State Wage and Hour Laws

In most wage and hour cases, each workweek gives rise to a separate claim, at least for statute of limitations purposes. Thus, an employee seeking payment for alleged off-the-clock work or an independent contractor claiming misclassification and entitlement to overtime ordinarily may seek back wages and related recovery only for work performed within a set amount of time—usually two to six years preceding the filing of the complaint, depending on the jurisdiction—preceding the filing of the complaint. But what happens to the statute of limitations when a plaintiff tries to bring a class action under state law, the court denies class certification, and a new plaintiff seeks to bring a subsequent class action presenting the same claims?

On June 11, 2018, the Supreme Court provided the answer in China Agritech, Inc. v. Resh. In short, the Court held that although a class action suspends the running of the limitations period for individual potential class members who subsequently seek to join a suit or to file their own individual case, the class action does not permit the filing of subsequent time-barred class actions.

American Pipe Tolling

The Supreme Court first addressed the interplay of class actions and statutes of limitations more than four decades ago. In American Pipe & Construction Co. v. Utah, the Court concluded that a timely-filed complaint seeking relief on behalf of a class under Rule 23 of the Federal Rules of Civil Procedure suspends the running of the statute of limitations for potential class members, and that, upon the denial of class certification, members of the unsuccessful class may intervene in the original case without erosion of their claims to the statute of limitations. 414 U.S. 538, 544, 552-53 (1974).

Nine years later, the Court concluded that so-called American Pipe tolling applies not only when members of the pleaded class intervene in the original suit, but also when they file their own individual cases. Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 350, 353-54 (1983). An open question following American Pipe and Crown, Cork is whether these tolling principles also apply to subsequent class actions.

The Supreme Court’s Ruling

In China Agritech, a company’s stock price dropped following public disclosure of allegedly fraudulent conduct by the company. Claims accrued on February 3, 2011, and on February 11, 2011, a plaintiff filed a putative class action under the Securities Exchange Act of 1934, which provides for a two-year statute of limitations. The court denied class certification in May of 2012, and the original case settled in September 2012, leading to dismissal.

The following month, the same counsel filed a second putative class action against the company alleging the same claims on behalf of a new named plaintiff. The court again denied class certification, leading to another settlement and dismissal.

On June 30, 2014—more than two years after the February 3, 2011 accrual of the claims—yet another plaintiff, represented by new counsel, commenced a third putative class action, which made its way to the Supreme Court. The district court dismissed the complaint as untimely, holding that the first two class complaints did not toll the time to bring further class claims. The U.S. Court of Appeals for the Ninth Circuit reversed.

The Supreme Court granted certiorari to resolve a three-way split among the federal appellate courts on the tolling issue. The Court framed the question presented as follows: “Upon denial of class certification, may a putative class member, in lieu of promptly joining an existing suit or promptly filing an individual action, commence a class action anew beyond the time allowed by the applicable statute of limitations?” (Slip Op. at 2.) Justice Ginsburg’s answer, in a decision joined by seven other justices, was that “American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.” (Id.)

The Court noted that the reason for American Pipe tolling for individual claims is that “economy of litigation favors delaying those claims until after a class-certification denial. If class certification is granted, the claims will proceed as a class and there would be no need for the assertion of any claim individually.” (Slip Op. at 6.) If a court denies class certification, “only then would it be necessary to pursue claims individually.” (Id.)

But when a case involves class claims, “efficiency favors early assertion of competing class representative claims. If class treatment is appropriate, and all would-be representatives have come forward, the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel.” (Slip Op. at 7.) In cases in which “the class mechanism is not a viable option for the claims, the decision denying certification will be made at the outset of the case, litigated once for all would-be class representatives.” (Id.)

The Court cautioned that the plaintiffs’ “proposed reading would allow the statute of limitations to be extended time and again; as each class is denied certification, a new named plaintiff could file a class complaint that resuscitates the litigation.” (Slip Op. at 10.) The Court observed that although “[t]he Federal Rules [of Civil Procedure] provide a range of options to aid courts” in managing complex litigation, “[w]hat the Rules do not offer is a reason to permit plaintiffs to exhume failed class actions by filing new, untimely class actions.” (Id. at 14-15.)

