Authored by Cheryl Luce

Employers often grapple with what to do when their policies prohibit off-duty work, like working on mobile devices after hours, that employees don’t follow. Even if it has a policy prohibiting off-duty work, if the employer knows (or should know) an employees is working, the employer must compensate the employee for the off-duty work. The same can be said if an employer has a policy requiring employees to report all off-duty time worked but knows (or should know) that employees are not reporting it. As the regulations put it, employers cannot “sit back and accept” work without compensating it, even though the employer has rules against it. 29 C.F.R. § 785.13.

But what about when the employer knows that employees are working off-duty, but does not know that employees aren’t reporting their time? Does the requirement that an employer must exercise “reasonable diligence” to unearth unreported work mean the employer has a responsibility to check what it knows of employees’ off-duty work against the time they report? Earlier this month, the Seventh Circuit agreed that the FLSA’s “suffer or permit to work” standard does not go so far.

In Allen v. City of Chicago, police officers at the Chicago Police Department’s Bureau of Organized Crime claimed that they were owed overtime pay for off-duty work on their BlackBerrys, even though they failed to report the overtime using the police department’s time slip reporting system. The trial court concluded that the Bureau supervisors knew the officers sometimes worked off-duty on their BlackBerrys, but they did not know or have reason to know that the officers were not submitting time slips for such work. Affirming the judgment in favor of the police department, the Seventh Circuit held that the trial court reasonably concluded that requiring the police department to check what they knew of the officers’ off-duty work against officers’ time slips they approved would be “extremely impractical.”

The Allen police officers also contended that the police department discouraged them from seeking overtime payment for off-duty BlackBerry work, which stopped them from submitting time slips for the work. Neither the trial court nor the Seventh Circuit were moved by the evidence in support of this argument. No supervisor ever told plaintiffs not to submit time slips for BlackBerry work, and no officer was disciplined for submitting such time slips. The plaintiffs’ de facto policy theory failed.

This case serves as a reminder that employers are only required to pay for off-duty work that they know or should have known was performed—not what they could have known was performed. Assuming it has no reason to believe an employee who sometimes works off hours is working off the clock, an employer in the Seventh Circuit is generally not required to cross-check the employee’s timecards to make sure they are reporting all time worked.

Co-authored by Noah Finkel, Colton Long, Kyle Petersen, and John Giovannone

Seyfarth Synopsis:  FLSA cases holding against employers typically invoke a canon of construction that the FLSA should be construed broadly, and any of its exemptions narrowly. But a study of the roots of this language shows that the canon has a dubious foundation and that it tends to be applied inconsistently to justify a result.

As our readers saw earlier this week, the Ninth Circuit recently issued a decision in McKeen-Chaplin v. Provident Bank, turning the traditional administrative vs. production dichotomy of the administrative exemption on its head. In Provident Bank, the Ninth Circuit held that the bank’s mortgage underwriters are not exempt because their duties go to the heart of marketplace offerings rather than the administration of the bank’s business. In our view, that decision wrongly interpreted the administrative vs. production dichotomy and parted ways with the Sixth Circuit’s sound 2015 decision in Lutz v. Huntington Bank.

One additional point caught our eye: the prefatory language the Ninth Circuit used in Provident Bank in arriving at its conclusion that the administrative exemption did not apply. Indeed, the Ninth Circuit’s holding could have been predicted at the very beginning of the Court’s analysis. There, before even interpreting the administrative exemption, the court cleared its throat with a series of pronouncements we see all too frequently in FLSA jurisprudence:  “exemptions” the pronouncement goes, “are to be construed narrowly,” and must be “withheld except as to persons plainly and unmistakably within their terms and spirit.” The Ninth Circuit hearkened back to this language later in its opinion as well.

But while exemptions must be construed narrowly, the quotation continues, the FLSA as a whole “is to be liberally construed to apply to the furthest reaches consistent with Congressional direction.” This language is not unique; it appears in most, though not all, FLSA administrative exemption cases, and variants of it appear in other FLSA contexts, usually in those opinions permitting FLSA cases to move forward. Earlier this summer, for instance, the Sixth Circuit rejected an employer’s decertification effort by first explaining that “Congress passed the FLSA with broad remedial intent,” and that the provisions of the FLSA are “remedial and humanitarian in purpose and must not be interpreted or applied in a narrow, grudging manner.”

