We have written previously about California’s new statute, referred to as AB 5, which codifies and expands the “ABC test” for independent contractors set forth in Dynamex Operations West, Inc. v. Superior Court.

A California ballot initiative that would remove ride-share and delivery drivers from application of the “ABC test” is already underway.

And the California Trucking Association has filed suit challenging the statute.

Now, other organizations have challenged the statute. Specifically, organizations representing freelance writers and photographers have done so, challenging the provision that prevents an individual from submitting more than 35 pieces to a publication per year unless it employs him or her. Cal. Labor Code § 2750.3(c)(2)(B)(ix) and (x). They also challenge the provision that excludes video recording from the still photography and photojournalism exemption. Cal. Labor Code § 2750.3(c)(2)(B)(ix).

In the lawsuit known as American Society of Journalists and Authors, Inc., et al. v. Xavier Becerra, the American Society of Journalists and Authors (“ASJA”) and the National Press Photographers Association (“NPPA”) contend that provisions of AB 5 pertaining to writers and photographers unconstitutionally restrict free speech and the media. They contend that limiting the number of submissions a journalist can write for a single publication is unconstitutional because the same restrictions are not placed on similar professions, such as marketers, graphic designers and fine artists.

ASJA and NPPA allege that AB 5 harms their members by singling out freelance journalists for unique and significant burdens. By classifying their members as employees, AB 5 adds tax and insurance costs to the client-turned-employer, resulting in lost job opportunities, strips freelancers of their ownership of the copyright of their work, which they typically retain while licensing work to clients, and robs them of the flexibility and control over workload that they enjoy as freelancers.

ASJA and NPPA claim that the provisions of AB 5 that pertain to the 35-submission cap and the video recording exclusion to the exemption violate the Equal Protection Clause of the Fourteenth Amendment. By exempting marketers, graphic designers, grant writers, and fine artists from AB 5 while limiting photographers, photojournalists, freelance writers and editors to 35 content submissions per publisher per year, they contend AB 5 creates an irrational and arbitrary distinction among speaking professionals. They also contend that the provision excluding video recording from the still photography and photojournalism exemption creates an arbitrary distinction between similarly situated professions by allowing marketers, graphic designers, grant writers, and fine artists to record video as independent contractors, while requiring photographers and photojournalists who record video to be hired as employees.

Additionally, ASJA and NPPA contend that the 35-submission cap and video recording exclusion provisions violate their members’ First Amendment rights because the application of these provisions is based on the content of speech. If the speech constitutes marketing or graphic design, the 35-submission cap applies, but if the speech constitutes journalism or photography, it does not. Similarly, if the speech is in the form of video that is deemed fine art, the exemption applies, but if the speech is in the form of video that communicates news, the exemption does not.

The pending lawsuits and anticipated ballot initiative challenging AB 5 suggest that it could be some time before the law is settled on a statute that appears to have been hastily passed.  We will continue to monitor developments on this law. In the meantime, the law remains scheduled to go into effect in little more than a week, and companies that do business in California with persons previously considered independent contractors are running out of time to determine if and how to change these relationships.

As previously discussed, the federal Department of Labor has begun the process of increasing the minimum salary threshold for employees that fall under the “white collar” exemptions. Joining Alaska, New York, and California, Washington State and Maine have now approved higher salary thresholds for employees that fall under the exemptions; Colorado is expected to follow in early 2020.

Effective July 1, 2020, Washington employers will be required to pay a higher salary to satisfy the professional, administrative, and executive exemptions, with gradual increases from July 1, 2020, until January 1, 2026. Over the years, the increases will differ for small employers (50 or fewer employees in Washington) and large employers (51 or more employees in Washington), as multipliers of minimum wage. The annual increases will include an adjustment for the Consumer Price Index.  A full breakdown of the effect of Washington’s changes to the exemption minimum salary, by employer size and for exempt computer professionals, is below:

Date

Small Employers (50 or fewer employees)

Large Employers (51 or more employees)

 

Minimum Wage Multiplier Minimum Salary Minimum Wage Multiplier

Minimum Salary

 July 1, 2020

1.25x

 $675 per week ($35,100 per year)

1.25x

  $675 per week ($35,100 per year)
 January 1, 2021

1.5x

 $827 per week ($43,004 per year)

