We have written here frequently about California’s controversial AB 5 law, which permits companies to treat workers as independent contractors only if they satisfy a stringent “ABC” test.

The broad statue, unambiguously written to try to force companies to treat gig economy workers as employees, has been the subject of a great deal of debate and litigation, including a state court action filed by the State Attorney General trying to force ride share companies to treat their drivers as employees.

In the action filed by the State Attorney General, the Superior Court judge has issued a temporary restraining order requiring the ride share companies to treat their drivers as employees.

The Superior Court judge ruled that the companies could not satisfy the “B” part of AB 5’s “ABC” test, which requires that the worker performs work that is outside the usual course of the hiring entity’s business in order to be treated as an independent contractor.

The decision is appealable within 10 days – and there is every reason to believe that the ride share companies in fact will appeal the decision.

How the issue plays out with the Court of Appeal will be closely monitored.  But whatever the Court of Appeal does, there ultimately will be a ballot showdown in November 2020 when California voters will be asked to decide whether ride share and food delivery companies may treat their workers as independent contractors.  Of course, only time will tell whether that initiative will be successful.

In employment, as in life generally, breaking up can be hard to do.  This is particularly so when a departing employee owes the employer money.  Most employers understand that applicable law often prohibits simply deducting such debts from an employee’s final paycheck.  Consider, for example, a recently terminated employee who refuses to return a $500 printer the employer provided to allow the employee to work from home.  In most states, absent an agreement in writing, wage payment laws prohibit the employer from deducting $500 from the employee’s final paycheck to recover the cost of the printer.  A small claims lawsuit may be the only available way to recover the $500 owed, but that is not likely to be worth the time or money.

But what about business expenses the employer ordinarily reimburses to the employee – e.g., airfare, hotel, and meal expenses for work-related trips, or, during these pandemic times, monthly cell phone and internet service?  Continuing with our example, if the employee has properly submitted for reimbursement of expenses (meaning complied with policy requirements) in an amount equal to or greater than the $500 cost of the printer, may the employer refuse to reimburse the employee for $500 in expenses, and call it even?  This potential offset strategy faces several potential hurdles.

The First Hurdle:  Are Reimbursable Expense “Wages”?

The FLSA:  Reimbursable Expenses Are Not “Wages,” But Beware Minimum Wage and Salary Basis Traps

Withholding expense reimbursements will not work as an offset strategy if the expense reimbursements qualify as “wages” under applicable law.  The FLSA’s definition of “wages” does not include business expense reimbursements.  See 29 U.S.C. § 203(m).  And the FLSA’s definition of “regular rate” for purposes of calculating overtime specifically excludes reimbursable business expenses, such as “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of the employer’s interests and properly reimbursable by the employer.”  29 U.S.C. § 207(e)(2).  However, beware the minimum wage requirement.  Withholding an expense reimbursement can give rise to a minimum wage violation under the theory of an indirect wage deduction, if the employee’s earnings are reduced below the required minimum wage.  The DOL highlighted this prohibition against unlawful “kickbacks” as part of its COVID-19 guidance, which we explained here.  [hyperlink:  https://www.wagehourblog.com/2020/03/articles/wage-and-hour-policies/employees-telecommuting-during-public-health-crisis-may-be-entitled-to-expense-reimbursement/].  Similarly, plaintiffs’ lawyers may argue that withholding an expense reimbursement affects an exempt employee’s salaried compensation for the final week of work.

State Wage Payment Laws:  Definitions Differ

State wage payment laws, unfortunately, provide differing answers.  On one hand, the District of Columbia Court of Appeals recently analyzed this question under Washington D.C.’s wage payment law, concluding that “expense reimbursements” are not “wages.”  Sivaraman v. Guizzetti & Assocs., 2020 WL 3088865, — A.2d. – (D.C. June 11, 2020) (reviewing dictionary definitions, applying statutory interpretation canons, and relying upon Antonin Scalia & Bryan A. Garner, Reading Law:  The Interpretation of Legal Texts (2012)).  On the other hand, states like New York specifically define “wages” to include “reimbursement for expenses.”  See N.Y. Labor Law §§ 190(1), 198c(2).  Consequently, the operative state’s definition of “wages” may pose an insurmountable hurdle to the expense reimbursement offset strategy.

A Second Hurdle:  Many States’ Laws Specifically Govern Expense Reimbursements

California’s well-known Labor Code § 2802 provides that an employer “shall indemnify” employees “for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties[.]”  The mandatory “shall indemnify” language precludes an employer from refusing to pay an otherwise proper expense reimbursement.  Consequently, § 2802 prohibits the potential expense reimbursement offset strategy.

Illinois passed a similar law governing expense reimbursements that became effective in 2019, which has received considerable attention during the COVID-19 pandemic.

[hyperlink:  https://www.workforcebulletin.com/2020/03/25/illinois-stay-at-home-order-a-checklist-for-operating-during-covid-19/].