The Concurrence

Concurring in the judgment only, Justice Sotomayor took issue with the Court’s holding as applied to cases outside the securities context. She addressed several differences between the procedures required by the Private Securities Litigation Reform Act, including publication of notice of the filing of a putative securities class action, designed to encourage active participation early in the case by other potential lead plaintiffs and counsel, not required for other class actions under Rule 23. (Concurrence at 2-4.) Justice Sotomayor agreed with the denial of tolling in the case before the Court, but she would have limited the ruling to cases subject to these additional procedural requirements and would not have issued a decision applicable to all Rule 23 cases. (Id. at 1, 7.)

What the Decision Means for Employers

In light of China Agritech, employers should expect courts to reject the use of American Pipe tolling to allow plaintiffs in wage and hour putative class actions to seek relief for workweeks that are outside the applicable limitations period. Courts will likely continue to allow individual claims for those otherwise time-barred workweeks when supported by American Pipe tolling. In addition, courts may continue to allow subsequent class actions by members of previously denied classes, but without the benefit of tolling. As always, employers faced with a wage and hour putative class action should carefully consider all available defenses, including the statute of limitations as to individual and class claims.

More than 7 months after hearing oral argument on an issue that will affect countless employers across the country – whether employers may implement arbitration agreements with class action waivers — the United States Supreme Court has issued what is bound to be considered a landmark decision in Epic Systems Corp. v. Lewis (a companion case to National Labor Relations Board v. Murphy Oil USA and Ernst & Young LLP v. Morris), approving the use of such agreements.

The decision will certainly have a tremendous impact upon pending wage-hour class and collective actions, many of which had been stayed while the courts and parties awaited the Supreme Court’s decision.  And it is likely to lead many more employers to implement arbitration agreements with class action waivers going forward, if only to avoid the in terrorem effect of those types actions.

In a 5-4 vote along the very lines that many commentators had predicted, with newest Supreme Court Justice Neil Gorsuch penning the majority opinion, the Supreme Court determined that the law is “clear” that class action waivers are enforceable under the Federal Arbitration Act (“FAA”) – and that they are not prohibited by the National Labor Relations Act (“NLRA”), as several Circuit Courts had concluded following the National Labor Relations Board’s (“NLRB”) DL Horton decision.

In reaching this decision, the Court took great pains to address – and reject – the various arguments presented by the former NLRB General Counsel, the related labor union and various amicus briefs submitted by the plaintiffs’ bar.  In so doing, the Court noted that for the first 77 years of the NLRA, the NLRB had never argued that class action waivers violated the Act; instead, the FAA and the NLRA had coexisted peacefully.  In fact, as the Court pointed out, as recently as 2010 the NLRB’s General Counsel had asserted that class action waivers did not violate the NLRA.

The decision is an unqualified victory for employers, particularly those who already have such arbitration agreements in place.  Given the prevalence of wage-hour class and collective actions, and the potential exposure in even the most baseless of suits, other employers would be wise to consider whether they, too, wish to implement such agreements.

Not unimportantly, the decision might give employers new grounds to argue that employees who sign such agreements are prohibited from pursuing representative claims under California’s Private Attorneys General Act (“PAGA”).  Even if those new arguments prove to be unavailing – to date, the California state courts have held that such claims cannot be compelled to arbitration because they belong to the state, not the employee –the Supreme Court’s decision could be used to require that an individual arbitrate his or her individual claims first such that he or she would not have standing to pursue the PAGA claims if the employer prevailed in arbitration.

And employers should be mindful that in some states (California again), an employer must pay virtually all of the costs of the arbitration process, a reality that has led more than a few plaintiffs’ lawyers to file multiple individual arbitrations in order to drive up employers’ costs to try to force them to the settlement table.

Our colleagues Jeffrey H. Ruzal, Adriana S. Kosovych, and Judah L. Rosenblatt, attorneys at Epstein Becker Green, co-authored an article in Club Director, titled “Recent Trends in State and Local Wage and Hour Laws.”

