Years ago, Epstein Becker Green (“EBG”) created its free wage-hour app to put federal, state, and local wage-laws at employers’ fingertips.

The app provides important information about overtime exemptions, minimum wages, overtime, meal periods, rest periods, on-call time, travel time, and tips.

As the laws have changed, so, too, has EBG’s free wage-hour app, which is updated to reflect new developments.

No fewer than 46 states (or the localities within them) had changes to their overtime, minimum wage, or child labor laws effective January 1, 2021 – and EBG’s free wage-hour app includes those changes.

EBG’s free wage-hour app also includes 2021 changes to sick leave and vacation laws.

As always, downloading the app could not be easier. It is available without charge for iPhoneiPad, and Android devices.

I had planned to focus this month’s installment of “Time Is Money” on the practice of rounding timeclock entries, addressing the history behind the practice as well as factors that make rounding today a riskier proposition than it used to be.  Then, while reviewing our previous writings on the subject, I came across my colleague Mike Kun’s treatment of the topic in our July 2019 installment, where he already said pretty much everything I had to say.

Back at the drawing board, it occurred to me that rounding is part of a broader challenge that businesses face: how best to record employee working time.  Nearly every large case we handle involving non-exempt employees includes allegations that the employer hasn’t compensated workers fully for their time. Sometimes the claim is unfair rounding, other times exclusion of potentially compensable pre-shift or post-shift activity, and recently we see more employers concerned about recordkeeping in the context of remote work.

These concerns all have a common thread:  there is no risk-free way to record employee working time.  Every timekeeping system yet invented has pros and cons, with varying opportunities for cost savings or budget-breaking overruns, employee evasion, manipulation by wayward supervisors and managers, and exposure to claims in litigation that are increasingly likely to wind up as certified class or collective actions.

As with many aspects of employment law compliance, options that tend to reduce the risk of litigation also tend to cost more.  In timekeeping, that means potentially overpaying employees for their work.  And while overpaying employees can be expensive, paying lawyers—including plaintiffs’ lawyers—to address these issues in litigation can often be even more expensive.

So what’s a well-meaning, compliance-minded employer to do? Are the only choices overpaying your employees, which in many industries can put a company out of business rather quickly, or blindly trusting your employees and your supervisory staff to handle timekeeping properly, which can put an employer on a fast track to litigation?

While there are no perfect solutions, some practices have emerged that many employers see as striking an appropriate balance between cost and litigation risk:

  1. Consider eliminating rounding.

Our 2019 post covered this topic well, and we won’t restate it all here. But increasingly, employers are moving away from rounding in order to save themselves the inconvenience and expense of litigation it tends to invite.

  1. Give more thought to the number and placement of timeclocks.

Many employers with physically large workspaces, such as factories, casinos, and hotels, have employees clock in at a central location before walking several minutes to their work area.  These employees then finish their shifts and walk several minutes to clock out for the day. Several minutes a day, every day, for hundreds or thousands of workers quickly adds up to a lot of money in wages for unproductive and potentially noncompensable time.

What if the employees had the ability to clock in much closer to their work area?  Depending on the employer’s timekeeping system, this may require purchasing more time clocks, but the potential savings from not having to pay for unproductive walking time at the start and end of shifts could quickly pay for the additional time clocks.  If employees engage in compensable donning or doffing away from their work area, placing time clocks by their changing areas serve the same goal: paying for all time the law regards as compensable, while not paying for lengthy pre-shift or post-shift walking to and from the time clock.

In work environments like call centers, where the employees are normally unable to perform compensable work away from their workstation and issues arise regarding time spent booting up, logging in, and loading applications, many employers have moved toward having employees clock in and out as they enter or leave the call center floor.  That approach may result in paying employees for an extra two or three minutes on either end of the shift, but it spares employers the common allegation in lawsuits that it took employees five, ten, or even more minutes to get their computer ready at the start of the shift or to close out at the end of the day.

There is no single correct answer that fits all workplaces, but by giving some thought to how many time clocks an employer has and where to place them, there may be opportunities to make time records more accurately reflect the compensable activity the workers perform.

  1. Provide employees an avenue for reporting time worked outside of the normal routine.

Things happen that render employee time records inaccurate or incomplete. Employees forget to clock in or out. Situations arise after hours. Employees may interact with their supervisors before or after shifts. The key to achieving compliance is to be sure that the employees have—and know about—a way to correct errors or to record working time not already reflected in the timekeeping system. These corrections may involve the supervisor in the first instance, or the employee may have the ability to make changes or to include new or additional time entries directly. If your timekeeping system recognizes only those activities that occur between in-punches and out-punches, you may be failing to capture the full scope of your employees’ compensable working time.

  1. Consider requiring creation of an auditable record whenever a supervisor or manager changes an employee’s time entry.

Time shaving by supervisors and managers continues to be a common claim in litigation, often tied to the assertion that these individuals alter their workers’ time records in order to reduce or to eliminate overtime.  One important way to prevent time shaving and reduce the likelihood of such claims is to require the timekeeping system to record the identity of any person who changes a time record, along with a short statement of the reason for each change. In addition, periodic auditing of changes to time records can help identify patterns of abnormal adjustments by certain supervisors or managers.