And several other states have laws on the books regulating payment of expense reimbursements, including Pennsylvania, Montana, Iowa, and New Hampshire.  The full text of these laws is set out below.  These laws vary somewhat in scope, but generally require reimbursement of expenses, particularly when the employer maintains an expense reimbursement policy.  Consequently, state laws like these probably prohibit withholding otherwise valid expense reimbursements to offset separate amounts owed to the employer.

A Third Hurdle:  Your Reimbursement Policy

If the relevant state neither defines “wages” to include expense reimbursements nor regulates expense reimbursements, the offset strategy faces a third hurdle:  your expense reimbursement policy.  Specifically, your expense reimbursement policy may not permit offsetting otherwise proper expense reimbursements to repay separate amounts owed.  In reality, your policy drafter was probably not thinking about the interplay of offsets and  expense reimbursements when creating your policy.  Consequently, it seems unlikely the company will have a contractual right to refuse to pay an otherwise valid request for reimbursement.  However, the offset strategy may create the practical outcome the offset strategy seeks.  The employee may not be incentivized to pursue a $500 expense reimbursement claim in small claims court knowing he or she has wrongfully retained the $500 printer.

In sum, when time is money, companies must carefully, and quickly, weigh the risks of taking action against an employee.  Before refusing an otherwise proper request to reimburse expenses to offset a separate debt, carefully analyze the governing state’s laws governing wages and expense reimbursements, and the language of your specific policy.

State Expense Reimbursement Laws

California, Cal. Lab. Code § 2802:

(a) An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.

(b) All awards made by a court or by the Division of Labor Standards Enforcement for reimbursement of necessary expenditures under this section shall carry interest at the same rate as judgments in civil actions. Interest shall accrue from the date on which the employee incurred the necessary expenditure or loss.

(c) For purposes of this section, the term “necessary expenditures or losses” shall include all reasonable costs, including, but not limited to, attorney’s fees incurred by the employee enforcing the rights granted by this section.

(d) In addition to recovery of penalties under this section in a court action or proceedings pursuant to Section 98, the commissioner may issue a citation against an employer or other person acting on behalf of the employer who violates reimbursement obligations for an amount determined to be due to an employee under this section. The procedures for issuing, contesting, and enforcing judgments for citations or civil penalties issued by the commissioner shall be the same as those set forth in Section 1197.1. Amounts recovered pursuant to this section shall be paid to the affected employee.

Illinois, 820 ILCS 115/9.5L

(a) An employer shall reimburse an employee for all necessary expenditures or losses incurred by the employee within the employee’s scope of employment and directly related to services performed for the employer. As used in this Section, “necessary expenditures” means all reasonable expenditures or losses required of the employee in the discharge of employment duties and that inure to the primary benefit of the employer. An employer is not responsible for losses due to an employee’s own negligence, losses due to normal wear, or losses due to theft unless the theft was a result of the employer’s negligence. An employee shall submit any necessary expenditure with appropriate supporting documentation within 30 calendar days after incurring the expense, except that an employer may provide additional time for submitting requests for reimbursement in a written expense reimbursement policy. Where supporting documentation is nonexistent, missing, or lost, the employee shall submit a signed statement regarding any such receipts.

(b) An employee is not entitled to reimbursement under this Section if (i) the employer has an established written expense reimbursement policy and (ii) the employee failed to comply with the written expense reimbursement policy. An employer is not liable under this Section unless the employer authorized or required the employee to incur the necessary expenditure or the employer failed to comply with its own written expense reimbursement policy. If the written expense reimbursement policy of an employer establishes specifications or guidelines for necessary expenditures, the employer is not liable under this Section for the portion of the expenditure amount that exceeds the specifications or guidelines of the policy so long as the employer does not institute a policy that provides for no reimbursement or de minimis reimbursement.

(c) To ensure consistency with federal law, any rules adopted by the Department and interpretation of this Section shall be consistent and not in conflict with federal regulations and guidelines regarding employer requirements for reimbursement of employee expenses.

Iowa, Iowa Code §91A.3(6):

Expenses by the employee which are authorized by the employer and incurred by the employee shall either be reimbursed in advance of expenditure or be reimbursed not later than thirty days after the employee’s submission of an expense claim. If the employer refuses to pay all or part of each claim, the employer shall submit to the employee a written justification of such refusal within the same time period in which expense claims are paid under this subsection

Montana, Mont. Code Ann. § 39-2-701:

(a) An employer shall indemnify an employee, except as prescribed in subsection (2), for all that the employee necessarily expends or loses in direct consequence of the discharge of duties as an employee or of the employee’s obedience to the directions of the employer, even though unlawful, unless the employee at the time of obeying the directions believed them to be unlawful.

(b) An employer is not bound to indemnify an employee for losses suffered by the employee in consequence of the ordinary risks of the business in which the employee is employed.

(c) An employer shall in all cases indemnify an employee for losses caused by the employer’s want of ordinary care.

New Hampshire, N.H. Rev. Stat. § 275:57: 

(a) An employee who incurs expenses in connection with his or her employment and at the request of the employer, except those expenses normally borne by the employee as a precondition of employment, which are not paid for by wages, cash advance, or other means from the employer, shall be reimbursed for the payment of the expenses within 30 days of the presentation by the employee of proof of payment.

