is claiming victory.  To the extent they contend that Duran allows the use of statistical evidence to prove liability, they are ignoring the most important word in that sentence – “may” – along with the various caveats laid out by the Court.

Because the Supreme Court explained that the process must allow an employer to impeach the statistical model and litigate its affirmative defenses, and that there must be “glue” holding claims together beyond statistical evidence, the defense bar is likewise claiming victory.  But even they must admit that it is not the death blow to wage-hour class actions that they may have hoped for.

In truth, Duran is a unusual decision in that it provides more than a few quotes for plaintiffs’ lawyers and defense lawyers alike to rely on.

Ultimately, the most important language in Duran may be this: “A trial plan that relies on statistical sampling must be developed with expert input and must afford the defendant an opportunity to impeach the model or otherwise show its liability is reduced.”

What does this mean?

It means that some trial plans based on statistical sampling may be approved.

And it means that some trial plans based on statistical sampling may not be approved.

It means that a trial court’s analysis will turn, at least in part, on whether the employer will be able to impeach the model and show that it does not work.

And it means that, more than ever, these cases are going to require the parties to retain expert witnesses, and whether classes will be certified will turn on those expert witnesses.  Remember, the Court did not just say that a trial plan that relies on statistical sampling might be appropriate.  No, it said that such a trial plan “developed with expert input” might be appropriate.

The result of all of this is that, with the plaintiffs’ bar now emboldened because the door has not been shut on the use of statistical evidence on liability, employers may face even more wage-hour class actions in California than before.

And statistical experts can go buy those new houses, cars and boats they’ve been eyeing because their services will be in greater demand than ever.  They are the real victors in this decision.

By: Kara M. Maciel

The following is a selection from the Firm’s October Take 5 Views You Can Use which discusses recent developments in wage hour law.

  1. IRS Will Begin Taxing a Restaurant’s Automatic Gratuities as Service Charges

Many restaurants include automatic gratuities on the checks of guests with large parties to ensure that servers get fair tips. This method allows the restaurant to calculate an amount into the total bill, but it takes away a customer’s discretion in choosing whether and/or how much to tip the server. As a result of this removal of a customer’s voluntary act, the Internal Revenue Service (“IRS”) will begin classifying automatic gratuities as service charges, taxed like regular wages, beginning in January 2014.

This change is expected to be problematic for restaurants because the new treatment of automatic gratuities will complicate payroll accounting. Each restaurant will be required to factor automatic gratuities into the hourly wage of the employee, meaning the employee’s regular rate of pay could vary from day to day, thus adding a potential complication to overtime payments. Furthermore, because restaurants pay Social Security and Medicaid taxes on the amount that its employees claim in tips, restaurants are eligible for an income-tax credit for some or all of these payments. Classifying automatic gratuities as service charges, however, would lower that possible income-tax credit.

Considering that the IRS’s ruling could disadvantage servers as well, restaurants may now want to consider eliminating the use of automatic gratuities. Otherwise, employees could come under greater scrutiny in reporting their tips as a result of this ruling. Furthermore, these tips would be treated as wages, meaning upfront withholding of federal taxes and delayed access to tip earnings until payday.

Some restaurants, including several in New York City, have begun doing away with tips all together. These restaurants have replaced the practice of tipping with either a surcharge or increased food prices that include the cost of service. They can then afford to pay their servers a higher wage per hour in lieu of receiving tips. This is another way for restaurants to ensure that employees receive a sufficient wage, while simultaneously removing the regulatory burdens that a tip-system may impose.

  1. The New DOL Secretary, Tom Perez, Spells Out the WHD’s Enforcement Agenda

On September 4, 2013, the new U.S. Secretary of Labor, Tom Perez, was sworn in. During his remarks, Secretary Perez outlined several priorities for the U.S. Department of Labor (“DOL”), including addressing pay equity for women, individuals with disabilities, and veterans; raising the minimum wage; and fixing the “broken” immigration system.

