As featured in #WorkforceWednesday: California voters passed Proposition 22, which will exempt app-based transportation and delivery network companies from the state’s AB5 worker classification law. Attorneys Amy Ramsey and Kevin Sullivan tell us what this means for CA employers and the gig economy more broadly. You can read more here.
As we have written here before, ride share and food delivery companies doing business in California had a lot at stake in the November 3, 2020 election. In fact, it was possible that those businesses might even cease doing business in California depending on the outcome of the election – or dramatically change their business models in the state.
Specifically, on November 3, 2020, California voters were asked to decide the fate of Proposition 22, the ballot initiative that would remove those companies from the scope of AB 5 and allow drivers to be treated as independent contractors. (As we explained here, AB 5 codified and expanded the controversial “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.)
Depending on sources, ride share and food delivery companies spent between $110 million and $200 million on the campaign to pass Proposition 22.
Their campaign seems to have paid off. While the votes are still being tallied at the time this post is being written, it appears that Proposition 22 has passed with approximately 58.4% of the votes.
There is more than a great deal of irony in the apparent passage of Proposition 22. It is no secret that AB 5 was aimed at forcing ride share and food delivery companies to treat drivers as employees. Now, the very industries at which the legislation was directed are excluded from it.
While app-based ride share and food delivery companies will be able to treat drivers as independent contractors going forward (with some wage and benefit concessions found in Proposition 22), there may be some uncertainty about whether or how the passage of Proposition 22 will impact pending litigation challenging the status of the drivers pre-Proposition 22. Unlike Proposition 11, the meal and rest period initiative in the emergency services industry that California voters passed in 2018 – and that expressly provided that it was clarifying existing law and would apply retroactively – Proposition 22 does not expressly include such provisions.
Once immediate consequence seems likely, however. As we previously wrote here, in August 2020 in an action filed by the State Attorney General, a California Superior Court judge issued a temporary restraining order requiring the ride share companies to treat their drivers as employees in compliance with AB 5. While that decision has been appealed, it seems likely that the temporary restraining order will be dissolved now that ride share companies in California are effectively excluded from AB 5.
And at least one of the ride share companies still faces a perhaps unexpected challenge— a class action complaint alleging that it was improperly forcing drivers to support Proposition 22.
Only time will tell whether other industries or businesses will choose to use the California ballot initiative process to seek to be excluded from AB 5 or from other California laws – or whether the passage of Proposition 22 will inspire the legislature to find a better way to deal with independent contractor issues than the hastily passed AB 5.
November 3, 2020 has been circled on the calendars of app-based ride share and food delivery companies doing business in California for many months now. After a new ruling by the California Court of Appeal, those companies have likely gone back and circled that date a few more times in thick red ink.
On November 3, 2020, California voters will decide the fate of Proposition 22, the ballot initiative that, if passed, will allow app-based ride share and food delivery companies to treat drivers as independent contractors rather than as employees, carving them out of California’s controversial AB 5 statute. (As we explained here, AB 5 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.)
As we previously wrote here, in August 2020 in an action filed by the State Attorney General, a California Superior Court judge issued a temporary restraining order requiring the ride share companies to treat their drivers as employees in compliance with AB 5. 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 ride share companies appealed. And on October 22, 2020, the California Court of Appeal affirmed the trial court’s ruling. In reaching its decision, the Court of Appeal concluded that the State had shown that it was likely to prevail on its claims against the companies, and it rejected the companies’ arguments that they could not be expected to change their business models with the “flick of a switch.”
Now Proposition 22 looms larger than ever.
Depending on reports, the ride share and food delivery companies have devoted between $110 million and $200 million to the campaign to get voters to pass Proposition 22.
Of course, there will be a tremendous irony if Proposition 22 in fact passes. It is no secret that AB 5 was aimed at ride share and food delivery companies – and it could end up being the case that most companies doing business in California must comply with the controversial statute except for the very companies at which it was aimed.
