Wage and Hour Policies

As we have discussed previously, in early September the U.S. Department of Labor (“DOL”) withdrew its appeal of last November’s ruling from the Eastern District of Texas preliminarily enjoining the Department’s 2016 Final Rule that, among other things, more than doubled the minimum salary required to satisfy the Fair Labor Standards Act’s executive, administrative, and professional exemptions from $455 per week ($23,660 per year) to $913 per week ($47,476 per year).  The DOL abandoned its appeal in light of the district court’s ruling on August 31, 2017 granting summary judgment and holding that the 2016 increase to the salary level conflicted with the statute and thus was invalid, a ruling that rendered the appeal of the injunction moot.

On October 30, 2017, to the surprise of many observers, the DOL filed a notice of appeal regarding the district court’s summary judgment ruling, taking the case back to the U.S. Court of Appeals for the Fifth Circuit.   Four days later, the DOL filed an unopposed motion asking the Fifth Circuit to stay the appeal in light of the Department’s pending rulemaking to update the salary requirement.  On November 6, 2017, the Fifth Circuit granted the motion, staying the appeal pending the outcome of the new rulemaking.

The DOL’s maneuvers may appear confusing. In short, the district court’s summary judgment ruling causes a certain amount of heartburn for the Department because the court in effect concluded that although the DOL has the authority to require a minimum salary for these exemptions, there is a point beyond which the Department cannot go without having the salary level deemed invalid.  The court did not, however, provide a clear standard for identifying the outer limit of the Department’s authority to impose a salary threshold, and this uncertainty creates confusion and a risk of time-consuming and expensive litigation for the Department — and for employees and employers throughout the country.

By appealing the summary judgment ruling, the DOL preserves the option of challenging the decision rather than simply allowing it to remain on the books as a precedent.  Once the Department completes the rulemaking process and issues an updated salary standard, the likely final move would be for the Department to move to dismiss the litigation and to vacate the district court’s order on the basis that the challenge to the 2016 Final Rule has become moot.  Once the new rule is in place and the district court’s summary judgment ruling is no longer on the books, it will be as though the 2016 Final Rule never happened.

We will keep you posted as this matter develops.

Our colleagues , at Epstein Becker Green, have a post on the Retail Labor and Employment Law blog that will be of interest to many of our readers: “New Jersey’s Appellate Division Finds Part C of the “ABC” Independent Contractor Test Does Not Require an Independent Business

Following is an excerpt:

In a potentially significant decision following the New Jersey Supreme Court’s ruling in Hargrove v. Sleepy’s, LLC, 220 N.J. 289 (2015), a New Jersey appellate panel held, in Garden State Fireworks, Inc. v. New Jersey Department of Labor and Workforce Development (“Sleepy’s”), Docket No. A-1581-15T2, 2017 N.J. Super. Unpub. LEXIS 2468 (App. Div. Sept. 29, 2017), that part C of the “ABC” test does not require an individual to operate an independent business engaged in the same services as that provided to the putative employer to be considered an independent contractor. Rather, the key inquiry for part C of the “ABC” test is whether the worker will “join the ranks of the unemployed” when the business relationship ends. …

Read the full post here.

On October 14, 2017, California Governor Jerry Brown signed Assembly Bill 1701, which will make general contractors liable for their subcontractors’ employees’ unpaid wages if the subcontractor fails to pay wages due.  The new law will go into effect on January 1, 2018.

Specifically, section 218.7 has been added to the Labor Code. Subdivision (a)(1) provides the following:

For contracts entered into on or after January 1, 2018, a direct contractor making or taking a contract in the state for the erection, construction, alteration, or repair of a building, structure, or other private work, shall assume, and is liable for, any debt owed to a wage claimant or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the direct contractor for the wage claimant’s performance of labor included in the subject of the contract between the direct contractor and the owner.

Under section 218.7, the direct contractor’s liability will extend only to any unpaid wage, fringe benefit or other benefit payments or contributions – including interest – but will not extend to penalties or liquidated damages.