This type of language, though perhaps useful in predicting the direction a court is heading without needing to read the opinion all the way through, is an otherwise meaningless canon of statutory construction and ought to be put out to pasture.

First, the language is applied inconsistently. Variants of the above language are often employed in cases in which courts find that an employee or groups of employees are or may be owed additional overtime compensation. But when no FLSA violation is found, this language is more frequently absent. Indeed, we studied all federal appellate decisions issued this century that interpret the administrative exemption, of which there are a total of 61. Of the 17 that find that an employee or group of employees do not or might not meet the requirements for application of the administrative exemption, 13 of them use this type of language (76%). But when an appellate court finds the administrative exemption to apply, and thus an employee or group of employees is not owed any additional overtime compensation, this type of language is found in only 21 of 44 opinions (48%).

The Ninth Circuit is the most result-oriented of the federal circuits. It has issued 10 decisions this century interpreting the administrative exemption. Four of those opinions find the employee to be non-exempt or potentially non-exempt, and 3 of the 4 (75%) contain language about narrowly construing exemptions and/or broadly construing the FLSA’s overtime provisions. Six of those opinions find employees to be properly classified as exempt, and only one of those opinions contains this language (17%).

In other words, language providing that the FLSA’s exemptions must be “narrowly construed” and/or which maintain that the FLSA is “remedial” or “humanitarian” and thus should be interpreted broadly appear to be used all too frequently as a tool to justify the outcome of a court’s decision, not as a meaningful analytical framework for reviewing the statute, interpreting its regulations, and determining whether job duties do or do not fall within an applicable FLSA exemption.

Second, delving into the origins of this language reveals its flimsy legal foundation. The language dates back to a 1945 Supreme Court case entitled A.H. Phillips, Inc. v. Walling, which held that a grocery store chain was not exempt from the FLSA’s requirements because it was not a “retail establishment” engaged primarily in the business of interstate commerce. The crux of Walling is that the employer was quite plainly trying to assert an exemption that did not apply. So the Supreme Court noted that it should not construe the FLSA’s exemptions too broadly and should give “due regard to the plain meaning of statutory language and the intent of Congress.” The Court then cited President Roosevelt’s May 24, 1934 message to Congress regarding the purpose of the FLSA, and declared, based on Roosevelt’s statement, that the FLSA is a “humanitarian and remedial” statute, and nebulously suggested that because the FLSA is “remedial” and “humanitarian” the exemptions should be “narrowly construed.” But the Supreme Court cited no authority in Walling for this assertion and provided no true reasoning. At its best, as noted below, this language is just an imprecise statement that the FLSA’s exemptions should not be construed so broadly that they swallow the statute’s other material provisions. At its worst, this language is just unsupported dicta that had no bearing on the outcome of the particular case and was never intended to be a grand pronouncement of how courts should interpret the FLSA or its exemptions moving forward.

Third, and as a logical outgrowth of the second point, the way this canon of interpretation is now used by litigants and courts does not make sense. As an initial matter, it is hard to see why one section of a statute or regulation would be interpreted broadly and another narrowly, which is precisely what courts and litigants suggest when they cite to this language. Indeed, as suggested above and as Judge Posner noted in the Seventh Circuit’s decision Yi v. Sterling Collision Centers, Inc., the language likely just means that an exemption should not be construed so broadly that it “renders the statutory remedy ineffectual or easily evaded.” The language does not mean, though, that an employer bears a higher burden of proof in asserting an exemption–which, again, appears to be how this language is usually used. Further, courts and litigants justify their use of this language by reasoning that the FLSA is “humanitarian and remedial” legislation. If legislation is humanitarian and/or remedial, the reasoning goes, exemptions to the legislation must be viewed with a jaundiced eye and other provisions more generously. But this begs a key question: what piece of legislation passed by Congress is not intended as remedial or humanitarian? It would seem that one has to presume that Congress is always attempting to benefit the public, and that it does not classify its legislation as though some is for the public good, some is for the benefit of lobbying or business groups, and some is to score political points. All legislation is aimed in some way at benefitting the public interest (or at least we would like to, and have to, assume); it is both illogical and unjust that exceptions to one particular piece of legislation would be held to a higher standard of proof without articulation of that standard in the text of the statute itself. The FLSA should instead be interpreted to mean what it says, exemptions and all; one section should not receive a boost based solely on unsupported, gratuitous language drawn from a 72 year-old Supreme Court case.

