Wage & Hour Litigation Blog

Seventh Circuit Serves Up Employer-Friendly Recipe For Compensating Tipped Employees

Posted in Service Charges/Gratuities

Authored by Gerald L. Maatman, Jr. and Jennifer A. Riley

Many employers, particularly in the hospitality industry, pay tipped employees less than the minimum wage.  They do so anticipating that tipped employees will receive tips from customers that push employees’ income above minimum wage.  The FLSA and many state laws allow such a practice – often referred to as taking a “tip credit” – so long as employers meet certain conditions.

The vague nature of the statutes and regulations governing the tip credit, coupled with a lack of developed case law interpreting such statutes and regulations, has created fertile ground for litigation.  In particular, some plaintiffs’ wage & hour lawyers have sought to feast on unsuspecting restaurateurs who require tipped employees to perform side work – from wiping tables to cutting fruit to polishing brass.  Plaintiffs argue that such tasks invalidate the tip credit because they put servers, bartenders, and other tipped employees in a “dual job” or second occupation that employers must compensate at minimum wage.

Last week, the U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises (7th  Cir. July 18, 2016), in which the court rejected Plaintiff’s theory and affirmed a district court’s order granting summary judgment in favor of Defendants.

The Seventh Circuit held that Defendants properly took the tip credit for time servers spent performing side work duties and that Defendants properly informed servers of their intention to take the tip credit by distributing an employee handbook and displaying a DOL poster.  The decision represents a significant victory for hospitality industry employers, particularly the significant number that require servers to perform end-of-shift and beginning-of-shift side work duties at the tip credit rate of pay.

Factual Background

In 2010, Plaintiff-servers brought suit against Walker Brothers contending that the restaurants violated federal and state minimum wage laws in two ways:  (1) by incorrectly using the tip credit to pay servers less than minimum wage while requiring them to perform duties unrelated to their tipped occupation; and (2) by failing to inform the servers of their intent to apply the tip credit to the servers’ wages.

Walker Brothers owns six restaurants in the Chicago suburbs that operate under the name “The Original Pancake House.”  Upon hire, Walker Brothers provides servers with an employee handbook that states, among other things, that the restaurants apply a tip credit that reduces servers’ hourly wages 40% below minimum wage.  The restaurants also display DOL-approved posters explaining the tip credit in well-traveled areas.

In addition to serving customers, servers perform side work tasks that vary, among other things, by the station to which they are assigned.  Defendants required servers, for instance, to wash and cut strawberries, mushrooms, and lemons; mix applesauce and jams, restock bread bins and replenish dispensers of milk; fill ice buckets; brew tea and coffee; wipe toasters and tables; wipe down coffee burners and woodwork; dust picture frames; and occasionally polish brass.

After the district court granted class certification, the restaurants moved for summary judgment.  The district court granted their motion finding that the side work tasks were “incidental to the regular duties of the server (waiter/waitress)” and that Walker Brothers provided notice of the tip credit by giving servers an employee handbook and displaying posters approved by the Illinois DOL.

The Seventh Circuit’s Opinion

The Seventh Circuit affirmed the district court’s judgment in favor of Walker Brothers in all respects and, in doing so, rendered an important decision for the hospitality industry.  Most significantly, the Seventh Circuit found Plaintiff’s position that none of their side work was related tipped work as “untenable.”  It held that servers engaged in making coffee, cleaning tables, and several other activities that the DOL provided as examples of duties that could be performed by persons paid at the tip credit rate.  The court reasoned “[t]hat some of our plaintiffs’ tasks may be performed by untipped staff at other restaurants does not make them unrelated as a matter of law”; rather, the “right question” is whether the tasks are “related” or “incidental” to tipped duties.  The Seventh Circuit noted that the “most problematic” duties were “wiping down [coffee] burners and woodwork and dusting picture frames,” but because the DOL gave “cleaning and setting tables” and “occasionally washing dishes or glasses” as examples of related duties, it could not categorically exclude “clean up tasks” from the definition of duties related to a server’s tipped occupation.  In any event, the Seventh Circuit concluded that it need not decide what to make of wiping woodwork or dusting picture frames because, as the record showed, the time spent on such tasks was “negligible.”  The Seventh Circuit noted that the law “does not convert federal judges into time-study professionals and require every minute to be accounted for.”  Given the flexible standards imposed by the DOL, the possibility that a few minutes a day were devoted to keeping the restaurant “tidy” did not require the restaurants to pay the normal minimum wage for those minutes.