That said, should Proposition 22 pass, ride share companies may face a new and perhaps unexpected challenge posed by it — a class action complaint has been filed against one of the ride share companies, alleging that it was improperly forcing drivers to support Proposition 22.
With the end of the year just around the corner, many employers may be contemplating giving year-end bonuses to their non-exempt employees. And bonuses, year-end or otherwise, can create problems for employers when it comes to calculating overtime compensation for those employees.
One mistake some employers make concerns calculating an employee’s regular rate for purposes of paying overtime premiums. Indeed, many employers have found truth in the adage “no good deed goes unpunished” after implementing bonus policies or issuing other forms of compensation intended to reward employees, only to later discover that those payments had the unintended effect of increasing their employees’ regular rate and, thus, the overtime premiums that those employees should have received.
While this article focuses solely on the regular rate under the Fair Labor Standards Act (FLSA), employers should consult legal counsel to ensure that their compensation policies and calculations of overtime premiums comply with the FLSA as well as all applicable state and local laws.
What Is The Regular Rate?
The FLSA requires employers to pay non-exempt employees “at a rate not less than one and one-half times the regular rate at which [an employee] is employed” for all hours worked in excess of forty hours in a workweek. 29 U.S.C. § 207(a)(l). The regular rate includes “all remuneration for employment paid to, or on behalf of, the employee,” subject to eight statutory exclusions. 29 U.S.C. § 207(e).
The amount of overtime pay due to an employee is a function of the employee’s regular rate of pay and the number of hours worked in a workweek. Wages may take many forms, such as hourly pay, salary, commissions, piece-rate, tips, bonuses, meals, or lodging, but in all such cases the overtime pay due must be computed on the basis of the average hourly rate derived from such earnings. This requires dividing the total pay for employment (except for the statutory exclusions) in any workweek by the total number of hours actually worked to determine the regular rate.
The regular rate depends on an employee’s actual earnings and hours worked and is not subject to contrary agreement, insofar as an employer must pay at least the minimum overtime premium required by the FLSA. Under the FLSA, the formula to compute the regular rate for the workweek is as follows:
Regular rate = Total compensation in the workweek (minus statutory exclusions) ÷ Total hours worked in the workweek.
Exclusions From The Regular Rate
As noted above, the FLSA identifies a number of types of payments that do not become part of the regular rate of pay when calculating overtime compensation. 29 U.S.C. § 207(e).
Generally speaking, all remuneration for employment, including bonuses, presumptively goes into the regular rate calculation. 29 C.F.R. §§ 778.208, 778.211. However, there is an important exception to that rule for discretionary bonuses.
Discretionary bonuses paid in recognition of services performed during a given period and paid at or near the end of that period can be excluded from the regular rate if (1) the fact that such bonuses are paid, and (2) the amount of those bonuses are left to the sole discretion of the employer. 29 U.S.C. § 207(e)(3); 29 C.F.R. § 778.211.
If an employer has promised, agreed, or contracted to pay employees a bonus such that the employees expect to receive it, such a bonus would not qualify as discretionary under the FLSA, and, thus, would be included in the regular rate for purposes of calculating overtime compensation. For example, bonuses issued pursuant to a policy that compensates employees when they hit certain metrics do not ordinarily qualify as discretionary.
On December 12, 2019, the Department of Labor (DOL) announced a Final Rule to clarify what perks and benefits can be excluded from an employees’ regular rate of pay. The Final Rule provides a non-exhaustive list of discretionary bonuses, including: severance bonuses, referral bonuses for employees not primarily engaged in recruiting activities, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation. 29 C.F.R. § 778.211.
However, the Final Rule explicitly states that the label an employer gives to a bonus does not determine whether it qualifies as discretionary. Similarly, the mere fact that a bonus may be paid in December or January, rather than earlier in the year, is irrelevant to whether it can be excluded from an employee’s regular rate. 29 C.F.R. §§ 778.211.
