Under the Fair Labor Standards Act (“FLSA”), employers can satisfy their minimum wage obligations to tipped employees by paying them a tipped wage of as low as $2.13 per hour, so long as the employees earn enough in tips to make up the difference between the tipped wage and the full minimum wage. (Other conditions apply that are not important here.) Back in 1988, the U.S. Department of Labor’s Wage and Hour Division amended its Field Operations Handbook, the agency’s internal guidance manual for investigators, to include a new requirement the agency sought to apply to restaurants. Under that then-new guidance, when tipped employees spend more than 20% of their working time on tasks that do not specifically generate tips—tasks such as wiping down tables, filling salt and pepper shakers, and rolling silverware into napkins, duties generally referred to in the industry as “side work”—the employer must pay full minimum wage, rather than the lesser tipped wage, for the side work.

This provision of the Handbook flew largely under the radar for years. This was partly because the Department did not publicize the contents of the Handbook, and party because the Department did not bring enforcement actions premised on a violation of this 20% standard. And historically, virtually nobody in the restaurant industry maintained records specifically segregating hours and minutes spent on tip-generating tasks as compared to side work.

In 2007, a federal district court in Missouri issued a ruling in a class action upholding the validity of the 20% standard, and that decision received an enormous amount of attention and publicity. In the years that followed, a wave of class actions against restaurants flooded the courts across the country, all contending that the restaurants owe the tipped employees extra money because of the Department’s 20% standard in the Handbook.

In January of 2009, in the waning days of the George W. Bush Administration, the Department issued an opinion letter rejecting the 20% standard, superseding the Handbook provision, and stating that there is no limit on the amount of time a tipped employee can spend on side work. Six weeks later, however, in March of 2009, the Obama Administration withdrew that opinion letter. In subsequent years, the Department filed several amicus curiae briefs in pending court cases endorsing the 20% standard, and the Department even modified the Handbook provision to make the requirements even more difficult for employers to satisfy.

In late 2017, a divided three-judge panel of the U.S. Court of Appeals for the Ninth Circuit concluded, in nine consolidated appeals presenting the same issue, that the Department’s 20% standard is not consistent with the FLSA and thus was unlawful. A few months later, however, a divided 11-judge en banc panel of the same court reached the opposite conclusion, ruling by an 8-3 vote that the 20% standard is worthy of deference.

In July of 2018, the Restaurant Law Center, represented by Epstein Becker Green, filed a declaratory judgment action against the Department in federal court in Texas challenging the validity of the 20% standard under the FLSA, the Administrative Procedure Act, and the U.S. Constitution. Roughly a month before the employers’ deadline to file a certiorari petition with the Supreme Court regarding the en banc Ninth Circuit ruling, and just days before the government’s response is due in the Texas litigation, the Department reissued the 2009 opinion letter.

This opinion letter, now designated as FLSA2018-27, once again rejects the 20% standard and clarifies that employers may pay a tipped wage when employees engage in side work so long as the side work occurs contemporaneously with, or in close proximity to, the employees’ normal tip-generating activity. This opinion letter should put an end to the many pending cases, including numerous class actions, that depend on the 20% standard.

The overall take-away for employers is that at least under federal law, side work performed during an employee’s shift, in between tip-generating tasks, should present no concern. The same should be true of side work performed at the start or end of an employee’s shift, so long as the side work does not take too long. An employee coming in fifteen or thirty minutes before the restaurant is open to help get the restaurant ready for the day, followed by the remainder of the shift in which the employee generates tips, seems to be consistent with the new opinion letter. Likewise for employees who spend some time at the end of the shift helping to close the restaurant for the day. But employers should use common sense and good judgment, as having tipped employees spend hours and hours performing side work may still give rise to risks. And it remains important to be aware of any state or local law requirements that may differ from federal law.

Joining several other federal appellate courts including the Fourth and Ninth Circuits , on October 22, 2018 the Seventh Circuit concluded in Herrington v. Waterstone Mortgage Corporation, No. 17-3609 (7th Cir. Oct. 22, 2018) that the arbitrability of a class claim is one for the court to decide, not the arbitrator. In so doing, the court placed in jeopardy a $10 million arbitration award in a wage-hour case.

Herrington originally filed suit against Waterstone, alleging that Waterstone failed to pay her and other employees minimum wages and overtime pay in violation of  the FLSA. Waterstone moved to enforce an agreement to arbitrate that stated the “arbitration may not be joined with . . . any claims by any person not party to this Agreement.” Despite that language, the district court sent the parties to arbitration, instructing the arbitrator to allow other employees to join the case.