(b) Enforcement and administration of this section by the department shall be as provided for wage claims under RSA 275:51

(c) An action by an employee to recover unreimbursed expenses may be maintained in any court of competent jurisdiction by any one or more employees for and in behalf of himself or herself, or themselves, or such employee or employees may designate an agent or representative to maintain such action.

(d) An employer who willfully violates the provisions of this section may be assessed interest and a civil penalty of up to $1,000 per violation, which shall be deposited into the department of labor restricted fund established in RSA 273:1-b.

(e) The commissioner shall adopt rules under RSA 541-A necessary for the administration of this section.

Pennsylvania, 43 Pa. Stat. Ann § 260.3:

(a) Wages other than fringe benefits and wage supplements.  Every employer shall pay all wages, other than fringe benefits and wage supplements, due to his employes [sic] on regular paydays designated in advance by the employer.  Overtime wages may be considered as wages earned and payable in the next succeeding pay period.  All wages, other than fringe benefits and wage supplements, earned in any pay period shall be due and payable within the number of days after the expiration of said pay period as provided in a written contract of employment or, if not so specified, within the standard time lapse customary in the trade or within 15 days from the end of such pay period.  The wages shall be paid in lawful money of the United States or check, except that deductions provided by law, or as authorized by regulation of the Department of Labor and Industry for the convenience of the employe [sic], may be made including deductions of contributions to employe [sic] benefit plans which are subject to the Employee Retirement Income Security Act of 1974 …

(b) Fringe benefits and wage supplements.  Every employer who by agreement deducts union dues from employes’ [sic] pay or agrees to pay or provide fringe benefits or wage supplements, must remit the deductions or pay or provide the fringe benefits or wage supplements, as required, within 10 days after such payments are required to be made to the union in case of dues or to a trust or pooled fund, or within 10 days after such payments are required to be made directly to the employee, or within 60 days of the date when proper claim was filed by the employee in situations where no required time for payment is specified.

As we wrote here recently,  two federal courts in California rejected Postmates’ attempt to escape having to defend thousands of individual arbitrations filed by drivers contending they have been misclassified as independent contractors. Those decisions require Postmates to pay millions in arbitration fees alone.

A federal court in Illinois has now reached the same conclusion, holding that Postmates must proceed with more than 200 individual arbitrations that will cost Postmates $11 million in arbitration fees.

Arbitration agreements with class action waivers have become more prevalent than ever following the United States Supreme Court’s Epic Systems decision.  And they are especially prevalent with gig economy employers.

As we have written before, companies that implement arbitration agreements with class action waivers must be careful what they ask for.  By using such agreements, they run the risk of dozens, hundreds or even thousands of individual arbitrations, the cost of which could threaten the companies’ very existence.  (In California, we estimate that the arbitration costs alone for a single-plaintiff case are approximately $60,000 – which does not include the attorney’s fees in defending that case or the potential exposure.)  It is for that very reason that some companies have elected not to implement such agreements.

While the COVID-19 pandemic remains a challenge to employers nationwide, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) continues to field non-COVID-related wage and hour questions.  On June 25, 2020, the WHD issued five new opinion letters addressing the outside sales, administrative, and retail or service establishment exemptions under the Fair Labor Standards Act (“FLSA”), as well as the relationship between third-party payments to workers and the FLSA’s minimum wage requirement.  Employers should take note of these useful explanations of key FLSA concepts.

FLSA2020-6

In FLSA2020-6, the WHD analyzed the applicability of the FLSA’s outside sales exemption to salespeople paid a base salary and commission to travel to different locations to sell products using their employer’s mobile assets.  As transport, the salespeople use stylized trucks stocked with merchandise, marketing displays, and demonstration units.  The salespeople use electronic tablets to make their presentations.  They spend 80% of their time on sales deployments and 20% of their time handling sales-related duties such as event planning and inventory management.  They manage their “event calendar” and how to stock the truck for each deployment.  They receive sales training from the employer.

To meet the outside sales exemption, an employee’s primary duty must be “making sales” to or “obtaining orders or contracts for services” from customers (with “sale” including sales work and work performed incidental to and in conjunction with sales/solicitations), and the employee must be “customarily and regularly engaged” in performing that duty “away from the employer’s place or places of business.”  29 CFR §§  541.500(a), -.501, -.502; see also 29 U.S.C. § 203(k).

The WHD found these criteria satisfied here.  First, that the employees’ primary duty is to make sales and to obtain orders for services is clear from the fact that they (1) travel to consumer locations to sell tangible products and to obtain signatures for service contracts; (2) earn a commission on their own sales; and (3) receive sales training.  Employees who spend more than half their time performing exempt work generally satisfy the primary duty requirement (29 C.F.R. § 541.700(b)), and even the 20% of their working time spent on sales-related activities furthers their own out-of-office sales efforts, thereby constituting exempt sales activities under the FLSA.