Following is an excerpt:

As the U.S. Department of Labor (DOL) appears to have relaxed its employee protective policy-making and enforcement efforts that grew during the Obama administration, increasingly states and localities have enacted their own, often more protective, employee-protective laws, rules and regulations. To ensure full wage and hour compliance, private clubs should consult their HR specialists and employment counsel and be mindful of all state and local requirements in each jurisdiction in which they operate and employ workers. Here are just some of the recent wage and hour requirements that have gained popularity among multiple jurisdictions.

Click here to download the full version in PDF format.

When California employees bring lawsuits alleging minimum wage, overtime, meal period or rest period violations, they typically bring additional claims that are purportedly “derivative” of these substantive claims.  One of these derivative claims is for wage statement (i.e., paystub) violations, alleging that because the employee was paid not all wages he or she allegedly earned, the wage statements he or she was provided were not accurate.

The maximum penalty for a wage statement violation under the California Labor Code is $4,000 per employee.  With such a significant potential penalty, it is no wonder that plaintiffs’ attorneys typically tack on these types of claims, especially in proposed class actions, driving up the potential value of a case.

On May 8, 2018, however, the California Court of Appeal published an employer-friendly decision that could operate to defeat these claims in many cases – if it is not reversed by the California Supreme Court.

In Maldonado v. Epsilon Plastics, Inc., ___ Cal.App.5th ___ (B278022, Apr. 18, 2018), the Court of Appeal confirmed that a wage statement claim fails as a matter of law when it is based on the alleged failure to show all wages purportedly “earned” but the wage statements accurately reflect the wages paid to the employee.  The Court agreed with the employer’s “commonsense position that the pay stubs were accurate in that they correctly reflected . . . the pay received” and held that a failure to pay wages “does not mandate that [employees] also receive penalties for the wage statements which accurately reflected the[] compensation” they were paid.

The Court of Appeal’s decision in Maldonado is a welcome one for employers that have had to face wage statement claims that are tacked on by plaintiffs’ lawyers for the purpose of increasing potential exposure.  Because this is the first published opinion directly deciding this issue, employers now have the tool necessary to seek to strike these claims.

Of course, it is possible that the California Supreme Court will review Maldonado.  If it were to do so, it would not be entirely surprising for the Court to reverse the decision, as the Supreme Court has done in other employment cases in recent years where the Court of Appeal had issued employer-friendly interpretations of the California Labor Code.

On May 3, New Jersey Governor Phil Murphy signed an executive order (“Order”) establishing a Task Force on Employee Misclassification (“Task Force”) to address concerns surrounding the misclassification of employees as independent contractors. The Order estimates that misclassification may deprive New Jersey of over $500 million yearly in tax revenue and deprive workers of employment-related benefits and protections to which they are entitled.

The Task Force’s mandate is to provide advice and recommendations to the Governor’s Office and Executive Branch Departments and agencies on both strategies and actions to fight misclassification, including:

  1. Examining and evaluating existing misclassification enforcement by executive departments and agencies;
  2. Developing best practices by departments and agencies to increase coordination of information and efficient enforcement;
  3. Developing recommendations to foster compliance with the law, including by educating employers, workers, and the public about misclassification; and
  4. Conducting a review of existing law and applicable procedures related to misclassification.

The Task Force will be comprised of at least 12 members, including three representatives from the Department of Labor and Workforce Development; three representatives from the Department of the Treasury; and one representative each from the Department of Law and Public Safety, the Department of Agriculture, the Department of Banking and Insurance, the Department of Human Services, the Department of Transportation, and the Economic Development Authority.

The Order calls for the Task Force to organize and meet as soon as possible to begin its work and is a likely harbinger of increased governmental audits and enforcement actions. Accordingly, the time is ripe for employers to review their policies and practices with respect to consultants and other independent contractors to ensure they meet New Jersey’s stringent ABC Test for classification of independent contractors, which we have previously discussed.

In 2012, we were proud to introduce our free wage and hour app.  Over the years, thousands of clients and potential clients have downloaded the app on their mobile phones and tablets.