In a collective arbitration , the arbitrator awarded more than $10 million in damages.

Following the Supreme Court’s decision in Epic Sys. Corp. v. Lewis, ___ U.S. ___, 138 S. Ct. 1612 (2018), the Seventh Circuit concluded that the waiver of class claims was enforceable. One question not addressed by Epic, however, was whether the court or the arbitrator should make this determination.

Because the availability of a class or collective action is a “gateway matter,” the Seventh Circuit concluded it is a question of arbitrability for the court to decide, not the arbitrator. The fundamental question was whether the employees had agreed to arbitrate — and whether Waterstone also agreed. The Court noted  that in agreeing to arbitration, an employer essentially waives appellate review—which could result in a large arbitration award with little or no opportunity for review.

In view of Herrington, two issues now seem settled in the Seventh and several other circuits. First, agreements mandating individual arbitration of wage-hour claims are enforceable. Second, it is for the court to interpret the arbitration agreement to determine whether it permits class claims, not the arbitrator .

Three months ago, the United States Supreme Court issued its decision in Epic Systems Corp. v. Lewis, holding that the National Labor Relations Act (“NLRA”) does not prevent the use of arbitration agreements with class and collective action waivers covered by the Federal Arbitration Act (“FAA”). (See our discussion of Epic here.) The Court of Appeals for the Sixth Circuit has now similarly concluded in Gaffers v. Kelly Services, Inc.that the Fair Labor Standards Act (“FLSA”) does not bar such arbitration arrangements. While this is not a surprising outcome in light of the Supreme Court’s ruling, the decision underscores the influence that Epic has had and will continue to have as courts evaluate efforts to evade promises to arbitrate.

Case Background

A former employee of a business that provides outsourcing and consulting services sued the company in an FLSA collective action in the Eastern District of Michigan, alleging failure to pay virtual call center support workers for time spent logging into and out of the network and addressing technical problems. More than 1,600 workers opted into the lawsuit. Although the named plaintiff did not agree to arbitrate disputes with the company, approximately half of the opt-in plaintiffs did, and their agreements specified that arbitration would be on an individual basis.

The company moved to compel individual arbitration for those opt-in plaintiffs who signed arbitration agreements. The plaintiffs opposed the motion, arguing that the NLRA and the FLSA render the arbitration agreements unenforceable. The district court denied the motion to compel arbitration, and the company appealed.

The Sixth Circuit’s Decision

1. Under Epic, the NLRA does not render the agreements unenforceable.

The Sixth Circuit noted at the outset that Epic “answers half of this case.” (Slip Op. at 1-2.) In light of the Supreme Court’s recent decision, the plaintiffs’ NLRA-based challenge to the arbitration agreements with class action waivers was unavailing. “[A]s it relates to the NLRA, the Supreme Court heard and rejected these arguments last term in Epic.” (Id. at 3.)

2. The FLSA’s collective action provision does not conflict with the FAA.

The Court then turned to the plaintiffs’ FLSA-based contentions. Their first argument was that “the FLSA’s collective-action provision and the Arbitration Act are irreconcilable and that the former therefore displaces the latter.” (Slip Op. at 3.) Relying on Epic, the Court explained that “a federal statute does not displace the Arbitration Act unless it includes a ‘clear and manifest’ congressional intent to make individual arbitration agreements unenforceable.” (Id.) That standard, as the court saw it, requires that Congress “do more than merely provide a right to engage in collective action. Instead, Congress must expressly state that an arbitration agreement posed no obstacle to pursuing a collective action.” (Id. (citation omitted).)

The FLSA “provides that an employee can sue on behalf of himself and other employees similarly situated.” (Slip Op. at 3.) Thus, “it gives employees the option to bring their claims together” but “does not require employees to vindicate their rights in a collective action, and it does not say that agreements requiring one-on-one arbitration become a nullity if an employee decides that he wants to sue collectively after signing one.” (Id.) The Court, therefore, was able to “give effect to both statutes: employees who do not sign individual arbitration agreements are free to sue collectively, and those who do not sign individual arbitration agreements are not.” (Id.)

3. These arbitration agreements are outside the FAA’s savings clause.

The Sixth Circuit then focused on the plaintiffs’ second FLSA-based argument: that the arbitration agreements fall within the FAA’s savings clause. That portion of the law “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract.’” (Slip Op. at 4 (quoting 9 U.S.C. § 2).) Specifically, the plaintiffs asserted that “because the FLSA gives the employees a right to pursue a collective action, the agreements that the employees signed . . . requiring them to pursue individual arbitration are illegal and therefore unenforceable.” (Id.)

