Featured on Employment Law This Week:  The Department of Labor (“DOL”) rolls back the 80/20 rule.

The rule prohibited employers from paying the tipped minimum wage to workers whose untipped side work—such as wiping tables—accounted for more than 20 percent of their time. In the midst of a federal lawsuit challenging the rule, the DOL reissued a 2009 opinion letter that states that the agency will not limit the amount of side work a tipped employee performs, as long as that work is done “contemporaneously” with the tipped work or for a “reasonable time” before or after that work. The letter was previously withdrawn by the Obama administration.

Watch the segment below and read our recent post.

Watch Paul DeCamp’s full segment here.

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.

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.

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.

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

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

American Pipe Tolling

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

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

The Supreme Court’s Ruling

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

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

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

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

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

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

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

The Concurrence

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

What the Decision Means for Employers

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

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.

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.

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.