Wage & Hour Litigation Blog

Taking a Pass on a “Reclass” Class (or Collective): Court Denies Reclassified Employees’ Certification Motion

Posted in Conditional Certification

Authored by Jessica Lieberman

The decision whether to reclassify employees whose exempt status is arguable can sometimes create something of a double bind for employers: reclassification should be the conservative approach, but it also can be risky if it is interpreted as evidence that the prior classification was wrong.  For this reason, employers may fear that reclassification aimed at reducing potential liability may actually spur litigation.

Last week the District of New Jersey issued a decision that provides some hope and help for employers facing this conundrum.  In Henry v. Express Scripts Holding Co., an employee who had been reclassified by the defendant in 2013 sought conditional certification of a putative collective of 170 employees who had been reclassified at the same time.  She claimed that she was similarly situated to these individuals because  the defendant “did not review the job duties that the employees performed during the prior three years” and “did not pay back overtime wages to any of the 170 reclassified employees.”

The district court rejected this bid for conditional certification, stating that in the Third Circuit an employee must show the existence of a common policy or practice that arguably violates the FLSA, and “[r]eclassification, alone, does not evidence a FLSA violation” for these purposes.  The plaintiff had failed to show any additional facts that would support her claim or suggest that “the previous classifications as exempt resulted in FLSA violations.”  Accordingly, the court held that the plaintiff had failed to make the “modest factual showing” necessary for conditional certification and denied the motion.

The Henry case does not eliminate all risk associated with a reclassification, and whether and how to reclassify remains a nuanced issue that should be discussed with counsel.  Going forward however, employers should be able to point to Henry in trying to avoid certification of FLSA lawsuits stemming from such decisions.

WHD Recovers $240 Million for More Than 270,000 Workers

Posted in DOL Enforcement

Authored by Alex Passantino

In a post today on the U.S. Department of Labor’s blog, WHD Administrator, Dr. David Weil, announced that WHD recovered more than $240 million in back wages for more than 270,000 workers in FY2014. This recovery was slightly down from FY2013’s $249 million. Since 2009, WHD has recovered more than $1.3 billion as a result of its enforcement efforts.

Notably, 43% of WHD’s investigations were targeted or “directed” investigations (as opposed to complaint-based), which is up from years past. In those investigations, WHD investigators found violations 78% of the time.

Dr. Weil’s post references the Division’s strategic enforcement efforts, as well as its fissured industry initiative. As we’ve discussed previously on the blog, the fissured industry initiative is focused on those industries more likely to use independent contractors, subcontractors, franchise relationships, and employment agencies, such as hotel, restaurant, construction, janitorial services, and staffing.

Employers in these industries should take some time and consider whether their payment practices comply with the FLSA and other wage and hour laws. Are your exempt employees properly classified? Are bonuses and other incentive payments being included in the regular rate? Are you capturing all hours worked?

Conducting an audit of these practices before WHD shows up at your door can help keep you out of next year’s enforcement numbers. As Dr. Weil’s post makes clear, enforcement is the fissured industries will continue, and less than a quarter of the time do employer make it out unscathed.

Wage and Hour Division Requests $49 Million Increase to Pressure Fissured Industries

Posted in DOL Enforcement

Co-authored by Alex Passantino and Kevin Young

Although widely regarded as being “dead on arrival,” the President’s recently released FY2016 budget request provides many insights into the Administration’s priorities.  Those insights are crystal clear when it comes to the Labor Department:  the Administration will continue to focus on equipping the Department with the resources necessary to aggressively increase its investigation, identification, and penalization of workplace violations.

Certainly included in the Administration’s plans is the DOL’s Wage & Hour Division.  WHD has requested a 22% budget increase, from about $227 million in FY2015 to about $277 million in FY2016.  This proposed increase to WHD’s budget would provide it with more than 300 new full-time positions.  The increase would also allow WHD to upgrade its technology, which would in turn improve WHD’s employer targeting and violation tracking.