And indeed, it appears that the Supreme Court may now be shying away from this “narrowly construe exemptions” language. The Supreme Court stated in Sandifer v. U.S. Steel and Christopher v. SmithKline Beecham Corp., for instance, that this language does not apply to the Supreme Court’s interpretation of the FLSA’s definitions section found at 29 U.S.C. § 203. The Court further intimated in Sandifer that it may revisit the “narrowly construed exemptions” language at a later date. And last year, Justice Thomas concluded his dissent in Encino Motorcars, LLC v. Navarro by noting that exemptions should not be construed any more narrowly than how they are written.

Perhaps the selective citation to unsound and outdated language applying the FLSA’s exemptions and construing the FLSA as a whole is a symptom of our modern legal research model, in which “copy and paste” can all too often supplant reasoned analysis. Or maybe it is just how lawyers and judges have always supported their arguments and decisions–searching for language to bolster a position without giving due regard to the implications or background of the language itself. Whatever the reason, case language maintaining that the FLSA should be broadly construed but that exemptions should be construed narrowly is a nebulous, unsupported, illogical, and inconsistently applied canon of statutory construction and we should stop using it.

Co-authored by John Giovannone, Kyle Petersen, and Noah Finkel

Seyfarth Synopsis: Earlier this month, the Ninth Circuit chose to side with the Second Circuit, and not the Sixth Circuit, to opine that mortgage underwriters fail to meet the FLSA’s administrative exemption from overtime test because underwriting duties “go to the heart of… marketplace offerings, not to the internal administration of” the mortgage banking “business.” That is, their duties were found to fall on the “production side” of the tortuous, judicially created “administrative/production” dichotomy.

Selling loans is not a duty that satisfies the FLSA’s administrative exemption test. But loan underwriters do not sell or even drive sales of loans. If anything, they apply the brakes after a loan officer has made the pitch and obtained a loan application from a prospective borrower.

Underwriters perform a distinct back-office role. They apply a multitude of factors to decide whether their employers should extend credit—after the application has been completed and the loan has been sold pending approval. We only have to look back about a decade to this country’s housing credit crisis to appreciate the central importance to a lender of a high-functioning and discerning underwriting team.

Historically, Underwriters Have Been Found Exempt Under The Administrative Exemption

Particularly now, given the odor that still wafts from the bursting of the housing bubble, one would think the modern judiciary would readily view underwriters as primarily providing a centrally important variety of “office or non-manual work related to the management or general operations of the employer” lender—work that thus satisfies this requirement of the administrative exemption test.

And in 2015, consistent with this common-sensical assessment of underwriting, the Sixth Circuit in Lutz v. Huntington Bank concluded that mortgage underwriters were administrative exempt precisely because they “assist in the running and servicing of the Bank’s business by making decisions about when [the Bank] should take on certain kinds of credit risk, something that is ancillary to the Bank’s principal production of selling loans.”

Ninth Circuit Denies Underwriters’ Administrative Exemption

Earlier this month, the Ninth Circuit, in McKeen-Chaplin v. Provident Bank deviated from the Sixth Circuit’s sound decision in Lutz. In assessing whether mortgage underwriters’ work is “related to the management or general operations” of the bank, examined a judicially created “framework for understanding whether employees satisfy [this] requirement [called] the ‘administrative-production dichotomy.’”

The dichotomy’s purpose, Provident Bank explained, “is to distinguish between the goods and services which constitute the business’ marketplace offerings” (so-called non-exempt production work), “and work which contributes to ‘running the business itself’” (so-called exempt administrative work).