Section 218.7 makes clear that nothing in it “shall be construed to impose liability on a direct contractor for anything other than unpaid wages and fringe or other benefit payments or contributions including interest owed.”

Notably, employees will not have standing to enforce section 218.7 on their own. That is, AB 1701 gives the California Labor Commissioner, labor-management cooperation committees, and unions the right to bring an action against the direct contractor, but it does not provide any private right of action to potentially unpaid employees themselves to bring a claim against the direct contractor for unpaid wages.

For labor-management cooperation committees and unions who prevail in an action against a direct contractor for unpaid wages, they will be entitled to their reasonable attorney’s fees and costs, including expert witness fees.

For judgments rendered against direct contractors, their property may be attached to satisfy judgment.

Direct contractors will now be provided the right to request from their subcontractors their employees’ wage statements under Labor Code section 226(a) and payroll records that must be maintained under section 1174.  Such “records must contain information sufficient to apprise the requesting party of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.”

Direct contractors and subcontractors also have the right to request from subcontractors below them “award information that includes the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project.”

Significantly, a direct contractor may withhold as “disputed” all sums owed if a subcontractor fails to timely provide the payroll or project information referenced above, until that information is provided.

The new statute will make it more important than ever for contractors in California to ensure that they are doing business with reputable subcontractors. As part of those efforts, they will want to consider taking steps to ensure that their subcontractor agreements include adequate indemnification provisions and assurances that the subcontractors will comply with wage-hour laws, and perhaps even a term requiring subcontractors to provide periodic statements ensuring compliance with the law.  Of course, there will be a delicate balance to strike to avoid “joint employer” status.

Additionally, the Labor Commissioner, labor-management cooperation committees, and unions may argue that the term “wages” extends to meal and rest period premiums for missed, short, or non-compliant meal and rest periods. Accordingly, contractors in California may want to include specific assurances that subcontractors have compliant meal and rest period policies and practices, in addition to compliant wage and overtime policies and practices.

Tips Do Not Count Towards the Minimum Wage Unless a Worker Qualified as a “Tipped Employe"It is a common practice for employers to provide their employees with rest breaks during the work day.  (And in some states, like California, it is required by state law.) But under what circumstances is an employer required to pay its employees for break time?

In U.S. Department of Labor v. American Future Systems Inc. et al., the Third Circuit Court of Appeals was asked to decide whether the Fair Labor Standards Act requires employers to compensate employees for breaks of 20 minutes or less during which they are free from performing any work.

The employer in that case produced business publications that were sold over the telephone by sales representatives.  The sales representatives could log off of their computers and take breaks whenever they chose and for any length of time.  They were free to leave the premises.   However, if the employees were logged off their computers for more than 90 seconds, they were not paid for the break time.

The Department of Labor (“DOL”) filed suit against the company.  The DOL relied on 29 C.F.R. § 785.18, which states:

Rest.

Rest periods of short duration, running from 5 minutes to about 20 minutes, are common in industry. They promote the efficiency of the employee and are customarily paid for as working time. They must be counted as hours worked…

The District Court for the Eastern District of Pennsylvania granted partial summary judgment to the DOL, concluding that section 785.18 created a “bright-line rule” and the company violated the FLSA by failing to pay its employees for rest breaks of twenty minutes or less.  The company appealed to the Third Circuit.

The company argued that the DOL was attempting to enforce the wrong regulation, and instead the court should apply 29 C.F.R. § 785.16 to its break policy.  That regulation states:

Off duty.

Periods during which an employee is completely relieved from duty and which are long enough to enable him to use the time effectively for his own purposes are not hours worked.  He is not completely relieved from duty and cannot use the time effectively for his own purposes unless he is definitely told in advance that he may leave the job and that he will not have to commence work until a definitely specified hour has arrived.  Whether the time is long enough to enable him to use the time effectively for his own purposes depends upon all of the facts and circumstances of the case.