Not surprisingly, WHD’s Congressional Budget Justification—which is WHD’s explanation to Congress of what it intends to do with the money it requests—identifies “Addressing the Fissured Workplace” as a key enforcement initiative.  As we’ve discussed plenty of times on this blog, WHD has focused investigative efforts in “fissured industries,” which include industries using independent contractors, employee leasing, and franchise relationships, such as restaurants, hotels, staffing companies, cleaning services, and construction, among several others.

Notably, WHD has dramatically increased its targeted cases.  In FY2014, 44% of its investigations were directed (i.e., not complaint-based), a 27-point increase from FY2010.

WHD also identifies a “reengineered” approach to FMLA enforcement.  WHD is developing strategies so, when conducting local establishment FMLA compliance, it will also provide a more in-depth review of the employer’s business practices and leave policies.  WHD hopes to have a broader impact on compliance, rather than simply resolving an individual complaint.

The budget proposal reflects the Administration’s desire to raise the minimum wage, which would require a legislative act.  The Administration’s talking points also identify another legislative proposal:  a change to the FLSA’s civil monetary penalties provisions that would allow WHD to assess a $5,000 penalty per violation against employers that intentionally keep fraudulent wage and hour records or no records at all.

Of course, the budget also notes the Administration’s current effort to revise the FLSA’s overtime exemptions for the first time since 2004.  The Administration has signaled a full-court press on narrowing the class of workers who may be classified as overtime-exempt by heightening the exemptions’ salary requirements and tightening their duty requirements.  A proposed rule is expected in the coming weeks.

Although the President’s budget proposal is not likely to be enacted by Congress in anything close to its current form, it provides a good look into WHD’s priorities for the coming year.  Targeted enforcement—particularly in the fissured industries—is at the top of the list.  We will, of course, keep you apprised of further developments.

Live From New York – It’s The Second Circuit (Unpaid Intern Case)!

Posted in DOL Enforcement, Misclassification/Exemptions

Co-authored by Robert S. Whitman and Adam J. Smiley

The Second Circuit heard arguments this morning in two cases that raise critical issues for the fate of internships in for-profit businesses: Fox Searchlight’s appeal of the decision granting summary judgment and class certification to interns who worked on film productions, and the appeal by former Hearst Corporation interns whose motion for class certification was denied.

Lawyers from both sides, and from the U.S. Department of Labor, sought to persuade the Court of the appropriate test to evaluate whether interns are employees, subject to the minimum wage and overtime provisions of the FLSA, or “trainees” who are not entitled to compensation.  Under the common law “primary benefit” test advanced by the companies, if the internship primarily benefits the intern rather than the employer, the intern is properly deemed a trainee.  The interns and the DOL voiced support for the DOL’s strict 6-factor test, which provides that if each factor is not satisfied, the intern is entitled to compensation.

The panel of Judges Walker, Jacobs, and Wesley peppered the lawyers with questions, at times joking about the lack of internships when they were students in the “stone age.”  Overall, they were critical of the application of the rigid DOL test, with Judge Wesley candidly noting that the three judges are “skeptics” of the 6-factor approach.

Here are the highlights of the arguments:

  • The panel focused on the utility of the primary benefit test for judges who are accustomed to conducing balancing inquiries.  The primary benefit test, they said, allows for such a balancing analysis, with consideration of all the key issues, while the DOL test is rigid and does not allow for the consideration of important issues such as the receipt of academic credit, the brevity of internships, or the fact that an internship may end at the same time as the academic semester.
  • In further challenging the rigidity of the 6-factor test, Judge Jacobs wondered what a reference letter for an intern would look like if the program fully conformed with the DOL test – suggesting that such a letter would be an “absurd” read that would not paint the intern in a favorable light.
  • In response to this tough questioning, the DOL made what appeared to be an important admission:  that its test is not absolutely rigid, and that under certain circumstances, an intern may properly be deemed a trainee even if the internship did not meet all 6 of the DOL factors.  Lawyers for Fox jumped on this statement as an additional indication that the DOL test is facially contradictory and is in essence encompassed by the primary benefit test.
  • The panel also commented that an intern’s decision to accept no compensation, and no expectation of a future job, suggests that the intern was in fact gaining a benefit from the program – because there would be no reason to accept such a position without other benefits.  Lawyers for the interns countered that, since the 2008 recession, students are desperate to get their feet in the door and are willing to take internships with no benefits in exchange for the remote possibility of a job down the road.
  • The panel, picking up on the interns’ argument, questioned how an intern could gain an educational benefit from performing menial tasks, such as getting coffee and running errands.  The employers argued that being immersed in a particular industry’s work environment and evaluating a type of job are tangible benefits that should be considered under the primary benefit test.  While he acknowledged that this was just one part of the analysis, Judge Wesley expressed disagreement with the proposition that simply “[learning] to co-exist in a work environment” is educational.
  • The panel, and Judge Jacobs in particular, seemed persuaded that the grant of academic credit by an educational institution was an important consideration in favor of finding that an internship had a valid educational component.  Judge Jacobs also criticized the interns’ suggestion that the payment of minimum wage was an easy fix, suggesting that the slew of other legal protections that come with employee status might make it impossible to fire an intern – an observation that drew laughter from the audience.
  • The panel seemed to believe that any internship would necessarily require interns to perform some “real work.”  Judge Jacobs, in fact, gave an example of law school clinic programs where law students clamored for “real work” in writing briefs and meeting with witnesses, and how this is what makes internships desirable.

It may be months before the court issues its decision, and we will provide an update as soon as that happens.  In the meantime, employers should continue to carefully scrutinize their internships to ensure that, at a minimum, the interns are the primary beneficiaries of the program.  We also recommend that employers at least look to the DOL factors as a guide in this analysis, as some of those factors may be adopted by the Court as part of a balancing test, even if it rejects the strict 6-factor approach.

Whatever Happened to those Overtime Rules?

Posted in Overtime

Authored by Alex Passantino

Over the past several weeks, we have received an increasing number of questions about the status of the Department of Labor’s revisions to the “white collar” overtime exemptions.  As regular readers know, last March, the President directed the Secretary of Labor to begin the regulatory process on those regulations.  At that time, the President directed the Secretary to consider how the regulations could be revised to:

  • Update existing protections in keeping with the intention of the Fair Labor Standards Act.
  • Address the changing nature of the American workplace.
  • Simplify the overtime rules to make them easier for both workers and businesses to understand and apply.

Since the initial direction by the President, indications are that the anticipated revisions to the overtime regulations may involve:

  • A (potentially significant) increase to the current salary level of $455 per week.
  • An adjustment to the primary duty test, presumably to implement a California-style hard 50% limitation on work deemed non-exempt, although a different—and more workable—standard (e.g., 30%, 40%) is certainly possible.
  • And other changes to the duties tests, such as limitation or elimination on the ability of managers to engage in management and non-exempt work concurrently or the re-introduction of the requirement that an administrative employee’s work be related to management “policies.

The details of the proposed revisions, however, remain in the Department of Labor.

In May of last year, the Department of Labor identified a target date of November 2014 for publication of a proposed rule.  In the months that followed, the Department engaged in a series of “listening sessions” with the regulated community, soliciting input and ideas.  The Department, however, did not meet its November target date.

In December, the Department identified a target date of February.  As of this post, the proposed rule has not yet been submitted to the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA).  Given that OIRA can sometimes take months to review a rule, it is difficult to see how the Department can meet its February date, but there has been no formal announcement of a delay.

There has, however, been much speculation about what may be holding the regulations up at the Department.  That speculation typically focuses on the proper salary level for the exemption.  Earlier this month, the Economic Policy Institute, a think-tank that receives a significant portion of funding from organized labor, posted a letter sent by a number of labor economists to Secretary Perez.  In that letter, the economists noted that the Department had been considering a salary level of $42,000.  The economists pushed for a $50,000 threshold.

The U.S. Senate also jumped into the salary level debate today, when a group of 25 Democratic Senators (as well as Sen. Bernie Sanders, an Independent who caucuses with the Democrats) sent a letter to President Obama requesting that the salary level be increased to at least $56,680 per year.