Second, the employees are customarily and regularly away from the employer’s place of business because they spend 80% of their working time deployed away from the employer’s place of business, which exceeds the “greater than occasional but … less than constant” standard (29 C.F.R. § 541.701).  Here the WHD noted that the trucks themselves are not “places of businesses”—i.e., a “fixed site…used by a salesperson as a headquarters.”  Not only do these trucks move to and from a different sales site every day, but once at the site, the employees go out into the crowds to mingle with consumers, which is analogous to a salesperson who drives to a neighborhood and then solicits sales door to door— an example falling squarely within the outside sales exemption.

FLSA2020-7

As background, the FLSA requires employers to pay their covered, nonexempt employees a minimum hourly wage for all hours worked.  29 U.S.C. § 206(a).  Wages under the FLSA may include third-party payments.  A payment from a third party is a wage when the employer and employee have an agreement, express or implied, to treat it as such.  29 C.F.R. § 778.108.  In the Third Circuit’s view, other facts that may be probative in determining whether a third-party payment is part of an implied employment agreement include (1) whether the specific requirements for receiving the payment are known by the employees in advance of their performing the relevant work; (2) whether the payment is for a reasonably specific amount; and (3) whether the employer’s facilitation of the payment is more than serving as a pass-through vehicle, as with, e.g., processing tips.  U.S. Dep’t of Labor v. Bristol Excavating, Inc., 935 F.3d 122, 137 (3d Cir. 2019).

In FLSA2020-7, the WHD analyzed whether payments to automobile sales consultants from manufacturers pursuant to an incentive program are wages for purposes of the employing dealership’s FLSA’s minimum wage requirements.  Concluding that these payments are wages, the WHD emphasized that the dealerships embrace these third-party incentive payments as wages, the employees know of the specific program incentive terms in advance of their performing sales work, and the dealership facilitates these payments by communicating these terms to their employees and working with incentive program sponsors to determine when payments should occur.

FLSA2020-8

In FLSA 2020-8, the WHD analyzed whether the FLSA’s outside sales exemption applies to salespeople who travel to various retail operations—home and garden shows, trade shows, state and county fairs, and big-box stores—for sales demonstrations/pitches lasting, on average, 10 days, with no one retail location used for more than 30 total days per year.  The salespeople receive sales training, earn commissions, and are eligible for bonuses based on purchases customers make during their assigned shows.  At retail operations shows, customers pay the retailer, and a portion of those sales passes through to the employer.  At all other shows, the salespeople process the payment directly and no third-party retailer is involved.

The WHD advised that the salespeople at locations other than big-box stores qualify for the outside sales exemption, whereas the salespeople at big box stores qualify for the exemption only if their primary duty is performing sales work directed toward the consummation of their own sales.  In drawing this distinction, the WHD explained that salespeople at shows and fairs sell products directly to consumers and that the employer hires them for their sales experience.  They earn commissions and bonuses based on purchases at these shows (i.e., their own sales) and receive sales training.  In contrast, employees at big-box stores purchase the products through the third-party retailer, not from the employee directly, and thus the employees’ primary duty may not be “making sales.”  To make sales within the meaning of the exemption, the employee must obtain a commitment to buy from the customer and receive credit for the sale.  Without information about whether and how an employee obtains a commitment from a customer to buy the employer’s products, the WHD could not say whether the facts satisfy this standard.  Nevertheless, the employees may still be eligible for the outside sales exemption if they spend the majority of their time in non-big box location sales pitches—i.e., if their primary duty is performing exempt work.  29 C.F.R. § 541.700(a).  As a reminder, spending the majority of one’s time on exempt activity is not a necessary element in establishing the primary duty, but time is a relevant part of the primary duty inquiry.

The WHD also concluded that the employees at all locations are customarily and regularly away from the employer’s place of business because the sales locations are not fixed, and the employees used none of these locations for more than a limited duration.  29 C.F.R. § 541.502.  Furthermore, the WHD has long held that the outside sales exemption encompasses sales somewhere besides a customer’s home or office.

FLSA2020-9

 FLSA 2020-9 analyzes whether emergency-management coordinators employed by a county government qualify for the learned professional or administrative exemptions to the FLSA.  The coordinators must have a bachelor’s degree in public administration, political science, emergency management, or a related field; certification in specific courses offered through FEMA Emergency Management Institute; and soon, a state certification in emergency management.  The coordinators’ duties include, inter alia, assisting schools, organizations, and industries with emergency operation plans; coordinating community resources; reporting activities and conditions accordingly; requesting assistance as needed; organizing disaster drills and exercises for all phases of emergency management; reviewing results; and making improvements.

To qualify for either the professional or administrative exemption, generally an employee must receive compensation on a salary or fee basis at not less than the standard level and must have a qualifying primary duty.  29 C.F.R. §§ 541.200(a)(1), -.300(a)(1).  The primary duty of an exempt learned professional must be performing work that requires advanced knowledge (i.e., work that is predominantly intellectual in character rand requires the consistent exercise of discretion and judgment) in a field of science or learning customarily acquired through a prolonged course of specialized intellectual instruction.  29 C.F.R. § 541.301(a).  The primary duty of an exempt administrative employee must be performing office or non-manual work with discretion and independent judgment with respect of matters of significance and must relate directly to management or general business operations of the employer/employer’s customers.  29 C.F.R. § 541.200(a)(2)-(3).