The Court explained that the savings clause “includes an ‘equal-treatment’ rule: individuals can attack an arbitration agreement like they would any other contract, but they cannot attack the agreement simply because it is one involving arbitration.” (Slip Op. at 5.) The court pointed out that under Epic, defenses that “interfere with the ‘fundamental attributes of arbitration’ are . . . insufficient.” (Id. at 5 (quotation omitted).) As shown in Epic, “one of arbitration’s fundamental attributes is its historically individualized nature.” (Id.) Thus, objecting to an agreement because it requires individualized arbitration “does not bring a plaintiff within the territory of the savings clause[,]” or else litigants “could use this contract defense to attack arbitration itself.” (Id.) As the court observed, “[t]hat selective treatment is exactly what Epic says is not allowed.” (Id.)

What the Decision Means for Employers

The Sixth Circuit’s holding confirms that the Supreme Court set a high bar in Epic for parties to argue that statutes other than the FAA provide a basis for courts not to enforce arbitration agreements. A number of significant issues remain for the courts to decide, however, including the applicability of the FAA to independent contractor agreements in the transportation industry (set for oral argument in the U.S. Supreme Court on October 3, 2018), as well as whether claims under California’s Private Attorneys General Act must now be arbitrated. In addition, employers must remain mindful that courts continue to scrutinize arbitration agreements for elements of substantive and procedural unconscionability. Whether and to what extent Epic may affect how courts evaluate unconscionability remains to be seen.

On July 26, 2018, the California Supreme Court issued its long-awaited opinion in Troester v. Starbucks Corporation, ostensibly clarifying the application of the widely adopted de minimis doctrine to California’s wage-hour laws. But while the Court rejected the application of the de minimis rule under the facts presented to it, the Court did not reject the doctrine outright. Instead, it left many questions unanswered.

And even while it rejected the application of the rule under the facts presented, it did not address a much larger question – whether the highly individualized issues regarding small increments of time allegedly worked “off the clock” could justify certification of a class on those claims.

For more than 70 years, federal courts have regularly applied the de minimis doctrine in certain “circumstances to excuse the payment of wages for small amounts of otherwise compensable time upon a showing that the bits of time are administratively difficult to record.” Those courts have concluded that as much as 15 minutes per day could be considered de minimis and, therefore, noncompensable.

In Troester, the California Supreme Court concluded that most of California’s wage and hour laws have not in fact adopted the de minimis doctrine found in the federal Fair Labor Standards Act (“FLSA”). However, the Court did not go so far as to reject the application in all instances. Indeed, the Court specifically declined to “decide whether there are circumstances where compensable time is so minute or irregular that it is unreasonable to expect the time to be recorded.” (Emphasis added.)

The key words in that sentence appear to be “minute” and “irregular.”

The Court declined to do so “given the wide range of scenarios in which this issue arises,” proffering what appear to be examples where the de minimis rule could apply – e.g., “paperwork involving a minute or less of an employee’s time” or “an employee reading an e-mail notification of a shift change during off-work hours.”

Under the facts presented to it, where the employer allegedly required employees to “work ‘off the clock’ several minutes per shift,” the Court found that the relevant statute and regulations did not permit application of the de minimis rule.

Specifically, it apparently was undisputed that the plaintiff “had various duties related to closing the store after he clocked out, and the parties [had] agree[d] for purposes of [the California Supreme Court] resolving the issue . . . that the time spent on these duties is compensable.” It also apparently was undisputed that these tasks took the plaintiff as few as 4 minutes and as much as 10 minutes each shift that he worked. Given those specific facts, the Court found that the de minimis rule would not be applicable, holding that, under California law generally, an “employer that requires its employees to work minutes off the clock on a regular basis or as a regular feature of the job may not evade the obligation to compensate the employee for that time by invoking the de minimis doctrine.” (Emphasis added.)

Consistent with prior language in the opinion, the key words in that conclusion appear to be “minutes” and “regular.”

In other words, while significant, regular time would not be de minimis, insignificant and irregular time could be.

And how that issue could be addressed on a classwide basis seems questionable, at best, given that the very nature of “off the clock” work is that there are no records of it. Individualized inquiries apparently would need to be conducted person-by-person, day-by-day, to determine if an individual in fact worked “minutes” off-the-clock on a “regular” basis.