1.75x

  $965 per week ($50,180 per year)
 January 1, 2022

1.75x

 $986 per week ($51,272 per year)

1.75x

  $986 per week ($51,272 per year)
 January 1, 2023

1.75x

 $1,008 per week ($52,416 per year)

2x

  $1,152 per week ($59,904 per year)
 January 1, 2024

2x

 $1,177 per week ($61,204 per year)

2x

  $1,177 per week ($61,204 per year)
 January 1, 2025

2x

 $1,202 per week ($62,504 per year)

2.25x

  $1,353 per week ($70,356 per year)
 January 1, 2026

2.25x

 $1,382 per week ($71,864 per year)

2.25x

  $1,382 per week ($71,864 per year)
 January 1, 2027

2.25x

 $1,415 per week ($73,424 per year)

2.5x

  $1,569 per week ($81,588 per year)
 January 1, 2028

2.5x

 $1,603 per week ($83,356 per year)

2.5x

  $1,603 per week ($83,356 per year)

Washington State will require a minimum hourly rate for exempt computer professionals:

Date

Small Employers

Large Employers

 July 1, 2020  $27.63 per hour  $37.13  per hour
 January 1, 2021  2.75x minimum wage  3.5x minimum wage
 January 1, 2022  3.5x minimum wage  3.5x minimum wage

Along with Washington, Maine’s salary threshold for exemption from overtime eligibility will increase to $36,000 per year, higher than the federal increase to $35,568 per year. Effective January 1, 2020, the Maine Department of Labor has changed the state’s minimum wage from $11 to $12 per hour for most workers, which simultaneously will increase the minimum salary for the white-collar exemptions to a minimum salary of $692.31 per week.

In addition, the Colorado Department of Labor and Employment is expected to adopt an increase in minimum salary by January 10, 2020, through the Colorado Overtime & Minimum Pay Standards Order (“COMPS Order”), with the first changes effective beginning July 1, 2020. Here is an annual breakdown:

Date

Minimum Salary Threshold

 July 1, 2020  $817.31 per week ($42,500 per year)
 January 1, 2021  $817.31 per week ($42,500 per year)
 January 1, 2022  $875 per week ($45,500 per year)
 January 1, 2023  $932.69 per week ($48,500 per year)
 January 1, 2024  $990.38 per week ($51,500 per year)
 January 1, 2025  $1,048.08 per week ($54,500 per year)
 January 1, 2026  $1,105.77 per week ($57,500 per year)

Currently, certain provisions of the Colorado Minimum Wage order apply only to employees in certain industries (e.g., retail, commercial, food & beverage, and health & medical). If adopted, when the COMPS Order would go into effect on March 1, 2020, it would apply to all employees in the state. This would expand the daily overtime and break time rules to all employers in the state. Colorado employers are also required to provide notice to employees via a display of a Minimum Wage Order poster in each workplace, unless such posting would be impractical given the workspace, and must also update their employee handbooks and handbook acknowledgement forms to include a copy and signed receipt of the COMPS Order. Colorado has issued new vacation payment and carryover rules, which will require reviewing handbook policies, as well.

With January 1, 2020, quickly approaching, employers should review their current policies and employee exemption status to determine where changes may be necessary to comply with federal and state requirements.

Over the past six months, Congress has made two notable attempts to amend the Fair Labor Standards Act of 1938 (the “FLSA”).  In July, U.S. Representative Elise Stefanik (R-NY) introduced The Modern Worker Empowerment Act (“MWEA”) with the stated aim of harmonizing the FLSA’s definition of employee with the common law.  And last month, Senator Brian Schatz (D-HI) introduced the Treating Workers with Dignity Act of 2019 (“TWDA”), which would amend the FLSA to require certain compensated breaks.

Modern Worker Empowerment Act

Subject to certain exclusions, the FLSA defines the term “employee” as “any individual employed by an employer.”  29 U.S.C. § 203(e)(1).  This definition is both circular and sweeping.  The statute then, rather unhelpfully, declares that “‘[e]mploy’ includes to suffer to permit to work.” (29 U.S.C. § 203(g))—providing little to no practical guidance to employers trying distinguish between employees and independent contractors for purposes of FLSA compliance.