Most notably, and unsurprisingly, Secretary Perez emphasized the enforcement work of the Wage and Hour Division (“WHD”). Just last year, the WHD again obtained a record amount—$280 million—in back-pay for workers. Employers can expect to see continued aggressive enforcement efforts from the WHD in 2013 and 2014 on areas such as worker misclassification, overtime pay, and off-the-clock work. In fact, Secretary Perez stated in his swearing-in speech that “when we protect workers with sensible safety regulations, or when we address the fraud of worker misclassification, employers who play by the rules come out ahead.” By increasing its investigative workforce by over 40 percent since 2008, the WHD has had more time and resources to undertake targeted investigation initiatives in addition to investigations resulting from complaints, and that trend should continue.

  1. DOL Investigates Health Care Provider and Obtains $4 Million Settlement for Overtime Payments

On September 16, 2013, the DOL announced that Harris Health System (“Harris”), a Houston health care provider of emergency, outpatient, and inpatient medical services, had agreed to pay more than $4 million in back wages and damages to approximately 4,500 current and former employees for violations of the overtime and recordkeeping provisions of the Fair Labor Standards Act (“FLSA”). The DOL made this announcement after the WHD completed a more than two-year investigation into the company’s payment system, prompted by claims that employees were not being fully compensated.

Under the FLSA, employers typically must pay their non-exempt employees an overtime premium of time-and-one-half their regular rate of pay for all hours worked in excess of 40 hours in a workweek. Employers within the health care industry have special overtime rules. Notably, for all employers, an employee’s “regular rate of pay” is not necessarily the same as his or her hourly rate of pay. Rather, an employee’s “regular rate of pay” includes an employee’s “total remuneration” for that week, which consists of both the employee’s hourly rate as well as any non-discretionary forms of payment, such as commissions, bonuses, and incentive pay. The FLSA dictates that an employee’s “regular rate” of pay is then determined by dividing the employee’s total remuneration for the week by the number of hours worked that week.

The DOL’s investigation concluded that Harris had failed to: (i) include incentive pay when determining its employees’ regular rate of pay for overtime purposes, and (ii) maintain proper overtime records. As a result, Harris owed its employees a total of $2.06 million in back wages and another $2.06 million in liquidated damages.

Because an employee’s “total remuneration” for a workweek may consist of various forms of compensation, employers must consistently evaluate and assess their payment structures and payroll systems to determine the payments that must be included in an employee’s overtime calculations beyond just the hourly wage. Additionally, employers should conduct periodic audits to ensure that they are maintaining full and accurate records of all hours worked by every employee.

  1. Federal Court Strikes Down DOL Tip Pooling Rule

In 2011, the WHD enacted a strict final rule related to proper tip pooling and service charge practices. This final rule was met with swift legal challenges, and, this summer, the U.S. District Court for the District of Oregon (“District Court”) concluded that the DOL had exceeded its authority when implementing its final rule. See Oregon Rest. and Lodging Assn. v. Solis, No. 3:12-cv-01261 (D. Or. June 7, 2013).

Inconsistent interpretations of the FLSA among various appellate courts have created confusion for both employers and courts regarding the applicability of valid tip pools. One of the most controversial interpretations of the FLSA occurred in early 2010, when the U.S. Court of Appeals for the Ninth Circuit held that an employer could require servers to pool their tips with non-tipped kitchen and other “back of the house staff,” so long as a tip credit was not taken and the servers were paid minimum wage. See Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). According to the Ninth Circuit, nothing in the text of the FLSA restricted tip pooling arrangements when no tip credit was taken; therefore, because the employer did not take a tip credit, the tip pooling arrangement did not violate the FLSA.

In 2011, the DOL issued regulations that directly conflicted with the holding in Woody Woo. As a result, employers could no longer require mandatory tip pooling with back-of-the-house employees. In conjunction with this announcement, the DOL issued an advisory memo directing its field offices nationwide, including those within the Ninth Circuit, to enforce its final rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.