Not unimportantly, in addition to the Court’s majority opinion, Justices Mariano-Florentino Cuéllar and Leondra Kruger wrote separate concurring opinions, each offering some additional support for employers.

Justice Cuéllar noted that while the Court’s majority opinion “protects workers from being denied compensation for minutes they regularly spend on work-related tasks,” it “does not consign employers or their workers to measure every last morsel of employees’ time.”

Justice Kruger also offered some examples where she opined that the de minimis rule could apply:

  • An employer requires workers to turn on their computers and log in to an application in order to start their shifts. Ordinarily this process takes employees no more than a minute (and often far less, depending on the employee’s typing speed), but on rare and unpredictable occasions a software glitch delays workers’ log-ins for as long as two to three minutes.
  • An employer ordinarily distributes work schedules and schedule changes during working hours at the place of employment. But occasionally employees are notified of schedule changes by e-mail or text message during their off hours and are expected to read and acknowledge the messages.
  • After their shifts have ended, employees in a retail store sometimes remain in the store for several minutes waiting for transportation. On occasion, a customer will ask a waiting employee a question, not realizing the employee is off duty. The employee – with the employer’s knowledge – spends a minute or two helping the customer.

Justice Kruger wrote that “a requirement that the employer accurately account for every second spent on work tasks may well be impractical and unreasonable” in the situations above.

Following Troester, entities doing business in California will want to review their practices and their timekeeping systems.

And while Troester certainly suggests that employers in California will face an increased number of class actions alleging that certain insignificant amounts of time should have been compensated, plaintiffs’ difficulty in actually getting classes certified on such claims appears relatively unchanged.

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.

In November 2017, four convenience store franchisees brought suit in federal court against 7-Eleven, Inc., alleging that they and all other franchisees were employees of 7-Eleven. The case was filed in the United States District Court for the Central District of California, entitled Haitayan, et al. v. 7-Eleven, Inc., case no. CV 17-7454-JFW (JPRx).

In alleging that they were 7-Eleven’s employees, the franchisees brought claims for violation of the federal Fair Labor Standards Act (“FLSA”) and the California Labor Code, alleging overtime and expense reimbursement violations. The trial court granted judgment in 7-Eleven’s favor, concluding that 7-Eleven was not the four franchisees’ employer under California law or federal law.

The court noted that the franchisees’ “basic legal theory underlying [their] claims [wa]s that 7-Eleven’s restrictive policies and practices created an employment relationship between the parties.” The court concluded that because the franchisees could not establish an employment relationship, each of their claims failed.

For example, while 7-Eleven required the franchisees to keep their stores open 24 hours per day, 364 days per year, the court was persuaded by the fact that the franchisees themselves were not “actually required to work at the stores a particular number of hours or on particular days” – they could hire employees to meet these requirements. And while the franchisees argued that 7-Eleven controls the payment of all wages and instructs franchisee on pay practices, performance appraisals, and disciplinary actions, including worker terminations, that did not persuade the court because “the fact that a franchisor pays a franchisees’ employees’ wages does not create an employment relationship,” and the franchisees admitted that they have unfettered discretion to hire and fire employees and set wages.

Because the franchise agreements explicitly provided that franchisees “control the manner and means of the operation” of their stores and “exercise complete control over and all responsibility for all labor relations and the conduct of [franchisees’] agents and employees, including the day-to-day operations” of franchisees’ stores and employees, the court concluded that such minimal control was insufficient to make franchisees common law employees of 7-Eleven.

The federal court’s decision is a welcome one for franchisors that have sound franchise agreements and practices in place. It is certainly possible that the court would have reached a different conclusion had 7-Eleven’s franchise agreement or practices provided for 7-Eleven to have a greater right to exercise control over franchisees.  In light of this decision, franchisors should review their agreements and practices to ensure they do not have a right to control the wages, hours, or working conditions of franchisees.

Featured on Employment Law This Week:  The Ninth Circuit held that certain auto service advisors were not exempt because their position is not specifically listed in the FLSA auto dealership exemption.

The 9th relied on the principle that such exemptions should be interpreted narrowly. In a 5-4 decision last week, the Supreme Court found no “textual indication” in the FLSA for narrow construction. Applying a “fair interpretation” standard instead, the Court ruled that the exemption applies to service advisors because of the nature of the work.

Watch the segment below and read our recent post.

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.

