Earlier today, the Ninth Circuit issued its opinion in cases involving the Department of Labor’s (“DOL”) “80/20 Rule” regarding what is commonly referred to as “sidework” in the restaurant industry.  Agreeing with the arguments made by our new colleague Paul DeCamp, among others, the Ninth Circuit issued a decidedly employer-friendly decision.  In so doing, it disagreed with the Eighth Circuit, potentially setting the issue up for resolution by the United States Supreme Court.

As those in the restaurant industry are aware, restaurant workers and other tipped employees often perform a mix of activities in the course of carrying out their jobs.  Some tasks, such as taking a customers’ orders or delivering their food, may contribute directly to generating tips.  Other tasks, such as clearing tables, rolling silverware, and refilling salt and pepper shakers—activity generally known in the industry as “sidework”— arguably generate tips indirectly.

In 1988, the DOL issued internal agency guidance purporting to impose limits on an employer’s ability to pay employees at a tipped wage, which under federal law can be as low as $2.13 per hour, if employees spend more than 20% of their working time on sidework.  This guidance, commonly known as the “80/20 Rule,” has led to a wave of class and collective action litigation across the country, including a 2011 decision from the U.S. Court of Appeals for the Eighth Circuit deferring to the Department’s guidance as a reasonable interpretation of the Fair Labor Standards Act (“FLSA”) and its regulations.

Today, the Ninth Circuit issued a 2-1 decision in Marsh v. J. Alexander’s LLC, concluding that the Department’s attempt to put time limitations on how much sidework an employee can perform at a tipped wage is contrary to the FLSA and its regulations and thus unworthy of deference by the courts.

The Department adopted the 20% limitation as a purported clarification of the Department’s “dual jobs” regulation, which addresses employees who work in separate tipped and non-tipped jobs for the same employer.  The Ninth Circuit explained, however, that the 20% limitation on sidework was inconsistent with the statutory notion of an “occupation,” as well as the regulation’s focus on two distinct jobs.

Because the 80/20 Rule did not in reality stem from the statute or the regulations, the Court determined that it constitutes “an alternative regulatory approach with new substantive rules that regulate how employees spend their time” and thus amounts to a “‘new regulation’ masquerading as an interpretation.”

In reaching this conclusion, the Court disagreed with the Eighth Circuit’s analysis and conclusion, noting that “the Eighth Circuit failed to consider the regulatory scheme as a whole, and it therefore missed the threshold question whether it is reasonable to determine that an employee is engaged in a second ‘job’ by time-tracking an employee’s discrete tasks, categorizing them, and accounting for minutes spent in various activities.”

The plaintiffs in these cases may well seek rehearing en banc, and it remains to be seen what approach the Department will take regarding the 80/20 Rule in response to today’s decision. And the split between the circuits certainly suggests that this is an issue that may well be resolved by the Supreme Court.

We have previously written in this space about the United States Supreme Court’s decision in Integrity Staffing Solutions, Inc. v. Busk, holding that time spent awaiting bag checks was not compensable time under the Fair Labor Standards Act (“FLSA”). But is such time compensable under California law, which differs from the FLSA in some regards? 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 bag checks or security screenings.

Faced with this issue, the Ninth Circuit Court of Appeals has turned to the California Supreme Court for guidance, as it has done on several other wage hour issues in recent years. The case before the Ninth Circuit is Frlekin v. Apple, Inc., a case about which we have written previously. In Frlekin, the district court entered summary judgment in favor of Apple with regard to the compensability of bag check time. 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.

On appeal, the U.S. Court of Appeals for the Ninth Circuit essentially threw up its hands, concluding that it did not have enough guidance on whether such time would be compensable under California law. Accordingly, it certified to the California Supreme Court the following question:

Is time spent on the employer’s premises waiting for, and undergoing, required exit searches of packages or bags voluntarily brought to work purely for personal convenience by employees compensable as “hours worked” within the meaning of California Industrial Welfare Commission Wage Order No. 7?

