Changes to the white collar exemptions under the Fair Labor Standards Act (“FLSA”) are coming slowly.  Very, very slowly.  Back in May 2016, under the Obama Administration, the Department of Labor issued a Final Rule updating the regulations for the FLSA’s minimum wage and overtime executive, administrative, and professional exemptions.  That rule would, among other things, have increased the minimum salary required for most employees within these exemptions from $455 a week ($23,660 a year) to $913 a week ($47,476 a year).  In November 2016, a federal judge in Texas enjoined that regulation just nine days before it was to go into effect.

In July 2017, the Department issued a Request for Information seeking public comment on a whole series of questions relating to whether and how the Department should update the existing regulations, which have been on the books since 2004.  Those questions include such topics as whether and how to revise the salary threshold, whether to differentiate salary levels based on geographic or other criteria, and whether to even have a salary requirement at all.

The Department’s semi-annual regulatory agenda indicates that the current plan is to issue a Notice of Proposed Rulemaking regarding these exemption regulations in or about January 2019.  That date has slipped before, and it may well slip again.

Apparently feeling that it does not yet have sufficient information to be able to make an informed decision about what it should say in the proposed regulations—notwithstanding the more than 214,000 comments received to date in response to the 2017 Request—the Department has announced a series of five “listening sessions” to be held in September in Atlanta, Seattle, Kansas City, Denver, and Providence.  According to the Department’s press release, “[t]he Department plans to update the Overtime Rule, and it is interested in hearing the views of participants on possible revisions to the regulations.”

Employers interested in letting their views be known to the Department in connection with this rulemaking are may register for one or more of these two-hour sessions.  There is no charge to attend, but the Department requires registration.  Given the nature of this type of gathering, it seems unlikely that the Department will provide any insights into where the rulemaking may be headed.  Instead, the purpose seems to be for the public to express its views and for the Department to take note of those views.

If you are interested in attending, please click here for the Department’s registration link.

Last Friday, the Department of Labor (“DOL”) issued Field Assistance Bulletin No. 2018-4 to help guide the DOL Wage and Hour Division field staff as to the correct classification of home care, nurse, or caregiver registries under the Fair Labor Standards Act (“FLSA”). This is the most recent piece of guidance on a topic first addressed by the DOL in a 1975 Opinion Letter. The bulletin is noteworthy in two respects. First, it confirms that the DOL continues to view a registry that simply refers caregivers to clients but controls no terms or conditions of the caregiver’s employment activities as outside the purview of the FLSA. Second, and most helpfully, the bulletin provides specific examples of common registry business practices that may establish the existence of an employment relationship under the FLSA.

The following chart summarizes the DOL’s position on a number of common registry business practices, with the caveat that no one factor is dispositive to determining whether a registry is an employer of a caregiver under the FLSA.

Indicative of Employment Relationship Not Indicative of Employment Relationship
Background

Checks

Interviewing the prospective caregiver or the caregiver’s references to evaluate subjective criteria of interest to the registry Performing basic background checks of caregivers (e.g., collecting the caregiver’s criminal history, credit report, licensing, and other credentials)
Hiring and Firing Controlling hiring and firing decisions by, e.g., interviewing or selecting the caregiver or firing the caregiver for failing to meet the standards of the registry or industry Inability to hire or fire employees
Scheduling/

Assigning Work

Scheduling and assigning work to specific caregivers (i.e., a subset of qualified caregivers) based on the registry’s own discretion and judgment rather than the client’s Providing client access to vetted caregivers who meet client’s stated criteria; requesting all qualified caregivers contact a particular client if they are interested in working for the client
Scope of Caregiver’s Work Controlling the caregiver’s services/behavior, including but not limited to restricting a caregiver’s ability to work with other referral services or work directly with clients outside the registry Seeking information concerning the type of care needed by the client for matching purposes
Caregiver’s Pay Rate Receiving fees from a client on an on-going basis based on the numbers of hours that a caregiver works for the client or some other arrangement Receiving a one-time referral fee
Fees for Caregiver Services Directly setting the caregiver’s pay rate Communicating general market/typical pay rates or relaying offers/counteroffers to the client
Caregiver Wages Paying the caregiver directly Performing payroll services, provided that the client provides funds directly or via an escrow account
Tracking of Caregiver Hours Actively creating and verifying time records Performing payroll services after client/caregiver submits time records
Caregiver Equipment/

Supplies

Investing in equipment or supplies for a caregiver or the caregiver’s training or licenses Investing in office space, payroll software, timekeeping systems, and other products to operate a registry business; providing caregivers the option to purchase discounted equipment or supplies from either the registry or a third party
Receipt of EINs or 1099s N/A Requiring an Employment Identification Number or issuing a caregiver an IRS 1099 form

The issuance of this field assistance bulletin indicates a commitment by the DOL to clarify the employment relationship between caregivers and home care, nurse, or caregiver registries, which is a positive development from the perspective of the registries. However, registries should promptly review their business practices, as the Wage and Hour Division, now armed with this guidance, may be more inclined to fight misclassification in this industry.

