In a much anticipated filing with the Fifth Circuit Court of Appeal in State of Nevada, et a. v. United States Department of Labor, et al, the United States Department of Labor has made clear that it is not defending the Obama Administration’s overtime rule that would more than double the threshold for employees to qualify for most overtime exemptions. However, the Department has taken up the appeal filed by the previous Administration to reverse the preliminary injunction issued blocking implementation of the rule, requesting that the Court overturn as erroneous the Eastern District of Texas’ finding, and reaffirm the Department’s authority to establish a salary level test. And the Department has requested that the Court not address the validity of the specific salary level set by the 2016 final rule because the Department intends to revisit the salary level threshold through new rulemaking.

The litigation stems from action taken by the Department in May 2016 to issue a final rule that would have increased the minimum salary threshold for most overtime exemptions under the Fair Labor Standards Act (“FLSA”) from $23,660 per year to $47,476 per year. The rule was scheduled to become effective on December 1, 2016, but a federal judge issued a temporary injunction blocking its implementation just days beforehand.

Section 13(a) of the FLSA exempts from the Act’s minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional [(“EAP”)] capacity * * * [specifically providing,] as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor].” 29 U.S.C. § 213(a)(1). To be subject to this exemption, a worker must (1) be paid on a salary basis; (2) earn a specified salary level; and (3) satisfy a duties test.  In enjoining the 2016 rule, the District Court for the Eastern District of Texas reasoned that the salary-level component of this three-part test is unlawful, concluding that “Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level,” and that the statute “does not grant the Department the authority to utilize a salary-level test.”

In seeking reversal of the preliminary injunction, the Department has argued that the Fifth Circuit expressly rejected the claim that the salary-level test is unlawful in Wirtz v. Mississippi Publishers Corp. In Wirtz, the Court reasoned that “[t]he statute gives the Secretary broad latitude to ‘define and delimit’ the meaning of the term ‘bona fide executive * * * capacity,” and he rejected the contention that “the minimum salary requirement is arbitrary or capricious.”  Further, the Department argues that every circuit to consider the issue has upheld the salary-level test as a permissible component of the EAP regulations.

By many accounts, the Department’s recently-appointed Labor Secretary, Alexander Acosta, has made clear that he does not think the salary level should be at $47,476 per year, but rather set at a more reasonable level between $30,000 and $35,000 per year. While Secretary Acosta may disagree with the salary level of the 2016 rule, the Department’s brief seems to make clear that he wants to ensure that he has the authority to set any salary threshold.

In issuing the preliminary injunction, the District Court did not address the validity of the salary level threshold set by the 2016 rule. Because the injunction rested on the legal conclusion that the Department lacks authority to set a salary level, it may be reversed on the ground that the legal ruling was erroneous. As a result, by requesting that the Fifth Circuit not address the validity of the salary level set by the 2016 rule, should the Court reverse the preliminary injunction without ruling on the salary level’s validity, it is unclear whether the 2016 rule will immediately go into effect pending new rulemaking. Employers need to stay tuned.

When an employer pays the minimum wage (or more) instead of taking the tip credit, who owns any tips – the employer or the employee? In Marlow v. The New Food Guy, Inc., No. 16-1134 (10th Cir. June 30, 2017), the United States Court of Appeals for the Tenth Circuit held they belong to the employer, who presumably can then either keep them or distribute them in whole or part to employees as it sees fit. This directly conflicts with the Ninth Circuit’s decision last year in Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.3d 1080, 1086-89 (9th Cir. 2016), pet for cert. filed, No. 16-920 (Jan. 19, 2017) and likely sets up a showdown this fall in the U.S. Supreme Court.

The plaintiff in Marlow, who was paid $12 per hour, alleged her employer was obligated to turn over to her a share of all tips paid by catering customers. The Tenth Circuit first held that the statutory language of 29 U.S.C. §203(m), which allows employers the option of paying a reduced hourly wage of $2.13 so long as employees receive enough tips to bring them to the current federal minimum of $7.25, does not apply when the employer pays the full minimum wage, and thus the plaintiff had no claim to any tips. In this regard the Court followed the 2010 decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010), as well as a number of cited district court cases.