Compounding matters is the number of different tests for differentiating employees from independent contractors, which can result in a potential finding that a worker should be classified as an employee pursuant to certain statutes, and a bona fide independent contractor under others.  For example, the IRS uses a three-factor test (with approximately twenty sub-factors) for determining whether a worker is an independent contractor or an employee for tax purposes; the U.S. Department of Labor has historically relied on the so-called “economic realities” test, which weighs six factors; and California recently codified the strict, three-part ABC test in A.B. 5, which presumes employee status.

The MWEA would amend these definitions as follows:

  • “Employee”—“Except as provided in paragraphs (2), (3), and (4), the term “employee” means any individual employed by an employer, as determined under the usual common law rules (as applied for purposes of section 3121(d) of the Internal Revenue Code of 1986).”
  • “Employ”—“‘Employ’ includes to suffer or permit an employee to work.”

Under Section 3121(d) of the Internal Revenue Code, an individual is an employee “if under the usual common law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee.”  More specifically, an individual is an employee if “the person for whom services are performed has the right to control and direct the individual who performs the services … not only as to what shall be done but how it shall be done.”  This definition readily borrows from the economic realities tests used by the U.S. DOL and courts when determining whether a worker is an employee or independent contractor, where, among other non-dispositive factors, control tends to suggest an employer-employee relationship.

Treating Workers with Dignity Act

Unlike certain state law requirements, under current federal law employers are not required to provide workers with meal or rest periods.  The FLSA, pursuant to implementing regulations, requires only that employers who voluntarily offer rest breaks of up to 20 minutes in duration ordinarily must pay employees for such time and include that time as hours worked for purposes of calculating overtime.  In contrast, employers who choose to offer a 30-minute or longer meal period are not required to compensate employees for such time unless the employee is performing work and is not free to use the break time as the employee wishes.  While a number of states, including California, Illinois, Massachusetts, and New York, require mandatory meal and/or rest periods, only a minority of states require paid rest periods, and no states require paid meal breaks.

The TWDA seeks to create uniformity and grant new employee rights by:

  • Requiring employers to provide an uninterrupted 30-minute meal break to any employee with a shift of at least six hours;
  • Allowing employees to take short, paid breaks to tend to a documented medical condition; and
  • Requiring employers to provide a paid restroom break at least once every four hours.

The TWDA exempts employees covered by a collective bargaining agreement that provides for different meal and rest rules, and any state law that provides greater employee protection.  Under the TWDA, the rate of compensation for medical and restroom breaks is the employee’s straight-time rate, whereas the rate of compensation for an employee who works during his or her meal break is not less than one and one-half times the employee’s straight-time rate.

Take-Aways

Whether these bills will pass will likely turn on the outcome of the 2020 Senate and House of Representative elections, as neither bill is likely to garner broad bipartisan support.  The MWEA is a Republican-sponsored bill, whereas the TWDA is a Democrat-sponsored bill.  More specifically, efforts to narrow the FLSA’s definition of “employee” will likely generate strong opposition from worker advocates who will criticize the measure as taking away employee rights to benefit big business.  At the same time, efforts to impose meal and rest break requirements in the roughly half of the states that do not already require them will probably draw significant opposition from the business community as costly and unnecessary measures that will reduce employment opportunities.  This perceived zero-sum dynamic to the FLSA—any changes that help workers are seen as hurting business, and vice versa—is a big part of why significant amendments to this law, originally enacted in 1938, so rarely come to fruition.  We will continue to monitor the progress of these bills and will report on any significant developments.

On December 6, 2019, the Second Circuit Court of Appeals held that judicial approval is not required for offers of judgment to settle Fair Labor and Standards Act (“FLSA”) claims made pursuant to Federal Rule of Civil Procedure 68(a). This development may provide employers with a valuable strategic tool for use in FLSA cases, at least in the Second Circuit, allowing the parties to include terms in offers of judgment that the courts might disallow were court approval required.

Generally speaking, Rule 68 offers of judgment are a pre-trial mechanism whereby defendants can cap their litigation costs by shifting to the plaintiff all costs incurred after a pre-trial offer is made (including attorney’s fees) if that offer is rejected and the court subsequently renders a judgment that is less favorable to the plaintiff than the rejected offer.  If accepted, a Rule 68 offer of judgment does not provide the court with an opportunity to hold a hearing or otherwise consider the fairness of the offer; rather, the rule states that the clerk of the court must enter a judgment.