Shortly after the issuance of the DOL’s final rule, hospitality groups filed a lawsuit against the DOL challenging the agency’s regulations that exclude back-of-the-house restaurant workers from employer-mandated tip pools. The lawsuit sought to declare the DOL regulations unlawful and inapplicable to restaurants that pay employees who share the tips at least the federal or applicable state minimum wage with no tip credit. On June 10, 2013, the District Court granted the plaintiffs’ summary judgment motion, holding that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The District Court stated that the language of Section 203(m) of the FLSA is clear and unambiguous; it only imposes conditions on employers that take a tip credit.

The District Court’s decision may have a large impact on the tip pool discussion currently before courts across the country, especially if employers in the restaurant and hospitality industries begin to challenge the DOL’s regulations. Given the District Court’s implicit message encouraging legal challenges against the DOL, the status of the law regarding tip pooling is more uncertain than ever. Although the decision is a victory for employers in the restaurant and hospitality industry, given the aggressive nature of the DOL, employers in all circuits should still be extremely careful when instituting mandatory tip pool arrangements, regardless of whether a tip credit is being taken.

  1. Take Preventative Steps When Facing WHD Audits

In response to a WHD audit or inspection, here are several preventative and proactive measures that an employer can take to prepare itself prior to, during, and after the audit:

  • Prior to any notice of a WHD inspection, employers should develop and implement a comprehensive wage and hour program designed to prevent and resolve wage hour issues at an early stage. For example, employers should closely examine job descriptions to ensure that they reflect the work performed, review time-keeping systems, develop a formal employee grievance program for reporting and resolving wage and hour concerns, and confirm that all written time-keeping policies and procedures are current, accurate, and obeyed. Employers should also conduct regular self-audits with in-house or outside legal counsel (to protect the audit findings under the attorney-client privilege) and ensure that they address all recommendations immediately.
  • During a DOL investigation, employers should feel comfortable to assert their rights, including requesting 72 hours to comply with any investigative demand, requesting that interviews and on-site inspection take place at reasonable times, participating in the opening and closing conferences, protecting trade secrets and confidential business information, and escorting the investigator while he or she is at the workplace.
  • If an investigator wants to conduct a tour of an employer’s facility, an employer representative should escort the investigator at all times while on-site. While an investigator may speak with hourly employees, the employer may object to any impromptu, on-site interview that lasts more than five minutes on the grounds that it disrupts normal business operations.
  • If the DOL issues a finding of back wages following an investigation, employers should consider several options. First, an employer can pay the amount without question and accept the DOL’s findings. Second, an employer can resolve disputed findings and negotiate reduced amounts at an informal settlement conference with the investigator or his or her supervisor. Third, an employer can contest the findings and negotiate a formal settlement with the DOL’s counsel. Finally, an employer may contest the findings, prepare a defense, and proceed to trial in court.

In addition, employers should review our WHD Investigation Checklist, which can help them ensure that they have thought through all essential wage and hour issues prior to becoming the target of a DOL investigation or private lawsuit.

Following these simple measures could significantly reduce an employer’s exposure under the FLSA and similar state wage and hour laws.

by John F. Fullerton III

The U.S. Court of Appeals for the Second Circuit recently took a significant step toward bringing uniformity to the law of class and collective action waivers under the Fair Labor Standards Act (FLSA). 

In Sutherland v. Ernst & Young LLP, the court held that employees can be contractually compelled to arbitrate their claims on an individual basis, and thereby waive their right to participate in a FLSA collective action. The decision is another in a series of cases that have required employees to arbitrate employment-related claims on an individual basis when they have clearly agreed to do so.

A little background is in order. In its 2011 decision in AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court held that, under the Federal Arbitration Act (FAA), states must enforce arbitration agreements even when the agreement requires individual, and not class action, arbitration. The Court found that states may not apply generally applicable contract defenses, such as unconscionability,” in a way that “disfavors arbitration.” 

