driving car on highway, close up of hands on steering wheel

Co-authored by Gerald L. Maatman, Jr., Gina Merrill, Brendan Sweeney, and Mark W. Wallin

Seyfarth Synopsis: A New York federal court in Durling, et al. v. Papa John’s International, Inc., Case No. 7:16-CV-03592 (CS) (JCM) (S.D.N.Y. Mar. 29, 2017), recently denied Plaintiffs’ motion for conditional certification of a nationwide collective action in an FLSA minimum wage action against Papa John’s International, Inc. (“PJI”), in which the drivers alleged that they have not been sufficiently reimbursed for the cost of their vehicle expenses.  This ruling shows that even though the burden for “first stage” conditional certification is modest, employers can defend their pay practices by showing the absence of any evidence of a common policy or plan that violates the FLSA. This is especially so when plaintiffs seek to certify a nationwide collective action, for as the court held in Durling, conditional certification is not proper when plaintiffs submit evidence pertaining to only a small sub-set of the putative collective action members.

In 2016, approximately 80% of conditional certification motions were granted in the Second Circuit.  Plaintiffs undoubtedly have a low bar to hurdle to obtain conditional certification under section 16(b) of the FLSA.  It is a hurdle nonetheless, and some courts have shown a willingness to look closely at plaintiffs’ proffered evidence to ensure that a factual nexus exists that binds together the members of a putative collective action.  In Durling, et al. v. Papa John’s International, Inc., Judge Cathy Seibel of the U.S. District Court for the Southern District of New York rejected Plaintiffs’ motion for conditional certification of a nationwide collective action that would have included drivers employed at corporate-owned stores and stores operated by franchisees.  The Court concluded that Plaintiffs’ evidence did not support a finding that the named plaintiffs were similarly situated to thousands of drivers employed by hundreds of different employers.

By highlighting Plaintiffs’ failure to show that Papa John’s International, Inc. (“PJI”) dictated a common corporate policy to franchisees, or any significant factual nexus among the members of the putative collective action across corporate and franchise stores, PJI won a significant victory.

Case Background

Plaintiffs are five delivery drivers who work for either PJI or one of two restaurants owned by independent franchisees. Each Plaintiff delivered pizzas in his own vehicle, and alleged that PJI and the franchisees under-reimbursed delivery drivers for wear and tear, gas, and other vehicle expenses such that PJI violated the FLSA.  Pointing to the practice of one franchisee, as an example, Plaintiffs averred that they were paid $6 per hour plus $1 per delivery, which, at an average rate of five deliveries per hour, amounts to wages of approximately $11 per hour.  Applying the IRS standard mileage rate, Plaintiffs claim that they paid $13.50 per hour for upkeep on their vehicles, resulting in a net loss of $2.50 per hour.  Accordingly, Plaintiffs asserted that they earned less than minimum wage in violation of the FLSA and corresponding state minimum wage laws.

There are over 3,300 Papa John’s restaurants in the United States.  Approximately 700 are owned and operated, at least in part, by PJI.  The remaining 2,600 plus restaurants are owned and operated by 786 independent franchisees.  Although four of the five Plaintiffs worked for franchisees, they did not sue any franchisees in this litigation — only PJI.  Plaintiffs claimed that PJI is a joint-employer of the drivers at all franchised Papa John’s.  They alleged that PJI disseminated policies to the franchisees that caused the drivers to be under-reimbursed in a uniform way.  Plaintiffs supported this theory with purported evidence that all stores, both corporate and franchise, use the same point-of-sale (“POS”) technology to record deliveries and calculate reimbursements, and use the same logos and uniforms.

Plaintiffs filed their Complaint on May 13, 2016, which they amended on July 12, 2016.  On October 14, 2016, Plaintiffs filed a motion for conditional certification of their FLSA collective action, seeking to represent all delivery drivers on a nationwide basis.

The Court’s Decision

The Court denied Plaintiffs’ conditional certification motion.  While the Court declined PJI’s invitation to apply a heightened standard in assessing the motion (due to the discovery that had been undertaken in the case), the Court found that Plaintiffs failed to satisfy even the modest standard generally used in step one conditional certification motions.  The Court also declined to decide whether PJI was in fact a joint-employer, finding this to be a merits issue.  Framing the conditional certification issue, however, the Court reasoned that Plaintiffs could show that they were similarly-situated with the other members of the proposed collective action in two ways: (1) by demonstrating that PJI dictated a common reimbursement policy for all delivery drivers working at both corporate and franchise-owned restaurants, or (2) by showing that a common policy existed across the entire proposed collective action.