For 2018, we are pleased to introduce a brand-new version of the app, available without charge for iPhoneiPad, and Android devices. See our press release here.

Importantly, the 2012 and 2014 versions of the app have been retired.  If you had downloaded them, you will need to download the new version.

The new version of the app includes wage-hour summaries for all 50 states, as well as D.C. and Puerto Rico.  And it includes updates for 2018, including new state minimum wages and tipped employee rates.

Now more than ever, we can say that the app truly makes nationwide wage-hour information available in seconds. At a time when wage-hour litigation and agency investigations are at an all-time high, we believe the app offers an invaluable resource for employers, human resources personnel, and in-house counsel.

Key features of the updated app include:

  • Summaries of wage and hour laws and regulations, including 53 jurisdictions (federal, all 50 states, the District of Columbia, and Puerto Rico)
  • Available without charge for iPhoneiPad, and Android devices
  • Quick access to, and a direct feed of, Epstein Becker Green’s award-winning Wage and Hour Defense Blog, which provides up-to-date commentary on wage and hour developments
  • Social media feeds from Twitter, Facebook, LinkedIn, and YouTube
  • Quick links to Epstein Becker Green’s attorneys and practices – and more!

If you haven’t done so already, we hope you will download the free app soon.  To do so, you can use these links for iPhoneiPad, and Android.

For more than 70 years, the Supreme Court has construed exemptions to the Fair Labor Standards Act (“FLSA”) narrowly. In A.H. Phillips, Inc. v. Walling, for example, the Court stated that “[t]o extend an exemption to other than those plainly and unmistakably within its terms and spirit is to abuse the interpretative process and to frustrate the announced will of the people.”  324 U.S. 490, 493 (1945).  The Supreme Court has restated this rule many times in the intervening years, and the lower courts have followed, citing this principle in virtually every significant case involving overtime exemptions.

On April 2,2018, the Supreme Court issued its highly anticipated ruling in Encino Motorcars, LLC v. Navarro.  Marking the second time that the case has gone to the high court, the ruling held that the specific employees at issue—service advisors at an automobile dealership—are exempt from the FLSA’s overtime requirement.  What people will long remember the 5-4 ruling for, however, is not the exempt status of the particular plaintiffs in that case, but rather the Court’s rejection of the principle that courts construe FLSA exemptions narrowly.  By removing a heavy judicial thumb from the workers’ side of the scales in FLSA exemption litigation, Encino Motorcars is likely to figure prominently in many pending and future exemption cases.

Background

In one of the law’s lesser-known subsections, FLSA section 13(b)(10)(A) exempts from the federal overtime requirement “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers[.]” 29 U.S.C. § 213(b)(10)(A).  In the early 1970s, the U.S. Department of Labor originally interpreted this language as not applying to so-called “service advisors,” whom the Court described as “employees at car dealerships who consult with customers about their servicing needs and sell them servicing solutions.”  (Opinion at 1-2.)  Courts took a different view, and from 1978 to 2011 the Department accepted the view that service advisors are exempt.  (Id. at 2.)  In 2011, the Department changed course again, issuing a regulation stating that service advisors are not “salesmen” and thus are not within the scope of the exemption.  (Id. at 3.)

In 2012, current and former service advisors sued a California car dealership, asserting that they are non-exempt and entitled to overtime. The dealership moved to dismiss the complaint, arguing that the section 13(b)(10)(A) exemption applies.  The district court agreed and dismissed the case, but on appeal the U.S. Court of Appeals for the Ninth Circuit reversed.  In April 2016, the Supreme Court reversed the Ninth Circuit, concluding in a 6-2 ruling that the Department’s 2011 regulation is invalid and entitled to no deference, and remanding the matter to the Ninth Circuit to consider the meaning of the statutory language without the regulation.  (Opinion at 3-4 (discussing Encino Motorcars, LLC v. Navarro, 579 U.S. — (2016)).)  On remand, the Ninth Circuit again held that the service advisors are not exempt, and the case went back up to the Supreme Court.