The company contended that the “off duty” regulation should apply.  The company pointed out that its policy was completely flexible, allowed employees to take as many breaks as they wanted for as long as they wanted, allowed them to be completely relieved of all duties and created no obligation to return to work.  Therefore, the company argued that under the facts and circumstances of the case, even breaks of less than 20 minutes were not compensable.

The Third Circuit disagreed.  It stated that the “off duty” regulation provides a general rule regarding the compensability of hours worked, but section 785.18 is a more specific regulation that carves out an exception to the general rule.  The Third Circuit held that section 785.18 establishes a bright-line rule that employers must pay their employees for any rest breaks of 20 minutes or less.

To date, it does not appear that any other Circuit Court has weighed in on this issue.  That another Circuit might reach a different conclusion is certainly possible.  And it is also possible that the Supreme Court may have the final word on this issue.

In many industries, sales are subject to ebbs and flows.  Sometimes the fish are biting; sometimes they aren’t.

A common device that employers with commissioned salespeople use to take the edge off of the slow weeks and to ensure compliance with minimum wage and overtime laws is the recoverable draw.  Under such a system, an employee who earns below a certain amount in commissions for a given period of time, often a week, receives an advance of as-yet unearned commissions to bring the employee’s earnings for the period up to a specified level.  Then in the next period, the employees’ commissions pay off the draw balance before the employee receives further payouts of commissions.  Occasionally, employees challenge these recoverable draw pay systems.

In Stein v. hhgregg, Inc., the U.S. Court of Appeals for the Sixth Circuit considered one such draw system.  The employer, a retail seller of appliances, furniture, and electronics at more than 220 stores nationwide, paid its salespeople entirely in commissions.  In weeks where an employee worked 40 or fewer hours and did not earn commissions sufficient to cover minimum wage for the week, the employee would receive a draw against future commissions sufficient to bring the employee’s earnings for the week up to minimum wage.  In weeks where the employee worked more than 40 hours, and did not earn sufficient commissions to cover one and a half times the minimum wage, the employee would receive a draw against future commissions sufficient to bring the employee’s earnings for the week up to one and a half times the minimum wage.  The purpose of this pay structure was, among other things, to achieve compliance with the overtime exemption in section 7(i) of the Fair Labor Standards Act (“FLSA”) for certain commissioned employees of a retail or service establishment.  The company’s policy also provided that upon termination of employment, an employee will immediately pay the company any unpaid draw balance.

Two employees of a store in Ohio brought a putative nationwide collective action under the FLSA, as well as a putative state law class action asserting unjust enrichment with respect to the company’s more than twenty-five locations in Ohio.  They alleged failure to pay the minimum wage or overtime based on the theory that offsetting draw payments against future commissions amounted to an improper kick-back of wages to the employer.  They also claimed that the employer did not pay for certain non-sales activities and encouraged employees to work off the clock.  The complaint did not specifically allege that the two named plaintiffs worked off the clock or that the one plaintiff who was a former employee had to repay a draw balance when his employment ended.  The district court granted the company’s motion to dismiss, concluding that there was no FLSA violation and declining to exercise supplemental jurisdiction over the state-law claims.

On appeal, after reviewing extensive interpretive guidance from the U.S. Department of Labor, the Sixth Circuit rejected the plaintiffs’ central theory that a recoverable draw amounts to an impermissible wage kick-back.  To the court, the key consideration is that under the pay system at issue, “deductions will be made from wages not delivered, that is, from future earned commissions that have not yet been paid.”  Because the company does not recover wages already “delivered to the employee,” the court “h[e]ld that this practice does not violate the ‘free and clear’ regulation.  See 29 C.F.R. § 531.35 (emphasis added).”  (Op. at 9-10.)

The divided panel reversed, however, in certain other respects.