          Provident Bank’s Labored Discussion of The Administrative/Production Dichotomy And The Circuit Split.  Provident Bank applied its strained view of administrative/production dichotomy by first observing that, “in the last decade, two of our sister Circuits have assessed whether mortgage underwriters qualify for the FLSA’s administrative exemption and have come to opposite conclusions. The Second Circuit held in Davis v. J.P. Morgan Chase [in] 2009.. that ‘the job of an underwriter… falls into the category of production rather than administrative work.’ … In contrast, the Sixth Circuit held recently that mortgage underwriters are exempt administrators, explaining that they ‘perform work that services the Bank’s business, something ancillary to [the Bank’s] principal production activity’… . [W]e conclude the Second Circuit’s analysis in Davis should apply.”

Having voiced a preference for the Second Circuit’s more restrictive application of the administrative/production dichotomy (which had, perhaps erroneously, assumed that underwriters were involved in the sale of mortgages), Provident Bank applied the dichotomy to hold that the mortgage underwriters were production workers, even while conceding a number of non-production components of mortgage underwriter work.

Provident Bank observed, for example, that mortgage underwriters “do review factual information and evaluate the loan product and information and … assess liability in the form of risk,” but then immediately dismissed this important role by concluding that the bank’s promulgation of underwriter “guidelines that [the underwriters] do not formulate,” somehow reduced the administrative quality of the work.

Provident Bank even went on to acknowledge the existence of significant differentiation between non-exempt “loan offers in the mortgage production process [and mortgage underwriters]—most significantly [the distinguishing fact that underwriters’] primary duty is not making sales on Provident’s behalf.”

          A “Not So Distinct From Production” Standard?  Despite these factual findings, the Provident Bank court still applied the administrative/production dichotomy to invalidate the bank’s determination of exempt status. To accomplish this goal, Provident Bank articulated a “not so distinct from production” standard, explaining that the mortgage underwriters were still not administrative exempt because their duties “are not so distinct” from loan officers’ role in the “mortgage production process” so “as to be lifted from the production side [of the dichotomy] to the ranks of administrators.” The Ninth Circuit then ratcheted the standard up by explaining that “the question is not whether an employee is essential to the business, but rather whether her primary duty goes to the heart of internal administration — rather than marketplace offerings” (emphasis added).

This “not so distinct from production” standard highlights the limitations of the administrative/production dichotomy and runs afoul of its intended purpose. For example, the Department of Labor’s 2004 regulations, and case law, have made clear that this “dichotomy has always been illustrative – but not dispositive – of exempt status.” The dichotomy “is only determinative if the work ‘falls squarely’ on the production side of the line.”

Certainly, work that “is not so distinct” from the production side of the line is a far cry from work that “falls squarely” on the production side of the line. But a finding that work is not so distinct from production, though virtually meaningless, is all that Provident Bank seems to require.

The Administrative-Production Dichotomy Has Been Stretched Beyond Its Utility, Resulting In A Circuit Split And Confusion

Provident Bank’s finding that underwriting work “is not so distinct from production” work has little to do with the test for administrative exemption or the Department of Labor’s explanation of the limitations of the administrative/production dichotomy. Yet Provident Bank threatens to flip the dichotomy on its head, as it could be read to require an employer to show that that the work “falls squarely” off “the production side of the line” rather than establishing merely what the FLSA requires: that the employee performed office or non-manual work related to the management or general operations of the employer.

Sometimes, work such as underwriting does not obviously fall squarely on one side of the administrative/production dichotomy line or the other. That is why, for example, even the historically exemption-resistant California Supreme Court in Harris v. Superior Court (2011) observed “the limitations of the administrative/production worker dichotomy itself as an analytical tool” and thus reversed a decision that “improperly applied the administrative/production worker dichotomy as a dispositive test” with respect to insurance claims adjusters.  Harris explained that since “the dichotomy suggests a distinction between the administration of a business on the one hand, and the ‘production’ end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940’s’” when they should not force a strained application of the dichotomy, which is just an illustrative tool. Indeed, the Seventh Circuit of Appeals similarly reasoned in Roe-Midgett v. CC Services, Inc., (7th Cir. 2008) that the “typical example” of the dichotomy is a factory setting, an analogy that is “not terribly useful” in the service context.