Recognizing the difficulty in determining whether the job duties of government positions are exempt under the administrative position, the WHD looked to whether the duties involve the day-to-day carrying out of the government’s functions or, on the other hand, running the government itself.  Under this framework, the WHD concluded that certain of the coordinators’ duties are exempt and others will depend on the circumstances of how and when those duties are exercised and precisely what they entail.  At a high level, the WHD characterized the coordinators’ planning and business management duties as largely exempt because they directly relate to the management or general business operations of the employer or the employer’s customers.  Likewise exempt are the coordinators’ duties of handling the county’s relationships with other federal, state, and local and government entities; preparing news releases, acting as a press officer, and furnishing information to the media; recruiting, supervising, and scheduling volunteers; and writing and reviewing grant proposals.

Lacking the requisite information, the WHD did not attempt to identify the coordinators’ primary duty.  Similarly, the WHD did not analyze the discretion and independent judgment element because the employer represented that this requirement was satisfied.

The WHD noted that it could not advise on whether the coordinator position qualifies for the learned professional doctrine.

FLSA2020-10

 As background, the retail or service establishment commissioned sales exemption applies if (1) the employee is employed by a retail or service establishment; (2) the employee’s regular rate of pay exceeds one and one-half times the minimum hourly rate; and (3) more than half of the employee’s compensation for a representative period (not less than one month) consists of commissions on goods or services.  29 U.S.C. § 207(i); 29 C.F.R. § 779.412.

In FLSA2020-10, the WHD analyzed whether the retail or service establishment commissioned sales exemption is available where:

  • The client hires employees to work at a new store with unknown volume or new salespeople with no track record of making sales, who are guaranteed compensation at one and one-half times the applicable minimum wage for all hours worked during a representative period;
  • The commissions requirement is not met every week; and
  • The client cannot determine whether more than half of the compensation that the salesperson will receive by the end of the full representative period will consist of sales commissions at the end of the representative period.

The WHD reaffirmed that an employer can use the Section 7(i) exemption simultaneously with commencement of the representative period.  Consistent with its earlier guidance, the WHD cautioned that if at the conclusion of the initial representative period, the employee’s commissions do not constitute more than half of his or her compensation, the employee must receive overtime premium compensation for any overtime hours worked during that period.  The employer could again attempt to establish a representative period for the new employee and simultaneously claim the Section 7(i) exemption for that employee on a prospective basis.

The times they are a-changin’ and Washington’s rules relating to overtime pay are changing with them. Effective July 1, 2020, the Washington State Department of Labor & Industries (“L&I”) has updated the criteria for workers to be exempt from receiving overtime pay, paid sick leave, and other requirements under the state Minimum Wage Act. These changes affect executive, administrative, and professional workers, as well as outside salespeople and computer professionals across all industries in Washington State.

Overtime exemption rules generally require “white collar” – those performing executive, administrative, and professional duties – employees to meet a three-part test to be exempt; the worker must (1) be paid a fixed salary, (2) perform certain types of job duties, and (3) be compensated at or above a minimum salary threshold. The L&I’s revised rules change the minimum salary level and the job duties test.

Changes to the Minimum Salary Level

Under the approved changes, the minimum pay a salaried worker must receive to be considered overtime-exempt will increase incrementally to 2.5 times the state minimum wage by 2028. Small employers (1–50 Washington-based employees) will have a more gradual phase-in schedule to give them additional time to comply with the new rules as compared to large companies (51 or more Washington-based employees). There is also a separate phase-in schedule for computer professionals who are paid on an hourly basis. The new salary threshold is set at just over $35,000 annually, which will then increase to an estimated $83,356 a year by 2028, when the new rules will be fully phased in.

Despite the new rules, Washington employers should continue to follow the current federal salary guidelines for white-collar workers until 2021. Effective January 1, 2020, the U.S. Department of Labor updated the federal overtime rules and increased the minimum salary threshold for white-collar workers to $684 per week ($35,568 per year). When state and federal thresholds conflict, businesses must meet the threshold most favorable to employees. Therefore, until January 1, 2021, Washington businesses must use the federal threshold because it is higher than the salary threshold ($675 per week) provided under the revised state rules.

On January 1, 2021, employers should begin following the new Washington rules because the state threshold will become more favorable at $827 a week (1.5 times the state minimum wage) for small employers, and approximately $965 per week (1.75 times the state minimum wage) for large businesses.