Clearly, the proper salary level to be included in the proposal is something under careful consideration at the Department.  Presumably, once that level is determined, the proposed regulations will be sent to OIRA, and, ultimately, published in the Federal Register for comment by the regulated community.  Only after that notice, comment, consideration—and, presumably, another long debate surrounding the salary level—will any changes become applicable to the U.S. workforce.

We will keep you updated on further developments as they arise.

Unpaid Internship Showdown at the Second Circuit

Posted in DOL Enforcement

Co-authored by Robert S. WhitmanNadia S. Bandukda, Adam J. Smiley, and Jade Wallace

The Super Bowl isn’t the only major showdown coming this weekend.

On Friday morning, a three-judge Second Circuit panel will hear argument in two cases raising critical issues for the fate of internships in for-profit businesses:  (1) Fox Searchlight’s appeal of the decision granting summary judgment and class certification to interns who worked on film productions and (2) the appeal by former Hearst Corporation interns whose motion for class certification was denied.

At issue in both cases is the test to be used to evaluate whether interns are “employees” under the FLSA or “trainees” who are exempt from minimum wage and overtime requirements.  Under the common law “primary benefit” test, if the internship primarily benefits the intern rather than the employer, the intern is properly deemed a trainee and not entitled to compensation.  The Department of Labor (“DOL”) has declared that internship status should instead be determined by a strict 6-factor test and that if each factor is not satisfied, the intern is entitled to compensation.  The lower courts have applied modified versions of these tests and reached differing results.

We have written frequently on this topic (in May 2013, November 2013, and April 2014), but to tide you over until kickoff, we break down the matchup by looking at what the many friends of the Court have to say about the issue.

Five groups have filed amicus curiae briefs in the two appeals: the Secretary of Labor, the U.S. Chamber of Commerce, the Economic Policy Institute, Organized Labor (AFSCME, SEIU, CWA, UFCW), and the American Council on Education.  Here is where each group stands on the key issues before the Court:

 

DOL

Chamber of Commerce

EPI

Organized Labor

ACE

What test does group support? DOL 6-Factor Test Primary Benefit Test Brief does not urge the court to adopt any specific test DOL 6-Factor Test Functional standard similar to Primary Benefit Test:  leaves the determination of intern status with educational institutions rather than DOL
Key arguments DOL test is based on Supreme Court’s Portland Terminal decision.DOL test provides a consistent, objective standard for analyzing internship programs. Focuses on the benefits to interns and businesses from internship programsDOL test: 1) impedes students’ ability to develop skills in meaningful internship experiences; 2) will reduce available internship opportunities; and 3) places an onerous burden on employers to ensure interns are not engaging in productive work FLSA must be expansively construed to cover internships where “workers are suffered or permitted to work.”“Many… non-traditional jobs come under the broad FLSA definitions of employment, and when scrutinized do not pass muster.” The Primary Benefit test could deny traditional common-law employees from FLSA protection Primary Benefit analysis allows courts to develop a standard that prevents abuse but also permits varied and flexible learning experiences without fear of liabilityThe approval of an internship by a college or university should provide a presumption of compliance with the FLSA
Notable Quotes: “In an internship context, a primary benefit test could be applied to exclude from the protections of the FLSA interns who are receiving very basic training on the employer’s operation while performing productive work for the employer on the theory that because interns are new entrants to the workforce, even the most rudimentary instruction or general exposure to a particular industry inures to their benefit.” “Prohibiting interns from performing any productive work is antithetical to a meaningful internship.” “Unpaid interns are likely to receive jobs with lower median wages than paid interns and applicants with no internship experience.” Applying the Primary Benefit test would “strip [workers] of a slew of other statutory workplace rights – concerning sexual harassment, discrimination on the basis of race and gender, workplace safety, and collective bargaining – that apply only to wage earners.”“Unpaid internships are a hallmark example of the race to the bottom in wages that result when, in the perceived absence of FLSA coverage, workers at the lowest rung of the labor market are forced to compete against one another to offer their services at the cheapest possible rate.” The DOL 6-factor test would be insufficient to address experiential learning and “cannot be used to evaluate the educational value of a particular internship.”“The uncertain and chilling prospect of employer FLSA liability for a legitimate educational internship restricts, if not altogether eliminates, opportunities which college students need in the public sector, in the non-profit sector, and in the business world.”The business concern about employing the 6-factor test and about civil liability under the FLSA has brought a “profound negative impact on the availability of internships” and allowing businesses to feel that such programs are “too risky.”