Two Circuits have now built the administrative/production dichotomy into something larger than it was ever intended to be. The focus on the administrative/production dichotomy has overshadowed and confused focus on the actual rules and regulations intended to be assessed in considering the administrative exemption.

Provident Bank creates more questions than answers for employers seeking to classify their workforce, and calls out for Supreme Court review, or for Department of Labor clarification on how courts are supposed to apply the administrative-production dichotomy.

Authored by Alex Passantino

Seyfarth Synopsis: On July 26, 2017, the U.S. Department of Labor will publish its anticipated Request for Information on the White-Collar Overtime Exemption in the Federal Register. The RFI will give the regulated community 60 days to provide its comments in response.

The RFI seeks input on a wide variety of topics, many of which involve issues that have been raised since the Department published its final rule increasing the salary level over a year ago. With the salary level on hold, the Department has the opportunity to revisit the level–or at least to take the temperature of the regulated community.

The issues on which the Department seeks comment are:

  • Should the 2004 salary test be updated based on inflation? If so, which measure of inflation?
  • Would duties test changes be necessary if the increase was based on inflation?
  • Should there be multiple salary levels in the regulations? Would differences in salary level based on employer size or locality be useful and/or viable?
  • Should the Department return to its pre-2004 standard of having different salary levels based on whether the exemption asserted was the executive/administrative vs. the professional?
  • Is the appropriate salary level based on the pre-2004 short test, the pre-2004 long test, or something different? Regardless of answer, would changes to the duties test be necessary to properly “line up” the exemption with the salary level?
  • Was the salary level set in 2016 so high as to effectively supplant the duties test? At what level does that happen?
  • What was the impact of the 2016 rule? Did employers make changes in anticipation of the rule? Were there salary increases, hourly rate changes, reductions in schedule, changes in policy?  Did the injunction change that? Did employers revert back when the injunction was issued?
  • Would a duties-only test be preferable to the current model?
  • Were there specific industries/positions impacted? Which ones?
  • What about the 2016 provision that would permit up to 10% of the salary level to be satisfied with bonuses? Should the Department keep that? Is 10% the right amount?
  • Should the highly compensated employee exemption salary level be indexed/how? Should it differ based on locality/employer size?
  • Should the salary levels be automatically updated? If so, how?

Of course, the value of these responses ultimately is dependent on the Fifth Circuit’s decision on whether the salary test is permissible to begin with. Should the Fifth Circuit rule in the Department’s favor on that issue, the RFI responses will provide the Department with the information it needs to proceed on a new rulemaking adjusting the salary level…assuming the employer community responds.

For additional information on how to respond to the RFI, please contact OTRuleHelp@seyfarth.com or Alex Passantino at apassantino@seyfarth.com. We’ll continue to update you as additional information becomes available.

Authored by Holger G. Besch 

Perhaps signaling the importance of the issue for American businesses and jurisprudence, the U.S. Supreme Court‎ chose the first day of its term beginning in October as the date to set oral arguments in three petitions for certiorari asking whether employees can be required to waive their rights via arbitration agreements to file class and collective actions against their employers. The arguments in Ernst & Young LLP v. Morris; Epic Systems Corp. v. Lewis; and NLRB v. Murphy Oil USA Inc., will all be heard on October 2nd, so mark your calendars.

The cases before the Supreme Court originated either before the National Labor Relations Board, which had ruled that such agreements violate workers’ rights under the National Labor Relations Act to take collective action to ameliorate their working conditions, or with district courts that had used the NLRB’s ruling to reject employers’ motions to compel bilateral arbitration of putative collective and class actions.

SCOTUS will be resolving the resulting Circuit split, in which the Ninth and Seventh Circuits backed the NLRB’s position when they ruled against Ernst & Young and Epic Systems, respectively, and the Fifth Circuit ruled in favor of Murphy Oil. Opening briefs are already on file and address, at bottom, whether the Federal Arbitration Act or the NLRA should take precedence.