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.

On April 12, 2018, the Wage and Hour Division of the U.S. Department of Labor (“DOL”) issued the first Opinion Letters since the Bush administration, as well as a new Fact Sheet.  The Obama administration formally abandoned Opinion Letters in 2010, but Secretary of Labor Alexander Acosta has restored the practice of issuing these guidance documents.  Opinion Letters, as Secretary Acosta states in the DOL’s April 12 press release, are meant to explain “how an agency will apply the law to a particular set of facts,” with the goal of increasing employer compliance with the Fair Labor Standards Act (“FLSA”) and other laws.  Not only do Opinion Letters clarify the law, but pursuant to Section 10 of the Portal-to-Portal Act, they provide a complete affirmative defense to all monetary liability if an employer can plead and prove it acted “in good faith in conformity with and in reliance on” an Opinion Letter.  29 U.S.C. § 259; see also 29 C.F.R. Part 790.  For these reasons, employers should study these and all forthcoming Opinion Letters closely.

Opinion Letter FLSA2018-18 addresses the compensability of travel time under the FLSA, considering the case of hourly-paid employees with irregular work hours who travel in company-provided vehicles to different locations each day and are occasionally required to travel on Sundays to the corporate office for Monday trainings.  The Opinion Letter reaffirms the following guiding principles: First, as a general matter, time is compensable if it constitutes “work” (a term not defined by the FLSA).  Second, “compensable worktime generally does not include time spent commuting to or from work.”  Third, travel away from the employee’s home community is worktime if it cuts across the employee’s regular workday.  Fourth, “time spent in travel away from home outside of regular working hours as a passenger on an airplane, train, boat, bus, or automobile” is not worktime.

With these principles in mind, this letter provides two non-exclusive methods to reasonably determine normal work hours for employees with irregular schedules in order to make an ultimate judgment call on the compensability of travel time.  Under the first method, if a review of an employee’s hours during the most recent month of regular employment reveals typical work hours, the employer can consider those the normal hours going forward.  Under the second method, if an employee’s records do not show typical work hours, the employer can select the average start and end times for the employee’s work days.  Alternatively, where “employees truly have no normal work hours, the employer and employee … may negotiate … a reasonable amount of time or timeframe in which travel outside the employees’ home communities is compensable.”  Crucially, an employer that uses any of these methods to determine compensable travel time is entitled to limit such time to that accrued during normal work hours.

Opinion Letter FLSA2018-19 addresses the compensability of 15-minute rest breaks required every hour by an employee’s serious health condition (i.e., protected leave under the FMLA).  Adopting the test articulated by the Supreme Court in the Armourdecision—whether the break primarily benefits the employer (compensable) or the employee (non-compensable)—the letter advises that short breaks required solely to accommodate the employee’s serious health condition, unlike short, ordinary rest breaks, are not compensable because they predominantly benefit the employee.  The letter cautions, however, that employers must provide employees who take FMLA-protected breaks with as many compensable rest breakers as their coworkers, if any.

Opinion Letter CCPA2018-1NA addresses whether certain lump-sum payments from employers to employees are considered “earnings” for garnishment purposes under Title III of the Consumer Credit Protection Act (the “CCPA”).  The letter articulates the central inquiry as whether the lump-sum payment is compensation “for the employee’s services.” The letter then analyzes 18 types of lump-sum payments, concluding that commissions, bonuses, incentive payments, retroactive merit increases, termination pay, and severance pay, inter alia, are earnings under the CPA, butlump-sum payments for workers’ compensation, insurance settlements for wrongful termination, and buybacks of company shares are not.

Finally, Fact Sheet #17S addresses the FLSA’s minimum wage and overtime requirement exemptions for employees who perform bona fide executive, administrative, professional, and outside sales duties (known as the “white collar exemptions”) in the context of higher education institutions.  Specifically, the letter provides guidance as to the exempt status of faculty members, including coaches, non-teacher learned professionals (e.g., CPAs, psychologists, certified athletic trainers, librarians, and postdoctoral fellows), administrative employees (e.g., admissions counselors and student financial aid officers), executive employees (e.g., department heads, deans, and directors), and student-employees (i.e., graduate teaching assistants, research assistants, and student residential assistants).  Of note, the letter confirms that the DOL is undertaking rulemaking to revise the regulations that govern the white collar exemptions.