In doing so, the Court recognized that California law differs in some respects from federal law on whether such time is compensable. The Court opined that the case seems to fall somewhere between decisions focusing on whether an employee has the ability to avoid the time, which could apply here because the employees have the option of avoiding a search by not bringing a bag to work in the first place, and decisions focusing on the control the employer exerts over the employees, which could apply here because the employees are under the employer’s control in the workplace.

As the Court noted, “[o]nce an employee has crossed the threshold of a work site where valuable goods are stored, an employer’s significant interest in preventing theft arises.” In light of the benefit to the employer in avoiding shrinkage, “[i]t is unclear . . . whether, in the context of on-site time during which an employee’s actions and movements are compelled, the antecedent choice of the employee obviates the compensation requirement.”  The Court suggested that the answer may turn on whether “as a practical matter” employees do not truly have the option of not bringing a bag to work.

Time will tell how the California Supreme Court elects to answer this question. It will likely take at least a year, if not substantially longer, for the Court to issue a ruling. In the meantime, employers in California should review their security practices and consider whether options exist to devise practices that obviate these concerns or at least reduce the associated risk.

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.

Featured on Employment Law This Week: The California Supreme Court has clarified the state’s ambiguous “day of rest” provisions.

The provisions state that, with certain exceptions, employers will not cause “employees to work more than six days in seven.” The state’s high court addressed three questions about this law that had been certified by the U.S. Court of Appeals for the Ninth Circuit. The court determined that employees are entitled to one day of rest per workweek. So, every Sunday marks the beginning of a new seven-day period. Additionally, the court clarified that employees who work six hours or less during each day of the week are not entitled to a day of rest and that employees can choose not to take the day of rest if they are fully aware of the entitlement.

Watch the segment below, with commentary from our colleague Kevin Sullivan, and read our recent post.

A new “comp time” bill that would dramatically change when and how overtime is paid to private sector employees in many, if not most, jurisdictions has passed the House of Representatives.  And unlike similar bills that have been considered over the years, this one might actually have a chance of passing. If it can get past an expected Democratic filibuster in the Senate, that is.

“Comp time” – short for “compensatory time” – is generally defined as paid time off that is earned and accrued by an employee instead of immediate cash payment for working overtime hours.

Generally speaking, public sector employers may provide “comp time” to employees.

However, putting aside various nuances and state law differences, it has long been the case that the Fair Labor Standards Act (“FLSA”) requires private sector employers to pay non-exempt employees time-and-a-half for all work performed beyond 40 hours in a workweek.  “Comp time” generally is not permissible in the private sector.

(If you want to gain a better understanding of the various nuances and state law differences, we invite you to download our free wage-hour app, available on Apple and Android devices.)

This long-standing law could change under the new bill, known as the Working Families Flexibility Act (“the Act”). (Although its title references “working families,” it does not appear that the proposed limitation would be limited to persons with families. It would apply to single persons, too.)

Although its title does not reference the FLSA or overtime, the Act would amend the FLSA to allow private sector employers to offer non-exempt employees the choice between being paid in cash for hours they work beyond 40 in a work week or accruing an hour and one-half of paid time off.  More specifically, employees could accrue up to 160 hours of “comp time” for hours worked beyond 40 in a week – again, at a rate of an hour and one-half for each overtime hour worked.

The Act has been presented as a potential benefit to employers and employees alike – employers might be able to improve cash flow by postponing payments, and employees would have greater flexibility in scheduling their work around their personal lives.

As written, the Act would not apply to all employees. Instead, it would only apply to those employees who have worked at least 1,000 hours in a 12-month period before they agree to the employer’s proposed “comp time” arrangement.  In most circumstances, it would not apply to new hires, and it would not apply to many part-timers.

As written, eligible employees would have to agree in writing to the “comp time” arrangement.  Their agreement would have to be voluntary, and they would reserve the right to revoke their agreement at any time and receive cash for their unused “comp time.” At the same time, employers could revoke the “comp time” arrangement by giving their employees 30 days’ notice of the change in the employer’s policy.