Co-authored by Robert S. Whitman and Howard M. Wexler

Seyfarth Synopsis: A New York intermediate appellate court with jurisdiction over Manhattan weighed in on the enforceability of arbitration agreements with class and collective action waivers.  Its decision, issued on July 18, 2017, holds that waivers are unenforceable as they interfere with employees’ rights under the National Labor Relations Act to engage in protected concerted activity by depriving them of the ability to bring class or collective actions.

As our loyal readers are well aware, the U.S. Supreme Court is scheduled to hear oral argument in its Fall 2017 term regarding the enforceability of arbitration agreements with class and collective action waivers.  This has been a “hot button” issue ever since the NLRB’s highly controversial D.R. Horton decision in 2012, which held that these waivers violate employees’ right to engage in protected concerted activity.   Three circuits—the Second, Fifth, and Eighth—have concluded that such agreements are enforceable, while three circuits—the Sixth, Seventh, and Ninth— have held that they are not.

As practitioners eagerly await the Supreme Court’s decision (oral argument is scheduled for the October 2017 term, with a decision expected in early 2018), a New York intermediate appellate court with jurisdiction over Manhattan weighed in on this divisive question.  Its decision, issued on July 18, 2017, holds that waivers are unenforceable as they interfere with employees’ rights under the National Labor Relations Act to engage in protected concerted activity by depriving them of the ability to bring class or collective actions.

In reaching its decision, the court weighed “an individual’s right to resort to the courts, on the one hand, and this State’s preference for enforcing arbitration agreements.” The court found there to be “no reason that the [Federal Arbitration Act] policy favoring arbitration should trump the NLRA policy prohibiting employers from preventing collective action by employees.”  Accordingly, the court came down on the side of the Sixth, Seventh, and Ninth Circuits and held “that waiver of collective claims violates the NLRA, and is void and invalid under the FAA’s saving clause.”

In a vigorous dissent, Judge Andrias noted that, “although the NLRA gives employees a right to bargain collectively, the statute does not expressly give employees the right to arbitrate or litigate disputes as a class or collective action, and the legislative history lacks any indication of a congressional command precluding courts from enforcing collective-action waivers according to their terms.”

This critically important question has significant implications for employers within Manhattan, many of whom implemented class waivers in their arbitration agreements with employees following the approval of such clauses in decisions issued by the U.S. Supreme Court and the Second Circuit. In light of this decision, those New York employers are now subject to contrary decisions issued by the state and federal courts with authority over their place of operation.  Until the Supreme Court decides the issue in the coming months, or the New York Court of Appeals somehow steps in during the interim (which is unlikely), employers may face more state court filings by employees seeking to nullify their class action waivers.  We will be watching these developments closely, so stay tuned!

Authored by Alex Passantino

Seyfarth Synopsis: The Wage & Hour Division announced its regulatory plan for the next year and it is less ambitious than some may have anticipated.  A request for information on the overtime rule and a proposal to rescind a limited tip credit regulation are all that is on the immediate horizon for employers.

Each spring and fall, Washington waits with bated breath as the Executive Branch releases its regulatory agenda. As the first pronouncement of some of the specifics of the Trump Administration’s regulatory plans, this year’s agenda was anticipated more than most. And now we have it

The Wage and Hour Division’s initial plans include the announced Request for Information on the white collar exemptions, which is expected to be published this month. An as-of-yet-unannounced action, however, is a notice of proposed rulemaking (NPRM) that would rescind aspects of the Department’s 2011 rule related to tipped employees. Specifically, the NPRM would seek comment on the Department’s proposal to rescind the portion of the rule that restricts tip pooling for employers who do not use the tip credit to satisfy their minimum wage obligations. That rule has been the subject of much litigation, with mixed results. One of the cases may be on its way to the Supreme Court, with the Administration’s response to a cert petition due on September 8. With the NPRM slated for an August publication, it’s possible that the Administration may be seeking to avoid review by the Supreme Court on some of the touchier issues related to the proper deference a federal agency should be afforded. We’ll keep you posted.

Finally, WHD has identified a long-term plan to revisit the Section 14(c) program. Section 14(c) of the FLSA permits, under certain circumstances, employment of individuals with disabilities at subminimum wages. It is a politically sensitive program, and one in need of updating. No timetable has been provided for the Department’s review.