Crucially, the Court went on to hold that the U.S. Department of Labor (DOL) had no authority to promulgate its post-Woody Woo regulation, 76 Fed. Reg. 18,855 (April 5, 2011), amending 29 C.F.R. §531.52, which, contrary to Woody Woo, states that tips are the property of the employee whether or not the employer takes the tip credit under section 2013(m). In so doing, it held that although agencies may promulgate rules to fill “ambiguities” or “gaps” in statutes, they cannot regulate when there is no ambiguity or gap that the agency was authorized to fill. It then found (1) there were no “ambiguities” in the statute that needed to be filled, as the statute clearly only applied when an employer sought to use the tip credit; (2) there were no undefined terms in the statute; and (3) there was no statutory directive to regulate the ownership of tips when the employer is not taking the tip credit. In so doing, the Tenth Circuit expressly rejected the Ninth Circuit’s decision last year in Oregon Restaurant, which held that the DOL had the discretion to issue the regulation precisely because the statute was silent on the subject.

Notably, the Supreme Court has four times extended the time for DOL to file its opposition to the petition for certiorari in Oregon Restaurant, most recently on June 30 granting an extension until September 8, 2017. It appears the current DOL may not yet be not sure what position to take as to the validity of its Obama-era regulation. Marlow’s direct conflict with Oregon Restaurant increases the likelihood that either DOL may choose not to defend the regulation or that the Supreme Court will grant review to resolve the conflict when it returns in October.

In a move likely to impact employers in a variety of industries, U.S. Secretary of Labor Alexander Acosta announced on June 7, 2017 that the Department of Labor has withdrawn the Administrator’s Interpretations (“AIs”) on independent contractor status and joint employment, which had been issued in 2015 and 2016, respectively, during the tenure of former President Barack Obama.

The DOL advised that the withdrawal of the two AIs “does not change the legal responsibilities of employers under the Fair Labor Standards Act . . . , as reflected in the department’s long-standing regulations and case law.” As discussed below, however, this announcement may reflect both a change in the DOL’s enforcement priorities going forward, and a return to the traditional standards regarding independent contractor and joint employment status that had been relied on by federal courts prior to the issuance of the AIs.

Independent Contractor Status

In determining whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act (“FLSA”), courts have historically relied on the six-factor “economic realities test,” which considered: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss; (3) the nature and extent of the worker’s investment in his/her business; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. While no single factor was meant to be determinative, courts typically placed primary emphasis on the degree of control exercised by the putative employer.

Under the Obama administration, the DOL increased its emphasis on the potential misclassification of workers as independent contractors. As part of this initiative, the agency issued Administrator’s Interpretation No. 2015-1 on July 15, 2015.  While this guidance nominally reaffirmed DOL’s support for use of the “economic realities test” to determine independent contractor status, it reflected a far more aggressive interpretation of several of the six “economic realities” factors than that historically used by courts, and emphasized the agency’s position that most workers should be classified as employees under the FLSA.

The 2015 AI rejected courts’ historical emphasis on the “control” factor, and focused instead on workers’ entrepreneurial activities, and whether they were “economically dependent” on the putative employer or actually in business for themselves. For example, while courts had merely considered whether a worker had an opportunity for profit or loss, the AI emphasized that the critical inquiry should be whether the worker had the ability to make decisions and use his/her managerial skill and initiative to affect the opportunity for profit or loss.  Similarly, while courts focused on the nature and extent of a worker’s investment in his/her business, the AI stated that a worker’s investment must be significant in magnitude when compared to the employer’s investment in its overall business, in order for the worker to properly be classified as an independent businessperson.  The AI further indicated that courts had been focusing on the wrong criteria when evaluating whether workers possessed “special skills,” stating that only business skills, judgment, and initiative, not specialized technical skills, were relevant to the independent contractor inquiry.

With the withdrawal of the 2015 AI, one may reasonably assume that the DOL has chosen to reject this more aggressive interpretation of the “economic realities test,” and return to the traditional independent contractor analysis used by courts before the AI was issued. If this is the case, employers may expect to see a decreased emphasis on workers’ entrepreneurial activities in DOL enforcement proceedings, and a return to the previous emphasis on the degree of control exerted by the putative employer over workers.

