Fair Labor Standards Act

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.

Over the past year, there has been an increased discussion of Fair Labor Standards Act (“FLSA”) requirements for tipped employees. The courts have focused on a number of issues related to tipped employees, including addressing who can participate in tip pools and whether certain deductions may be made from tips. While the FLSA requires employers to pay a minimum wage of $7.25 per hour in most cases, Section 203(m) of the FLSA provides that employers may take a “tip credit” and pay as little as $2.13 per hour to employees who customarily and regularly receive tips, so long as two criteria are satisfied:

  • the employee’s wages and tips are at least equal to the minimum wage, and
  • all tips “received” by a tipped employee are actually retained by the employee or added into a tip pool that aggregates the tips of a group of tipped employees.

Notably, 29 CFR § 531.55 states that a “compulsory charge for service . . . imposed on a customer by an employer’s establishment, is not a tip . . . .” However, some states (such as New York) have their own requirements for determining whether a service charge will be considered a “tip.”

Who Can Be Treated as a Tipped Employee?

When a tip pool is covered by Section 203(m) of the FLSA, an employer may not divert tips from tipped employees by including “non-customarily tipped employees” in the tip pools. But whether an employee customarily (and regularly) receives tips may be unclear.

In Montano v. Montrose Restaurant, the U.S. Court of Appeals for the Fifth Circuit considered a tip pool in which the employer included a “coffeeman,” and the parties submitted conflicting evidence regarding the coffeeman’s duties. The Fifth Circuit concluded that an employee can be part of a tip pool if it can be expected that the customer intended the employee to receive a portion of the tip. Satisfying that requirement depends on such factors as whether the employee had more than a de minimis interaction with the customers who leave the undesignated tips and whether the employee is engaging in customer service functions.

In Schaefer v. Walker Bros. Enterprises, the Seventh Circuit evaluated a plaintiff’s contention that he and other employees at his restaurant (who primarily worked in a tipped capacity) had to be paid the full minimum wage during any time spent performing non-tipped work. The Seventh Circuit noted that the DOL’s Field Operations Handbook states that an employer may pay the tip-credit rate for time that tipped employees spend on non-tipped duties “related to” their tipped work. According to the Seventh Circuit, making coffee, cleaning tables, and “ensuring that hot cocoa is ready to serve” and that “strawberries are spread on the waffles” are activities related to a tipped server’s work. The Seventh Circuit characterized other duties, however, such as wiping down burners and woodwork and dusting picture frames, as “problematic” because they did not seem to be “closely related to tipped duties.” But the time spent on those duties was “negligible” and therefore did not require the restaurants to pay the normal minimum wage rather than the tip-credit rate for those minutes.

Can Credit Card Fees Be Deducted from “All Tips”?

In Steele v. Leasing Enterprises, Ltd., the Fifth Circuit considered whether an employee is receiving “all tips” when an employer deducts the costs and fees associated with collecting tips that are paid through a customer’s credit card.

To offset costs associated with credit card tips, the defendant retained 3.25 percent of any tips paid by credit card. According to the defendant, the costs included not only fees charged by the card issuer, but also the cost of cash deliveries made by an armored vehicle three times per week to ensure that the employees could be paid their tips on a daily basis (as the employees had requested).

Based on prior authority from the Sixth Circuit and a DOL opinion letter, the Fifth Circuit agreed that the defendant could offset credit card tips by the amount of the credit card issuer fees and still satisfy the requirements of Section 203(m). One week later, the Southern District of Ohio reached a similar conclusion in Craig v. Landry’s, Inc., ruling that “controlling precedent specifically permits” the deduction of credit card processing fees as long as the amount of the deduction “reasonably approximates the charge incurred by the employer.”

What Other Fees or Costs Can Be Deducted from “All Tips”?