As to the first issue, the Court found that while PJI admitted that it reimbursed the drivers it employs at corporate-owned stores by paying them a specific amount per delivery (without conceding that the rate is so low as to violate the FLSA), Plaintiffs failed to offer any evidence that PJI was involved in its franchisees’ policies for reimbursing delivery drivers.  According to the Court, the mere use of the same POS system, with the corresponding ability to access data on how drivers are paid, “in no way indicates that [PJI] dictated a nationwide delivery driver payment policy.”

In analyzing the question of whether Plaintiffs could show a common policy across the collective action that would bind the putative members together, the Court answered it in the negative.  The Court rejected Plaintiffs’ attempt to show common policies regarding issues wholly unrelated to the purported practice of under-reimbursement.  The Court reasoned that proffering common policies “such as wearing the same uniforms, or use of the Papa John’s logo, or even the general use of personal vehicles to make deliveries, is not sufficient to demonstrate a common policy with respect to the payment of drivers.”

The Court determined that while Plaintiffs arguably had made a “modest showing” of a common policy across PJI corporate-owned stores and the two franchises for which Plaintiffs work, this “evidence is insufficient to infer a nationwide policy.”  The Court rejected Plaintiffs’ conclusory averments that other franchisees had the same policy, observing that witnesses as to this claim lacked personal knowledge.  The Court also found that Plaintiffs failed to offer evidence of a common policy that violated the FLSA, noting that while the evidence showed that a few more franchisees do not use the IRS reimbursement rate, “there is no evidence that these franchisees do not pay a rate reasonably related to driving and wear and tear costs, or that what they pay is so low that the drivers end up getting less than the minimum wage.” The Court also opined that it had found no similar cases where plaintiffs succeeded in certifying a nationwide collective action involving hundreds of franchisees where the declarations offered descriptions of only two stores, and no evidence existed that the franchisor dictated the policy at issue to all franchisees.  Thus, even recognizing that the Plaintiffs’ modest burden at the conditional certification stage, the Court declined to certify the collective action by “infer[ring] from the policy of two franchisees, that a nationwide 780-something other franchisees reimburse delivery drivers on a per-delivery basis that results in compensation below the minimum wage.”  Consequently, the Court denied Plaintiffs’ motion for conditional certification of a nationwide collective action, holding that Plaintiffs failed to meet their modest burden of showing that delivery drivers were similarly-situated.

Implication for Employers

FLSA collective actions are ubiquitous due in large part to the low burden for conditional certification — especially compared to class certification under Rule 23.  Indeed, the vast majority of FLSA collective actions are conditionally certified, which can have the effect of driving large early settlements.  Members of the plaintiffs’ class action bar have attempted to stretch the conditional certification device to cases that involve joint employer theories, in the hopes that the court will certify a large collective action without scrutinizing the novel aspects of the case.  Employers facing FLSA collective action allegations in situations involving a decentralized policy across multiple locations can add this ruling to their defensive arsenal.  And although the Plaintiffs’ bar will likely continue to pursue FLSA collective actions as long as the burden for conditional certification is so low and the benefit of a substantial settlement is so high, this ruling shows that certification is far from automatic.

Co-authored by Julie Yap and Billie Pierce

Seyfarth Synopsis: A federal court in California recently held that a franchisor cannot be held liable for labor code claims where it did not exercise control directly, or through an actual agency relationship with the employer, over the terms and conditions of the workers’ employment. The decision limits claims against independent businesses based on an “ostensible” or perceived agency relationship between the employer and the independent business.

On March 10, 2017, a federal judge handed a Franchisor—a Fast-Food-Giant (FFG) who franchises with independent restaurant owners—a second straight summary judgment win, ruling that the FFG could not be held liable under an ostensible agency theory for workers’ California wage claims arising out of their employment with the franchise restaurants. As we explained earlier this year, three fast-food workers from Oakland sued a family-owned company that operated eight franchise restaurants in Northern California. They brought the FFG along for the ride under a joint employment theory, serving up a complaint chock full of California Labor Code, Private Attorneys General Act (PAGA), and negligence claims.

Last August, a federal judge dismissed the claims against the Franchisor, in part, after finding that the FFG did not control the workers’ employment directly or through an actual agency relationship with their employer, and was therefore not a joint employer. But the judge didn’t toss out the workers’ claims completely, opining that a jury could be persuaded that the FFG was liable under an “ostensible agency” theory—namely that the franchisee might have created an impression that it was acting as the franchisor’s agent (even if it was not), and the employees may have relied on that impression to their detriment.

Recently, the FFG moved for dismissal of all claims against it, arguing that it could not be held liable for the workers’ wage and labor code claims because—by definition—it is only an “employer” if it exercised “actual” control over their employment (and the court had already ruled that was not the case in its prior grant of summary judgment). The workers countered that liability could be premised on ostensible agency because the California Wage Order defines an employer to include anyone who “directly or indirectly, or through an agency or any other person, employs or exercises control over the wages, hours, or working conditions of any person.”