Employers with 1–50 employees Employers with 51+ employees
7/1/2020 $675 ($35,100) $675 ($35,100)
1/1/2021 $827 ($43,004) $965 ($50,180)
1/1/2022 $986 ($51,272) $986 ($51,272)
1/1/2023 $1,008 ($52,416) $1,152 ($59,904)
1/1/2024 $1,177 ($61,204) $1,177 ($61,204)
1/1/2025 $1,202 ($62,504) $1,353 ($70,356)
1/1/2026 $1,382 ($71,864) $1,382 ($71,864)
1/1/2027 $1,412 ($73,424) $1,568 ($81,588)
1/1/2028 $1,603 ($83,356) $1,603 ($83,356)

Minimum Wage Increases

As the white-collar salary threshold is tied to the minimum wage, it is important to note that Washington’s minimum wage increased on January 1, 2020 from $12 per hour to $13.50 per hour. This was the final increase imposed by Initiative 1433, which was approved by voters in 2016. Now that the step-increases are complete, beginning in 2021, and each year thereafter, L&I is required to make annual cost-of-living adjustments to the minimum wage based on the federal Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”). While the salary threshold is tied to the state minimum wage, employers with workers operating in Seattle and the city of SeaTac should recall that those cities have their own minimum wage.

Changes to the Job Duties Tests

In addition to the increase in the minimum salary level, the new rules update the job duties tests, which describe the duties a worker must perform to be classified as exempt. The duties test involves an analysis focused on what the worker actually does, rather than their job title or job description. Specifically, L&I will now use one test for each exemption category, with language that more closely aligns with the federal job duties tests under FLSA, rather than the previous two job duties tests per category. Importantly, however, Washington continues to depart from federal rules in one key way: the state rules do not recognize an exemption for highly-compensated employees.

Employer Action

Employers in Washington should review their employee classifications and minimum salaries to ensure compliance with the new overtime rules. If an employer wishes to maintain an employee’s exempt status, the employer needs to ensure that the worker meets the new duties test requirements and is paid at least the minimum salary threshold requirements, even as they increase over the next eight years.

The California Labor Commissioner’s Office has taken aim at Mobile Wash, Inc., a business that offers a mobile app for on-demand car washing and detailing services, filing a lawsuit against the company and its president to enforce AB5, California’s controversial law designed to make it more difficult for businesses to engage workers as independent contractors.

As we wrote here, AB5 codified and expanded the “ABC test” adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court for determining whether workers in California should be classified as employees or as independent contractors.

To satisfy the ABC test, a hiring entity must demonstrate that:

  • the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
  • the worker performs work that is outside the usual course of the hiring entity’s business; and
  • the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In the lawsuit against Mobile Wash, the Labor Commissioner alleges that the company “made a calculated business decision to misclassify” car washers who perform services arranged through the company’s app as independent contractors, rather than employees.

Among other things, the Labor Commissioner contends that because Mobile Wash is allegedly a “car wash company in the business of selling car washes to its customers,” and the services that car washers perform are “central to the very purpose of Mobile Wash’s business,” the company cannot establish that the washers perform work outside of its usual course of business, as required under the “B” prong of the test.

The Labor Commissioner seeks to recover unpaid wages and overtime premium pay, unreimbursed business expenses (including costs associated with uniforms, car washing tools and equipment, insurance, cell phone service, and mileage), rest period premiums, misappropriated gratuities, waiting time penalties, and liquidated damages, on behalf of the allegedly misclassified car washers, as well as various civil penalties payable to the State of California.  The Labor Commissioner asserts that the company’s president is also liable for the Labor Code violations alleged in the lawsuit.

In a press release, the Labor Commissioner—without acknowledging the significant entrepreneurial freedoms and opportunities available to “gig economy” workers, or the public backlash to AB5—noted that her office “is committed to combatting th[e] unlawful practice [of misclassifying workers as independent contractors] as a business model.”  Accordingly, this is unlikely to be the Labor Commissioner’s last lawsuit seeking to enforce AB5.

As employers continue to deal with workplace issues related to COVID-19, you should be aware that the U.S. Department of Labor’s Wage and Hour Division (“WHD”) has indicated that it will be investigating allegations of wage and hour violations that have occurred as a result of the rapid workforce changes undertaken by many organizations earlier this year.   Unfortunately, as you may know, the WHD rarely announces those investigations in advance and, instead, employers typically learn of them when a letter arrives announcing 72 hours’ notice to produce payroll records, or a WHD investigator shows up at their doorstep demanding to interview employees.

In order to assist employers in dealing with these sudden investigations, Epstein Becker Green attorneys have prepared a “Break-the-Glass Kit” and “Wage and Hour Division Investigation Checklist,” resources that employers can use to establish procedures in advance of an investigation, as well as to gain insight into the WHD investigative process.  And our attorneys will be able to assist you every step of the way.

As we wrote about in more detail here, the ongoing coronavirus pandemic has brought increased attention to the legal and practical distinctions between employees (who are entitled to various compensation and employment benefits under the law) and independent contractors (who generally are not).  The pandemic has also prompted lawmakers at the federal, state, and local level to explore further legislation designed to provide independent contractors with greater protections under the law.

The Seattle City Council has now passed two ordinances—the “Gig Worker Premium Pay Ordinance” and the “Gig Worker Paid Sick and Safe Time Ordinance”—that will temporarily impose heightened requirements on transportation network and food delivery network companies.