After approving the deduction of credit card issuer fees from the gross tips in Steele, the Fifth Circuit turned to the question of whether an employer violates Section 203(m)’s requirements if the employer deducts costs other than direct fees charged by the credit card issuers. The defendant argued that employers could deduct the additional expenditures associated with paying credit card tips and still maintain the tip credit. Specifically, the defendant argued that the additional costs that it was incurring in arranging for the payment of tips paid via credit card, such as the cost of the armored car deliveries to its restaurants, could be deducted from the gross tips.

The Fifth Circuit concluded that “an employer only has a legal right to deduct those costs that are required to make such a collection.” While the defendant had no choice but to pay to credit card issuer fees, the costs relating to its thrice-weekly armored car deliveries were discretionary costs resulting from internal business decisions by the defendant. Therefore, deducting those amounts from employees’ tips was a violation of Section 203(m).

It is worth noting the Eastern District of New York added an interesting twist to this principle in Widjaja v. Kang Yue USA Corp. The court had previously ruled that the defendant violated the minimum wage as a result of, among other things, improperly withholding 11.5 percent of credit card tips. In a late-2015 ruling on damages, the court found that the defendant was liable for the difference between the minimum wage and the hourly wage that it actually paid its tipped employees. Moreover, the court in Widjaja held that the wage deficiency could not be offset by the tips actually received by the tipped employees because those tips were not an hourly wage. Consequently, because it improperly applied the tip-credit rule, the employer received no credit against the minimum wage for the tips actually received by its tipped employees.

Is There a Cause of Action for Withheld Tips If the Employer Does Not Take a Tip Credit?

Several years ago, the DOL revised 29 C.F.R. § 531.52 to provide that all tips are the property of the employee and, thus, must be passed along to the tipped employee or a pool of tipped employees regardless of whether the employer has taken a tip credit under Section 203(m). Because the FLSA, on its face, does not specifically prohibit or address wage deductions that do not result in minimum-wage violations, there has been substantial controversy regarding the DOL’s authority to issue this regulation.

Earlier this year, in Oregon Rest. & Lodging Ass’n v. Perez, the Ninth Circuit noted that Section 203(m) of the FLSA is silent as to employers that do not take a tip credit. Therefore, the Ninth Circuit concluded that the DOL has the authority to regulate “tip pooling” practices even if employers do not take tip credits. Conversely, this past summer, federal courts in Florida and Georgia arguably joined with the position taken by the Fourth Circuit and courts in Maryland, New York, and Utah that Section 203(m) of the FLSA does not create a cause of action for improperly withheld tips unless the employer is taking a tip credit.

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

Employment Law This Week – Epstein Becker Green’s new video program – has a story this week on off-the-clock security screenings, which are under scrutiny around the country. Two federal class actions challenging them have reached different outcomes.

Bath & Body Works recently agreed to settle a suit in California over unpaid overtime and off-the-clock security inspections. But a federal judge in the same state dismissed a similar class action against Apple in which retail workers claimed that they should be compensated for time spent having their bags checked. The judge concluded that the employees were not performing job duties and could avoid the screenings by not bringing a bag or cell phone to work.

See below to view the episode and read our recent blog post “Have We Now Seen the Last of ‘Bag Check’ Class Actions?”

 

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.

Wage and Hour Image 3

On August 7, 2015 the Second Circuit held that parties cannot enter into private settlements of Fair Labor Standards Act (“FLSA” or the “Act”) claims without  the approval of either the district court or the Department of Labor. Cheeks v. Freeport Pancake House, Inc., No. 14-299 (2nd Cir. 2015).

Although other circuits are split on the issue of whether pre-suit agreements to settle FLSA claims are enforceable, this is the first appellate decision to address the issue of whether judicial approval is required to terminate an FLSA lawsuit once it has been filed. See Lynn’s Food Stores, Inc. v. US., 679 F. 2d 1350 (11th Cir. 1982); Martin v. Spring Break’83 Productions, LLC, 688 F. 3d 247 (5th Cir. 2012). Despite holding that district courts must approve the settlement, the court expressed no opinion regarding “what the district court must consider in deciding whether to approve the putative settlement.”