In Yu v. Hasaki Restaurant, Inc., Yu, a sushi chef employed by Hasaki Restaurant, Inc. (“Hasaki”), filed a complaint against the restaurant and its owners alleging violations of the overtime provisions of the FLSA and New York Labor Law.  In response, Hasaki mailed Yu a Rule 68 offer of judgment for $20,000 plus reasonable attorneys’ fees, costs, and expenses through the date of the offer.  Yu accepted and notified the court of same.

Based on the Second Circuit’s decision in Cheeks v. Freeport Pancake House, Inc., which held that stipulated dismissals settling FLSA claims with prejudice pursuant to FRCP 41(a)(1)(A)(ii) require approval of either the district court or the DOL to take effect, the trial court ordered the parties to submit briefs on the issue as to why the settlement should be approved as fair and reasonable or, alternatively, why judicial approval was not required.  The parties argued that judicial approval of Rule 68(a) offers of judgment for FLSA claims is not required, notwithstanding Cheeks.  At approximately the same time, the Secretary of Labor filed an amicus brief in a separate, unrelated case arguing that judicial approval in fact is required in this exact scenario.

Notwithstanding Rule 68’s clear language directing the clerk to enter judgment for the plaintiff (without any court discretion or oversight), the trial court t held that judicial approval of the parties’ FLSA settlement was required, relying on the existence of certain exceptions to Rule 68(a)’s mandatory terms (none of which explicitly includes offers of judgment implicating the FLSA) and the Second Circuit’s reasoning in Cheeks.  Recognizing a division on this question among the lower courts, however, the trial court certified its order for interlocutory appeal.

Upon carefully examining the statutory text of Rule 68(a) and the FLSA, the Second Circuit agreed with the parties that Rule 68(a)’s language regarding entry of judgment is mandatory regardless of the absence of any judicial approval or oversight.  It further held that even if exceptions to Rule 68(a)’s mandatory terms exist, there was no clear congressional intent to exempt the FLSA from the operation of Rule 68(a) and no Supreme Court precedent requiring judicial approval of stipulated settlements of FLSA claims.

With Yu, the Second Circuit cleared an often significant obstacle to the resolution process of FLSA settlements.  Parties in that Circuit can now avoid the time and expense that would be incurred by presenting the settlement to the court for review and a fairness hearing and will have freedom to include terms, such as non-disclosure and non-disparagement provisions, that are often disallowed in FLSA settlements submitted to court for fairness and approval.  It is important to note, however, that Rule 68 judgments must be filed publicly on the court’s docket, reflecting that the plaintiff is a prevailing party.

It seems as though there is a minefield that employers must navigate to ensure that they fulfill their wage and hour obligations to their employees. Employers must somehow comply with overlapping and seemingly contradictory federal, state, district, county, and local requirements. The wave of civil actions that are filed against employers alleging wage and hour violations is not slowing. And given the potential financial consequences for non-compliance, illustrated in part by a $102 million award for technical paystub violations, meeting these requirements must be a priority for all employers.

The issues discussed briefly below are only the “tip” of the iceberg in terms of complying with the plethora of wage and hour laws created by various legislative, judicial, and regulatory bodies. Also, if you would like a more in-depth discussion of an issue, please click on the title of the relevant article.

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. New Salary Thresholds for Certain Exempt Employees
  2. Is Time Rounding Worth the Trouble?
  3. California Meal and Rest Period Requirements
  4. Navigating Travel Time Pay Under Federal Law
  5. The Quirks in Paying Wages to Discharged Employees in California

Read the full Take 5 online.

As winter once again approaches, employers, particularly those in cold-weather states, face the recurring specter of inclement weather affecting business operations and employee attendance.  While the weather may create stress and disruption for a business and its people, employers must not lose sight of the fact that the rules governing how you pay your employees continue to apply throughout any weather event.

There are five main rules that employers need to keep in mind when bad weather strikes:

1. If a business closes for any amount of time less than a full workweek, it must continue to pay its salaried exempt employees.

With a few exceptions, including certain doctors, lawyers, and teachers, salaried employees subject to the executive, administrative, or professional exemption under the Fair Labor Standards Act must receive their full salary for any workweek in which they perform any work.  See 29 C.F.R. § 541.602(a)(1).  “An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made 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.”  Id. § 541.602(a)(2).