Like much legislation, the Act leaves some questions unanswered and could lead to significant litigation if passed, including collective actions. On first glance, the most significant grounds for potential litigation would be the requirement that any acceptance of a “comp time” arrangement be entirely “voluntary.” Employees may well claim that they were pressured into accepting “comp time” by management, particularly those in seasonal businesses.

But the most significant unanswered question remains the most important – will the bill get past an expected filibuster?

Our colleague Adriana S. Kosovych, associate at Epstein Becker Green, has a post on the Hospitality Employment and Labor blog that will be of interest to many of our readers: “Chipotle Exploits Wide Variation Among Plaintiffs to Defeat Class and Collective Certification.

Following is an excerpt:

A New York federal court recently declined to certify under Rule 23 of the Federal Rules of Civil Procedure (“Rule 23”) six classes of salaried “apprentices” at Chipotle restaurants asserting claims for overtime pay under New York Labor Law (“NYLL”) and parallel state laws in Missouri, Colorado, Washington, Illinois, and North Carolina, on the theory that they were misclassified as exempt executives in Scott et al. v. Chipotle Mexican Grill, Inc. et al., Case No. 12-CV-8333 (S.D.N.Y. Mar. 29, 2017).  The Court also granted Chipotle’s motion to decertify the plaintiffs’ conditionally certified collective action under Section 216(b) of the Fair Labor Standards Act (“FLSA”), resulting in the dismissal without prejudice of the claims of 516 plaintiffs who had opted in since June 2013.

The putative class and collective action of apprentices working in certain of Chipotle’s 2,000-plus restaurants nationwide were provisionally employed while being trained to become general managers of new Chipotle locations. The Scott action challenged Chipotle’s blanket exempt classification of the apprentice position, claiming that the duties plaintiffs actually performed during the majority of their working time were not managerial, and therefore, as non-exempt employees they were entitled to receive overtime pay. …

Read the full post here.

Tips Do Not Count Towards the Minimum Wage Unless a Worker Qualified as a “Tipped Employe"In Romero v. Top-Tier Colorado LLC, the Tenth Circuit Court of Appeals ruled that tips received by a restaurant server for hours in which she did not qualify as a tipped employee were not “wages” under the FLSA, and therefore should not be considered in determining whether she was paid the minimum wage.

Tipped Employees & the FLSA

The FLSA provides that employers may take a “tip credit” and pay employees as little as $2.13 per hour if: (i) the tip credit is applied to employees who customarily and regularly receive tips; (ii) the employee’s wages and tips are at least equal to the minimum wage, and (iii) all tips received by a tipped employee are retained by the employee or pooled with the tips of other tipped employees.

In Romero, the Tenth Circuit noted that an employee may hold both tipped and non-tipped jobs for the same employer.  In those cases, the employee is entitled to the full minimum wage while performing the job that does not generate tips.

Moreover, the Circuit Court cited to the directive in the Wage Hour Division’s Field Operations Handbook stating that, if a tipped employee spends more than 20% of his or her time performing related-but-nontipped work, then the employer may not take the tip credit for the amount of time the employee spends performing those duties.

The Plaintiff’s Claims

The plaintiff in Romero worked as a server at the defendants’ restaurant.  The defendants paid her a cash wage of $4.98 an hour, and took a tip credit to cover the gap between the cash wage rate and the federal minimum wage.

The plaintiff contended that she also worked in nontipped jobs for the defendants, and that she spent more than 20% of her workweek performing related-but-nontipped work. Therefore, she concluded she was entitled to a cash wage of at least $7.25 per hour during certain hours, and filed a lawsuit in the U.S. District Court for the District of Colorado claiming violations of the federal minimum wage.