First, the court determined that the FLSA section 7(i) overtime exemption does not apply because although the company’s pay plan provides for a minimum rate equal to one and one half times the minimum wage for any week where an employee works more than 40 hours, the exemption technically requires, among other things, a rate that is more than one and a half times the minimum wage.  (Note: federal minimum wage is $7.25 per hour, and 1.5 times that rate is $10.875 per hour.  Strictly speaking, a wage of $10.875 does not satisfy this aspect of the exemption, whereas $10.88 per hour does.  Perhaps on remand it will turn out that the company actually paid $10.88 per hour rather than $10.875, as it would be very unusual for an employer to use a pay rate that does not round up to the nearest cent.)

Second, the panel majority held that the company’s policy of requiring repayment of a draw balance upon termination of employment violated the FLSA as an improper kick-back.  This part of the decision is interesting because the majority parted ways with the dissenting judge and the district court over the issue of policy versus practice.  The complaint did not suggest that either named plaintiff actually paid back any draw balance, and at oral argument it became clear that the company never enforced that policy and, in fact, had eliminated the repayment policy during the litigation.  The dissenting judge, like the district court before him, believed that because the company had never applied the policy to the named plaintiffs, the policy would not support a claim for relief.  The majority, however, took a more expansive approach to the matter.  “Incurring a debt, or even believing that one has incurred a debt, has far-reaching practical implications for individuals.  It could affect the way an individual saves money or applies for loans.  An individual might feel obligated to report that debt when filling out job applications, credit applications, court documents, or other financial records that require self-reporting of existing liabilities.”  (Op. at 15.)  In short, the court arguably opened the door to allowing plaintiffs to bring FLSA claims even where they have suffered no injury cognizable under the FLSA, so long as the policy they challenge could potentially cause them other types of consequential damages beyond those covered by the FLSA.  This aspect of the ruling appears to be a first of its kind in FLSA jurisprudence.

Third, the panel majority concluded that the plaintiffs adequately alleged minimum wage and overtime violations based on the assertions regarding the company’s knowledge and encouragement of working off the clock.  Although the dissent pointed out that the complaint contained no allegation that either named plaintiff actually suffered a minimum wage or overtime violation as a result of working off the clock, the majority focused on the alleged practice, rather than its specific application to the named plaintiffs, determining that “Plaintiffs have alleged sufficient facts to support a claim that this practice violates the minimum wage and overtime requirements of the FLSA.”  (Op. at 19.)

This decision provides several lessons for employers:

  • Generally speaking, the FLSA allows for the concept of a recoverable draw against commissions.  Recovering a draw against future commissions is not automatically an impermissible wage kick-back.  (Note that there may be certain restrictions under state law, and under some conditions a recoverable draw may violate the FLSA.)
  • When relying on the FLSA section 7(i) exemption, ensure that the policy is clear that an employee will receive more than one and a half times the federal minimum wage for any workweek in which the employer will claim the exemption.
  • Closely review any policies regarding recovery of draw payments (or, indeed, any other types of payments) upon an employee’s termination.  Such policies are often subject to challenge, and they can serve as a trigger for claims by demanding a payment right at the time when a departing employee may cease to have an interest in maintaining a positive relationship with an employer.
  • Be very careful about policies or practices that may arguably encourage employees to work off the clock.  Employers should have clear written policies prohibiting employees from working off the clock, and employees and supervisors should receive periodic training on those policies.

A year ago, employers across the country prepared for the implementation of a new overtime rule that would dramatically increase the salary threshold for white-collar exemptions, on the understanding that the new rule would soon go into effect “unless something dramatic happens,” a phrase we and others used repeatedly.

And, of course, something dramatic did happen—a preliminary injunction, followed by a lengthy appeal, which itself took more left turns following the U.S. presidential election than a driver in a NASCAR race. The effect was to put employers in a constant holding pattern as they were left to speculate whether and when the rule would ever go into effect.

The current status of the overtime rule is but one of several prominent issues to reckon with as wage and hour issues, investigations, and litigation remain as prevalent as they have ever been.