The so-called “salary basis” regulation allows employers to make deductions from an employee’s salary under certain circumstances, including “when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability.”  29 C.F.R. § 541.602(b)(2).  Each year, this regulatory language trips up many employers who rely on that provision to make salary deductions when weather forces a business closure.

The Department of Labor has long concluded (see opinion letters from October 24, 2005 and October 28, 2005) that an employee’s absence resulting a business closure due to inclement weather is not an absence “for personal reasons” under section 541.602(b)(2), and thus a salary deduction for such an absence is inconsistent with the regulations and may jeopardize exempt status.  This is because when the employer has closed and is not making work available, it is the employer’s choice—not the employee’s—whether to come to work.

2. An employer may, at least under federal law, require a salaried exempt employee to use accrued paid time off to cover absences due to business closure caused by inclement weather.

Although an employer must generally continue to pay salaried exempt employees during a weather-related closure, the Department of Labor does not draw a distinction between paying an employee from a salary account and paying from a paid leave account.  So long as the employee receives the dollars called for under the regulations, the source of the dollars is immaterial.

Thus, to the extent that an employee has accrued paid time off available to cover some or all of the unworked hours resulting from the business closure, an employer may require that the employee use paid time off to account for the hours not worked.  If, however, the employee has insufficient paid leave available to cover the entire absence, the employer must still pay the employee in accordance with the regulations.  For example, if the employee has twelve hours of paid time off available and the business closes for two full days, the employer may require that the employee use all of the accrued time, and then the employer would have to pay the remaining four hours’ worth of salary.

3. If an employer remains open for business and allows employees to come to work, but a salaried exempt employee chooses not to report to work for one or more full days because of the weather, the employer may make a salary deduction for that absence.

When an employer remains open notwithstanding adverse weather conditions, as is often the case for hospitals and other types of operations that do not necessarily have the option of closing because of weather, an employee who chooses not to report to work for one or more full days is absent “for personal reasons.”  In that circumstance, the employer may make a salary deduction because of the absence, so long as the deduction is only for full-day absences and not for any partial-day absences.

When weather conditions render getting to and from work physically hazardous, as may occur if roads are especially slippery, employers may want to think carefully before requiring employees to report to work.  The last thing any business wants is to have an employee injured or killed getting to or from work, or harming anyone else in the process.  Employees facing a pay loss due to not reporting to work may find themselves under pressure to take safety risks that may not be in the employer’s best interest.

4. Employers must pay non-exempt employees for the time they work, and comply with any state or local requirements.

Under federal law, paying non-exempt employees during a weather event is comparatively straightforward: pay them for the time they work.  Some state and local laws, however, may require that employees receive at least a certain amount of pay for reporting to work, even if the business closes shortly after they arrive to work.  And some laws require that certain employers in particular sectors, such as retail or restaurants, provide at least a minimum amount of notice regarding any changes in an employee’s schedule, with penalties that apply in the event of noncompliance.

5. If an employer requires employees to remain on premises for the duration of a weather event, that requirement may create a risk that the off-duty time becomes compensable work.

Some employers take steps to ensure adequate staffing and to protect employee safety during a weather emergency such as requiring employees to sleep at the employer’s site or preventing employees from going home.  Depending on the specific facts, as well as the requirements of state and local law, efforts to exert control over employees during non-working time may convert some or all of that time into compensable work.  There may be a significant legal difference between offering to allow employees to remain on premises during off-duty hours for their own convenience so as to spare them a risky commute, versus forbidding them to leave the worksite even though they prefer to go home.

If an employer truly fears that allowing an employee to leave the premises may result in harm to the employee, the employer may still choose to require the employee to stay on site, but that decision may also require paying the employee for that time.

*  *  *

In addition to the five rules described above, employers should remain mindful of any written policies or other promises they have made to their employees that go beyond what the law requires.  In addition to complying with the wage and hour laws, employers must, of course, continue to abide by their policies.  In the event that an employer has not yet formulated a clear written policy to cover inclement weather, we would suggest a call to a friendly wage and hour lawyer.  As my fifteen-year-old is fond of saying, winter is coming . . . .