The Supreme Court’s Ruling

The meaning of the words in the statute

Noting the parties’ agreement that certain language in the exemption either does not apply or is not at issue, Justice Thomas, writing for the Court, distilled the legal question to whether service advisors are “salesm[e]n . . . primarily engaged in . . . servicing automobiles” for purposes of the statute’s overtime exemption. (Opinion at 5.)  The Court began its analysis by observing that “[a] service advisor is obviously a ‘salesman.’”  (Id. at 6.)  The Court looked to dictionary definitions of “salesman,” concluding that the term means “someone who sells goods or services.”  (Id.)  The Court stated that “[s]ervice advisors do precisely that.”  (Id.)

The Court then held that “[s]ervice advisors are also ‘primarily engaged in . . . servicing automobiles.’” (Opinion at 6.)  Once again turning to dictionaries, the Court observed that [t]he word ‘servicing’ in this context can mean either ‘the action of maintaining or repairing a motor vehicle’ or ‘[t]he action of providing a service.’”  (Id.)  To the Court, “[s]ervice advisors satisfy both definitions.  Service advisors are integral to the servicing process.”  (Id.)  Although they “do not spend most of their time physically repairing automobiles[,]” neither do “partsmen,” another category of employees whom “[a]ll agree . . . are primarily engaged in . . . servicing automobiles.”  (Id.)  Thus, “the phrase ‘primarily engage in . . . servicing automobiles’ must include some individuals who do not physically repair automobiles themselves”; and the verbiage “applies to partsmen and service advisors alike.”  (Id.)

The inapplicability of an arcane rule of statutory construction

The Court then rejected the Ninth Circuit’s use of the so-called “distributive canon,” a principle of statutory construction whereby courts may interpret a statute in a manner other than indicated by its plain language, and instead relate certain words back only to particular words appearing earlier in the statute. Here, the exemption uses the expansive, disjunctive word “or” three times, but the Ninth Circuit declined to read “or” in its usual sense, instead interpreting “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements” as meaning “any salesman . . . primarily engaged in selling” and “any . . . partsman[] or mechanic primarily engaged in . . . servicing[.]”  (Opinion at 4, 7.)  The Court gave three reasons for declining to apply the distributive canon to FLSA section 13(b)(10)(A): (1) the absence of one-to-one matching, as the Ninth Circuit’s reading requires pairing one category of employees with “selling” but two categories of employees with “servicing”; (2) the possibility, and indeed reasonableness, of construing the statute as written; and (3) the inconsistency of using the narrowing canon in light of the exemption’s overall broad language.  (Id. at 8.)

Rejection of the narrow construction rule

The most significant aspect of the Court’s ruling is its rejection of the Ninth Circuit’s use of the “narrow construction” principle for FLSA exemptions:

The Ninth Circuit also invoked the principle that exemptions to the FLSA should be construed narrowly. We reject this principle as a useful guidepost for interpreting the FLSA.

(Opinion at 9 (emphasis added, citation omitted).) The Court observed that “[b]ecause the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a “narrow”) interpretation.’”  (Id. (citation omitted).)  The Court remarked that “exemptions are as much a part of the FLSA’s purpose as the overtime-pay requirement.  We thus have no license to give the exemption anything but a fair reading.”  (Id. (citation omitted).)

The Court also rejected the Ninth Circuit’s reliance on a 1966-67 Handbook from the Department, as well as legislative history that was silent on the issue of service advisors. (Opinion at 9-11.)

The Dissent

Justice Ginsburg dissented, joined by Justices Breyer, Sotomayor, and Kagan. They disagreed with the Court’s linguistic construction of the exemption, while arguing that the regular schedules worked by service advisors render overtime exemption unnecessary.  (Dissent at 3-7.)  The dissent rejected the car dealership’s asserted reliance interest and concern for retroactive liability, noting the potential availability of the FLSA’s good faith defense.  (Id. at 7-8).  Finally, the dissent criticized the Court for rejecting the narrow construction principle for FLSA exemptions “[i]n a single paragraph . . . without even acknowledging that it unsettles more than half a century of our precedent.”  (Id. at 9 n.7.)