Non-Discretionary Year-End Bonuses Increase Employees’ Entitlement To Premium Pay For All Overtime Hours Worked During The Period The Bonus Covers
Once an employer pays a non-discretionary bonus, it must recalculate the employees’ regular rate for the entire time period covered by the bonus and pay employees additional overtime premiums for any overtime hours worked during that time period. 29 C.F.R. § 778.209.
For example, if an employee worked 50 weeks in the year and received a non-discretionary bonus of $1,000, the employer would have to recalculate the employees’ regular rate to include $20 ($1,000 ÷ 50 weeks) of additional compensation for each of workweek in which the employee worked overtime and divide that additional compensation by the number of hours worked in each of those weeks.
Thus, if the employee worked 40 hours, the employee’s regular rate would increase by $0.50 ($20 ÷ 40hrs), and the employee must then receive an additional amount of compensation equal to one-half of that amount ($0.25) multiplied by the number of statutory overtime hours worked during the week.
An alternative to this calculation is to divide the bonus by the number of hours worked in the entire time period, thereby identifying the effect of the bonus on the regular rate across the time period, and then pay the additional half-time overtime. Thus, using the same example above of a $1,000 annual bonus, and assuming that the employee worked 2,000 hours in the year, the result is an increase of $0.50 in the average pay the employee received for each and every hour during the year. The employer would then address the overtime by paying an additional $0.25 of premium pay per overtime hour worked during the year. See 29 C.F.R. § 778.209(b).
For this reason, employers should confirm whether any year-end bonuses they pay non-exempt employees satisfy the requirements of a discretionary bonus under the FLSA. If employers inadvertently treat non-discretionary bonuses as discretionary and fail to include those bonus amounts in their employees’ regular rate, they may be in for a nasty surprise when they receive a demand letter seeking unpaid overtime premiums for an entire class of employees.
In response to the increased use and enforcement of class and collective action waivers, plaintiffs’ attorneys are now relying on a new strategy to gain leverage over businesses. More specifically, they have started to commence mass arbitrations by simultaneously filing hundreds—and in some cases, thousands—of individual arbitration demands in an effort to trigger a business’ obligation to pay its share of filing fees for the arbitrations.
Depending on the number of arbitration demands at issue, the filing fees alone can add up to tens of millions of dollars.
Postmates has been the target of such an approach in California. And as we wrote about here, Judge Saundra Brown Armstrong of the United States District Court in Oakland previously ordered Postmates to conduct more than 5,000 individual arbitrations. Postmates later appealed that order to the Ninth Circuit.
Among other things, Postmates has argued that because the claimants’ arbitration demands were generic, and lacked specific information required by the parties’ arbitration agreement, the demands amounted to de facto classwide arbitration proceedings, in contravention of the parties’ class action waiver. Postmates has further argued that in light of a provision that carves out disputes relating to the class action waiver from the arbitration provision’s delegation clause, the court (as opposed to an arbitrator) must decide the threshold issue of whether the parties agreed to a de facto classwide arbitration.
On September 29, 2020, the Ninth Circuit affirmed Judge Armstrong’s decision, concluding that “the district court correctly held that an arbitrator [as opposed to the court] must decide whether [the claimants] have violated the [c]lass [a]ction [w]aiver.” The Ninth Circuit reasoned that Postmates’ challenge to the claimants’ mass arbitration tactics fell outside the scope of the only exception to the delegation clause, which the Ninth Circuit determined is limited to claims that the class action waiver is “unenforceable, unconscionable, void, or voidable.”
As a result, the Ninth Circuit did not address Postmates’ argument that the thousands of generic arbitration demands amounted to de facto classwide proceedings. Per the Ninth Circuit’s order, that issue must be decided in arbitration.