But the court didn’t buy the workers’ argument, noting that the Wage Order’s second phrase—“exercises control over”—limited the scope of agency liability to actual agency or actual control over their employment. The Wage Order’s specific, limited definition of an “employer” meant that the conflicting ostensible agency provisions were not a viable basis for the workers’ claims. The court was also not persuaded by the workers’ resort to policy arguments that adopting a broader interpretation would advance the protective purpose of the Wage Order, stating “[t]o ignore [lawmakers’] decision to limit the definition of ‘employer’ to those who, through an agent, control workplace conditions would be to rewrite the law.”

This decisions is good news for franchisors and other similar types of entities that do not exercise actual control over employees. This case takes California law at the language of its text and prevents employees from pursuing entities that are not joint employers. However, the take-away order for franchisors continues to be to stay out of the kitchen when it comes to the relationship between franchisees and their employees.

Authored by Brett Bartlett

Seyfarth Synopsis: The Fourth Circuit Court of Appeals recently set forth a new standard for determining whether two or more businesses may be held responsible as joint employers for overtime pay due to a single worker because they are joint employers. Although more expansive than other courts’ standards — and even more so than former Wage and Hour Administrator David Weil’s standard pronounced in his 2016 Administrator’s Interpretation on joint employment — businesses following best practices to avoid joint employment liability under the FLSA should remain insulated from responsibility to pay for overtime worked by another business’s employees.  

Employers have no doubt been paying close attention to the future of the joint employer doctrine, which was a focus of change and expansion for DOL leadership during the Obama administration. With a new administration in place, many have speculated as to the doctrine’s narrowing and possible demise.

The Fourth Circuit’s recent decision in Salinas v. J.I. General Contractors, Inc., reminds us of Mark Twain’s famous line: “The reports of my death are greatly exaggerated.” The decision embodies what is perhaps the most aggressive interpretation of joint employment yet to grace the hallowed halls of FLSA jurisprudence. Joint liability under the FLSA for unpaid wages is alive and kicking.

In Salinas, the plaintiffs worked for a subcontractor that did work almost exclusively for the co-defendant contractor, which they alleged to be jointly responsible for unpaid overtime under the FLSA. The subcontractor was generally responsible for hiring and firing the plaintiffs; although the contractor threatened a plaintiff with termination for substandard work and actually hired several of the plaintiffs when it needed them on the payroll for insurance policy purposes. The plaintiffs received paychecks directly from the contractor on a few occasions.

That’s not all. The contractor played a role in setting the plaintiffs’ daily and weekly work schedules, decided their start and end times at their worksites, assigned them additional unscheduled hours, and decided where they would work. The plaintiffs signed timesheets marked with the contractor’s name. They wore hardhats and vests bearing the contractor’s logo. Their supervisors wore contractor-branded sweatshirts. They used the contractor’s tools and equipment to do their work (the subcontractor, which was their direct employer, didn’t provide any tools for them to use); and they did their work under supervision and direction of the contractor’s foremen. The plaintiffs were even instructed to tell anyone who asked that they worked for the contractor.

Somewhat remarkably, the trial court concluded that the alleged joint employers were not jointly responsible for the FLSA violations proved in the case. The Fourth Circuit reversed.

In reversing the lower court’s judgment, the Fourth Circuit articulated and applied a new joint employment test that, based on a facial reading alone, has the potential to force federal courts within that Circuit to conclude that a joint employment relationship exists in almost any case where two or more businesses derive the benefit of work done by an employee of one of them.

Under the rule of Salinas, a court must determine whether alleged joint employers are not “completely disassociated” with respect to the employment of a particular employee. If they are not completely disassociated, then they are joint employers. And this, according to the Fourth Circuit judges, is something that must be considered in a manner “[c]onsistent with the FLSA’s ‘remedial and humanitarian’ purpose,” according to which “Congress adopted definitions of ‘employ,’ ‘employee,’ and ‘employer’ that brought a broad swath of workers within the statute’s protection.”

Fortunately, the court did not stop there, with a standard that might birth joint employment liability from any relationship between two or more businesses. It went on to provide some guidance for determining whether alleged joint employers are in fact completely disassociated. It set forth a non-exhaustive list of six factors to consider (which, in fairness, are fairly reminiscent of factors considered under other tests for joint employer liability that predate Salinas). It provided that courts should consider:

  1. Whether, formally or as a matter of practice, the alleged joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means;
  2. Whether, formally or as a matter of practice, the alleged joint employers jointly determine, share, or allocate the power to—directly or indirectly—hire or fire the worker or modify the terms or conditions of the worker’s employment;
  3. The degree of permanency and duration of the relationship between the alleged joint employers;
  4. Whether, through shared management or a direct or indirect ownership interest, one alleged joint employer controls, is controlled by, or is under common control with the other alleged joint employer;
  5. Whether the work is performed on a premises owned or controlled by one or more of the alleged joint employers, independently or in connection with one another; and
  6. Whether, formally or as a matter of practice, the alleged joint employers jointly determine, share, or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll, providing workers’ compensation insurance, paying payroll taxes, or providing the facilities, equipment, tools, or materials necessary to complete the work.