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.

In a move allowing increased flexibility for employers and greater opportunity for unpaid interns to gain valuable industry experience, the United States Department of Labor (“DOL”) recently issued Field Assistance Bulletin No. 2018-2, adopting the “primary beneficiary” test used by several federal appellate courts to determine whether unpaid interns at for-profit employers are employees for purposes of the Fair Labor Standards Act. If interns are, indeed, deemed employees, they must be paid minimum wage and overtime, and cannot serve as interns without pay. The “primary beneficiary” test adopted by the DOL examines the economic reality of the relationship between the unpaid intern and the employer to determine which party is the primary beneficiary of the relationship. Unlike the DOL’s previous test, the “primary beneficiary” test allows for greater flexibility because no single factor is determinative.

Along with its announcement of this change, the DOL also issued a new Fact Sheet which sets forth the following seven factors that make up the “primary beneficiary” test:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

For more information on the DOL’s adoption of the “primary beneficiary” test and actions employers may want to take given this change, go to our Act Now Advisory on this topic.

Federal regulations have long provided that employees whose wages are subject to a tip credit must retain all tips they receive, with the exception that customarily tipped employees — i.e. front-of the-house service employees — are permitted to share in tips received.

In 2011, the U.S. Department of Labor (“DOL”) amended its tip regulations to limit tip pool participation to front-of-the-house employees regardless of whether a tip credit was applied to their wages.

Employers and hospitality industry advocacy groups reacted by filing lawsuits throughout the country challenging the DOL’s rulemaking authority to extend the scope of tip pooling restrictions to employees whose wages were not subject to a tip credit.

There is currently a circuit split over the validity of the DOL’s 2011 regulation.

In Oregon Restaurant and Lodging Association v. Perez, the Court of Appeals for the Ninth Circuit found that the Fair Labor Standards Act (“FLSA”) does not expressly set forth requirements for employers that do not apply a tip credit against employees’ wages, therefore the DOL is authorized to interpret this absence in the statute through rulemaking.

In contrast, in Marlow v. The New Food Guy, Inc., the Tenth Circuit rejected the 2011 regulation, finding that the DOL is not vested with such rulemaking authority, thus employers may distribute tips to both tip-earning and non-tip-earning employees, e.g. cooks and dishwashers, to the extent a tip credit is not applied to employees’ wages.

The National Restaurant Association has requested the Supreme Court of the United States to hear an appeal of the Ninth Circuit case.  The request is currently pending.

Acknowledging that it may have exceeded its rulemaking authority and in light of the pending petition to the Supreme Court, on December 4, 2017, the DOL issued a Notice of Proposed Rulemaking (“NPRM”) to rescind the portion of the 2011 regulation requiring tip pool compliance with respect to employees whose wages are not subject to a tip credit.  If finalized, this rule would permit employers to regulate tip pooling without restriction as long as employers do not apply a tip credit against its employees’ wages (or if employees are paid at least the current $7.25 federal minimum wage in states that maintain higher minimum wage thresholds and permit the taking of a tip credit).

In its NPRM Fact Sheet, the DOL explained that the proposed rule would allow employers to distribute customer tips to larger tip pools that include non-tipped workers, such as cooks and dishwashers, which would likely increase the earnings of those employees who are newly added to the tip pool and further incentivize them to provide good customer service.

The DOL additionally cited as a benefit greater flexibility to employers in determining pay practices for tipped and non-tipped workers, as well as a reduction in wage disparities among employees who all contribute to the customers’ experience.  Some early critics of the NPRM have voiced concern that it gives employers the unrestricted ability to retain employees’ tips, which would be antithetical to the DOL’s stated purpose for the Rule.

It is important to keep in mind, however, that even if finalized, the NPRM would not preempt state or local laws or regulations that provide for more expansive employee rights regarding tip pooling.  For example, the NPRM would not result in any change in New York under its current regulations, which prohibit tip sharing with back-of-the-house employees.

The NPRM is currently subject to a 30-day comment period with a January 4, 2018 deadline, pursuant to which the DOL will review and consider all comments received before publishing the rule in its final form in the federal register.

In the interim, employers should review and determine whether it is feasible — and, if so, advantageous — to adjust its employees’ wage rates (including increasing front-of-the-house employees’ wage rates to the $7.25 minimum wage threshold or decreasing back-of-the-house employees’ wage rates to the federal minimum wage) and abandon the tip credit to allow for unrestricted tip pooling among all employees.  In addition to considering the potential economic benefits, employers should also consider the potential employee relations concerns in making any such adjustments, including the possibility that employees’ total compensation may decrease on account of any such potential changes.

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.

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.