What The Decision Means For Employers

Most immediately, Encino Motorcars affects car dealerships by concluding that service advisors are exempt from the federal overtime requirement.  The decision, however, will reach far more broadly than just this one industry.  Since the 1940s, courts grappling with the meaning of ambiguously-worded FLSA exemptions have invoked the narrow construction rule as an often outcome-determinative facet of their decisions.  It served as much more than a tie-breaker, instead creating a very strong presumption of non-exempt status unless an employer could demonstrate that an exemption “plainly and unmistakably” applies.  In light of Encino Motorcars, that rule no longer has any place in interpreting FLSA exemptions.

What this means for employers is that it should now be easier than before for employers to persuade courts that employees fall within overtime exemptions. Now, employers must merely show that their reading of the exemption is more consistent with the statutory and regulatory text, rather than showing that there is little or no doubt about the matter.

At the same time, courts may find themselves tempted to resist this development, especially when construing exemptions under state law. It would not be surprising, for example, to see some courts begin to construe state-law exemptions differently from their FLSA counterparts, even when the wording of the exemptions is identical.

Recently, a number of proposed class and collective action lawsuits have been filed on behalf of so-called “gig economy” workers, alleging that such workers have been misclassified as independent contractors. How these workers are classified is critical not only for workers seeking wage, injury and discrimination protections only available to employees, but also to employers desiring to avoid legal risks and costs conferred by employee status.  While a number of cases have been tried regarding other types of independent contractor arrangements (e.g., taxi drivers, insurance agents, etc.), few, if any, of these types of cases have made it through a trial on the merits – until now.

In Lawson v. GrubHub, Inc., the plaintiff, Raef Lawson, a GrubHub restaurant delivery driver, alleged that GrubHub misclassified him as an independent contractor in violation of California’s minimum wage, overtime, and expense reimbursement laws.  In September and October 2017, Lawson tried his claims before a federal magistrate judge in San Francisco.  After considering the evidence and the relevant law, on February 8, 2018, the magistrate judge found that, while some factors weighed in favor of concluding that Lawson was an employee of GrubHub, the balance of factors weighed against an employment relationship, concluding that he was an independent contractor.

The court’s decision was guided by the California Supreme Court’s multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), which focuses on “whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”  There are also a number of secondary factors.

Among other things, the court found that Grubhub did not control how Lawson made deliveries or what his appearance was during deliveries. GrubHub also did not require Lawson to undergo any training or control when or where Lawson worked – that is, Lawson had complete control of his schedule and territory.  And, Grubhub did not control how or when Lawson delivered the restaurant orders he chose to accept.  Whereas GrubHub controlled some aspects of Lawson’s work, such as determining the rates he would be paid, the court gave those minimal weight.  On balance, the court concluded that “the right to control factor weighs strongly in favor of finding that Mr. Lawson was an independent contractor.”

The court also considered the secondary factors under the Borello test.  Some secondary factors weighed in favor of an employment relationship – for example, Lawson’s delivery work was part of GrubHub’s regular business, the type of work did not require a significant amount of skill, and Lawson was not engaged in a distinct delivery business such that GrubHub was just one of his clients.  Yet, weighing all of the factors above, the court found that “Grubhub’s lack of all necessary control over [] Lawson’s work, including how he performed deliveries and even whether or for how long,” was paramount.

Lawson is certainly a welcome decision for companies hiring independent contractors to perform a part of their regular business.  Nevertheless, the court’s emphasis on the particulars of GrubHub’s relationship with Lawson, issues regarding Lawson’s credibility and the possibility that the California Supreme Court may moot this decision in Dynamex Operations West Inc. v. Superior Court (considering whether to replace Borello with a test that would make it easier for workers to show they are employees rather than independent contractors), argued just two days before the Lawson decision, mean that such companies should continue closely examining the manner in which they classify their workers.  Moreover, although Lawson should provide some support to relationships governed by California law, its impact in other jurisdictions may be negligible.  For now, employers should continue to keep in mind that there is no one deciding factor to determine whether someone performing work for a company is an employee or an independent contractor.  A number of factors must be considered.