 

It is of course too soon to know whether the Second Circuit panel will be swayed by any of this.  Given the DOL’s primary enforcement role under the FLSA, its views will surely be given respectful consideration and perhaps strong deference.  But the amicus briefs come from a range of interested parties and reflect the importance of the internship issue to the various constituencies.  As of this post, only the DOL has been allowed any argument time in addition to the parties.

We will report on the arguments shortly after they close on Friday, and update readers as soon as possible thereafter.

Juno How to Pay When Your Facilities Close for Weather-Related Reasons?

Posted in Off-the-Clock Issues, Salary Basis, State Laws/Claims

Authored by Alex Passantino 

As Juno prepares to pummel the Northeast with snow, employers should prepare for any weather-related closures of their offices, factories, or other facilities.  The effect of a weather-related closure on compensation requirements varies for different types of employees and also varies by state.

EXEMPT EMPLOYEES

Most employees who are exempt from federal overtime requirements and paid on a salary basis are not subject to reductions to their weekly salaries because of a closure.  Even if an exempt employee misses a full day of work, the employer may not reduce the employee’s weekly salary (unless the employee misses an entire work week).  An employer that improperly reduces an employee’s salary might lose or jeopardize the ability to treat the employee as exempt from overtime pay requirements — potentially a very costly mistake.

Even though employers will almost certainly have to pay exempt employees their full salaries regardless of storm-related closures, employers do have the right to charge exempt employees for vacation or PTO for any work that they miss.  Employees who do not have enough accrued vacation or PTO to cover the closure, however, must still be paid their full weekly salaries.

The legal rules for paying exempt employees apply in all states.  Of course, in deciding whether to charge employees with vacation or PTO, employers may also want to consider non-legal factors such as employee morale and the organization’s finances.

NON-EXEMPT EMPLOYEES

For non-exempt employees, federal law requires only that employers pay employees for the hours they actually work.

TELECOMMUTING

In assessing pay requirements for all employees, employers should keep in mind that, even if an office or other facility is closed, some employees might work remotely.  Work performed remotely generally must be paid to the same extent as work performed on an employer’s premises — even if the employer did not request that the work be performed.  Non-exempt employees working remotely must generally be paid at their usual hourly rate (and subject to the usual requirements for overtime pay).

REPORTING PAY

Certain Northeastern states have additional requirements that apply to hourly employees who report to work when a facility is closed or not operating at full capacity.  For example:

  • Connecticut has a reporting pay requirement that applies to employees in the “Mercantile trade.”  Employees in that industry must be paid four hours at their regular rate of pay, if they actually report for work.  The “Mercantile trade” is defined as the wholesale or retail selling of commodities and any operation supplemental or incidental thereto.  A two-hour guarantee is in place for the restaurant and hotel industries, if the employee was not “given adequate notice the day before” that she should not report for work.
  • Massachusetts mandates reporting pay for non-exempt employees of at least three hours at the statutory minimum wage ($9.00) if they are scheduled to work more than three hours on a given day and actually report for work.  Employees scheduled for less than three hours need only be paid for their scheduled hours.
  • New Hampshire requires reporting pay for non-exempt employees who actually report for work of at least two hours at their regular rate.
  • New Jersey requires reporting pay for non-exempt employees who actually report for work of at least one hour at their applicable wage rate (unless, prior to this report to work, the employer already made available to the employee the minimum number of hours of work agreed upon for the week).
  • New York requires “call-in pay” for non-exempt employees of at least four hours, or the number of hours in the regularly scheduled shift (whichever is less) at the basic minimum hourly wage ($8.75) for employees who actually report for work.  A 2009 New York Department of Labor opinion letter, however, interpreted the reporting-pay obligation as not applying if “the amount paid to an employee for the workweek exceeds the minimum and overtime rate for the number of hours worked and the minimum wage rate for any call-in pay owed.”  Employees working in the hospitality industry may be subject to different requirements.
  • Rhode Island requires an employer to pay an employee who reports for duty at the beginning of a work shift (where the employer offers no work for him to perform) not less than three (3) times the employee’s regular hourly rate of pay.
  • Washington, D.C., requires reporting pay of at least four hours at the statutory minimum wage ($9.50) for non-exempt employees who actually report for work if they are scheduled to work for at least four hours.  Employees scheduled for less than four hours need only be paid for their scheduled hours.