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Devoting some time and attention to these timekeeping issues can go a long way toward reducing the likelihood that you will face litigation down the road.  Once you establish practices that work best for your business, you will want to follow up with periodic training so that your non-exempt employees and their supervisors and managers clearly understand your policies and expectations.  Your compliance will very likely improve, and you will probably save money in the long run.

We have previously discussed on this page how rounding practices can be problematic.  Now, in Donohue v. AMN Services, LLC, the California Supreme Court has provided yet another reason for employers in California to review their time rounding practices, as well as their meal period practices.

As we previously discussed, more than eight years ago in Brinker Restaurant Corp. v. Superior Court, the California Supreme Court clarified many of the general requirements for meal and rest periods under California law.  Relevant to the decision in Donohue, the Court held that employees must be provided an opportunity to take an off-duty meal period of at least 30 minutes, and that they should be provided that opportunity within the first five hours of commencing work.  (A more detailed discussion of meal period (and rest period) requirements is here.)

The History of Donohue

In Donohue, the employer had previously used an electronic timekeeping system called “Team Time” that rounded punches to the nearest 10-minute increment:  “For example, if an employee clocked out for lunch at 11:02 a.m. and clocked in after lunch at 11:25 a.m., Team Time would have recorded the time punches as 11:00 a.m. and 11:30 a.m.  Although the actual meal period was 23 minutes, Team Time would have recorded the meal period as 30 minutes.  Similarly, if an employee clocked in for work at 6:59 a.m. and clocked out for lunch at 12:04 p.m., Team Time would have rounded the time punches to 7:00 a.m. and 12:00 p.m.  In that case, the actual meal period started after five hours and five minutes of work, but Team Time would have recorded the meal period as starting after exactly five hours of work.”  The employer “relied on the rounded time punches generated by Team Time to determine whether a meal period was short [i.e., less than 30 minutes] or delayed [i.e., not provided within the first five hours].”

Donohue filed suit against AMN Services, LLC in 2014 and the trial court certified a class of non-exempt employees in 2015 based on the plaintiff’s theory that rounding meal period times was unlawful because it resulted short or late meal periods for which no premium was paid.  The employer thereafter moved for summary judgment and the trial court granted that motion, finding that there “was insufficient evidence that AMN had a policy or practice of denying employees compliant meal periods,” and that AMN’s meal period policy complied with California law, and its practice of rounding the time punches for meal periods was proper.”

Donohue appealed and the Court of Appeal affirmed the trial court’s ruling, generally agreeing with the trial court’s reasoning.  Donohue then petitioned the California Supreme Court for review, which was granted to “address two questions of law relating to the meal period claim: whether an employer may properly round time punches for meal periods, and whether time records showing noncompliant meal periods raise a rebuttable presumption of meal period violations.”

Answering that first question, the Court held that “employers cannot engage in the practice of rounding time punches – that is, adjusting the hours that an employee has actually worked to the nearest preset time increment – in the meal period context” because California’s “meal period provisions are designed to prevent even minor infringements on meal period requirements, and rounding is incompatible with that objective.”  Answering the second question, the Court held that “time records showing noncompliant meal periods raise a rebuttable presumption of meal period violations, including at the summary judgment stage.”  Both of these conclusions are significant.

What Can Employers Do After Donohue?

Employers that round their employees’ punches in the meal period context should immediately review their practices and determine whether, after Donohue, they can lawfully continue those practices.

The Court’s other holding impacts employers beyond those that round meal period times.  In deciding that “time records showing noncompliant meal periods raise a rebuttable presumption of meal period violations, including at the summary judgment stage,” the Court essentially put the burden on employers to make an initial showing that a meal period was lawfully provided when an employee’s time record reflects otherwise.  In terms of providing evidence to meet that initial showing in a lawsuit, that can be difficult where memories fade or supervisors take other employment and are no longer controllable witnesses.  As such, employers can protect themselves by implementing certain measures.  Such measures would include not only having lawful meal and rest period policies and practices in place, but also having signed acknowledgments from employees each pay period (or each week or each day) wherein employees confirm that they received, among other things, an opportunity to take at least a 30-minute meal period within the first five hours of work.

Putting It All Together

Following Donohue, entities doing business in California will want to review their timekeeping systems and may want to consider taking another look at their employees’ time records themselves to determine whether the records reflect short or late meal periods. And they may want to consider whether they even want to continue to maintain time rounding practices.

As featured in #WorkforceWednesdayThis week on our special podcast series, Employers and the New Administration, we look at how the Biden administration’s approach to wage and hour issues will impact employers. Special podcast episodes air every other #WorkforceWednesday.

The Wage and Hour Division of the U.S. Department of Labor (DOL) has already adopted the Biden administration’s commitment to enforcement, its movement against arbitration agreements, and a fresh view on worker classification. What other wage and hour developments can employers expect under President Biden?

This episode features special guest Jon Steingart, a senior reporter for Law360’s new and expanded Law360 Employment Authority, and attorney Paul DeCamp, a past Administrator of the DOL’s Wage and Hour Division. Attorney David Garland leads the conversation.

See below for the video and the extended podcast edition. Visit our site for more news.

Video: YouTubeVimeo.

Extended Podcast: Apple PodcastsGoogle PodcastsOvercastSpotifyStitcher.