Our colleagues Michael S. Kun, Jeffrey H. Ruzal, and Kevin Sullivan at Epstein Becker Green co-wrote a “Wage and Hour Self-Audits Checklist” for the Lexis Practice Advisor.

The checklist identifies the main risk categories for wage and hour self-audits. To avoid potentially significant liability for wage and hour violations, employers should consider wage and hour self-audits to identify and close compliance gaps.

Click here to download the Checklist in PDF format.  Learn more about the Lexis Practice Advisor.

This excerpt from Lexis Practice Advisor®, a comprehensive practical guidance resource providing insight from leading practitioners, is reproduced with the permission of LexisNexis. Reproduction of this material, in any form, is specifically prohibited without written consent from LexisNexis.

In Tze-Kit Mui v. Massachusetts Port Authority, Massachusetts’ highest court held that Massachusetts law does not require employers to pay departing employees for accrued, unused sick time within the timeframe prescribed for “wages,” as the term is defined by the Massachusetts Wage Act.

In reaching its decision, the Court analyzed the plain meaning of “wages” under the Act and concluded that the legislature did not intend that “wages” would include sick time. The decision removes a significant concern for Massachusetts employers who are strictly liable for treble damages — and can face criminal liability —  for failing to pay wages in a timely manner.

The case involved an employee Massachusetts Port Authority (“Massport”), who retired while disciplinary charges were pending against him.  Massport discharged the plaintiff for cause weeks after his retirement.  Following a grievance procedure, his discharge was overturned by an arbitrator who found that the plaintiff could not have been discharged because he had already retired.

The plaintiff had 2,232 hours of unused sick time at retirement. Since a discharged employee is not eligible for sick pay under Massport’s sick time policy, Massport did not pay the plaintiff for his unused sick time until after the arbitrator’s decision finding that he had retired prior to being discharged.  The payment occurred more than one year after the plaintiff’s retirement.

The plaintiff filed suit, seeking treble damages for alleged violations of the Massachusetts Wage Act. Under the act, an employer must pay wages or salary earned by a departing employee “in full on the following regular pay day.”  A discharged employee must be paid wages or salary earned “in full on the day of his [or her] discharge.”

The plaintiff argued that Massport had violated the act by failing to timely compensate him for his unused sick pay. The plaintiff’s motion for judgment on the pleadings in the Superior Court was granted.  Massport appealed, and the Massachusetts Supreme Judicial Court transferred the case from the Appeals Court.

In evaluating whether sick pay qualifies as wages under Massachusetts law, the Court looked to the plain language of the Act to discern legislative intent. The act defines “wages” to include “any holiday or vacation payments due an employee under an oral or written agreement,” but does not reference sick pay.  The Court declined to read sick pay into the definition where it had not been expressly included by the legislature.

In addition, the Court explained that vacation time is different from sick time. The crucial distinction is that sick time, as defined by Massachusetts law, can only be used if the employee or a family member is ill, whereas vacation time can be used for any reason.  The Court reasoned that, because employees do not have an absolute right to use sick time, Massachusetts law does not require employers to compensate employees for accrued, unused sick time, and employers can adopt “use it or lose it” sick time policies.  Since employers are not required by law compensate employees for unused sick time, the court concluded “such time is clearly not a wage under the act.”

Under its policy, Massport agreed to pay departing employees for accrued, unused sick time as long as the employee had worked at Massport for two years and had not been terminated for cause. The Court characterized this arrangement as a “contingent bonus.”  Commissions are the only contingent compensation considered wages under the act provided that they “ha[ve] been definitely determined and due and ha[ve] become payable to [the] employee.”  The Court declined to extend the definition of “wages” to include other types of contingent compensation.

Finally, the Court concluded that, under the circumstances of the case, it would have been impossible for Massport to comply with the Act. The issue of the plaintiff’s separation date was not resolved until the payment deadline provided by the Act had lapsed.  Because compliance would not have been possible in this case, interpreting the act to include sick pay as wages would lead to an absurd result.

While the decision is a favorable one for employers who do business in Massachusetts, given the significant liability that employers may incur for failing to comply with the Act, Massachusetts employers should confer with counsel when wage payment issues arise.