Unlike most causes of action, which may be settled merely by filing a stipulation of dismissal, courts apply extra scrutiny to FLSA settlements to prevent workers from waiving the protections of the Act. To ensure workers maintain their rights under the FLSA, courts will only enforce FLSA settlements if the settlement amount is for the full amount claimed, or if less, there is “a bona fide dispute between the parties” regarding the amount owed. See Brooklyn Savings Bank v. O’Neil, 324 13 U.S. 697 (1945) and D.A. Schulte, Inc. v. Gangi, 328 U.S. 108 (1946).

The court rested its holding on the argument that judicial approval was necessary to ensure that private settlements furthered the policy goals underlying the Act. The concern is that plaintiffs may agree to compromise settlement amounts that do not achieve the goal of deterring employers from violating the Act.

Plaintiffs in need of immediate cash may value an immediate settlement at a discounted amount over the potential for a larger judgment at some future date. Although this resolution may be agreeable to both parties, it does not achieve the goal of preventing employers from deriving a competitive advantage by violating the Act.

In dicta, the decision went on to add that “to prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees” courts must scrutinize settlement agreements to ensure “employee protections, even where the employees are represented by counsel.”

Other than seeking court approval of all settlement agreements resolving cases with FLSA claims, it remains to be seen how this decision will be used in litigation. Employers should pay particular attention as to whether judges reserve their role to ensuring that the settlement resolves a bona fide dispute, or whether they instead use their power to second guess plaintiff’s counsel and demand more favorable settlement terms.

A question that remains unanswered is whether the federal courts will defer to a decision of an arbitrator in resolving FLSA claims.

Our colleague Jeffrey H. Ruzal recently wrote an article entitled “Offset as Defense to FLSA Suit May Mitigate Unpaid Wage Claims,” which appears in the June 2014 issue of Hospitality Law.

Following is an excerpt:

A federal district court in Michigan recently preserved for trial the question of whether a defendant employer may mitigate its back wage liability by offsetting paid break time, which would effectively extinguish plaintiff employees’ claims under the Fair Labor Standards Act.

In Hayes, et al., v. Greektown Casino, LLC, et al., No. 12-1552 (E.D. Mich. 03/31/14), a group of current and former security officers who were employed by Greektown Casino alleged that their employer violated the FLSA by failing to compensate them for all hours worked.

Read the full article here.

Reprinted with permission from Hospitality Law. Copyright 2014 by LRP Publications. Palm Beach Gardens, FL 33418. All rights reserved. For details on this or other related products, visit www.shoplrp.com/hospitality.html or call toll free 1-800-341-7874.

By: Jeffrey M. Landes and Susan Gross Sholinsky

The presentation slides and the recording for the webinar – Creating and Maintaining a Lawful Internship Program – are now accessible for your viewing. If you would like to review, please contact Kiirsten Lederer to obtain instructions.

During this timely and important webinar, we discussed how to minimize both your organization’s liability and the risk of wage and hour lawsuits. Specifically, participants walked away with answers to the following questions:

  • What are the best practices for recruiting and hiring interns, and what critical language should you include (or avoid) in offer letters, employment contracts, and other communications?
  • What assignments are appropriate for interns, and what tasks must you prevent interns from doing?
  • How does the Fair Labor Standards Act apply to interns?
  • What is the best way to handle various forms of remuneration (money, academic credit, company discounts, etc.) for interns?
  • How do the rules of for-profit and non-profit companies differ (and what rules apply to public-sector employers)?
  • How do child labor laws affect internships?
  • What are best practices for organizations—before, during and after an internship program?
  • Do company policies apply to interns?
  • What rules should you consider if you would like to hire an intern on a full-time basis in the future?
  • When does workers’ compensation or other insurance kick in, and how should you handle unemployment insurance?
  • What common blunders should you avoid when setting up school internship programs?
  • What ethical considerations apply when creating an internship program?

We look forward to your participation in future EBG educational programs. Please click here for a list of upcoming webinars/events that may be of interest to you or your colleagues.

By John Fullerton

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

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

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

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

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