It remains to be seen whether this withdrawal indicates that the current administration views potential misclassification of independent contractors as less of a priority than the previous administration did. A key barometer will be the level of DOL activity in agency audits or enforcement actions related to independent contractor status.  Any change in the DOL’s focus, however, will likely not impact the spread of misclassification litigation (including class and collective actions), which has continued to increase in recent years.

Joint Employment

With the recent growth of the “fissured workplace” or “gig economy,” the Obama administration also directed significant attention to the concept of joint employment.  In light of this development, the former Administrator of the DOL’s Wage and Hour Division issued Administrator’s Interpretation No. 2016-1 on January 20, 2016, to clarify DOL’s position on the increasing number of circumstances under which two or more entities may be deemed joint employers.

In its August 2015 decision in Browning-Ferris Industries of California, Inc., the National Labor Relations Board expanded the concept of joint employment under the National Labor Relations Act, holding that two entities may be joint employers if one exercises either direct or indirect control over the terms and conditions of the other’s employees or reserves the right to do so.  The 2016 AI similarly expanded the circumstances under which the DOL would deem two entities to be joint employers under the FLSA.

For the first time, the AI differentiated between two different types of joint employment. The existing joint employment regulations were deemed to apply to “horizontal joint employment,” a situation where a worker has an employment relationship with two or more related or commonly owned business entities.  “Vertical joint employment,” on the other hand, would exist where an individual performed work for an intermediary employer, but was also economically dependent on another employer, such as a staffing agency.  The AI stated that, in horizontal joint employment scenarios, the DOL would apply the FLSA regulations to assess whether a joint employment relationship existed between the two business entities.  In a vertical joint employment scenario, however, DOL would focus on the relationship between the worker and each business entity, applying the “economic realities test” to determine whether the worker was economically dependent on the potential joint employer(s).

The AI made it clear that the purpose of this revised analysis was to expand the number of businesses deemed employers under the FLSA, stating that “[t]he concept of joint employment, like employment generally, should be defined expansively under the FLSA . . . .” This would, in turn, increase the number of entities potentially liable for wage and hour violations, allowing employees and the DOL to pursue claims against multiple potential employers simultaneously.

With the withdrawal of the 2016 AI, presumably the DOL has chosen to reject the more expansive horizontal/vertical joint employment analysis, and the agency’s stated intent to rely on the “economic realities test” in the joint employment context. Instead, the agency will likely rely on the existing regulations regarding joint employment, which state that a joint employment relationship may exist where: (1) there is an arrangement between employers to share an employee’s services; (2) one employer is acting directly or indirectly in the interest of the other employer(s) in relation to an employee; or (3) multiple employers are not completely disassociated with respect to the employment of a particular employee, and may be deemed to share direct or indirect control of the employee by virtue of the fact that one employer controls, is controlled by, or is under common control with the other employer(s).

Similarly, as with the independent contractor scenario, the DOL’s withdrawal of the 2016 AI may reflect a change in DOL’s enforcement priorities with regard to joint employment. As noted above, however, any such change in administrative priorities will likely not affect the scope of private litigation in this area.

Impact on Employers

While the DOL’s action does not impact employers’ legal responsibilities under the FLSA, this change presumably reflects a reversion to the traditional independent contractor and joint employment standards that were in effect prior to the issuance of the AIs. The withdrawal of the AIs may reflect a shift in the DOL’s enforcement priorities, but private litigation regarding independent contractor and joint employment status remains prevalent.

A New Year and a New Administration: Five Employment, Labor & Workforce Management Issues That Employers Should MonitorIn the new issue of Take 5, our colleagues examine five employment, labor, and workforce management issues that will continue to be reviewed and remain top of mind for employers under the Trump administration:

Read the full Take 5 online or download the PDF. Also, keep track of developments with Epstein Becker Green’s new microsite, The New Administration: Insights and Strategies.