Some of the reporting pay requirements noted above may be waived if the employer makes a good faith effort to provide employees with reasonable advance notice that they should not to report to work.  Employers that foresee that their facilities will be closed should give employees who are scheduled to work as much notice as possible for both practical and wage/hour compliance reasons.

If you are an employer with questions about the requirements summarized above or any other impacts that the storm may have on your legal obligations as an employer, we encourage you to contact any Seyfarth Shaw attorney with whom you work.

Seyfarth Shaw Attorneys Author the 2015 Update to the Definitive Guide to Litigating Wage & Hour Lawsuits

Posted in Conditional Certification, Hybrid Lawsuits, Rule 23 Certification

Leading employment law firm Seyfarth Shaw has updated its definitive guide to the litigation of wage and hour lawsuits. Co-authored by three Seyfarth partners and edited by the chair of the firm’s national wage-hour practice, Wage & Hour Collective and Class Litigation is an essential resource for practitioners. The unique treatise provides insight into litigation strategy through all phases of wage & hour lawsuits, and is now updated with additional significant cases through 2014.

Among many other topics, the treatise’s authors examine how employers in multiple industries are targeted for wage-hour lawsuits and provides substantive procedural and practical considerations that determine the outcome of such actions in today’s courts. Principally designed to assist employment litigators and in-house counsel, the treatise also proves useful to senior management seeking to fend off wage-hour actions before they strike.

Authors Noah Finkel, Brett Bartlett and Andrew Paley, who practice in the firm’s Chicago, Atlanta and Los Angeles offices respectively, as well as Boston-based Richard Alfred, who is Chair of Seyfarth’s National Wage & Hour Litigation Practice Group, are each experienced wage and hour litigators who have handled numerous collective and class actions asserting violations under both state and federal law.

“The growth of wage and hour decisions at the appellate level has continued, and will have a significant impact on pending and future litigation,” said Alfred. “Our updated edition arrives at the perfect time for corporations looking for the most current insight and strategy on wage & hour litigation. New have touched on pleading requirements, the enforcement of class waivers in arbitration agreements, exemptions, and use of statistical evidence and sampling in class trials, among others. This handbook delves into these new developments and offers practical litigation advice to all employers navigating this complex space.”

Wage & Hour Collective and Class Litigation covers the complex rules surrounding all types of wage and hour lawsuits. These include claims under the Fair Labor Standards Act, claims under state wage and hour laws, or hybrid cases involving both, as well as special issues involving government contractors. It provides readers guidance around: how to respond to a wage and hour complaint; what to consider when deciding whether to remove a case to federal court; how to assess the particular merits of a claim; whether to settle; how to oppose plaintiffs’ motion to facilitate notice for conditional certification; what kinds of affirmative defenses are best; and how to tilt the odds in favor of the defense.

In its fourth update to the treatise, Wage & Hour Collective and Class Litigation features discussions of recent decisions from appellate and trial courts and their effect on wage and hour litigation, emphasizing the following developments:

  • Recent federal appellate court decisions, including the Third Circuit’s decision in Davis v. Abington Memorial Hospital, analyzing what is necessary to plead a plausible claim for relief to avoid a motion to dismiss in wage and hour cases.
  • The California Supreme Court’s recent decision in Duran v. U.S. Bank.  This case establishes important principles in the class action setting on the use of statistical evidence and sampling, on employers’ due process rights to present evidence on their affirmative defenses and the use of trial plans to determine if class actions are manageable.  Although controlling law only in California, Duran establishes principles that may be helpful to employers litigating class actions in any forum.
  • The Second Circuit decision in Pippins v. KPMG on the application of the professional exemption to entry-level accountants.
  • The California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC, which overruled its prior decision in Gentry v. Superior Court.  The Iskanian ruling provides California employers with far more flexibility to utilize arbitration agreements in the employment setting and avoid class action litigation.
  • The Third Circuit’s decision in Thompson v. Real Estate Mortgage Network  applying a more lax federal common law standard to determine successor liability under the FLSA.