So what should employers do with all this?

Although the court in Salinas defines joint employment broadly and differently than other courts in a technical sense, from a practical perspective the ruling should not cause employers to change radically the way they do business in the Fourth Circuit or elsewhere.

We have always cautioned that businesses should take care to insulate employees from circumstances that might lead to a conclusion of joint employment liability. For instance, care should be taken to avoid one business from assigning and overseeing work of another’s; shared employee scenarios should be limited when possible; workers should not wear uniforms of businesses that don’t employ them; and breaks in service do matter (a three-year assignment is not a temporary one). Where a joint employment determination might not be actually and completely avoidable, indemnification and other protective provisions should be used to mitigate exposure among parties that could be determined joint employers.

Finally, for employers operating in the Fourth Circuit, it would be worthwhile to assess those scenarios in which their operations rely on work performed by workers traditionally viewed as another business’s employees or independent contractors. Under Salinas, the lines of FLSA liability have become blurrier in the Fourth Circuit especially. An assessment may provide clarity and a better ability to mitigate any heightened risks that this aggressive ruling creates.

Co-authored by Rachel M. Hoffer and John Phillips

Seyfarth Synopsis: Vampire Weekend crassly and rhetorically asked us, “Who gives a f*** about an Oxford comma?” As it turns out, lots of people: First Circuit judges, dairy farmers in Maine, truck drivers, your authors—the list goes on.

And when lists go on—as a Maine dairy company recently learned the hard way in O’Connor v. Oakhurst Dairy—that little comma between the last item and the next-to-last item goes a long way in avoiding any ambiguity. In that case, a group of dairy delivery drivers sued Oakhurst, claiming the company failed to pay them overtime under Maine’s wage and hour laws.

Oakhurst argued that dairy delivery drivers are overtime-exempt under Maine’s “Exemption F.” Under Exemption F, Maine’s overtime law does not apply to:

The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.

Now, we can all agree that dairy products are “perishable foods,” and the parties agreed that the drivers were not involved in canning, processing, preserving, freezing, drying, marketing, storing, or packing any food. The case came down to whether the drivers engaged in “packing for shipment or distribution.”

The drivers argued that this phrase refers to a single activity of “packing,” whether the packing be for shipment or for distribution. As they did not pack food, the drivers reasoned, Exemption F did not apply to them. Oakhurst argued that the phrase actually refers to two different activities: “packing for shipment” and “distribution.” As the drivers clearly engaged in the distribution of food, Exemption F did apply to them.

The district court didn’t need a comma between “packing for shipment” and “or distribution” to be convinced that “packing for shipment” and “distribution” are each stand-alone exempt activities under the statute; it granted summary judgment in favor of Oakhurst. On appeal, the dairy company found a much tougher customer in the First Circuit.

The First Circuit set out to determine for itself what the contested phrase means. Because Maine’s high court had not interpreted Exemption F, the court looked to the plain language of the statute. Here, the court had an udder field day, parsing the language of the statute and applying rules of statutory construction. But, for want of an Oxford comma, the First Circuit found the statute ambiguous, no matter what rules or conventions it applied:

  • The Rule Against Surplusage: a court should give independent meaning to each word in a statute and treat no word as unnecessary. Oakhurst argued that “shipment” and “distribution” mean the same thing, so the Maine legislature could not have meant both to modify “packing.” The First Circuit disagreed, noting that Maine includes both “distribution” and “shipment” together in other lists in its statutes and finding that the words do not necessarily mean the same thing. Conclusion? Still ambiguous.
  • The Parallel Usage Convention: “every element of a parallel series must be a functional match of the others (word, phrase, clause, sentence) and serve the same grammatical function in the sentence (g., noun, verb, adjective, adverb.).” The drivers pointed out that every activity in Exemption F is a gerund—“canning,” “processing,” “preserving,” “packing,” etc.—but that both “shipment” and “distribution” are not. If the words “shipment” and “distribution” are read as the object of the preposition “for,” i.e., “packing for shipment” and “packing for distribution,” the statute doesn’t violate the convention—and “packing for shipment” and “distribution” do not constitute stand-alone exempt activity under the statute. But if “packing for shipment” and “distribution” are read as stand-alone activities, then we have gerunds and non-gerunds in a parallel series, which violates the convention and is an affront to grammarians everywhere. The First Circuit seemed to agree that the drivers’ construction wasn’t as messy grammatically but stopped short of saying that the parallel usage convention resolved the ambiguity. In other words, still ambiguous.
  • Maine’s Aversion to the Serial Comma: Maine’s legislative drafting manual instructs drafters of laws and rules not to use the Oxford comma. The dairy company argued that, because of this instruction, its construction must be right; we should just read the statute as if it included the prohibited comma. But, as the drivers pointed out, the manual isn’t “dogmatic on that point,” and it provides guidance on how “to avoid the ambiguity that a missing serial comma would otherwise create.” The court agreed that the missing serial comma—if indeed there was a missing serial comma—created ambiguity, casting doubt on whether this was a case of a missing serial comma at all. So, still ambiguous.
  • The Convention of Using Conjunctions: drafters typically use a conjunction like “and” or “or” to mark off the last item in a list. Oakhurst emphasized that there is no conjunction before “packing” in Exemption F, but there is a conjunction before “distribution.” While the First Circuit considered this “Oakhurst’s strongest textual rejoinder,” that wasn’t the final word on matter. The drivers fought back with asyndeton—a technique in which drafters make a list without using conjunctions, citing zero examples of Maine drafters using this technique—and Latin—specifically, the noscitur a sociis canon, which requires giving words grouped in a list “related meaning.” Like a glass of skim milk, the court found the drivers’ response “hardly fully satisfying,” but it was enough to keep their case alive. Yep. Still ambiguous.

With all this textual ambiguity, and “no comma in place to break the tie,” the First Circuit turned to the legislative history and statutory purpose to guide its interpretation of the statute. After churning out another five or so pages of analysis, the court concluded that these too were unhelpful in resolving the ambiguity.

Finding no other way to resolve the ambiguity, the First Circuit reverted to the default rule of construction under Maine law for ambiguous wage and hour laws: liberally construe the statute to further the purpose for which it was enacted. In other words, the court accepted the drivers’ narrower construction of the exemption and reversed the district court’s summary-judgment ruling.

Now, maybe you’re not an employer in a perishable food industry in Maine; chances are, you aren’t. But courts also narrowly construe the FLSA’s exemptions against employers. For that and other reasons, its always a good idea to periodically review whether the employees you’ve classified as exempt truly qualify for an exemption. Otherwise, like Oakhurst, you may find yourself crying over spilled milk.

Authored by Kiran A. Seldon

Seyfarth Synopsis: Three decisions issued earlier this month reveal an increasing tension between the Ninth Circuit and California appellate courts on whether representative PAGA actions can be arbitrated. As a result, employers wishing to compel arbitration of representative PAGA claims are likely to be better off in federal court than in state court.

In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC that pre-dispute arbitration agreements cannot require employees to waive representative claims under California’s Labor Code Private Attorneys General Act (“PAGA”). The following year, the Ninth Circuit agreed with Iskanian and held in Sakkab v. Luxottica Retail North America, Inc. that PAGA representative actions cannot be waived.

While state and federal courts agree that pre-dispute waiver of PAGA actions is prohibited, they disagree on the next logical question: can private arbitration agreements require PAGA claims to be arbitrated on a representative basis? In a pair of recent unpublished decisions, the Ninth Circuit has answered “yes.” Two state appellate courts, in contrast, have expressed the view that representative PAGA claims cannot be arbitrated—even if the employer and employee agreed to do so in a pre-dispute arbitration agreement—unless the State has also consented.

The Ninth Circuit. Earlier this month, Wulfe v. Valero Refining Co. California considered a pre-dispute arbitration agreement that was silent regarding waiver of PAGA claims. The Ninth Circuit held that “the district court’s order compelling arbitration did not run afoul of Sakkab and Iskanian because the order did not prevent [the employee] from bringing a representative PAGA claim in arbitration.” It is only “pre-dispute agreements to waive the right to bring a representative PAGA claim [that] are unenforceable,” the Court held.

Two days later, in another unpublished decision, the Ninth Circuit reached the same result. In Valdez v. Terminix International Company Limited Partnership, it reversed a district court, which had held that PAGA claims categorically cannot proceed to arbitration.” The Ninth Circuit again concluded that “Iskanian does not require that a PAGA claim be pursued in the judicial forum; it holds only that a complete waiver of the right to bring a PAGA claim is invalid.” It also interpreted Sakkab as “likewise recogniz[ing] that individual employees may pursue PAGA claims in arbitration.”

California appellate courts.  Days after Wulfe and Valdez, a state appellate court opined in Betancourt v. Prudential Overall Supply that PAGA claims cannot be arbitrated without the State of California’s consent. The “fact that [the employee] may have entered into a pre-dispute agreement to arbitrate does not bind the state to arbitration,” the court concluded. However, these statements arguably were not necessary to the Court of Appeal’s ultimate holding, which was that the arbitration agreement was unenforceable because it contained a PAGA waiver in violation of Iskanian.