The Gig Worker Premium Pay Ordinance

The Gig Worker Premium Pay Ordinance went into effect at 8:30 p.m. on June 26, 2020.  According to the City Council, the ordinance is designed to “increas[e] [the] retention of gig workers who provide essential services on the frontlines of a global pandemic and who should be paid additional compensation for the hazards of working with significant exposure to an infectious disease.”

Under this ordinance, food delivery network companies are required to pay delivery drivers at least $2.50 in premium pay for each delivery they complete with a pick-up or drop-off location in Seattle.  If the order involves multiple pick-up or drop-off points, drivers are entitled to an additional $1.25 in premium pay for each additional pick-up or drop-off point in Seattle.

The ordinance requires food delivery network companies to remit premium pay at the same time at which they provide compensation for other components of the delivery, identify the specific orders that qualified for premium pay, and separately itemize premium pay when compensating drivers.

The ordinance also prohibits food delivery network companies from retaliating against drivers for exercising their rights under the law, and from: (i) reducing or modifying service areas in Seattle, (ii) reducing drivers’ compensation, (iii) limiting drivers’ earning capacity, including by restricting drivers’ access to online orders, and (iv) charging customers additional fees for grocery deliveries, if the ordinance is a “motivating factor” in the decision.

Finally, the ordinance requires food delivery network companies to provide drivers with written notice of their rights under the law.

Covered businesses are obligated to provide premium pay for the duration of the coronavirus civil emergency.  And covered businesses must maintain records documenting their compliance with the ordinance for three years.

Drivers are entitled to lodge a complaint with the Seattle Office of Labor Standards (“OLS”) or file a civil action in court, in order to enforce the ordinance.  Businesses that violate the ordinance will be subject to various penalties and fines, and payment of unpaid compensation owed under the law, liquidated damages, and attorneys’ fees and costs.

The Gig Worker Paid Sick and Safe Time Ordinance

Under the Gig Worker Paid Sick and Safe Time Ordinance, which will go into effect July 13, 2020, covered transportation network and food delivery network companies will be obligated to temporarily provide paid sick and safe time benefits to ride-share and food delivery drivers, notwithstanding the drivers’ independent contractor status.  More specifically, covered drivers will earn one day of paid leave for every 30 calendar days that they work in whole or in part in Seattle, dating back to October 1, 2019, or the commencement of their engagement (whichever is later), and continuing through 180 days after certain civil emergency orders relating to the coronavirus pandemic have been terminated.

Drivers will have the right to use paid sick and safe time benefits in 24-hour increments for various reasons, including, among others: (i) to accommodate their need for medical diagnosis, care, or treatment, (ii) to care for a family member with a mental or physical illness, injury, or health condition, and (iii) when a covered business has reduced, suspended, or otherwise discontinued operations for any health or safety related reason.  For each day of leave, drivers will be entitled to their “average daily compensation” (which includes any bonuses, commissions, and tips) from their highest earning calendar month since October 1, 2019.

Covered businesses will also be required to provide drivers with written notice of their rights, and of the businesses’ relevant policies and procedures for meeting the requirements of the ordinance.  In addition, covered businesses will be prohibited from retaliating against drivers for exercising their rights under the law.  Covered business will also be required to maintain records documenting their compliance with the ordinance for three years.

The OLS will enforce the ordinance, and drivers will have the right to lodge a complaint with the OLS, or file a civil action in court, if they believe their rights under the ordinance have been violated.  Businesses that violate the ordinance will be subject to various penalties and fines, and payment of unpaid compensation owed under the law, liquidated damages, and attorneys’ fees and costs.

Takeaways

Although the requirements imposed by both Seattle ordinances are temporary, covered businesses will almost certainly need to make changes to their operations in the short-term.  Businesses that engage independent contractors should also bear in mind that state and local governments in other jurisdictions may ultimately adopt legislation with similar objectives (particularly if the coronavirus pandemic continues to grow).

Full-Time and Part-Time Employees under the FFCRA

The Department of Labor’s Wage and Hour Division issued standards governing emergency paid sick leave and expanded family and medical leave available to full-time and part-time employees for COVID-19 related reasons in its April 6, 2020 temporary rule on Paid Leave under the Families First Coronavirus Response Act (“FFCRA”) (the “Temporary Rule”).

Of particular interest to this blog is the Temporary Rule’s discussion of what it means to be a “full-time” or “part-time” employee for purposes of taking emergency paid sick leave under the FFCRA. Division E of the FFCRA, the Emergency Paid Sick Leave Act (“EPSLA”), specifies that a full-time employee of a covered employer is entitled to up to 80 hours of emergency paid sick leave, and a part-time employee is entitled to “a number of hours equal to the number of hours that such employee works, on average, over a 2-week period”. However, like the Fair Labor Standards Act (“FLSA”), the EPSLA does not define full-time and part-time employees.