Co-authored by Robert S. Whitman and Howard M. Wexler

Seyfarth Synopsis:  The majority of courts have held that releases of FLSA rights require approval by a court or the US Department of Labor.  A recent case in the Southern District of New York highlights a dilemma employers face when seeking “finality” through DOL-approved settlements.

In Wai Hung Chan v. A Taste of Mao, Inc., five employees asserted FLSA claims for unpaid minimum wage and overtime.  Before the lawsuit was filed, the employer agreed with the DOL to pay back wages of $38,883.80 to 19 of its employees, including four of the five plaintiffs in the lawsuit.  During negotiations on that agreement, the DOL confirmed that it had the authority to represent and resolve all of the employees’ claims, and it subsequently mailed WH-60 forms notifying them of the settlement and their right to a share of it.  Meanwhile, the employer transmitted the settlement funds to the DOL for distribution to the employees.

The five Chan Plaintiffs did not sign the WH-60 forms and instead commenced the lawsuit, seeking back pay for a period exceeding that covered by the DOL settlement.  The employer sought summary judgment on grounds that the DOL still possessed the settlement funds that it remitted on behalf of the plaintiffs, even though they did not sign the WH-60 forms.

District Judge William H. Pauley, III rejected the employer’s argument that the plaintiffs “constructively accepted the funds when the DOL, as their authorized representative, took possession of such funds.” He held that the plaintiffs’ refusal to sign the WH-60 forms was “tantamount to a rejection” of the settlement offer, invoking a presumption that “employees do not have to take the settlement unless they specifically opt into it.”  The court held that the employer expressly acknowledged this possibility as part of its settlement with the DOL by agreeing that any unclaimed funds would be disbursed to the U.S. Treasury.

Judge Pauley also rejected the employer’s argument that the plaintiffs should be bound to the agreement on grounds that “employers who in good faith strive to settle claims should be afforded the benefit of knowing that they will not face liability in the future.” Although he was sympathetic to the employer’s predicament, he stated that “it is Congress – not this Court – which must force a solution to that quandary…even if it means compelling an outcome that forces [the employer] to address the same allegations it believed were resolved through the DOL Settlement.”

The Chan decision highlights yet another potential hurdle to complete and binding settlements of employee wage claims.  In the Second Circuit  and elsewhere, releases of FLSA rights require approval, and agreements submitted for judicial approval are subjected to close scrutiny that is difficult to bypass.  In light of Chan, DOL approval doesn’t make the process any easier.  The circumstances described in Chan demonstrate that employers may not be able to obtain true finality in such settlements and may still face the risk of subsequent litigation.

Co-authored by Kristin McGurn and Kevin Young

Seyfarth Synopsis: At a time when the Massachusetts meal break landscape is increasingly friendly to employees, a federal judge in the state recently denied class certification in a meal break case, Romulus, et al. v. CVS Pharmacy, Inc. At issue were store policies, common in retail, that called for in-store key-holder coverage whenever the store was occupied. This decision represents both a victory and a roadmap for employers, and particularly retailers, facing meal break claims under Massachusetts law.

The plaintiffs in Romulus alleged that as Shift Supervisors, they were required to remain in the store during certain of their unpaid meal breaks, particularly during times when no other managers were present in the store. Further, the plaintiffs alleged, such breaks were often interrupted due to work. Based on these allegations, the plaintiffs sought certification of two classes of Shift Supervisors under Rule 23 of the Federal Rules of Civil Procedure.

On Wednesday, Judge Rya W. Zobel of the District of Massachusetts entered an order denying the plaintiffs’ bid for class certification. Relying on the Massachusetts Supreme Judicial Court’s recent decision in DeVito v. Longwood Security Services, which set a strict standard for being “relieved of all duties” in order for meal breaks to be unpaid under state law, Judge Zobel assumed for purposes of her decision that remaining on-premises during a break is compensable “work.” Even under that assumption, Judge Zobel found class certification improper due to the plaintiffs’ inability to satisfy Rule 23’s “commonality” and “predominance” requirements.