The articles in this edition of Take 5 include the following:

  1. The Status of the Department of Labor’s 2016 Overtime Rule
  2. Recent Developments Regarding Tip Pooling
  3. Mandatory Class Action Waivers in Employment Agreements: Is a Final Answer Forthcoming?
  4. “Time Rounding”: The Next Wave of Class and Collective Actions
  5. The Department of Labor, Congress, and the Courts Wrestle with the Definition of “Employee”

Read the full Take 5 online or download the PDF.

On September 5, 2017, the Department of Labor filed with the Fifth Circuit an unopposed motion asking the court to dismiss its appeal of the nationwide preliminary injunction ruling issued last November by a Judge Amos Mazzant in the Eastern District of Texas.  The motion states that DOL’s appeal is moot in light of Judge Mazzant’s entry of final judgment on August 31, 2017.  Barring any unusual further developments, we anticipate that the Fifth Circuit will dismiss the appeal promptly.

By withdrawing the appeal, the Department is signaling that it intends to abandon the 2016 Final rule and, instead, to proceed with a new rulemaking in line with the Request for Information (“RFI”) the Department issued on July 26, 2017.  That RFI seeks public input regarding what salary level or levels, if any, the Department should use in place of the 2016 figures in order to update the $455 weekly / $23,660 annual salary requirement for the executive, administrative, and professional exemptions implemented in the Department’s 2004 rulemaking, as well as the $100,000 annual compensation threshold for the highly-compensated variant of these exemptions.

The comment period for the RFI currently ends on September 25, 2017.  To date, regulations.gov has received more than 138,000 comments in response to the RFI, though most of the comments appear to be identical submissions by numerous different commenters, as is common for this type of rulemaking.  Watch for a Notice of Proposed Rulemaking announcing a new salary level for the executive, administrative, and professional exemptions in the next few months.

 

In Moon et al v. Breathless, Inc., the Third Circuit reviewed the dismissal of a class and collective action under the Fair Labor Standards Act, the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law.  The District Court for the District of New Jersey had dismissed the named plaintiff’s claims based on an arbitration clause in the written agreement between the her and Breathless, the club where she worked as a dancer.

In her lawsuit, the plaintiff alleged that she and other dancers were misclassified as independent contractors, and that Breathless unlawfully failed to pay them minimum wages and overtime pay.

In response, Breathless pointed to an agreement signed by the plaintiff stating that she was an independent contractor and not an employee. Breathless moved for summary judgment based on language in the agreement stating: “In a dispute between [the plaintiff and Breathless] under this Agreement, either may request to resolve the dispute by binding arbitration.”

The Third Circuit noted that, under New Jersey law, there is a presumption that a court will decide any issues concerning arbitrability. Finding no evidence to overcome that presumption, the Circuit Court proceeded to decide whether the plaintiff was required to submit her class and collective action claims to arbitration.

The New Jersey Supreme Court’s decisions in Garfinkel v. Morristown Obstetrics & Gynecology Assocs. and Atalese v. U.S. Legal Servs. Grp. were determinative of the scope of the arbitration agreement in this case, concluded the Third Circuit.

In Garfinkel, the arbitration provision in a contract stated it applied to “any controversy or claim arising out of, or relating to, this Agreement or the breach thereof.”  That language that suggested that the parties intended to arbitrate only those disputes “involving a contract term, a condition of employment, or some other element of the contract itself.”  Accordingly, the plaintiff in Garfinkel was not compelled to arbitrate his statutory claims.

In Atalese, the arbitration provision in a service agreement covered “any claim or dispute … related to this Agreement or related to any performance of any services related to this Agreement.”  That language “did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court,” and therefore the plaintiff was not required to arbitrate those claims.