Accordingly, the Department extrapolated from the fact that the EPSLA provides up to 80 hours of COVID-19-related emergency paid sick leave over a 2-week period to full-time employees in preparing the Temporary Rule. For purposes of such leave, a full-time employee is an employee who is normally scheduled to work at least 40 hours per workweek. 29 C.F.R. § 826.21(a)(2). An employee is also a full-time employee if he or she is scheduled to work at least 40 hours per workweek on average according to the “Varying Schedule Hours Calculation” for certain part-time employees under section 5110(5)(C)(i) of the FFCRA for six months (or the duration of employment, if an employee has been employed for less than six months) prior to the date on which leave is requested. 29 C.F.R. § 826.21(a)(3). A part-time employee under the Temporary Rule is, therefore, an employee who is normally scheduled to work (or if the employee lacks a normal weekly schedule, an employee who is scheduled to work, on average) fewer than 40 hours each workweek. Id. § 826.21(b).

Full-Time and Part-Time Employees under the ACA, ERISA, and the SECURE Act

While the definitions of full-time employees and part-time employees for purposes of FFCRA emergency paid sick leave focus on 40 hours per workweek, the determinations (if not outright definitions) of each type of employee—i.e., the number of hours applicable—are not uniform across federal law.

Furthermore, while the Temporary Rule (like the FLSA) focuses on the hours of work to determine the FFCRA emergency paid sick leave available to employees, other federal laws that govern the provision of employee benefits largely focus on hours of service, which includes all hours for which employees receive or are entitled to receive pay. Hours of service include paid hours in which employees may not be performing work, such as those for vacations, sick leave, disability leave, parental leave, jury duty, or military duty.

In addition, while the FFCRA provides emergency paid sick leave to all employees, part-time employees are often not eligible for benefits. These distinctions may be significant in light of the ongoing COVID-19 pandemic, which has caused heightened interest in benefits such as health insurance coverage and retirement savings.

The Affordable Care Act (the “ACA”) provides a different approach to delineating full-time and part-time employees. The ACA’s requirement that covered employers offer affordable health insurance applies to only similarly situated full-time employees with on average either (i) 30 hours or more of service per workweek or (ii) 130 hours of service during a month. Employees who work less than those hours are de-facto part-time employees who are not entitled to health insurance under the ACA.

The Employee Retirement Income Security Act (ERISA) allows employees to participate in any retirement plan offered to other employees if they have completed 1,000 hours of service in a 12-month period. Using the Temporary Rule’s 40 hours per workweek definition of full-time employee, at least some employees eligible to participate in a retirement plan would be part-time employees, such as an employee who is normally scheduled to work 1,000 hours of service in a 12-month period.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019[1] requires employers to allow employees who have completed at least 500 hours of service for three consecutive 12-month periods and are age 21 or older to make elective deferrals to employer-sponsored 401(k) plans, not including collectively bargained plans. Although the SECURE Act does not expressly define part-time employees, it implicitly does so in stating, under the heading that “Employees Who Become Full-Time Employees”, that the above requirement does not apply to employees who meet the standard requirements for 401(k) plan participation eligibility.[2]

Providing Benefits to Part-Time Employees

The above are just some examples of how certain federal laws determine full-time and part-time employee status for purposes of benefits eligibility. Of course, such laws often do not prevent employers from providing part-time employees, who would be otherwise ineligible, from participating in benefit plans. For example, an employer can choose to offer health insurance coverage to employees who do not qualify as full-time employees under the ACA, so long as the coverage meets requirements such as non-discrimination and minimum participation.

Additionally, employers may actually be required to provide part-time employees with benefits, such as paid leave and disability insurance, under state or local laws. In a trend that is likely to continue, states including California, New York, and Washington, as well as cities in those states and others, now require that employers provide part-time employees with certain types of benefits.

Benefits are more important than ever to employees, especially in this time of COVID-19. If employers choose to provide benefits to part-time employees beyond those that are legally required, they are advised to consider how to define eligible employees, whether that is based on hours of work, hours of service, and/or other factors, so that the definition aligns with the definitions for legally required benefits. Doing so can streamline the administration of benefits, and encourage more employees to work toward participating in forms of compensation beyond base wages.

[1] The SECURE Act, Public Law No. 116–94, is part of the Further Consolidated Appropriations Act, 2020, available at https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf.

[2] Id. at § 112(a)(2)(B)(iv).

Our colleague Jonathan Assia Class Action Mooted When Class Representative Settles, Ninth Circuit Rules.

Following is an excerpt:

On June 3, 2020, the Ninth Circuit dismissed a wage and hour class action on the grounds that once the class representative plaintiff settled his individual claims and no longer had any financial stake in the litigation’s outcome, the entire litigation was moot.

In Brady v. AutoZone Stores, Inc. and Autozoners, LLC, Plaintiff Michael Brady brought a class action suit against AutoZone Stores, Inc. and Autozoners LLC for allegedly failing to provide its nonexempt employees with meal breaks in accordance with Washington state law.  After several years of litigation, Brady settled his individual claims and simultaneously waived any right to recover attorney’s fees and costs.  Even though Brady settled his individual claims, the settlement agreement included a provision explicitly stating that Brady did not intend to settle or waive his class claims. …

Read the full article here.