The defendants’ moved to dismiss the complaint because plaintiff did not allege that her total weekly earnings, when divided by the number of hours worked, ever fell below the federal minimum wage rate. The District Court reasoned that a minimum wage violation is determined by dividing an employee’s total pay in a workweek by the total number of hours worked that week.  Because the plaintiff did not allege facts that would establish such a violation, the District Court granted the defendants’ motion and dismissed the complaint.

In light of that reasoning, the District Court never considered whether the plaintiff was properly considered a tipped employee.

When are Tips Considered “Wages” Paid by the Employer?

The Tenth Circuit Court of Appeals reversed the judgment of the District Court. The Tenth Circuit “assumed” that the district court correctly stated that an employer satisfies the FLSA’s minimum wage requirements so long as, after the total wage paid to each employee during any given week is divided by the total time that employee worked that week, the resulting average hourly wage is $7.25 per hour or more.

But the Tenth Circuit held that the existence of a minimum wage violation depends on the “wages” paid by an employer to an employee. The Court stated that tips are “wages” paid by an employer only when the tips are received by a worker who qualifies as a tipped employee under the FLSA.

Accordingly, the Tenth Circuit reversed the District Court’s dismissal of the plaintiff’s complaint. The Tenth Circuit directed the District Court to reconsider its ruling by examining the threshold question of whether the tips received by the plaintiff were “wages” for purposes of the minimum wage requirements of the FLSA.

What is the Impact of an Improper Tip Credit?

Assume, for example, that the plaintiff worked 40 hours in a given week, was paid cash wages of $199.20 (or $4.98 per hour) and received tips of $90.80.

If the evidence demonstrates that the plaintiff was a tipped employee at all times, she was paid wages of $290.00 (or $7.25 per hour) and the defendants did not violate the federal minimum wage.

However, the evidence could demonstrate that the plaintiff performed so much related-but-nontipped work that she did not qualify as a tipped employee at any time. As explained by the Tenth Circuit, the plaintiff’s tips would not count as wages and therefore she was paid $90.80 below the minimum wage.  The defendants could then be liable to her for that amount (as well as potential liquidated damages and attorneys’ fees).

The Tenth Circuit’s decision is consistent with the rulings of other circuit courts. Therefore, employers who are taking tip credits therefore must pay close attention to the specific requirements of the FLSA, and should not consider themselves insulated from liability merely by the fact that their tipped employees are earning more than the minimum wage.

Featured on Employment Law This Week:  Another Department of Labor action currently in limbo is the new federal salary thresholds for the overtime exemption. But New York went ahead with its own increased thresholds, sealing the deal at the end of 2016.

In New York City, the threshold is now $825 a week, or $42,950 annually, for an executive or administrative worker at a company with 11 or more employees. The salary thresholds will increase each year, topping out at $1,125 per week in New York City and in Nassau, Suffolk, and Westchester counties.

Watch the segment below and see our colleagues’ advisory.

Our colleagues, Susan Gross Sholinsky, Dean L. Silverberg, Jeffrey M. Landes, Jeffrey H. Ruzal, Nancy L. Gunzenhauser, and Marc-Joseph Gansah have written an Act Now Advisory that will be of interest to many of our readers: “New York State Department of Labor Implements New Salary Basis Thresholds for Exempt Employees.

Following is an excerpt:

The New York State Department of Labor (“NYSDOL”) has adopted its previously proposed amendments to the state’s minimum wage orders to increase the salary basis threshold for executive and administrative employees (“Amendments”). The final version of the Amendments contains no changes from the proposals set forth by the NYSDOL on October 19, 2016. The Amendments become effective in only three days—on December 31, 2016.

While the status of the new salary basis threshold for exempt employees pursuant to the Fair Labor Standards Act (“FLSA”) is still unclear following the nationwide preliminary injunction enjoining the U.S. Department of Labor (“USDOL”) from implementing its new regulations,this state-wide change requires immediate action for employers that did not increase exempt employees’ salaries or convert employees to non-exempt positions in light of the proposed federal overtime rule.

Read the full post here.

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.