A sometimes-overlooked requirement for classifying an employee as exempt from overtime is that, with limited exceptions, the employee must be paid on a “salary basis.” [1] Indeed, when employers fail to pay their exempt employees on a salary basis, they may be subject to lawsuits alleging exempt misclassification. As such, properly paying employees on a salary basis is critical to classifying employees as exempt.

The General Rule

Among other requirements, in order for an employer to classify an employee as exempt from overtime, the employee generally must be paid on a “salary basis.”

This means that the employee must receive at least the same amount of pay each week regardless of the amount or quality of work they perform for a given week. Specifically, subject to limited exceptions, an exempt employee must “regularly receive[] each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” [2]

As we explained here, as of January 1, 2020, that means paying employees at least $684 on a weekly basis for employees classified under the executive, administrative, and/or professional exemptions. (Many states – and some cities – have higher minimum salary levels for exempt employees. For example, the minimum weekly salary for most exempt employees in California is $1,120. In Washington, that minimum can be as much as $958.30.)

Exempt Employees Cannot Be Paid Less if the Quality or Quantity of Work Varies

The overarching principle of paying employees on a salary basis is that, subject to certain exceptions, the guaranteed minimum salary “must not be subject to reduction based on the quality or quantity of the work performed. [3] That means that “an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work,” subject again to a few specific exceptions. [4]

In other words, simply because an exempt employee does not work a full 40-hour workday – but performs any work within that week – that employee’s salary may not be reduced. The employee’s pay also may not be reduced “for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” [5]

An employee’s guaranteed salary may also not be reduced if the employee does not adequately complete a certain assignment, or if the employee is not productive as he or she should have been. Although performance issues can and should be addressed in such a circumstance, the employee’s guaranteed salary may not be reduced that week as a result.

Using Variable Compensation to Supplement the Guaranteed Salary

Effective January 1, 2020, “[u]p to ten percent of the [minimum] salary amount required . . . may be satisfied by the payment of nondiscretionary bonuses, incentives and commissions, that are paid annually or more frequently.” (29 C.F.R. § 541.602(a)(3).) That does not mean that such bonuses, incentives or commissions may be capped. Rather, it “means that the amount an employer may credit against the weekly standard salary level is limited to 10 percent of the required salary amount.” [6]

Paying Compensation beyond the Guaranteed Salary

So long as an exempt employee is paid a minimum guaranteed salary, “an employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement . . . .” [7]

However, when that additional compensation is “computed on an hourly, a daily or a shift basis,” the exemption would be lost if, despite paying a minimum guaranteed weekly salary, “a reasonable relationship” does not exist between the guaranteed amount and the amount actually paid to the employee. [8] [9]  “The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.” [10]  Although there is no precise measure, the U.S. Department of Labor has opined that this test is met if the ratio between an employee’s “usual weekly earnings” and his guaranteed weekly salary is equal to or less than 1.5-to-1, but would not be met if a ratio of 1.5-to-1 would be “materially exceeded.” [11]

Exceptions to Paying on a Salary Basis

Notwithstanding the general rule that exempt employees must receive at least the same amount of pay each week regardless of the amount or quality of work they perform for a given week, there are some exceptions to the salary basis that allow employers to make certain deductions from the guaranteed salary. For a thorough discussion of those permissible deductions, please see our prior post here.

Putting It All Together

Although there are few of them, the requirements for paying exempt employees on a salary basis are critical. Employers should ensure that they are paying their exempt employees in accordance with these requirements. And, of course, they should also ensure that they are complying at all times with state and local laws, which can and do differ.

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[1] 29 C.F.R. § 541.602(a); Cal. Lab. Code § 515(a). The exception to this general rule is that certain employees can be paid on a “fee basis.” 29 C.F.R. § 541.600(a). Given its seldom use, the fee basis is not addressed here. More information about paying on a fee basis can be found at 29 C.F.R. § 541.605.

[2] 29 C.F.R. § 541.602(a).

[3] 29 C.F.R. § 541.602(a)(1).

[4] 29 C.F.R. § 541.602(a).

[5] 29 C.F.R. § 541.602(a)(1).

[6] Wage and Hour Division U.S. Department of Labor Fact Sheet # 17U (2019).

[7] 29 C.F.R. § 541.604(a).

[8] 29 C.F.R. § 541.604(b).

[9] Note that a number of courts have concluded that this “reasonable relationship” test does not apply to employees classified under the “highly compensated” exemption. E.g., Anani v. CVS RX Servs., Inc., 730 F.3d 146, 149 (2d Cir. 2013); Litz v. Saint Consulting Grp., Inc., 772 F.3d 1, 5 (1st Cir. 2014)).

[10] 29 C.F.R. § 541.604(b).

[11] U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter No. FLSA-2018-25, at 2 (Nov. 8, 2018).

In November 2020, California voters approved Proposition 22, removing businesses that operate on-demand rideshare and food delivery platforms from the scope of AB 5, California’s controversial independent contractor law.  But before voters approved Proposition 22, the Attorney General of California filed suit against two such businesses, seeking injunctive relief, restitution, and penalties.

As we wrote about here, in August 2020, a California Superior Court judge issued a preliminary injunction prohibiting those businesses from treating drivers who use their platforms as independent contractors.  The businesses appealed, but the California Court of Appeal affirmed the trial court’s ruling, rejecting the companies’ arguments that they could not be expected to change their business models on such short notice.  The businesses then petitioned the California Supreme Court to review the Court of Appeal’s decision.