The District Court for the Eastern District of Texas has denied the U.S. Department of Labor’s application to stay the case in which the district court enjoined the DOL’s new overtime regulations. The DOL had asked the court for a stay while the Fifth Circuit Court of Appeals considered an interlocutory appeal of the injunction.

As wage and hour practitioners know:

  • In May 2016, the U.S. Department of Labor announced that it would implement new regulations increasing the salary threshold for the executive, administrative, and professional overtime exemptions to $47,476 ($913 per week);
  • In September 2016, a group of 21 states filed a Complaint in the Eastern District of Texas challenging the new regulations. A similar lawsuit was filed in the same court by several private industry groups, and those plaintiffs moved for summary judgment; and
  • In November 2016, the district court issued a nationwide preliminary injunction against the new regulations. The district court made a preliminary conclusion that, because the FLSA did not reference any salary thresholds, the DOL had exceeded its authority.

The Fifth Circuit Court of Appeals granted the DOL’s application for interlocutory review, and ordered that briefing be concluded by January 31, 2017.

The DOL then sought a stay of the proceedings before the district court.

In denying the DOL’s motion, the district court stated that the decision to grant or deny a discretionary stay pending an interlocutory appeal depends on: (1) whether the application is likely to succeed on the merits; (2) whether the applicant will be irreparably injured without a stay; (3) whether a stay will substantially injure other parties; and (4) where the public interest lies.

The district court stated that the DOL’s application argued only that the outcome of the case “will likely be controlled in large part by the Fifth Circuit’s decision on appeal.” Because the DOL did not “present a substantial case on the merits,” its application for a stay was denied.

Accordingly, the proceedings before the Fifth Circuit and the district court will proceed concurrently. We will continue to monitor each of these matters, and share any significant developments.

The new episode of Employment Law This Week offers a year-end roundup of the biggest employment, workforce, and management issues in 2016:

  • Impact of the Defend Trade Secrets Act
  • States Called to Ban Non-Compete Agreements
  • Paid Sick Leave Laws Expand
  • Transgender Employment Law
  • Uncertainty Over the DOL’s Overtime Rule and Salary Thresholds
  • NLRB Addresses Joint Employment
  • NLRB Rules on Union Organizing

Watch the episode below and read EBG’s Take 5 newsletter, “Top Five Employment, Labor & Workforce Management Issues of 2016.”

Berger v. National Collegiate Athletic Association,
No. 14-cv-1710 (7th Cir. Dec. 5, 2016)

Colleges and universities, at least in the jurisdiction of the Seventh Circuit Court of Appeals, surely breathed a collective sigh of relief earlier this month when the Court held that student athletes were not employees under the Fair Labor Standards Act (“FLSA”) and thus were not entitled to minimum wage.

Former student athletes at the University of Pennsylvania sued Penn, the National Collegiate Athletic Association (“NCAA”) and over 120 other colleges and universities that have Division I (the division that covers the largest schools) athletic programs, arguing that student athletes were employees entitled to the minimum wage. Interestingly, the court declined to use any of the multi-factor tests to resolve the issue because those tests would not capture the true nature of the relationship.

Instead, the court relied on the U.S. Department of Labor’s Field Operations Handbook, which indicates that students who participate in extracurricular activities are not employees of the school. In addition, the court took a common sense approach and recognized that college athletes participate in these programs for reasons wholly unrelated to immediate compensation and without any expectation of earning an income. Viewing student athletes as employees also would undermine what the court recognized as a “revered tradition of amateurism in college sports.”

Thus, the Seventh Circuit has added one more nail to the coffin of student athletes as employees. While some may argue that large colleges and universities should share some of the significant income they receive from football and other well attended games with the student athletes, that could signal a slide down a slippery slope. If student athletes were considered employees, what about student actors, orchestra members and any other students involved in extracurricular activities where performances mandate an admission fee? And in the last analysis, students receive a variety of non-economic benefits that distinguish these activities from “employment” within the meaning of the FLSA.

Overtime Clock Faces - Abstract PhotoWe have written more than a few times here about the new Fair Labor Standards Act (“FLSA”) overtime rules that were scheduled to go into effect on December 1, 2016, dramatically increasing the salary threshold for white collar exemptions.