Foreshadowing the direction of the law on this issue, in March of this year, the Second Circuit in Parisi v. Goldman, Sachs & Co., reversed a district court decision that had held that an employment agreement’s express “preclusion of class arbitration would make it impossible for [plaintiff] to arbitrate a Title VII pattern-or-practice claim, and that consequently, the clause effectively operated as a waiver of a substantive right under Title VII.” The court noted a few exceptions to the liberal policy favoring arbitration, in which the costs associated with the actions are prohibitive and preclude plaintiffs from bringing such claims. This is known as the “effective vindication” doctrine. The court observed that the doctrine was inapplicable in employment discrimination litigation.

In June, the U.S. Supreme Court issued its decision in American Express Co. v. Italian Color Restaurant, which addressed the issue of whether the “effective vindication” doctrine precluded class arbitration waivers in the antitrust context where expert testimony is required and therefore, it was argued, would be prohibitively expensive for individuals to pursue without the availability of class arbitration. The Court held that the FAA does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.

That brings us to Sutherland, and the question of whether these legal developments that apply to other types of class actions apply equally to FLSA collective actions, where the amounts at issue for each individual member of the potential class may indeed be much smaller than in a typical discrimination case. As a condition of employment, Sutherland had agreed to “binding arbitration … on an individual basis only.” She later filed a collective action under the FLSA. 

In its pre-Concepcion decision, the district court invalidated the agreement because plaintiff demonstrated that the waiver essentially resulted in her inability to assert the claims. The court reasoned that Sutherland, because of the small amount of potential individual recovery, (a) would not pursue her claims individually provided the high costs of litigation and (b) would be unable to obtain legal representation for such a small claim, which could be obtained on a class basis. 

Post-Concepcion, the employer moved for reconsideration, but the motion was denied. The court reasoned that the applicability of Concepcion was a “close question” but reconfirmed its view that Sutherland was unable to vindicate her rights on an individual basis. That decision was in conflict with other district court decisions within the Second Circuit under the FLSA, which had found that Concepcion was contrary to any argument that an absolute right to collective action is consistent with the FAA, and instead concluded that plaintiffs could be required to pursue their claims on an individual basis in arbitration. 

The Second Circuit has now subscribed to the same view, finding that the reasoning of the Supreme Court’s decision in Italian Colors abrogated the district court’s basis for invalidating the collective action waiver at issue. The court observed that there was no “contrary congressional command” requiring class-wide arbitration in the FLSA context, and that the recent Supreme Court decisions on class waivers pointed to the same conclusion. The court noted that a substantial majority of circuit and district courts had already concluded that the FLSA does not preclude the waiver of collective action claims. 

Pursuing FLSA claims in a collective action is not a “right;” it is a contractually waivable procedural mechanism that does not prevent an individual from effectively vindicating his or her claims for unpaid overtime wages on an individual basis through arbitration. The Second Circuit’s Sutherland decision therefore opens the door further to employers to draft broad class and collective action waivers in their handbooks and employment agreements that include FLSA claims and require such claims to be pursued in individual arbitrations.

By Michael Kun

“Hybrid” wage-hour class actions are by no means a new concept. 

In a “hybrid” class action, the named plaintiff files suit seeking to represent classes under both the federal Fair Labor Standards Act (“FLSA”) and state wage-hour laws.  As the potential recovery and limitations periods for these claims are often very different, so, too, are the mechanisms used for each. 

In FLSA claims, where classes can be “conditionally certified” if a plaintiff satisfies a relatively low burden of establishing that class members are “similarly situated” – a phrase nowhere defined in the statute – only those persons who affirmatively “opt in” to the lawsuit become class members.  In state wage-hour claims, governed by Federal Rule 23 (or a state law equivalent), a plaintiff generally must satisfy a higher standard – establishing numerosity, commonality, typicality, adequacy and superiority – and, if a class is certified, only those persons who affirmatively “opt out” are removed from the class.