Betancourt is in line with Tanguilig v. Bloomingdale’s, Inc., another state appellate court opinion issued in November 2016. Tanguilg also opined that “a PAGA plaintiff’s request for civil penalties on behalf of himself or herself is not subject to arbitration under a private arbitration agreement between the plaintiff and his or her employer. This is because the real party in interest in a PAGA suit, the state, has not agreed to arbitrate the claim.” As in Betancourt, however, the arbitration agreement had a PAGA waiver in violation of Iskanian, arguably making the Court of Appeal’s broader discussion unnecessary to its holding.

As a result of the current tension between state and federal courts, employers who wish to compel arbitration of a PAGA claim on a representative basis should pay careful attention to the forum in which they are litigating. Though Wulfe and Valdez are unpublished, they are persuasive Ninth Circuit authority, making the chances for success higher in federal court than in state court. Unless the issue is resolved by the California Supreme Court, the uncertainty surrounding arbitration of PAGA representative claims is likely to continue.

Authored by Hillary J. Massey

Seyfarth Synopsis: It remains to be seen whether the Trump administration will redirect its enforcement priorities away from independent contractor misclassification issues or curtail the applicable standards in the coming years. Because states and plaintiffs’ attorneys likely will continue to aggressively pursue independent contractor matters, employers should consider auditing their independent contractor positions to identify and address potential exposure.

Employers are understandably optimistic about what the Trump administration will mean for many aspects of employment law, including the test for independent contractor (“IC”) status. While it remains to be seen what President Trump’s Department of Labor will do, federal enforcement priorities and guidance likely will make it easier to classify workers as independent contractors. Many employers, however, face more stringent tests and aggressive enforcement priorities at the state level as well as plaintiffs’ attorneys searching for their next class action. In light of these ongoing risks, employers should continue to monitor laws concerning IC misclassification and consider auditing their IC arrangements for potential misclassification.

IC Issues in Recent Past

Independent contractor misclassification has been in the forefront in recent years, due to the enforcement efforts of the Obama administration’s Department of Labor and IRS and the attention of plaintiffs’ attorneys.

First, we saw a barrage of class actions brought by workers seeking overtime pay, expense reimbursements, and pay for other benefits they did not receive as ICs. These cases were difficult to defend on the merits due to the uncertain legal standards. They were also difficult to defend on damages, as employers typically did not keep records of hours worked by ICs and often paid ICs more than they would have paid them on an hourly basis as employees with benefits (thus ratcheting up the damages).

Then, on July 15, 2015, then administrator of the DOL’s Wage and Hour Division David Weil issued Administrator’s Interpretation No. 2015-1, taking the position that the “economic realities test” should be applied when determining if a worker is properly classified as an independent contractor under the FLSA. In sum, AI 2015-1 provided that if a worker was “economically dependent” upon an employer, the worker typically would be regarded as an employee. It described the employment relationship as “very broad” and stated that “most workers are employees.” The AI left no doubt that, in DOL’s view, proper IC classification would be rare.

In the meantime, at the state level, legislatures passed laws that made it more difficult (by applying a stricter test) and riskier (by increasing penalties and creating task forces) to classify workers as independent contractors. States likely focused on IC issues because they were not receiving unemployment insurance contributions, workers’ compensation premiums, and employee income tax withholdings related to these workers.

Notably, other states moved in the opposite direction in order to attract businesses, by passing laws specific to certain industries (e.g., ride-hailing) that explicitly define workers (drivers) as independent contractors for certain purposes.

Likely Upcoming Developments

Many employers are optimistic that, once confirmed, the new Secretary of Labor will repeal or replace AI 2015-1. In fact, the House Freedom Caucus requested repeal of the AI and many other regulations during an initial meeting with President Trump.

Even if that occurs, however, employers will not be relieved of the risk of complex IC litigation. There can be no doubt that plaintiffs’ attorneys and some states will continue to aggressively pursue IC misclassification.

Also, as the workforce changes (see Seyfarth’s Future of Work initiative), businesses in emerging industries such as the on-demand economy may be particularly vulnerable to enforcement initiatives and class actions. While lawmakers are considering options to address the gig economy, including creating portable benefits that would move with a worker from job to job and creating a third classification of worker, employers must continue to apply old laws and guidance to nontraditional jobs.

Next Steps for Employers

In light of this uncertain environment, employers should consider:

  • Continuing to monitor legal developments, especially at the state level;
  • Reviewing internal practices for the classification of new workers as ICs;
  • Training managers and others involved in hiring decisions about IC issues; and
  • Working with counsel to audit IC relationships (especially if operating in states like Massachusetts with stringent IC standards).