While it remains to be seen how this issue will unfold in arbitration, the Ninth Circuit’s decision serves as another reminder for businesses to carefully evaluate the pros and cons of class and collection action waivers before implementing an arbitration program.
On September 22, 2020, the U.S. Department of Labor (“DOL”) released its highly anticipated proposed rule for distinguishing independent contractors from employees under the Fair Labor Standards Act (“FLSA”).
When evaluating independent contractor status under the FLSA, courts have traditionally applied what is known as the “economic realities” test. The test varies slightly from circuit to circuit, and, perhaps, court to court, but courts generally consider the following factors on a non-exclusive basis: (i) the degree of control that the putative employer exercises over the workers; (ii) the workers’ opportunity for profit or loss, and their investment in the business; (iii) the degree of skill and independent initiative needed to perform the work; (iv) the permanence or duration of the working relationship; and (v) the extent to which the work is an integral part of the putative employer’s business. No single factor is dispositive, and the determination turns on a holistic assessment of the totality of the circumstances (i.e., the economic reality of the worker’s relationship to the putative employer).
The DOL’s proposed rule adopts a modified version of this test, focusing on certain factors, and clarifying and rearticulating others.
Perhaps most importantly, the DOL’s proposed rule focuses on two “core factors” that bear on a worker’s economic dependence: (i) the nature and degree of the individual’s control over the work, and (ii) the individual’s opportunity for profit or loss. The proposed rule states that these two factors are the “most probative” to the analysis, and that if both point towards the same classification, there is “a substantial likelihood that [the classification] is … accurate,” because the other factors, which are “less probative and afforded less weight, are highly unlikely, either individually or collectively, to outweigh the combined weight of the two core factors.” This is a stark departure from the arguably amorphous “totality of the circumstances” approach under the traditional economic realities test.
More specifically, the new “core” control factor will favor independent contractor status when a worker “exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors.” On the other hand, this factor will favor “employee” status if the putative employer “exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer.”
Importantly, the proposed rule further clarifies the control factor by stating that requiring workers to satisfy terms that are typical of contractual relationships between businesses—such as requiring workers to comply with legal obligations, to satisfy health and safety standards, to carry insurance, and to meet contractually agreed-upon deadlines or quality control standards—does not constitute the type of control that would make an individual more or less likely to be an employee under the FLSA.
With respect to the other core factor, profit and loss, the proposed rule states that this factor will favor independent contractor status when an individual has an opportunity to earn profits or incur losses based on the worker’s “exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.” This factor will favor “employee” status when a worker “is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.” If, for example, a worker receives a regular hourly wage and the worker’s earnings depend solely on the number of hours he or she works, this factor would point to “employee” status.
The proposed rule lists three other secondary factors that are “less probative” to the analysis: (i) the amount of skill required for the work, (ii) the degree of permanence of the working relationship between the individual and the potential employer, and (iii) whether the work is part of an integrated unit of production.
Notably, the proposed rule states that the “integrated unit of production” factor differs “from the concept of the importance or centrality of the individual’s work to the potential employer’s business.” In other words, under the proposed rule, the fact that an individual performs work that is important or central to a putative employer’s business operations will not support employee status. Instead, this factor will turn on whether the individual works under circumstances analogous to a production line. In its notice of proposed rulemaking, the DOL explained that “performance of discrete, segregable services for individual customers”—which broadly encompasses a wide variety of independent contractor engagements—“is not part of an integrated unit of production.”
As we wrote about here, in April 2019, the DOL issued an opinion letter concluding that workers who provided services to customers referred to them through an online virtual marketplace were properly classified as independent contractors under the FLSA. Although the DOL applied a traditional formulation of the economic realities test in its opinion letter, the DOL’s 2019 analysis closely aligns with the newly proposed rule, including with respect to the DOL’s stated desire to promote “innovative work arrangements.”
The public will have until October 26, 2020 to submit written comments to the DOL on the proposed rule. The DOL reportedly plans to finalize the rule by the end of 2020 (i.e., before a potential change to a new administration).