With respect to commonality, Judge Zobel relied on the U.S. Supreme Court’s monumental decision Dukes, et al. v. Wal-Mart Stores, Inc. in searching for a “common contention” that might produce the same injury to all class members. The judge found that resolving plaintiffs’ claims depended on the answers to two questions: (1) were putative class members required to remain in the store during meal breaks; and (2) if so, were they required to clock out (and thus be unpaid). She ruled that plaintiffs’ reliance on CVS’s policy and handbook statements were insufficient to resolve these critical questions on a class-wide level.

Specifically, Judge Zobel rejected the contention that policy statements relating to supervisor presence in the store when it was occupied by customers, taken together with a policy providing unpaid meal breaks, equated to common proof of an illegal practice capable of resolving all class members’ claims. The plaintiffs did not contend that the policies were facially unlawful, but rather challenged their implementation. Siding with CVS, Judge Zobel noted that the policy language did not necessitate that a Shift Supervisor remain in-store during meal breaks or take a meal break when no other manager was present. The judge also noted CVS policy language providing for the reporting and payment of in-store breaks. Accordingly, Judge Zobel found that—even assuming a policy requiring Shift Supervisors to remain in the store during certain meal breaks—resolving whether class members were required to clock out and go without pay for such breaks could not be resolved through common proof.

Judge Zobel also found that Rule 23’s more demanding predominance factor was unmet. That is, even if the law required CVS to compensate Shift Supervisors for meal breaks when they were required to remain on premises, the questions of whether supervisors were in fact required to do so, and whether they were then compensated, remained both unanswered and individualized. Denying certification, Judge Zobel ruled that the proposed classes were not “sufficiently cohesive to warrant adjudication by representation.”

The Romulus decision represents a major win for employers in the battle to avoid class certification, which is particularly notable on the heels of the stringent standard for unpaid meal breaks established in DeVito. The decision also provides a strategic roadmap for employers seeking to avoid certification where break-by-break implementation of facially lawful meal break policies is challenged.

Co-authored by Cheryl Luce and Noah Finkel

Seyfarth Synopsis:  An unpopular DOL regulation that prohibits employers from retaining customer tips received another blow this summer. The Tenth Circuit joined the Fourth Circuit and several district courts in holding that the FLSA does not require employers to turn over customers’ tips to employees so long as those employees are paid at least minimum wage. And parting ways with the Ninth Circuit, the court also struck down a DOL rule regulating tips even when employers do not take a tip credit.

In Marlow v. The New Food Guy, Inc., a unanimous Tenth Circuit panel (decided by two judges instead of three due to Justice Gorsuch’s ascension) held that an employer that pays its employees at least minimum wage does not violate the FLSA by retaining customer tips. The Tenth Circuit first found that the catering company, Relish, complied with the FLSA by paying the employee $12 an hour, which is above minimum wage, and held that Section 203(m) of the FLSA, which regulates tips when tips are used to satisfy the minimum hourly wage, does not apply in this case.

The Tenth Circuit also rejected a DOL regulation promulgated in 2011 that states: “Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.” 29 C.F.R. § 531.52. The Ninth Circuit upheld this regulation in Oregon Restaurant & Lodging Association v. Perez, but the regulation has been rejected by several district courts. In this case, the Tenth Circuit concluded that the DOL tip rule exceeds the DOL’s discretion, which it can only exercise in instances of statutory silence or ambiguity. The Tenth Circuit found no silence or ambiguity in whether the FLSA regulates tips of employees who are paid at least minimum wage. The plain language of the FLSA “does not direct the DOL to regulate the ownership of tips when the employer is not taking the tip credit.”

In a footnote, the opinion picks up on a point that we have argued is fatal to the DOL’s tipping regulation: there’s no remedy for violating it. Even if an employer keeps customer tips, what can its employees recover under the FLSA? Nothing more than the minimum wage owed to them, which, if they receive cash wages of more than minimum wage, they already have received. The FLSA creates a private cause of action for violations of the minimum wage and overtime requirements. The FLSA does not create any remedies for withheld tips.

Now that a circuit split has emerged on whether the DOL tipping rule can stand, we will wait to see if Justice Gorsuch will finally have a chance to weigh in on the issue with his eight new colleagues.