Authored by Sheryl Skibbe

On Wednesday, the Fifth Circuit Court of Appeals granted the Justice Department’s additional unopposed request for a 60-day extension to figure out its position on the new FLSA overtime exemption rules.

The stated reason for the government’s unopposed request was to “allow incoming leadership personnel adequate time to consider the issues.” Nevada v. DOL, No. 16-41606, Motion For Extension to File Reply (Feb. 17, 2017).

Presumably, the request for additional time is to permit the Senate to confirm the Trump administration’s new Labor Secretary, Alexander Acosta, and let him weigh in on the new rules. But the extension runs only to May 1, and it is not clear that the Senate could confirm Mr. Acosta and permit him to guide the government’s position by this new deadline.

Meanwhile, the district court in Texas is still considering the business groups’ motion for summary judgment to permanently invalidate the new rules and the Texas AFL-CIO’s motion to intervene in the case. A decision granting the summary judgment motion could moot the appeal if the district court enters a permanent injunction before the Fifth Circuit rules.

Co-authored by Gerald L. Maatman, Jr.Tiffany Tran, and Julie Yap

Seyfarth Synopsis: Seyfarth Shaw submitted comments and oral testimony to the Federal Advisory Committee on Civil Rules regarding needed reform and guidance to Rule 23, the rule that governs class action litigation in federal courts. While the proposed amendments address important issues, our workplace class action group proposed four additional areas for consideration that are not currently addressed by the pending proposed rule amendments.

Rule 23 Changes

As some employers may be aware, changes are coming to Rule 23 class action requirements. What exactly those changes will be, and when those changes will go into effect, however, are still to be determined.

The Advisory Committee on Civil Rules (the “Committee”) for the Federal Courts, which is responsible for recommending amendments to Rule 23, has been contemplating possible changes for years now — we previously blogged about the potential changes here. The Committee recently proposed specific rule changes that address important issues such as settlement class procedures and electronic notice to class members.

Various parties and groups submitted written comments to the Committee, including academics, worker and consumer advocacy groups, and corporate groups.

Seyfarth’s written submission is here. Seyfarth’s comments were prepared by the team of Thomas Ahlering, Kate Birenbaum, Matthew Gagnon, Gerald L. Maatman, Jr., Hilary Massey, Jennifer Riley, Tiffany Tran, Julie Yap, and Kevin Young.

Seyfarth’s submission identified four additional areas that remain in need of reform and guidance to address the practical difficulties regularly encountered in class action litigation

Testimony To The Committee

The Committee also selected 11 individuals to testify before the Committee.

The Committee selected Gerald L. Maatman, Jr. (“Jerry”) co-chair of our class action defense group, to testify. Jerry gave testimony to the Committee on February 16. Seyfath was the only law firm representing employers to be selected to testify.

Other individuals who testified included Theodore Frank of the Competitive Enterprise Institute; Eric Issacson, of the Issacson Law Office; Peter Martin of State Farm Mutual Insurance Co.; Patrick Paul of Snell & Wilmer; Timothy Pratt of Boston Scientific Corp.; Michael Pennington of Bradley, Arant, Boult & Cummings; Professor Judith Resnik of Yale Law School; Richard Simmons of Analytics LLC; Ariana Tadler of Milberg LLP; and Steven Weisbrot of Angeion Group.

Consistent with Seyfarth’s written submission, Jerry testified that class action litigation would be aided by an express requirement that a party seeking class certification must submit a viable trial plan. This change makes sense from both a legal and practical perspective as it would help prevent unmanageable class actions from proceeding past the class certification stage to trial. Indeed, this amendment conforms to the California Supreme Court’s decision in Duran v. U.S. Bank National Association, 59 Cal. 4th 1 (2014), which requires adequately developed trial plans at the class certification stage.

Jerry also advocated for a revision to Rule 23(f) to allow for an immediate right to appeal orders to certify, modify, or decertify a class. Jerry testified that an amendment to the current approach would ensure meaningful review of and guidance regarding class certification.

In addition, Jerry suggested that the Committee revisit the standards relating to class certification in the context of a settlement. This would amend Rule 23 to acknowledge and address the unique and practical considerations and impacts of certification in the two very different contexts of actual litigation versus settlement.

Finally, Jerry recommended that the Committee provide additional, specific guidance regarding Rule 26’s “proportionality” requirement and its application to pre-certification class discovery. Jerry shared Seyfarth’s collective experience in representing employers who face requests for discovery on class lists, contact information, and other information about potential class members. Rule 26 requires that discovery be “proportional to the needs of the case,” which directly affects pre-certification class discovery. Nonetheless, federal courts have taken varying approaches to resolving these discovery disputes. Jerry advocated the position that the Committee’s further guidance is needed to ensure a standard approach that fully considers the burden class discovery places on employers.

Implications For Employers

The Rule 23 amendments will have a significant impact on class action litigation and far-reaching consequences for employers.