Among other things, one of the businesses argued that Proposition 22 destroyed the legal basis for the injunction, and that the injunction therefore should not stand.  However, on February 10, 2021, the California Supreme Court denied the petitions for review, leaving the Court of Appeal’s decision intact.

The California Supreme Court’s decision to deny the petitions for review is a curious one in light of Proposition 22 and likely will not have any impact on the businesses’ operations going forward, as Proposition 22 carved out the businesses from the scope of the very law upon which the injunction was based. Presumably, the businesses will move the trial court to vacate the injunction based on the change in the law.

Ultimately, the California Attorney General’s lawsuit and the decisions in the case should serve as a reminder to businesses to consult with counsel to evaluate the risks associated with classifying workers as independent contractors in California.

On January 29, 2021, the U.S. Department of Labor announced the immediate termination of its Payroll Audit Independent Determination Program (PAID).  Launched in March 2018 by the Wage and Hour Division (WHD), PAID was intended to resolve wage and hour disputes with greater expediency and at lower cost to employers.  However, in the WHD’s press release, Principal Deputy Administrator Jessica Looman indicated that the program had not achieved the desired effect, stating that the PAID “program deprived workers of their rights and put employers that play by the rules at a disadvantage.”

PAID incentivized employers to self-report overtime and minimum wage violations of the Fair Labor Standards Act (FLSA) by mitigating the threat of not only penalties and extended statute of limitations, but also foreclosing affected workers from taking any private action based on the identified violations.  In exchange, the DOL would supervise settlements, approve agreements, and ensure 100% payment of back wages.

However, many were skeptical of PAID since its inception, including employers and state officials. PAID’s self-reporting provisions only resolved FLSA issues, not state law claims, exposing employers to state liability in exchange for their voluntary disclosures.  Furthermore, employers could not utilize PAID to resolve issues already under investigation by WHD or existing threat of litigation.

Despite PAID’s termination, employers should continue to be vigilant by auditing pay records and correcting any discovered wage issues.  Employers may also continue to utilize DOL-supervised settlements of FLSA claims.

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Please contact Michael S. Kun, Paul DeCamp, Jeffrey H. Ruzal, and Kevin D. Sullivan for assistance with questions regarding the FLSA and wage and hour issues.

*Law Clerk – Admission Pending 

The Wage and Hour Division of the U.S. Department of Labor (“WHD”) issued six opinion letters in January 2021.[1]  They address a number of important issues under the Fair Labor and Standards Act (“FLSA”).  To ensure wage and hour compliance, we recommend reviewing these letters closely and consulting counsel with any questions as to how they may apply to a specific business situation.

FLSA2021-1

In FLSA2021-1, the WHD addressed whether account managers employed by a life science products manufacturer were properly classified as exempt from the FLSA minimum wage and overtime provisions under the administrative employee exemption.  The administrative exemption applies to employees earning no less than $684 per week in salary or fee-basis compensation whose primary core duty is office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and includes the exercise discretion and independent judgment regarding matters of significance.  29 C.F.R. § 541.200(a).   The WHD concluded that the account managers qualified as administrative employees because they met all three of these requirements.

Salary:  The account managers received a base salary ranging from $60,000 to $90,000 and typically earned in excess of $107,432 per year in combined base salary and commissions.  They earned a guaranteed base of at least $684 per week.

Office or non-manual work related to management or general business operations:  The account managers developed relationships with target customers in order to facilitate a sales process, which required them to learn the potential customers’ business needs and requirements, and determine the services or products that the customer was most likely to purchase.  Account managers had broad discretion in targeting and working with potential customers.  They were the principal ongoing representatives of the company and served as a conduit for technical scientific customer information.  In addition, the account managers’ duty of promoting sales through a sophisticated consultative marketing process, in which they engaged with highly educated scientists and other professionals to assess their research needs and to recommend products, was related to the management of the client’s operations.

Discretion and independent judgment with respect to matters of significance:  Account managers had wide latitude in promoting and marketing products, designing portfolios of productions and solutions for potential clients, advising potential and prospective clients, and performing other consultative or servicing activities in support of a prospective or current client’s use of the employer’s products.  Although the employer provided training on sales techniques, the account managers were expected to independently develop account plans and strategies under minimal supervision and to build relationships with potential customers.  In other words, the account managers performed their duties with a high degree of independence.  In addition, the account managers could independently decide how to prospect customers and determine product solutions based on their technical knowledge and previous customer interactions—both activities requiring careful consideration of available products and client needs, and gathering and interpretation of sophisticated, unstructured data.  The employer indirectly increased its market share through the account managers’ work to build and maintain chief relationships with customers and other professionals.

All of these factors led the WHD to conclude the account managers were exempt administrative employees.

FLSA 2021-2

In FLSA2021-2, the WHD addressed whether the ministerial exception allows a private religious daycare and preschool to pay its teachers on a salary basis that would not otherwise conform to the FLSA’s requirements.  The ministerial exception applies to employees, regardless of their title, whose role is to convey a religious institution’s central message and carry out its mission.  See Our Lady of Guadalupe Sch. v. Morrisey-Berru, 140 S. Ct. 2049, 2060 (2020); U.S. Const. amend. I, cls. 1-2.  There is no rigid formula to determine application of this exception.  Under this test, teachers at religious schools can be ministers, and ministers are exempt from the FLSA’s wage and hour requirements.  See, e.g., WHD Opinion Letter FLSA2018-29 (Dec. 21, 2018).