By contrast, the New Jersey Supreme Court required the arbitration of statutory claims in Martindale v. Sandvik, Inc., where the arbitration clause in an employment agreement stated that plaintiff agreed to waive her “right to a jury trial in any action or proceeding related to [her] employment…”

Because the arbitration agreement in the plaintiff’s agreement with Breathless applied to disputes “under this Agreement,” without reference to statutory wage claims, the Third Circuit applied Garfinkel and Atalese to conclude that Moon was not required to arbitrate her statutory claims under the FLSA and New Jersey law.

The award of summary judgment in favor of Breathless was therefore reversed, and the case was remanded to the District Court.

While the laws of other states may vary, the Third Circuit’s decision suggests that, at the very least, employers in New Jersey should expressly reference statutory wage claims in arbitration provisions if they intend to have statutory wage claims arbitrated.

When an employer pays the minimum wage (or more) instead of taking the tip credit, who owns any tips – the employer or the employee? In Marlow v. The New Food Guy, Inc., No. 16-1134 (10th Cir. June 30, 2017), the United States Court of Appeals for the Tenth Circuit held they belong to the employer, who presumably can then either keep them or distribute them in whole or part to employees as it sees fit. This directly conflicts with the Ninth Circuit’s decision last year in Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.3d 1080, 1086-89 (9th Cir. 2016), pet for cert. filed, No. 16-920 (Jan. 19, 2017) and likely sets up a showdown this fall in the U.S. Supreme Court.

The plaintiff in Marlow, who was paid $12 per hour, alleged her employer was obligated to turn over to her a share of all tips paid by catering customers. The Tenth Circuit first held that the statutory language of 29 U.S.C. §203(m), which allows employers the option of paying a reduced hourly wage of $2.13 so long as employees receive enough tips to bring them to the current federal minimum of $7.25, does not apply when the employer pays the full minimum wage, and thus the plaintiff had no claim to any tips. In this regard the Court followed the 2010 decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010), as well as a number of cited district court cases.

Crucially, the Court went on to hold that the U.S. Department of Labor (DOL) had no authority to promulgate its post-Woody Woo regulation, 76 Fed. Reg. 18,855 (April 5, 2011), amending 29 C.F.R. §531.52, which, contrary to Woody Woo, states that tips are the property of the employee whether or not the employer takes the tip credit under section 2013(m). In so doing, it held that although agencies may promulgate rules to fill “ambiguities” or “gaps” in statutes, they cannot regulate when there is no ambiguity or gap that the agency was authorized to fill. It then found (1) there were no “ambiguities” in the statute that needed to be filled, as the statute clearly only applied when an employer sought to use the tip credit; (2) there were no undefined terms in the statute; and (3) there was no statutory directive to regulate the ownership of tips when the employer is not taking the tip credit. In so doing, the Tenth Circuit expressly rejected the Ninth Circuit’s decision last year in Oregon Restaurant, which held that the DOL had the discretion to issue the regulation precisely because the statute was silent on the subject.

Notably, the Supreme Court has four times extended the time for DOL to file its opposition to the petition for certiorari in Oregon Restaurant, most recently on June 30 granting an extension until September 8, 2017. It appears the current DOL may not yet be not sure what position to take as to the validity of its Obama-era regulation. Marlow’s direct conflict with Oregon Restaurant increases the likelihood that either DOL may choose not to defend the regulation or that the Supreme Court will grant review to resolve the conflict when it returns in October.

Not all new laws go into effect on the first of the year. On July 1, 2017, new minimum wage laws went into effect in several locales in California. Specifically:

  • Emeryville: $15.20/hour for businesses with 56 or more employees; $14/hour for businesses with 55 or fewer employees.
  • City of Los Angeles: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Los Angeles County (unincorporated areas only): $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Malibu: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Milpitas: $11 an hour.
  • Pasadena: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • San Francisco: $14 an hour.
  • San Jose: $12 an hour.
  • San Leandro: $12 an hour.
  • Santa Monica: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.

Of course, employers with employees in these locales will want to ensure that they are complying with these new minimum wage laws.