Most recently, we wrote about the November 22, 2016 nationwide injunction entered by a federal judge in Texas, enjoining the Department of Labor (“DOL”) from enforcing those new rules on the grounds that the DOL had overstepped its bounds.

The injunction threw the new rules into a state of limbo, as employers and employees alike were left to wonder whether the DOL would appeal that decision to the Fifth Circuit Court of Appeals.

Under normal circumstances, one would assume that the DOL would appeal that ruling.  However, normal circumstances do not exist.  With a new President set to be sworn in shortly, and with a new Secretary of Labor presumably to be appointed thereafter, there was much speculation about what the DOL would do.

The question has now been answered – at least for the short term.

On December 1, 2016 – perhaps not coincidentally, the same day the rules were to go into effect – the Department of Justice (“DOJ”) filed an appeal on behalf of the DOL. 

The DOL has issued a brief statement about its position, which may be found here: https://www.dol.gov/whd/overtime/final2016/litigation.htm

In short, it is the DOL’s position that the salary basis test has been part of the FLSA overtime rules since 1940, and that the new rules were the result of a comprehensive rule-making process that complied with the law.

While the notice of appeal has been filed, it remains difficult to predict whether or how long the appeal will in fact proceed.  Unless the President-elect should indicate otherwise, it is certainly possible that the new Secretary of Labor will pull the plug on the appeal shortly after he or she assumes the role.

We will continue to monitor the case and share any significant developments. In the meantime, it would appear safe to say that employers should feel comfortable that they need not comply with the new rules, and that those who already implemented or announced changes prior to the injunction should seek guidance on how best to proceed if they intend to rescind those changes.

Stop SignWe have written often in the past several months about the new FLSA overtime rules that were scheduled to go into effect in little more than a week, dramatically increasing the salary thresholds for “white collar” exemptions and also providing for automatic increases for those thresholds.

In our most recent piece about the important decisions employers had to make by the effective date of December 1, 2016, careful readers noticed a couple of peculiar words — “barring … a last-minute injunction.”

On November 22, 2016, a federal judge in the Eastern District of Texas entered just such an injunction, enjoining the Department of Labor from implementing the new rules on a nationwide basis.

“The court determines that the state plaintiffs have satisfied all prerequisites for a preliminary injunction,” wrote United States District Court Judge Amos Mazzant III. “The state plaintiffs have established a prima facie case that the Department’s salary level under the final rule and the automatic updating mechanism are without statutory authority.”

The state plaintiffs had argued that the Department of Labor usurped Congress’ authority in establishing new salary thresholds. Finding that the Department had overstepped its bounds, Judge Mazzant wrote, “If Congress intended the salary requirement to supplant the duties test, then Congress and not the department, should make that change.”

The injunction could leave employers in a state of limbo for weeks, months and perhaps longer as injunctions often do not resolve cases and, instead, lead to lengthy appeals. Here, though, the injunction could spell the quick death to the new rules should the Department choose not to appeal the decision in light of the impending Donald Trump presidency. We will continue to monitor this matter as it develops.

To the extent that employers have not already increased exempt employees’ salaries or converted them to non-exempt positions, the injunction will at the very least allow employers to postpone those changes. And, depending on the final resolution of this issue, it is possible they may never need to implement them.

The last-minute injunction puts some employers in a difficult position, though — those that already implemented changes in anticipation of the new rules or that informed employees that they will receive salary increases or will be converted to non-exempt status effective December 1, 2016.

Whether employers can reverse salary increases they have already implemented is an issue that should be addressed carefully with legal guidance.

As for those employers that informed employees of changes that would go into effect on December 1, 2016, they, too, should seek legal guidance as to how to communicate with employees that those announced changes will not go into effect at that time.

While the FLSA rules are now enjoined, employers must now be mindful not only of morale issues that might result from not providing employees with raises that were implemented or announced, but also of potential breach of contract claims.