The differences between these two mechanisms can be confusing even for lawyers, particularly in “hybrid” class actions where both are used simultaneously.  It is not difficult to understand how class members would find such proceedings even more confusing, especially if they receive notices telling them how to “opt in” to one type of wage-hour class and “opt out” of another, where the claims themselves sound identical to a layperson.  If class members wish to participate in both classes, they need to figure out that they must “opt in” to the FLSA class and do nothing as to the state law class.  And if they wish to participate in neither, they need to figure out that they should do nothing as to the FLSA class, yet “opt out” of the state class.  Anyone who has every received a class notice in the mail knows that, try as the court and parties might, those notices can be as difficult to navigate as trying to read the instructions for assembling a new bicycle. 

Because of the differences between the two mechanisms, the way the claims proceed under them, and the potential confusion, some employers have successfully argued that the two mechanisms were incompatible – a plaintiff had to choose whether to pursue federal or state law claims.  However, the circuit courts around the country have increasingly weighed in, ruling that the claims are not incompatible and that plaintiffs may pursue “hybrid” class actions.  Now, the Ninth Circuit has joined the chorus, issuing an opinion in Busk v. Integrity Staffing in which it determined that federal and state wage-hour claims may “peacefully co-exist” in the same action.

Unless and until the Supreme Court weighs in with a different opinion, it would seem that they “hybrid” class action is here to stay.  For employers, that means increased potential exposure in wage-hour class actions as plaintiffs can and will pursue both federal and state claims in the same action.  And it also means increased litigation activities, as parties in “hybrid” class actions normally will deal with two separate sets of class certification briefing – one on the FLSA claims, one on the state law claims – as well as two notices if classes are certified on each. 

The upside for employers?  To the extent there is one, it is that the inclusion of the FLSA claim ensures that the case can be removed to federal court at the outset.           

by Stuart Gerson

In Genesis Healthcare Corp. v. Symczyk, the Unites States Supreme Court held that a collective action under the FLSA was properly dismissed for lack of subject matter jurisdiction after the named plaintiff ignored the employer’s Fed. R. Civ. P. 68 offer of judgment. The Court concluded that the plaintiff had no personal interest in representing putative, unnamed claimants, nor did she have any other continuing interest that would preserve her suit from mootness.

The plaintiff’s collective action was originally filed in District Court for the Eastern District of Pennsylvania, and the employer made an offer of judgment that would have fully satisfied the plaintiff’s individual claim before any other claimants joined the case. Although the plaintiff did not respond to the offer of judgment, the District Court dismissed the case as moot.

The Third Circuit reversed and held that, while the plaintiff’s individual claim was moot, her collective action could go forward on the theory that a defendant should not be allowed to “pick off” named plaintiffs and thereby avoid certification of a collective action. 

The Supreme Court stated that the Courts of Appeals disagree over whether a Rule 68 offer that fully satisfies a plaintiff’s individual claim renders that plaintiff’s claim moot even if the offer is not accepted. However, the plaintiff in Symczyk had conceded that issue below. The Supreme Court therefore assumed (but did decide) that the plaintiff’s individual claim was moot even though she had not accepted the offer of judgment.

Distinguishing several cases with regard to headless classes being able to go forward where a named plaintiff’s case becomes moot, Justice Thomas, writing for a 5-4 majority (a straight conservative/liberal breakout) reversed the Circuit, holding that well-settled mootness principles control and that when the named plaintiff’s suit became moot (because the ignored Rule 68 motion covered all of her interests, including attorneys’ fees), she had no personal interest remaining that would allow her to represent others.

In so doing, the Supreme Court’s majority opined that while under Fed. R. Civ. P. 23, a putative class acquires an independent legal status once it is certified, no such independent status is conferred by” conditional certification” under the FLSA.

You may recall that I recently blogged about the Court’s decision in the Comcast case, suggesting that it presented a useful precedent that could be employed, not just in Rule 23 cases, but under the FLSA’s collective action jurisprudence, to require a court to hear merits arguments prior to certification and rule on standing then.  In fact, the Court’s decision today not only punctuates that view, it suggests that the FLSA allows for more stringent analysis of standing, even after “conditional certification.”