If finalized, the rule will provide additional support to businesses that engage independent contractors in a number of industries, including those operating in the “gig economy,” as it provides greater clarity for differentiating between independent contractors and employees in a practical manner.
However, the rule would not override state law, which is often more protective than federal law, including in California, which has adopted a test designed to make it more difficult for businesses to classify workers as independent contractors under state law.
Lastly, it is worth noting that a federal district court recently struck down the DOL’s new final rule on joint employment, which we wrote about here. Like the independent contractor proposed rule, the joint employer final rule addresses the scope of the employment relationship under the FLSA. In that case, the district court found that the final rule departed from the DOL’s prior interpretations on joint employment without adequate explanation, and was otherwise arbitrary and capricious. If the DOL’s new independent contractor rule is finalized, plaintiffs’ attorneys may argue that the rule should face similar scrutiny from the courts.
Many employers may—understandably—view gratuities as discretionary payments that customers leave in exchange for superior service. After all, federal wage and hour regulations define “tips” as “sum[s] presented by a customer as a gift or gratuity in recognition of some service performed.” 29 C.F.R. § 531.52 (emphasis supplied). The regulations also state that “compulsory charge[s] for service” are not tips. 29 C.F.R. § 531.55 (emphasis supplied).
But in some cases, a mandatory charge may qualify as a tip that employers must distribute to staff under state or local law.
By way of example, employers in the hospitality industry commonly assess mandatory “service” or “administrative” charges in connection with the administration of catered events, such as receptions and conferences. Depending on, among other things, the disclosures that the employers make to their customers, employees who provide services during the events may argue that state and/or local law requires their employers to distribute those charges to staff.
New York State is a prime (but not the only) example of a jurisdiction where this issue can arise.
In New York, employers cannot retain a gratuity or any “charge purport[ing] to be a gratuity for an employee.” NYLL § 196-d (emphasis supplied). Compulsory charges can qualify as charges “purporting to be a gratuity” if an employer represents or allows “customers to believe that the charges were in fact gratuities for their employees.” Samiento v. World Yacht Inc., 10 N.Y.3d 70, 81 (2008). Whether a mandatory charge purports to be a gratuity within the meaning of NYLL § 196-d turns on a holistic assessment of how a “reasonable customer” would understand the charge. Maldonado v. BTB Events & Celebrations, Inc., 990 F. Supp. 2d 382, 389 (S.D.N.Y. 2013).
In other words, if a reasonable customer would view a mandatory charge as a gratuity for staff—thereby theoretically reducing the likelihood that the customer would also provide a discretionary tip—the employer cannot retain it.
Notably, New York’s Hospitality Industry Wage Order creates a rebuttable presumption in the hospitality industry that any charge in addition to “charges for food, beverage, lodging, and other specified materials or services, including but not limited to any charge for ‘service’ or ‘food service,’ is a charge purport[ing] to be a gratuity.” N.Y. Comp. Codes R. & Regs. tit. 12, § 146-2.18.
The Wage Order also includes provisions specifically relating to charges associated with the administration of banquets and special functions, such as catered events. More specifically, the Wage Order states that employers must notify customers that such charges are not gratuities. N.Y. Comp. Codes R. & Regs. tit. 12, § 146-2.19. Under the Wage Order, adequate notification that such a charge is not a gratuity “shall include a statement in the contract or agreement with the customer, and on any menu and bill listing prices, that the administrative charge is for administration of the banquet, special function, or package deal, is not purported to be a gratuity, and will not be distributed as gratuities to the employees who provided service to the guests.” Id. In addition, the disclaimers must use “ordinary language readily understood … in a font size similar to surrounding text, but no smaller than a 12-point font.” Id.