While the WHD did not ultimately decide whether the teachers here qualified as ministers, it did reiterate that the critical inquiry is the employee’s duties, particularly whether they implicate the fundamental purpose of the exception.  To that point, the WHD noted that the Supreme Court recently observed that “educating young people in their faith, inculcating its teachings, and training them to live their faith are responsibilities that lie at the very core of the mission of a private religious school.”  Our Lady of Guadalupe, 140 S. Ct. at 2064.  In conclusion, the WHD confirmed that if the teachers qualify as ministers under the exemption, the school can pay them as salaried exempt employees or on any other basis it chooses.

FLSA 2021-3

In FLSA 2021-3, the WHD addressed whether three entities satisfied the requirements of FLSA Section 13(a)(3), pursuant to which employees of an amusement or recreational establishment, organized camp, or religious or non-profit education conference center are exempt from the federal minimum wage and overtime requirements if the entity meets one of two tests of seasonality.  The first entity organized, led, and facilitated nature walks, hikes, day-trips and other backpacking and overnight camping excursions for children.  Although the entity provided shorter events and day hikes throughout the year, it did not offer overnight trips during the colder months between November and April.  The events took place throughout nearby forests, rivers, mountains, fields, and beaches; the entity did not have a permanent establishment other than administrative offices with no programmatic function.  The second entity was a non-profit religious ministry that ran a ranch-style camp and retreat center with distinct high and low seasons.  This entity used the accrual method of accounting for tax and accounting purposes and received donations.  The third entity, a family-owned and operated employer, produced events for individuals, companies, non-profits, schools, universities, and public entities at a variety of event sites by planning and delivering, installing, and often operating amusement rides, attractions, entertainment concession equipment, personnel, and related items.  It maintained a warehouse and administrative offices where it stored and maintained inventory and conducted year-round sales and business activities, but did not offer any of its event services to the public at this location.

To provide context, unlike the white collar exemptions, the exemption available under Section 13(a)(3) turns on the attributes and operations of the employer.  Although Section 13(a)(3) does not define the phrase “amusement or recreational establishment,” the WHD’s interpretive regulations adopt the Supreme Court’s construction of “establishment” for the retail and service establishments exemption in since-repealed Section 13(a)(2), which states simply that an “establishment” is a distinct physical place of business.  29 C.F.R. §§ 779.23, 779.303-.305; A.H. Phillips, Inc. v. Walling, 324 U.S. 490 (1945); Mitchell v. Bekins Van & Storage Co., 352 U.S. 1027 (1957).  Several business operations on the same premises and even under the same roof may constitute separate establishments if each operation is physically separated, functionally operates as a separate unit with separate records and bookkeeping, and does not exchange employees more than occasionally.  See 29 C.F.R § 779.305.

Next, the WHD explained that an establishment is an “amusement or recreational” establishment if it is frequented by the public for its amusement or recreation.  In other words, it must be generally acceptable to the public and must exist for the purpose of amusement of recreation.  While this inquiry takes into account all relevant circumstances, one key factor is the amount of income derived from the recreational or amusement aspects of the entity, compared to other aspects.  Applying these standards, the WHD has found that recreational areas, parks, tennis courts, swimming pools, golf and miniature golf courses, ice skating rinks, football and hockey fields, playgrounds, stadiums, zoos, fairgrounds, theaters, campsites, beaches, boardwalks, and museums may all generally qualify as amusement or recreational establishments under Section 13(a)(3).  In contrast, hotels, motels, conventions, restaurants, municipal governments or departments, marinas, and apartment or condominium facilities with amenities generally do not qualify.

The WHD then turned to the Calendar Test and Receipts Test, which are designed to ensure that only truly seasonal employers qualify for the Section 13(a)(3) exemption.  Under the Calendar Test, an establishment must not operate for more than seven months in any calendar year (i.e., the period beginning January 1 and ending December 31), except some exempt employees may work more than seven months in the year or year-round so long as the facility is not open as the amusement or recreational establishment for more than seven months.  Under the Receipts Test, the establishment’s average receipts for any six months of the preceding calendar year must be no more than 33-1/3% of its average receipts for the other six months of the year.  To determine whether an establishment satisfies the Receipts Test, the WHD assesses whether the average total receipts for the six months in which receipts were largest is more than 3 times the average receipts for the remaining six months in which receipts were smallest.  An amusement or recreational establishment that does not satisfy either of the Calendar Test or Receipt Test will not qualify for the exemption.

Applying these standards, the WHD assessed each of the three entities in turn.

Entity One:  The WHD concluded the first entity was not a qualifying establishment for purposes of Section 13(a)(3).  Although the WHD accepted the entity’s representation that it satisfied the Receipts Test and found that the entity’s business of facilitating hikes, camping trips, and other outdoor events had an amusement or recreational character, the various outdoor locations—and lack of a fixed, non-administrative location—did not square with the concept of “establishment” required for the exemption to apply.  As the WHD explained, an entity that offers amusement or recreational services must have a physical location that is in some way used in any one of the activities that comprise its amusement or recreational character, even if such use is minimal, occasional, or infrequent, such as carnivals or festivals.  Here, the entity’s only distinct physical location, the administrative office, was entirely divorced from its amusement or recreational functions.  Moreover, the outdoor locations at which it held its events were not distinct physical places of business because the entity did not occupy and control it for the duration of its presence or transform it in any way into its place of business.