Stay tuned for more updates regarding the proposed Rule 23 amendments as we continue to monitor developments on this important issue.

capitol from afarAuthored by Emily Barker

President Trump’s pick for Labor Secretary, Andrew F. Puzder, has withdrawn his name from consideration. Support for Puzder had eroded quickly over the last week.

To secure his appointment, Puzder needed at least 50 Senate votes plus a possible tie-breaking vote from Vice President Pence. Republicans control 52 seats in the Senate. Puzder withdrew from consideration when, by Wednesday morning, it was being reported that there were at least four firm no-votes coming out of the GOP, perhaps as many as 12.

It is still unclear who Trump’s replacement pick will be, but the timing of Puzder’s withdrawal will have implications for whoever takes his place. As we previously reported, a judge has entered an order temporarily enjoining the DOL from implementing the new overtime exemption rule that was set to go into effect on December 1, 2016. The DOL appealed the order to the Fifth Circuit, which granted an expedited briefing schedule. The DOL’s reply brief is due on March 2, 2017, but no hearing date has been set. It was expected that Puzder would be confirmed prior to either date, and that his appointment might affect the DOL’s position in the matter. His withdrawal likely means the briefing will be finalized, and perhaps the Fifth Circuit will have ruled, before a new Labor Secretary can weigh in.

Co-authored by David D. Kadue and Rocio Herrera

Seyfarth Synopsis: A California appellate court has held that unless a collective bargaining agreement includes an explicitly stated, clear, and unmistakable intent to waive the right to a judicial forum for statutory claims, arbitration of those claims will not be compelled. The CBA in the case, Vasserman v. Henry Mayo Newhall Memorial Hospital, did not waive the right to a judicial forum because its “Grievance and Arbitration” section failed to specify the California Labor Code provisions that would have to be arbitrated.

The Facts

Tanya Vasserman, a registered nurse, worked for Henry Mayo Newhall Memorial Hospital, under a CBA between the Hospital and the California Nurses Association. The CBA’s “Grievance and Arbitration” section provided for grievances culminating in arbitration, and defined a grievance as any dispute “arising out of the interpretation or application of a specific Article and Section of this Agreement during the term of the Agreement … as to events or incidents arising only at the Hospital.” The CBA outlined a three-step grievance procedure. Step three required the Hospital or the California Nurses Association to “file the grievance for binding arbitration pursuant to the rules of the Federal Mediation and Conciliation Service.” The CBA included articles on compensation, including overtime, and meal and rest periods. None of these articles referred to the grievance procedure or to remedies for violations.

Instead of filing a grievance, Vasserman sued in state court for violation of the California Labor Code, including claims for a failure to pay all regular and overtime wages and a failure to provide meal and rest breaks. The Hospital moved to stay the case and compel arbitration. The Hospital argued that Vasserman and the other employees she sought to represent in her putative class action were all covered by a CBA that included a Grievance and Arbitration section that clearly required the Hospital or the union to file a grievance for mandatory arbitration at step three. The Hospital argued that the grievance procedure explicitly waived the right to pursue claims in a judicial forum and Vasserman had to arbitrate her claims. The trial court denied the Hospital’s motion to compel arbitration, and the Hospital appealed to the California Court of Appeal.

The Court of Appeal’s Decision

The Court of Appeal affirmed the trial court’s decision. It found that the Grievance and Arbitration section defined a grievance as “any complaint or dispute arising out of the interpretation or application of a specific Article or Section of this Agreement.” The section also described a three-step grievance procedure, including step three in which any unresolved grievances may be submitted to arbitration. But it also limited the power of the arbitrator. The section provided that the arbitrator “shall be without authority to decide matters specifically excluded or not included in this Agreement.”

The court held that because the Grievance and Arbitration section did not specifically refer to the California Labor Code or other state or federal statutes, or include any language suggesting that the union intended to waive employees’ rights to bring statutory claims in court, the CBA contained no explicitly stated, clear, and unmistakable waiver of a judicial forum.

The court also rejected the Hospital’s argument that the parties, by including specific articles on pay and meal and rest breaks in the CBA, clearly and unmistakably intended to submit all disputes regarding those subjects to the grievance or arbitration process. The articles on pay and meal breaks did not refer to state laws. A waiver cannot be inferred from “broad, nonspecific language … not coupled with an explicit incorporation of statutory requirements.”

What Vasserman Means for Employers

We are reminded that to preclude judicial litigation of statutory rights, CBAs should specify any statutory rights that will be subject to grievance and arbitration procedures. These grievance procedures should also be incorporated by reference in any other section of the CBA discussing statutory rights, to ensure that the parties clearly and unmistakably state their intent to submit all disputes regarding those subjects to the grievance and arbitration procedures set forth in the CBA.