The 2015 update to Wage & Hour Collective and Class Litigation is published by American Lawyer Media’s Law Journal Press.  It is available online at www.lawcatalog.com.

U.S. Supreme Court Declines to Referee Slugfest Between Federal and California Courts on Enforceability of Arbitration Agreements

Posted in Arbitration Agreements

Co-authored by David D. Kadue and Simon L. Yang

On Tuesday, January 20, 2015, the Court declined to take the case of CLS Transportation Los Angeles, LLC v. Iskanian, in which an employer asked the Court to reverse a ruling of the California Supreme Court. At issue was whether an employee who has agreed to submit all employment-related claims to arbitration, and who has also agreed to waive participation in class and representative actions, can evade that agreement and sue the employer under California’s Private Attorney General Act (“PAGA”). The California Supreme Court in June 2014 had sided with the suing employee.

Many observers expected that the case would be the latest episode in a drama that features a complicated relationship between two supreme courts. To simplify a bit, the U.S. Supreme Court traditionally has read the Federal Arbitration Act (“FAA”) to require the enforcement of private arbitration agreements by their terms. The California Supreme Court, meanwhile, has often searched creatively for some Cal-centric reason to deny enforcement to arbitration agreements.

Recent examples of the contrasting supreme viewpoints have occurred in the context of arbitration agreements that waive the procedural right to proceed or participate in a class action. The California Supreme Court once held, in both the consumer-claim context and in the employee-claim context, that a class-action waiver in an arbitration agreement is unenforceable, because any such waiver offends the California public policy favoring class actions. But then the U.S. Supreme Court, in Concepion v. AT&T Mobility, ruled in 2011 that the FAA preempts the California ban on class-action waivers. Concepion involved a consumer complaint. For several years, California courts resisted the clear implication that Concepcion also applies to employee complaints. Finally, in Iskanian, the California Supreme Court relented, acknowledging that, under the FAA, class-action waivers in arbitration agreements are enforceable, even in California.

But even then the Iskanian court also sounded a note of resistance, based on a special Cal-peculiarity: the court held that Concepcion does not apply to a PAGA claim. The rationale for creating this PAGA exception to Concepcion was that a PAGA claim differs from a class action in that PAGA plaintiffs act as private attorneys general, on behalf of the State of California—an entity that never agreed to arbitrate. Meanwhile, a dozen or more federal district court decisions repudiated this rationale, holding that the FAA, as interpreted by Concepcion, requires courts to enforce arbitration agreements calling for individual arbitration of PAGA claims, even if that enforcement keeps the plaintiff from acting as a private attorney general.

The employer petitioned the U.S. Supreme Court for a hearing on whether the California Supreme Court, in Iskanian, has once again strayed from the FAA’s true path. In supporting this request for intervention, the employer community explained that Iskanian’s rationale does not withstand scrutiny, for several reasons. First, the injuries that PAGA addresses are Labor Code violations that have harmed the suing “aggrieved employee.” The notion that this injury is really to the State of California is an overbroad legal fiction that could apply to any statutory claim—as California presumably has an interest in compliance with all of its statutes. This legal fiction contrasts with the actual governmental injury asserted in a true qui tam claim under the False Claims Act, in which a private party, on behalf of the government, alleges fraud on the government, after notifying the government of the claim and letting the government decide whether to sue for itself. Second, PAGA differs from a true qui tam action in that the State of California plays almost no role in a PAGA action. Under the False Claims Act, the government investigates the claims and a case cannot proceed as a qui tam action unless the government expressly consents, so the government plays a true gatekeeper role. Under PAGA, by contrast, the California Labor and Workforce Development Agency (“LWDA”) has a limited chance to investigate and intervene after the aggrieved employee gives written notice of a violation, and the LWDA almost never investigates. On the contrary, unless, within 33 days, the LWDA says it will investigate (a once-in-a-blue-moon occurrence), the aggrieved employee can sue, without any government oversight, so that the aggrieved employee may unilaterally dismiss the action. Third, the State of California rarely sees the 75% share of the civil penalties that PAGA nominally promises. Settlements of Labor Code claims often involve no PAGA penalty whatsoever. The only judicial oversight is to approve any PAGA penalty sought: if no PAGA penalties are allocated, the court has nothing to approve. Individual plaintiffs can thus use PAGA claims to pressure a greater settlement of their private claims, while producing nothing for the State. In short, because individuals control PAGA actions from start to finish, enabling them to seek recovery for their own alleged injuries, there is no good reason to distinguish PAGA claims from other wage and hour claims. As to all these claims, the FAA preempts any state public policy that would interfere with the enforcement of arbitration agreements. So why should PAGA be any different?