On December 16, 2019, the United States Department of Labor’s Wage and Hour Division (“WHD”) published in the Federal Register a Final Rule updating the Fair Labor Standards Act (“FLSA”) regulations that govern, among other things, whether certain types of pay and benefits constitute part of a non-exempt employee’s regular rate of pay for purposes of calculating overtime under federal law.  Under section 7(e) of the FLSA, an employee’s regular rate for any given workweek “shall be deemed to include all remuneration for employment paid to, or on behalf of the employee, but shall not be deemed to include” pay or benefits falling within eight enumerated exclusions.

WHD originally issued regulations interpreting section 7(e) in 1968, located at subparts C and D of 29 C.F.R. part 778, with minor revisions following in 1971, 1981, and 2011.  On March 29 of this year, WHD issued a Notice of Proposed Rulemaking identifying further regulatory changes under consideration.  This proposal largely flew under the radar, drawing only 86 comments from the public.  (By way of comparison, the recent proposal to update the salary threshold for the executive, administrative, and professional exemptions generated more than 116,000 public comments.)  The new standards set forth in the Final Rule go into effect on January 15, 2020, which represents a relatively speedy 292 days for a rule to progress from initial proposal to becoming binding law.

While the Final Rule is dense and worth a close read primarily by individuals tasked with designing and implementing compensation, benefits, and payroll, some of the more notable changes clarify that the following items need not factor into the regular rate, as described by the Department’s press release:

  • the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
  • payments for unused paid leave, including paid sick leave or paid time off;
  • payments of certain penalties required under state and local scheduling laws;
  • reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit; and clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
  • certain sign-on bonuses and certain longevity bonuses;
  • the cost of office coffee and snacks to employees as gifts;
  • discretionary bonuses, by clarifying that the label given a bonus does not determine whether it is discretionary and providing additional examples[;] and[]
  • contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

Where these regulatory changes broaden the categories of pay and benefits that may fall outside of the regular rate, employers should consider waiting until the effective date before relying on the new standards.  In addition, while most states follow federal regular rate principles, it is important to review state law to ensure that compliance with these revised regulations does not lead to difficulty under state overtime law.

On November 26, 2019, San Francisco Superior Court Judge Richard B. Ulmer ruled that the Federal Arbitration Act (“FAA”) might not apply to Uber drivers who are engaged in interstate commerce while driving passengers to or from international airports.

In his claims before the Division of Labor Standards and Enforcement (“DLSE”), driver Sangam Patel (“Patel”) seeks recovery of unpaid wages, overtime pay, vacation pay, meal and rest break premiums, and unpaid business expenses allegedly owed by Uber. Uber petitioned to compel arbitration of Patel’s (“Patel”) claims under the FAA.

The Labor Code provides a right to bring an action to collect wages notwithstanding the existence of an arbitration agreement. Cal. Lab. Code § 229. If the FAA applies, a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA applies to any “contract evidencing a transaction involving commerce” that contains an arbitration provision. Id. The FAA does not apply, however, to “contracts of…workers engaged in foreign or interstate commerce.” Id., at § 1.

Notably, there is a distinction between the term “involving” for purposes of section 2 and the term “engaged in” for purposes of section 1.

As the California Court of Appeal explained earlier this year in Muller v. Roy Miller Freight Lines, LLC (2019) 34 Cal.App.5th 1056, 1062, “the [United States] Supreme Court reasoned the plain meaning of ‘engaged in’ interstate commerce in section 1 is narrower in scope than the open-ended phrase ‘involving’ commerce in section 2. Unlike section 2’s reference to ‘involving commerce,’ which ‘indicates Congress’ intent to regulate to the outer limits of its authority under the Commerce Clause’ and thus is afforded an ‘expansive reading,’ section 1’s reference to ‘engaged in commerce’ is ‘narrower,’ and therefore ‘understood to have a more limited reach,’ requiring ‘a narrow construction’ and a ‘precise reading.’” (Internal citations omitted.)

Uber argued that the FAA applies to its arbitration provision because it involves commerce as the Uber app is available to riders and transportation providers in over 175 cities across the United States. Relying on precedent that stands for the proposition that workers need only engage in activities that affect interstate commerce to be considered “engaged in interstate commerce,” the Labor Commissioner argued that Uber drivers such as Patel engage in interstate commerce when they transport passengers to and from international airports, thus rendering the FAA inapplicable.