Class action lawsuits filed by employees seeking to recover mandatory charges under New York’s tip misappropriation law are common, and the lawsuits are not always limited to employers in the hospitality industry, or to service charges assessed in connection with banquets and special functions. Plaintiffs working as delivery drivers, for example, have filed lawsuits claiming that they are entitled to recover proceeds from “delivery fees” and similar charges associated with grocery delivery. Moreover, as stated above, New York State is not the only jurisdiction where these kinds of claims might arise.
Minnesota law, for example, defines “gratuities” as “monetary contributions received directly or indirectly by an employee … and includes an obligatory charge assessed to customers … which might reasonably be construed … as being a payment for personal services rendered by an employee and for which no clear and conspicuous notice is given by the employer … that the charge is not the property of the employee.” Minn. Statutes § 177.23, subd. 9 (emphasis supplied).
In addition, in 2019, a California Court of Appeal held that a mandatory service charge could potentially qualify as a gratuity under California Labor Code § 351, which prohibits employers from receiving “any gratuity or a part thereof that is paid, given to, or left for an employee by a patron.” See O’Grady v. Merchant Exchange Productions, Inc., 41 Cal. App. 5th 771, 790 (2019) (noting, among other things, that the “purpose [of Labor Code § 351] would not be served by allowing employers to take money intended for employees simply by saying the customer has paid a ‘service charge’”).
Finally, this issue also extends beyond an employer’s relationship with its employees. Indeed, if a business fails to provide appropriate disclosures to its customers about certain kinds of mandatory charges, the charges may implicate consumer protection laws designed to protect consumers against fraudulent and misleading business practices.
So how can employers ensure that they do not inadvertently convert a mandatory charge into a gratuity for staff?
As a general matter, clear and consistent communication to customers about the purpose of the charge is key. In addition, depending upon, among other things, the jurisdiction, industry, and nature of the charge, employees may argue that their employers are required to include disclaimers to customers in multiple different documents, using specific language, and a specific font size.
Given these intricacies, and the significant exposure that can arise in tip misappropriation (and consumer protection) class actions, employers should carefully evaluate whether any mandatory charges they impose on customers could be construed as gratuities, and whether, and in what manner, state and/or local law obligates them to notify customers that the charges are not gratuities for staff.
We recently authored “Elections May Decide Fate of Gig Worker Classification Regs,” the first of a series of articles on wage and hour issues for Law360. Subscribers can access the full version here – following is an excerpt:
As the gig economy has grown, so too have questions about it. One of the most consequential questions in the past several years has been whether workers in the gig economy are properly classified as independent contractors for purposes of various federal and state statutes, or whether they should be classified as employees of the businesses with which they have relationships.
The answer to that question has tremendous implications for both the companies and the workers. Various standards have emerged to address this question. The standards are by no means consistent, nor are they as clear as one might hope.
The same gig economy worker could be properly classified as an independent contractor under federal law, yet found to be misclassified as an independent contractor under state law. Indeed, the worker’s status could vary across different federal statutes, or under different laws in a single state.
In 2019, California enacted a statute known as A.B. 5, adopting a demanding ABC test for workers to qualify as independent contractors. And it is no secret that the legislators who drafted A.B. 5 were taking aim at gig economy companies and ride-share and food-delivery operators in particular.
At the same time, the U.S. Department of Labor has taken a very different approach, issuing guidance in 2019 indicating that many of these workers are, in fact, bona fide independent contractors under federal law. Just days ago, the DOL issued a proposed rule that takes a comparatively expansive view of who can be an independent contractor.
In the upcoming elections, both of these approaches to classifying gig economy workers will effectively be on the ballot. A victory by Democratic presidential nominee Joe Biden points toward a regulatory and enforcement view starkly at odds with the DOL’s current approach. In fact, Biden has publicly declared his support for adopting the California standard as the law of the land for purposes of a broad range of labor, employment and tax statutes.
And in California, Proposition 22, a voter initiative that would overturn the California statute as applied to some app-based drivers, has qualified to appear on the November ballot.