Entity Two:  For the second entity, the WHD addressed only whether its use of the accrual method of accounting for tax and other purposes could satisfy the Receipts Test, and relatedly, whether the entity should include some or all types of discretionary charitable donations when calculating average receipts.  Although the WHD previously had not answered this question or addressed it in its opinion letters, it relied on the plain meaning of the term “receipts”—the act of receiving money paid for goods or services—to conclude that Section 13(a)(3) refers to the money actually received in exchange for goods or services at the time it was received, without incorporating concepts of accrual accounting.  The WHD acknowledged the potential policy merits of using an accrual method of accounting to determine seasonality, noting that it was more widespread and more accurately reflects the operation of most businesses than a case receipts method.  Nevertheless, the WHD opined that the FLSA currently forecloses the consideration of such factors.  Turning to the second question of whether charitable gifts and donations constitute receipts, the WHD concluded that such payments are not counted under the Receipts Test because they are not in exchange for an amusement or recreational product or service provided by the entity to the donor.

Entity Three:  In assessing whether the third entity qualified for the Section 13(a)(3) exemption, it reverted to the analysis of the “establishment” requirement.  Specifically, while the third entity provided amusement and recreational activities, it did not do so at its own location or at a fixed location.  Instead, it had a warehouse and administrative offices that it used exclusively in a support capacity.  In addition, while the third entity supplied, installed, and in some cases, operated amusement rides and other attractions, such events did not appear to involve taking temporary possession of an event space, such as a fairground or a convention center, and converting it into its place of business.  It merely helped clients produce events on the client’s premises, for a very limited duration.

FLSA 2021-5

In FLSA 2021-5, the WHD addressed the proper calculation of overtime pay when a tipped employee works as a server and bartender, and receives tips and amounts charged as automatic gratuities or service charges.  Per the tip credit provision in Section 3(m)(2) of the FLSA, an employer who pays it tipped employees at least $2.13 per hour in cash wages can take a “tip credit” equal to the difference between the cash wages paid and the federal minimum wage (i.e., $7.25 per hour), provided it doesn’t exceed the amount of tips actually received or $5.12 per hour ($7.25 – $2.13).  29 U.S.C. § 203(m)(2)(A); 29 C.F.R. §§ 531.59-60.  Tips received by an employee in excess of the tip credit need not be included in the regular rate.  In contrast, a mandatory service charge, such as 15 percent of the bill, is not a tip and must be included in the regular rate when paid to employees.  29 C.F.R. §§ 531.52, 531.55.  For a tipped employee, the regular rate of pay consists of both the cash wage and any tip credit.  29 C.F.R. § 531.60.   For employees who within a single workweek work at two or more different types of work with different non-overtime rates of pay, the regular rate of pay is the weighted average of such rates.  29 C.F.R. § 778.115.  In other words, the employee’s total earnings include the employee’s compensation during the workweek from all such rates, which then divide into the total number of hours worked at all jobs to determine the regular rate of pay.

Applying these principles, the WHD provided the overtime pay calculation for an employee who, within a single workweek, worked 18 hours as a server earning $2.13 per hour as a cash wage and three eight-hour shifts as a bartender earning a $75 per shift wage, and also received $732 in tips and $160 in service charges:

Total Straight Time (i.e., Non-Premium) Wages:

  • 18 hours worked as a server x $7.25 per hour ($2.13 cash wage + $5.12 tip credit) = $130.50
  • 3 bartender shifts x $75 per shift = $225
  • $130.50 + $225 + $160 in service charges = $515 (total straight time pay)

Regular Rate of Pay Calculation:

  • $515.50 (total straight time pay) / 42 total hours worked = $12.27 regular rate of pay

Overtime Premium Due:

  • $12.27 (regular rate of pay) x .5 (half-time due for all hours worked over 40) x 2 overtime hours = $12.27 (overtime premium due)

The WHD noted that it included the total service charges in this calculation on the assumption that they were paid only for the bartending shifts, explaining that if the service charges were also paid for the time worked as a server, it would lower the regular rate because part of the service charge would be credited toward the cash wage paid for server hours, thereby diminishing the amount of service charge included.

FLSA2021-6

In FLSA2021-6, the WHD addressed whether staffing firms that recruit, hire, and place employees on temporary assignments with clients can fall under the “retail or service establishment” exemption of Section 7(i) of the FLSA.  The retail or service establishment exemption applies to employees of a retail or service establishment paid at a rate that is in excess of one and one-half times the minimum hourly rate applicable to them and who receive at least half of their compensation from commissions on goods or services for a representative period of not less than one month.  29 U.S.C. § 207(i).  The Opinion Letter addressed the first prong of this exemption.