The argument is similar to that raised Singh v. Uber Techs. Inc. earlier this year, where the U.S. Court of Appeals for the Third Circuit rejected Uber’s argument that a group of New Jersey drivers suing for unpaid overtime wages were required to arbitrate their claims. The Singh Court found that transportation workers who transport passengers may be exempt from the FAA if they are engaged in interstate commerce. Singh claimed that he frequently transported passengers on the highway across state lines, between New York and New Jersey. In light of the factual dispute as to whether Uber drivers engaged in interstate commerce, the Third Circuit sent the case back to the district court to decide, after discovery on the issue, whether Singh and the proposed class of Uber drivers engaged in interstate commerce. If they did, the FAA would not apply.

Consistent with the Third Circuit in Singh, Judge Ulmer granted the Commissioner’s request for limited discovery on the issue of whether Uber drivers engage in interstate commerce. Following that discovery, Uber may then re-calendar its petition for hearing.

The case bears watching as it may provide employees in some industries with arguments to try to circumvent the otherwise enforceable arbitration agreements that they signed with their employers. Ultimately, if Uber drivers are found to be engaged in interstate commerce such that the FAA is inapplicable, the FAA would not preempt their right to file suit under Labor Code section 229 notwithstanding any private agreement to arbitrate. But section 229 only applies to actions to collect due and unpaid wages. Any other claims – such as claims for missed meal or rest periods, failure to reimburse business expenses, or failure to provide accurate wage statements – would not be covered and, thus, should still be subject to a valid and enforceable arbitration agreement. It will be interesting to see if and how that issue is addressed.

On November 21, 2019, the Pennsylvania Department of Labor and Industry (“DLI”) formally withdrew new regulations that would have increased the minimum salary requirements for the Pennsylvania Minimum Wage Act’s (“PMWA”) white-collar exemptions.  The withdrawal occurred on the same day the state’s Independent Regulatory Review Commission (“IRRC”) was scheduled to consider the new requirements and rule upon them at a public meeting.

The Withdrawn Rule

The final rule was issued on October 17, 2019, and would have increased the minimum salary threshold for the PWMA’s white-collar exemptions (administrative, professional, and executive exemptions to overtime requirements) in three stages from $35,568 per year on January 1, 2020, to $40,500 the next year, until finally reaching a $45,500 annual threshold on January 1, 2022.

Starting on January 1, 2023, the rule would have continued to increase the minimum salary threshold every three years, with employers receiving just 30 days’ advanced notice of the increased threshold.  In addition, the rule also sought to make the PMWA’s duties test for the state’s administrative, professional, and executive exemptions align more closely with the corresponding exemptions under the federal Fair Labor Standards Act (“FLSA”).

What Happens Next

The sudden withdrawal of the rule was part of a compromise with state Senate Republicans.  In exchange for the withdrawal, the Senate passed Senate Bill 79, which will (1) increase the state’s hourly minimum wage rate over several years from $7.25 to $9.50, and (2) amend the PMWA so that its minimum wage and overtime requirements are applied in the same manner as the federal FLSA, except where a higher standard is specified by state law.

Pennsylvania employers will want to keep an eye on the legislation as it makes its way through the House as Governor Wolf’s administration has promised to resubmit the regulations to the IRRC for final approval if Senate Bill 79 does not pass.

Additionally, employers should remember that even without the state regulations, changes to the federal FLSA will increase the white collar salary threshold from $23,660 ($455 per week) to $35,568 ($684 per week) effective January 1, 2020.

As we wrote here in September 27, the new “white collar” salary thresholds under the federal Fair Labor Standards Act (“FLSA”)  are set to go into effect on January 1, 2020.

That deadline is sneaking up fast.

And, like waiting until the last minute to start holiday shopping, waiting until the last minute to make important decisions regarding the new thresholds may not be wise.

The New Salary Thresholds

Effective January 1, 2020, the salary threshold for the executive, administrative, and professional exemptions under the FLSA will increase from $23,660 ($455 per week) to $35,568 ($684 per week).

The total annual compensation requirement for “highly compensated employees” subject to a minimal duties test will also increase from $100,000 to $107,432.

Employers will be permitted to use commissions, nondiscretionary bonuses, and other incentive compensation to satisfy up to 10% of the salary requirement, provided that these payments occur no less frequently than annually, and subject to a single “catch-up” payment within one pay period of the close of the year.