Depending on the jurisdictions within which they operate, certain employers and their counsel will soon see a significant change in early mandatory discovery requirements in individual wage-hour cases brought under the Fair Labor Standards Act (“FLSA”).

A new set of initial discovery protocols recently published by the Federal Judicial Center (“FJC”), entitled Initial Discovery Protocols For Fair Labor Standards Act Cases Not Pleaded As Collective Actions (“FLSA Protocols”), available here, expands a party’s initial disclosure requirements to include additional documents and information relevant to FLSA cases. These Protocols apply, however, only to FLSA lawsuits that have been filed in participating courts that have implemented the Protocols by local rule or by standing, general, or individual case order. (At least one court has already adopted the Initial FLSA Protocols — the Southern District of Texas, Houston Division.) Also, as the title of this initiative makes clear, these protocols do not apply to FLSA actions styled as collective actions.

The goal of the FLSA Protocols in requiring an up-front exchange of information is to help frame issues to be resolved in the case, minimize potential opportunities for gamesmanship, and enable the court and parties to plan for more efficient and targeted discovery.  To that end, the Protocols focus on the type of information that is most likely to be useful in narrowing the issues in such cases.

Specifically, both parties must produce materials such as employment agreements, compensation agreements, and offer letters; documents recording the plaintiff’s wages and/or hours worked; written complaints from the plaintiff regarding the wages or overtime and any response; and documents showing the defendant’s good faith or willfulness.  The employer must also produce its wage and hour-related policies, procedures, or guidelines, as well as relevant portions of any employee handbook.  Additionally, both parties must identify the plaintiff’s start and end dates of employment, job title and duties, supervisors and managers, and any individuals having knowledge of the relevant facts.  The relevant time period for the FLSA Protocols mirrors the FLSA’s statute of limitations, which is two years before the date the Complaint was filed, or three years if the plaintiff’s complaint alleges a willful violation.

If adopted by a court, the FLSA Protocols will supersede the initial disclosure requirements set forth in Rule 26(a)(1) of the Federal Rules of Civil Procedure (“FRCP”); however, they will not supplant parties’ subsequent discovery obligations under the FRCP.   To address potential concerns by either party regarding the confidentiality of any documents or information to be exchanged, the FLSA Protocols include a model interim protective order allowing a party to designate documents or information as “confidential,” limiting their use to the particular case.

The FLSA Protocols are the second set of case-specific discovery protocols to be developed and implemented in the federal courts.  The FJC published the first set of protocols, the Initial Discovery Protocols for Employment Cases Alleging Adverse Action (“Employment Protocols”), in November 2011, and they have since been adopted by over 50 judges and on a district-wide basis in multiple jurisdictions around the country.

According to a FJC report issued in October 2015, cases filed in courts that adopted the Employment Protocols had less motion practice (both discovery-related and dispositive motions) than comparison cases, and they were more likely to settle. In a follow-up memorandum published a year later, the FJC found that the Employment Protocols had been more widely accepted by the federal judiciary than expected, despite the fact they specifically carve out from their application specific employment-related cases such as those arising under the FLSA and Family Medical Leave Act.

Like the Employment Protocols, the FLSA Protocols may very well become a helpful tool for employers being sued in FLSA litigations because they require early disclosure of relevant information that will help the parties to a litigation assess the strength of the plaintiff’s claims and employer’s defenses quickly and allow them to make informed decisions as to best strategies, including whether potential early resolution is appropriate.  Query, however, whether such potential early disclosure could alternatively be achieved by requiring federal district courts to maintain more rigorous case management plan deadlines.

Whether the FLSA Protocols will ultimately result in greater efficiency in the discovery process or an increase in early case resolution remains to be seen.  The FJC has announced that it will monitor their use, including by evaluating cases conducted in accordance with the Protocols’ early discovery requirements. Because many plaintiff-employees and their counsel file lawsuits as a collective action, rather than on an individual basis, as a matter of course, it is unclear how big of an impact the FLSA Protocols will actually have on non-collective FLSA litigation.  In fact, it is possible the FLSA Protocols could actually incentivize plaintiff’s counsel to file actions on a collective basis, rather than as individual plaintiff lawsuits, in order to avoid the additional work at the outset of a case.  If so, then expanding the Protocols to include collective actions would likely have a more resounding impact.  Should the Protocols find success with the participating federal judiciary, then perhaps they will be expanded, in both jurisdiction and scope, to include collective actions.  Only time will tell, and we will be sure to keep you apprised of all developments with this new initiative.

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.