A business qualifies as a “retail or service establishment” if it (a) engages in the making of sales of goods or services, (b) 75 percent of its annual dollar volume of sales of goods or services (or of both) “is recognized as retail sales or services in the particular industry,” and (c) “not over 25 percent of its sales of goods or services, or of both, [are] for resale.”  29 C.F.R. § 779.313.  The WHD opined that the staffing firms under review likely meet this definition.

First, the WHD found the staffing firms may be considered engaged in the making of sales of goods or services.  The WHD explained that “courts have repeatedly held that businesses may qualify as retail or service establishments when their customers are predominantly commercial entities.”  Thus, reasoned the WHD, since staffing firms sell “services” to commercial entities—namely, the services of temporary workers—they may meet this first part of the definition of retail or service establishment.

Second, the WHD found that the staffing firms could also meet the second part of the definition.  The DOL previously considered “employment agencies” among a list of establishments that categorically could not qualify as a “retail or service establishment” under any circumstance because they lacked a retail concept.  However, some federal courts found these categorical exclusions to be arbitrary and “contrary to reason.”  See, e.g., Martin v. Refrigeration Sch., Inc., 968 F.2d 3, 7 n. 2 (9th Cir. 1992).

Accordingly, the DOL recently repealed these categorical exclusions, instead applying its “retail concept” to all establishments.  The WHD held that the staffing agencies under review have a retail concept because their services are offered to businesses in the general public, at the “end of the stream of distribution,” not in bulk, and do not involve the manufacturing process.  See 29 C.F.R. § 779.318(a).

Finally, the WHD found that the staffing agencies under review could meet the third (and last) component of the retail or service establishment definition because they “rarely, if ever, ‘re-sold’” temporary employees to “other businesses.”  The WHD noted, however, that in the staffing context, employees may be “resold” where, for example, “one staffing firm refers a worker (for a fee) to a second staffing firm that ultimately assigns the worker to a business.”

The upshot of the Opinion Letter is that in line with exemptions now being given a “fair read,” as opposed to being narrowly construed, all businesses may potentially fall under the “retail or service establishment” exemption.  However, as there are numerous requirements to satisfy this exemption (including ones that were not addressed in the Opinion Letter), businesses would be wise to enlist employment counsel before classifying their workers under this exemption.

FLSA2021-7

In FLSA2021-7, the WHD addressed whether certain small-town and community news source journalists are creative professionals under Section 13(a)(1) of the FLSA and, therefore, exempt from the FLSA’s minimum wage and overtime requirements.  An artistic or creative professional is exempt if the employee’s primary duty requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work.  29 C.F.R. § 541.302(a).  Recognized fields of artistic or creative endeavor include music, writing, acting, and the graphic arts.  Id. at § 541.302(b).

At one time, the WHD took the position that newspaper reporters generally did not fall under this exemption, based on the belief that only a “minority [of reporters’] work depends primarily on invention, imagination, or talent.”  14 FR 7730, 7741 (Dec. 28, 1949).  Eschewing broad generalizations, the WHD amended its regulations in 2004 and recognized that journalists’ duties “vary along a spectrum from the exempt to the nonexempt,” which requires a “case-by-case” analysis.  69 FR 22,121, 22,158 (Apr. 23, 2004).

A lingering question remained as to whether a distinction should be made between small-town journalists and journalists working for major, national publications, such as the New York Times or Washington Post.  Some court rulings suggest that small-town journalists are less likely to be exempt.

Giving the exemption a “fair read,” as opposed to narrowly construing it, the WHD opined that such a distinction should not be made, and found that the employer’s journalists likely met the duties test of the creative professional exemption.  The journalists’ duties included:

  • Originating and developing creative, engaging, shareable, content-driven stories and live shots, relying on creativity, memorable storytelling, and unique perspectives;
  • Identifying, researching, and, when appropriate, interviewing sources of background information, including witnesses;
  • Composing and producing unique and captivating stories;
  • Interpreting and analyzing developing news stories; and
  • Operating autonomously and without constant supervision, subject to occasional check-ins and final editorial review for print or broad.

This Opinion Letter provides good authority for the proposition that there is no presumption that small-town journalists are non-exempt.  This is a welcome development for small newspapers and other media outlets.

*****************************************************************************

[1] The WHD originally issued nine opinion letters but subsequently withdrew opinion letters FLSA 2021-4, FLSA2021-8, and FLSA2021-9 for the purported reason that they are based on rules that have not gone into effect.

In a provocative  decision in the case known as  Swales v. KLLM Transport Servs., L.L.C., No. 19-60847 (5th Cir. 2021), the U.S. Court of Appeals for the Fifth Circuit broke from the pack by upending the standard two-step process for Fair Labor Standards Act (“FLSA” or the “Act”) collective certification. The Court opined that the two-step process followed by many, if not most, district courts throughout the country wrongly permitted conditional certification of collective actions without the appropriate evidentiary support to properly determine whether members of the putative collective are “similarly situated” to the named plaintiff(s) in the underlying lawsuit.

The decision could have a tremendous impact upon FLSA litigation going forward, particularly if other courts adopt the Swales Court’s analysis.

FLSA Conditional Certification and the Lusardi Framework

The FLSA provides that employees may proceed collectively when they are “similarly situated” — a term that is not defined anywhere in the Act. Nor does the FLSA reference “certification” or “notice” with regard to collective actions, which left the courts to create the FLSA collective action process.