Yet, alas, on Tuesday the U.S. Supreme Court denied the employer’s petition. We thus expect to see continuing discord between federal and California courts on whether PAGA represents an exception to the general rule that courts should enforce arbitration agreements that waive class and representative actions.

Employee or Independent Contractor? In New Jersey, It’s as Easy as “ABC”

Posted in Independent Contractors

Co-authored by Robert S. Whitman and Robert T. Szyba

New Jersey employers now have an answer to a question that had previously been mired in uncertainty:  What test is used to determine whether an individual is an employee or an independent contractor under state wage and hour laws?

In Hargrove v. Sleepy’s, LLC, the New Jersey Supreme Court, answering a question certified by the U.S. Court of Appeals for the Third Circuit, held that the “ABC Test,” taken from the New Jersey Unemployment Compensation Law, applies. Under that test, a worker is presumed to be an employee unless three elements—listed in subsections A, B, and C of the key section of the statute—are met.

Those factors are:

(A) the individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact;

(B) the service is either outside the usual course of business for which such service is performed, or such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business.

Unless all three criteria are satisfied, the worker will be deemed an employee.

The plaintiffs in Sleepy’s were delivery drivers who sued under the Employee Retirement Income Security Act (ERISA), the Family and Medical Leave Act (FMLA), New Jersey Wage Payment Law (as well as the state wage laws of New York, Massachusetts, Maryland, and Connecticut), and for breach of contract. They sought rescission of their independent contractor agreements and reformation of their contracts for employment, admission into Sleepy’s ERISA-governed benefit plans, damages for interference with their alleged FMLA benefits, and damages for allegedly unlawful wage deductions and offsets.  Sleepy’s moved for summary judgment on grounds that the workers were independent contractors.  The U.S. District Court agreed, holding that the facts “overwhelmingly show[ed] that the plaintiffs were independent contractors” and thus had no viable employment claims.  The court utilized the so-called “common law test” in its analysis, following the U.S. Supreme Court’s lead in Nationwide Mutual v. Darden, an ERISA case.

Considering the question after certification from the Third Circuit, the New Jersey Supreme Court noted that, of the various tests for independent contractor status, the ABC Test was the most expansive in favor of employment status, as it is the only such test that begins with the presumption that the worker is an employee and puts the burden on the employer to establish otherwise.  The test was also advocated by the state Department of Labor and Workforce Development, which uses it in administrative determinations under the Wage and Hour Law and in unemployment insurance matters.  The Court stated that, in adopting the test, it sought to foster predictability in employment determinations and greater consistency among the state wage and hour laws.  Nonetheless, it recognized that the test differs from the “economic realities” analysis used under the Fair Labor Standards Act and thus could create inconsistent results under state and federal law in New Jersey.

For New Jerseyans, the bar for employment status under the state’s wage and hour laws has been lowered.  Garden State companies that use independent contractors now run a greater risk than before of having those contractors deemed employees.  Because the (alleged) employer bears the burden of establishing independent contractor status, which is distinctly different from applicable federal law, companies should take this opportunity to carefully assess their existing contractor relationships to ensure that these workers are properly classified.