On January 20, 2016, the DOL issued Wage and Hour Division Administrator’s Interpretation 2016-1 (“AI”) providing that businesses that use employees of third parties may be considered “joint employers” of those workers for purposes of compliance with the FLSA. The genesis of the joint-employment AI is the DOL’s expectation that businesses may seek to avoid the high costs and potential liabilities of maintaining their own employee workforce.

Although this AI is less than a year old, there are longstanding federal regulations on joint employment stating that when the employee performs work that simultaneously benefits two or more employers, or works for two or more employers at different times during the workweek, a joint-employment relationship generally will be considered to exist in situations where: (1) employers share an employee’s services, (2) one employer acts in the interest of the other employer in relation to the employee, or (3) one employer controls the other employer and therefore shares control of the other employer.

The DOL’s AI on joint employment goes far beyond the streamlined regulations in explaining the complex and comprehensive analysis to determine whether joint employment exists. To that end, the AI focuses on the DOL’s newly envisioned concepts of “horizontal” and “vertical” joint employment.

“Horizontal” Joint Employment

The DOL has explained that “horizontal” joint employment exists where an employee has employment relationships with two or more related or commonly owned businesses. In assessing horizontal joint employment, the DOL focuses on the relationship between the businesses, i.e., putative joint employers, but not the putative employee’s relationship between and among the putative joint employers. The DOL provides, as an example, a server who works for two different restaurants that are commonly owned.

To determine whether horizontal joint employment exists, the DOL considers the following eight criteria:

  1. Is there common ownership or management with respect to the putative joint employers?
  2. Do the putative joint employers have common officers, directors, executives, or directors?
  3. Do the putative joint employers share control over operations of both businesses?
  4. Are the operations of the putative joint employers’ businesses interrelated?
  5. Do the putative joint employers supervise the same employees?
  6. Do the putative joint employers treat employees as part of a pool available to both businesses?
  7. Do the putative joint employers share clients or customers?
  8. Do the putative joint employers maintain any agreements?

“Vertical” Joint Employment

The DOL has explained that “vertical” joint employment occurs when a worker employed by a third party enters into a work relationship with the putative joint employer. This arrangement commonly involves staffing agencies.

The AI states that in a vertical employment arrangement, the DOL considers the relationship between the putative joint employers and the worker. The DOL will first examine whether the worker’s direct employer, e.g., the staffing agency, is actually an employee of the putative joint employer. If such a relationship exists, then the DOL automatically finds joint employment.

If no such relationship exists, the DOL will then conduct an “economic realities” analysis to determine whether an employee of one business, e.g., the staffing agency, is economically dependent on another business that is the beneficiary of the services performed by the staffing agency’s employee. The AI provides the following economic realities criteria:

  • Directing, Controlling, or Supervising the Work Performed. To the extent that the work performed by the employee is controlled or supervised by the putative joint employer beyond a reasonable degree of contract performance oversight, such control suggests that the employee is economically dependent on the putative joint employer. The potential joint employer’s control can be indirect and still be sufficient to indicate economic dependence by the employee.
  • Controlling Employment Conditions. To the extent that the putative joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay, such control indicates that the employee is economically dependent on the putative joint employer.
  • Permanency and Duration of Relationship. An indefinite, permanent, full-time, or long-term relationship by the employee with the putative joint employer suggests economic dependence.
  • Repetitive Nature of Work. To the extent that the employee’s work for the putative joint employer is repetitive, relatively unskilled, or requires little or no training, such facts indicate that the employee is economically dependent on the putative joint employer.
  • Integral to Business. If the employee’s work is an integral part of the putative joint employer’s business, that fact indicates that the employee is economically dependent on the putative joint employer.
  • Work Performed on Premises. The employee’s performance of the work on premises owned or controlled by the putative joint employer indicates that the employee is economically dependent on the putative joint employer.
  • Performing Administrative Functions Commonly Performed by Employers. To the extent that the putative joint employer performs administrative functions for the employee—such as handling payroll; providing workers’ compensation insurance; providing necessary facilities and safety equipment, housing, or transportation; or supplying tools and materials required for the work—such facts indicate economic dependence by the employee on the putative joint employer.

A version of this article originally appeared in the Take 5 newsletter Five Critical Wage and Hour Issues Impacting Employers.”