The U.S. District Court for the District of New Jersey was a trailblazer in FLSA collective action procedure with its decision in Lusardi v. Xerox Corp., 118 F.R.D. 351 (D.N.J. 1987), in which the Court crafted a two-step certification process for an FLSA collective.  The first step of the collective certification process, referred to as “conditional certification,” requires plaintiffs to allege that they and others similarly situated were subject to an employer’s policy, plan or practice that was in violation of the FLSA.  When considering whether to grant conditional collective certification, district courts often rely on scant evidence, such as self-serving declarations in which putative members of the collective attest that they are similarly situated to the named plaintiff and that their employer maintained a common policy, plan or practice that was in violation of the FLSA. If the court determines that plaintiff has cleared this evidentiary “low bar,” it will then permit plaintiff to disseminate notice to members of the putative collective inviting them to join the action.

The second-step of the collective certification process occurs at the conclusion of discovery when defendant can file a motion with the court to decertify the conditionally-certified collective, relying on documentary and testimonial evidence demonstrating that the members of the collective are not, in fact, similarly situated to the named plaintiff.

The Fifth Circuit Rejects Lusardi

The plaintiffs in Swales brought suit for violation of the FLSA’s minimum wage requirement, arguing that their employer, a refrigerated goods transportation company, misclassified them – and other allegedly similarly situated drivers – as independent contractors rather than employees.  Applying Lusardi, the District Court conditionally certified a collective action, but in so doing, also authorized defendant to pursue an interlocutory appeal, which paved the way for the Fifth Circuit to examine the issue before the District Court’s decision became a final judgment.

In rejecting the Lusardi framework, a panel for the Fifth Circuit criticized the two-step certification process, stating that instead of “applying ad hoc tests of assorted rigor in assessing whether potential members are ‘similarly situated,’” district courts “must rigorously scrutinize” whether potential opt-in plaintiffs are similarly situated “at the outset of litigation.” Eschewing the lenient first-step of the process, the Court crafted a test whereby district courts must first identify, at the outset of a case, what facts and legal considerations will be material to determining whether a group of employees is “similarly situated” before authorizing preliminary discovery. The amount of discovery will vary case by case, but the initial determination must be made as early as possible. The Court opined that its more rigorous initial step of the collective certification process adopts a “workable, gatekeeping framework for assessing, at the outset of litigation, before notice is sent to potential opt-ins, whether putative plaintiffs are similarly situated – not abstractly but actually.”

In pronouncing its alternative gatekeeping framework, the Court noted that nothing in the FLSA or relevant Supreme Court precedent interpreting it requires or recommends any certification process. Instead, the law provides that the district court’s job is ensuring that notice goes out to those who are “similarly situated” in a way that avoids endorsing the merits of the case. Ignoring this analysis at the outset runs the risk of crossing the line from using notice as a case-management tool – its intended purpose – to using notice as a claims-solicitation tool.

What’s Next?

The Fifth Circuit’s “gatekeeping” approach may serve to benefit employers through avoidance of “rubber stamped” conditional collective certification that sets the stage for often sprawling and expensive discovery, and subsequent costly motion practice for defendants to attempt to decertify the conditionally-certified collectives.  On the other hand, the Fifth Circuit’s ruling may result in significant early discovery to determine whether potential members of the collective are similarly situated, which could be costly to employers.

Only time will tell whether the Fifth Circuit’s approach creates efficiencies and advantages for employers.  It also remains to be seen whether other circuits will likewise abandon the two-step Lusardi approach and adopt the Swales analysis. At the very least, pending an unusual development, the Swales test will be the law in the Fifth Circuit.

*Law Clerk – Admission Pending 

As part of a “third wave” of executive orders, on January 22, 2021, President Biden issued an executive order instructing the Director of the U.S. Office of Personnel Management to “provide a report to the President with recommendations to promote a $15/hour minimum wage for Federal employees.”  The Biden Administration announced via a Fact Sheet published on the White House’s website that the move is purportedly designed to ensure that the federal government is a model employer:

[Federal employees] keep us healthy, safe, and informed, and their work transcends partisan politics. They are health care workers who care for veterans, the elderly, and the disabled. They are expert scientists, medical doctors, and technicians who maintain world-class standards, prevent and combat the spread of infectious diseases, and save countless lives. They deliver our mail, run our national parks, keep our federal buildings up and running, help protect us against climate change and environmental poisoning, and ensure that the law is applied faithfully and fairly. They are talented, hard-working, and inspiring Americans, worthy of the utmost dignity and respect.

(Click here to read the Fact Sheet.)

The Fact Sheet also announced that President Biden directed his administration “to start the work that would allow him to issue an Executive Order within the first 100 days that require federal contractors to pay a $15 minimum wage and provide emergency paid leave to workers.”  As the federal government is the nation’s largest employer, these proposed executive orders, if enacted, could affect a large swath of workers.

In addition, as many commentators have suggested, these orders may be a stepping stone to raise the minimum wage for private-sector employees as well, which is currently set at $7.25 per hour.  Indeed, in Biden’s proposed $1.9 trillion stimulus plan, dubbed the American Rescue Plan, is a proposal to increase the minimum wage to $15 per hour across the board, as well as give employees entitlements to sick leave and other benefits.  This would have huge implications for American employers, and require them to audit their existing pay practices to ensure compliance.