The outcome of the November elections both at the federal level and in California will likely determine whether the gig economy as we have come to know it continues to operate in a nonemployee model.
On September 9, 2020, Governor Newsom signed Assembly Bill (“AB”) 736, expanding the professional exemption under Industrial Welfare Commission (“IWC”) under Wage Orders Nos. 4-2001 and 5-2001 to expressly include part-time or “adjunct” faculty at private, nonprofit colleges and universities in California. The sponsors of AB 736, the Association of Independent California Colleges and Universities, advocated for the bill to address perceived ambiguities in the California Labor Code that had spawned litigation causing some colleges and universities to reclassify adjunct faculty as hourly, non-exempt employees.
AB 736 became effective immediately, adding section 515.7 to the Labor Code. Accordingly, independent institutions of higher education with adjunct faculty who are classified as exempt should review their employees’ duties and compensation structure to ensure they conform to the newly enacted two-part test set forth in section 515.7.
The first prong of the test is duty-related. Specifically, the exemption applies to employees who provide instruction for a course or laboratory at an independent institution of higher education if: “(A) The employee is primarily engaged in an occupation commonly recognized as a learned or artistic profession; and (B) The employee customarily and regularly exercises discretion and independent judgment in the performance of [those] duties.” The statute provides specific guidance regarding what qualifies as a “learned or artistic profession” for purposes of determining whether a specific employee meets this duty-related requirement.
If an employee satisfies the duty-related test, the exemption applies so long as one of two minimum compensation requirements is satisfied. Employees paid a monthly salary must earn at least two times the state minimum wage for at least 40 hours per week. Alternatively, employees paid per course or laboratory must be paid in accordance with the rates in section 515.7 (i.e., $117/hour for 2020; $126/hour for 2021; $135/hour for 2022). The rate increases for 2023 and subsequent years will be calculated based on a percentage increase to the California minimum wage.
Affected employers should review their employee classification and payroll practices immediately.
On September 8, 2020, a federal district court struck down the U.S. Department of Labor’s (“DOL”) Final Rule on joint employer liability, concluding that the Rule violated the Administrative Procedure Act (“APA”) by impermissibly narrowing the definition of joint employment under the Fair Labor Standards Act (“FLSA”), departing from the DOL’s prior interpretations on joint employment without adequate explanation, and otherwise being arbitrary and capricious. We previously blogged about the details of the Final Rule here. The DOL published the Final Rule in the Federal Register on January 16, 2020 with an effective date of March 16, 2020.
What is Joint Employment?
Joint employment is the principle that an individual worker can have multiple employers, all of which are potentially responsible for ensuring FLSA compliance. The joint employment doctrine has a long and well-developed history, including numerous interpretative guidance documents issued by the DOL and a multitude of court decisions. These various interpretations at their core have explained that a joint employment relationship is based on “economic reality” that takes into account various non-exclusive and non-dispositive circumstances surrounding the relationship between the worker and the putative joint employer. Before the Final Rule, the DOL had instructed, and courts had likewise found, that while an employer’s formal or indirect right to “control” a worker in the workplace can be a contributing, or even independently decisive, factor in determining the existence of a joint employment relationship, it is not the only or necessarily dispositive factor. Rather, the economic reality is based, in part, on a determination of whether a worker economically depends on a putative joint employer.
How Did the Final Rule Change the Analysis of Joint Employment?
The DOL posited two joint employment scenarios, what it describes as “vertical joint employment” and “horizontal joint employment.” According to the Final Rule, vertical joint employment exists where the employee has an employment relationship with one employer, e.g., a staffing agency or subcontractor, whereas horizontal joint employment exists where the employee has employment relationships with multiple and related or associated employers. The DOL in its Final Rule arguably departed from the economic reality analysis, adopting a four-factor balancing test for evaluating potential vertical joint employment relationships focused exclusively on control (derived from a Ninth Circuit decision in Bonnette v. California Health & Welfare Agency, 704 F.2d 1465 (9th Cir. 1983)), which includes whether the putative joint employer (i) hires or fires the employer, (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree, (iii) determines the employee’s rate and method of payment, and (iv) maintains the employee’s employment records. The DOL has stated that it intended the Final Rule to provide clarity by casting a uniform joint employment standard to avoid disparate interpretations by circuit courts throughout the country.