At first glance, dealing with the increase in the minimum salaries for white-collar exemptions would not appear to create much of a challenge for employers—they must decide whether to increase employees’ salaries or convert them to non-exempt status. Many employers that have already reviewed the issue and its repercussions would likely disagree with the assessment that this is a simple task. The decisions not only impact the affected employees, but also affect the employers’ budgets and compensation structures, potentially creating unwanted salary compressions or forcing employers to adjust the salaries of other employees.

In addition, converting employees to non-exempt status requires an employer to set new hourly rates for the employees. If that is not done carefully, it could result in the employee receiving an unanticipated increase in compensation—perhaps a huge one— or an unexpected decrease in annual compensation.

The Impact on Compensation Structures

For otherwise exempt employees whose compensation already satisfies the new minimum salaries, nothing need be done to comply with the new rule. But that does not mean that those employees will not be affected by the new rule. Employers that raise the salaries of other employees to comply with the new thresholds could create operational or morale issues for those whose salaries are not being adjusted.

It is not difficult to conceive of situations where complying with the rule by only addressing the compensation of those who fall below the threshold would result in a lower-level employee leapfrogging over a higher-level employee in terms of compensation, or where it results in unwanted salary compression. Salary shifts could also affect any analysis of whether the new compensation structure adversely affects individuals in protected categories. A female senior manager who is now being paid only several hundred dollars per year more than the lower-level male manager might well raise a concern about gender discrimination if her salary is not also adjusted.

The Impact of Increasing Salaries

For otherwise exempt employees who currently do not earn enough to satisfy the new minimum salary thresholds, employers have two choices: increase the salary to satisfy the new threshold or convert the employee to non-exempt status. Converting employees to non-exempt status can create challenges in attempting to set their hourly rates (addressed separately below).

If, for example, an otherwise exempt employee currently earns a salary of $35,000 per year, the employer may have an easy decision to give the employee a raise of at least $568 to satisfy the new threshold. But many decisions would not be so simple, particularly once they are viewed outside of a vacuum. What about the employee earning $30,000? Should that employee be given a raise of more than $5,000 or should she be converted to non-exempt status? It is not difficult to see how one employer would choose to give an employee a $5,000 raise while another would choose to convert that employee to non-exempt status.

What if the amount of an increase seems small, but it would have a large impact because of the number of employees affected? A salary increase of $5,000 for a single employee to meet the new salary threshold may not have a substantial impact upon many employers. But what if the employer would need to give that $5,000 increase to 500 employees across the country to maintain their exempt status? Suddenly, maintaining the exemption would carry a $2,500,000 price tag. And that is not a one-time cost; it is an annual one.

These are decisions that should not be left until December 31.

The Impact of Reclassifying an Employee as Non-Exempt

Employers may address the new threshold by converting employees from exempt to non-exempt. But if an employer decides to convert an employee to non-exempt status, it faces a new challenge—setting the employee’s hourly rate. Doing that requires much more thought than punching numbers into a calculator – and should not be left until December 31.

If the employer “reverse engineers” an hourly rate by just taking the employee’s salary and assuming the employee works 52 weeks a year and 40 hours each week, it will result in the employee earning the same amount as before so long as she does not work any overtime. The employee will earn more than she did before if she works any overtime at all. And if she works a significant amount of overtime, the reclassification to non-exempt status could result in the employee earning significantly more than she earned before as an exempt employee. If she worked 10 hours of overtime a week, she would effectively receive a 37 percent increase in compensation.

But calculating the employee’s new hourly rate based on an expectation that she will work more overtime than is realistic would result in the employee earning less than she did before. If, for instance, the employer calculated an hourly rate by assuming that the employee would work 10 hours of overtime each week, and if she worked less than that, she would earn less than she did before—perhaps significantly less. That, of course, could lead to a severe morale issue—or to the unwanted departure of a valued employee.

What About State Laws?

The new salary thresholds apply to federal law.  Many states still have higher thresholds for exempt status – and different criteria – than federal law.  Employers must be mindful of more onerous state and local wage-hour laws in making any decisions pertaining to employee compensation.

EBG’s free wage hour app provides summaries of those federal, state and local laws.  (It will be updated shortly to address the new federal thresholds.) You can download the free app here.

In the meantime, the clock is ticking on the time for employers to make their decisions regarding the new salary thresholds.