What Was the Basis of the Lawsuit to Vacate the Final Rule?
In response to the Final Rule, certain jurisdictions, including New York, Pennsylvania, California, Colorado, Delaware, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Oregon, Rhode Island, Washington, Vermont, Virginia, and the District of Columbia, filed suit to vacate it and to enjoin its implementation under the APA, which sets forth the procedures by which federal agencies are accountable to the public and their actions subject to review by courts. Pursuant to the APA, agency actions, including rules, may be set aside if they are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. The parties filed cross motions for summary judgment to decide the fate of the Final Rule.
U.S. District Judge Gregory Woods for the Southern District of New York found that the Final Rule’s changes to horizontal joint employer liability are severable, and that because the Final Rule makes only “non-substantive revisions” to existing law for horizontal joint employer liability, they can function independently from the changes to vertical joint employer liability. Judge Woods, however, granted the Plaintiffs’ motion to vacate the Final Rule as it pertains to vertical joint employment. The court found numerous infirmities, faulting the DOL’s application of different tests for “primary” and “joint” employment where the FLSA does not provide a separate definition of, or test to determine, joint employment. Judge Woods further opined that the Final Rule’s test for joint employment is impermissibly narrow where the four factors are really just “a proxy for control,” which is inconsistent with the DOL’s previous interpretive guidance, as well as a significant body of case law.
Notably, Judge Woods acknowledged that an agency rule is “entitled to a measure of respect, and the weight accorded to such interpretations depends on their thoroughness, validity, consistency and power to persuade,” but then concluded that the DOL’s interpretation is “unpersuasive,  conflicts with prior Department interpretations [,] . . . and, [i]n any event . . . contradicts the FLSA.” In addition, Judge Woods held the Final Rule to be arbitrary and capricious because the DOL failed to adequately explain why it departed from its prior interpretations, failed to consider consistency within the DOL’s existing regulations, and did not adequately consider the Final Rule’s cost to workers. On this last point, Judge Woods alluded to the DOL’s Notice of Proposed Rulemaking, in which the DOL provided that reducing the number of joint employers (through issuance of the Final Rule) would not affect the wages due employees because such employees could still recover the wages due from the employees’ primary employer. Rejecting this proposition, Judge Woods commented that the DOL’s rationale is “silly” because taken to its logical conclusion, if (“primary”) employers always fulfill their legal obligations, then the Final Rule serves no purpose.
What Should Employers—or Potential Joint Employers—Do Now?
While it is unclear whether the DOL will appeal the Court’s decision or abandon the Final Rule and perhaps pursue new rulemaking, employers should be mindful that, for now, absence of control over workers will not automatically result in the avoidance of joint employer status. Rather, courts will evaluate joint employment by considering the overall economic reality of the parties’ working relationships, which includes, but is not limited to workers’ economic dependence on putative joint employers. Accordingly, it is important that putative joint employers carefully review their contractual relationships with third parties, such as staffing agencies or subcontractors, as well as the actual working relationships with the workers who are performing the work for the benefit of the putative joint employers to determine whether there is potential risk of an actual joint employment relationship. In such cases, putative joint employers should ensure that they are acutely aware of the third party employer’s wage and hour practices with respect to the workers at issue to confirm that their practices are in compliance with the FLSA and state wage and hour laws and regulations. Putative joint employers should also consider implementing contractual safeguards, such as representations and warranties with respect to direct employers’ wage and hour practices, as well as indemnification provisions, to further protect against potential joint employer liability.