The court also rejected Plaintiff’s “notice” claim, holding that Walker Brothers was able to satisfy all elements of the notice requirements of the statute by combining different documents that it posted or provided to servers.

Implications For Employers

The Seventh Circuit’s decision in Schaefer is a significant victory for the restaurant industry.  Before the Seventh Circuit’s decision, few courts had addressed tip credit claims, and little favorable law existed to validate employers’ regular practice of using servers to perform incidental side work tasks.  As a result of this decision and a growing body of district court decisions favoring restaurant employers, restaurant employers may be able to breathe a little easier.

That’s a Wrap: Fox Reaches Deal with Unpaid Interns

Posted in Independent Contractors

Co-authored by Robert Whitman and Adam J. Smiley

Seyfarth Synopsis: Fox Searchlight and Fox Entertainment Group have reached a preliminary settlement with a group of former unpaid interns, possibly resolving the lawsuit that resulted in a Second Circuit decision that redefined the test used to evaluate whether interns are properly classified under the FLSA.

As this blog has previously reported [here, here], former unpaid interns who worked on Fox film productions sued the studio in 2010, alleging that they were misclassified and entitled to minimum wage and overtime compensation. In a 2013 decision, Judge William Pauley of the Southern District of New York granted summary judgment to two of the interns, holding that they should have been treated as employees, and held that a third intern could pursue his related claims as a class and collective action under the FLSA and New York Labor Law. Fox appealed to the Second Circuit, which in July 2015 held that that the “primary beneficiary” test, rather than the Department of Labor’s stricter six-factor test, should be used to evaluate the classification of unpaid interns. The court sent the case back to Judge Pauley for resolution under its newly articulated standard.

Under the proposed agreement, any intern who served for at least two weeks from 2005-2010 will be entitled to a $495 payment. That amount is within the payout range that we’ve seen in other internship lawsuits. Three of the lead plaintiffs, Erik Glatt, Alexander Footman, and Eden Antalik, will receive service awards of $7,500, $6,000, and $3,500, respectively.

The settlement would resolve claims in two lawsuits before Judge Pauley: Glatt v. Fox Searchlight, which concerns New York interns, and Mackown v. Fox Entertainment Group, which concerns California interns. The total monetary value of the settlement, covering both lawsuits, is approximately $600,000, of which $260,000 is for attorneys’ fees.

In papers supporting the proposed settlement, the plaintiffs noted that the Second Circuit’s ruling presented “significant risk to [them] on the merits and with regard to certification.” They also acknowledged their “extreme challenge” in obtaining class and collective action certification, especially given that the interns “were engaged in various divisions, performing different duties, and reporting to different supervisors,” such that the Court “could conclude that [their differences] exceed their similarities.” While still professing the strength of their case, the plaintiffs admitted that they faced litigation risks because the Second Circuit’s standard was “largely untested.”

The deal is not final: it still must be preliminarily approved by Judge Pauley, which will trigger the issuance of a notice informing class and collective members of their rights under the settlement. Putative class members will then have an opportunity to object to the settlement or opt out, and the deal must be finally approved by the Court after conducting a fairness hearing.

We’ll keep you posted as the settlement approval process moves forward, as well as any developments regarding the motion for summary judgment filed by the Hearst Corporation in a similar lawsuit, currently pending before Judge J. Paul Oetken, also in the Southern District of New York.

On a related note, the Wall Street Journal recently reported on a study conducted by the National Associate of Colleges and Employers, which found that paid interns are more likely to receive a job offer after graduation—and earn more money—then their fellow students who had an unpaid internship. The article also discusses important issues regarding income inequality and diversity between paid and unpaid interns, and employers may be well-served by reviewing the cited data when contemplating whether to offer paid or unpaid internship programs.

District Court Turns the Other “Cheeks” on Parties’ Proposed Stipulation of Dismissal

Posted in Settlement

Co-authored by Robert S. Whitman, Howard M. Wexler, and Meredith A. Berger

Seyfarth Synopsis: A district court judge within the Second Circuit held that, in light of Cheeks v. Freeport Pancake House, court or DOL approval is required for a valid dismissal of FLSA claims with prejudice pursuant to Federal Rule of Civil Procedure 41(a)(1)(A).

Settling FLSA cases in the Second Circuit is becoming more and more difficult. In Cheeks v. Freeport Pancake House, the Second Circuit held that judicial or DOL approval is required for a valid dismissal of FLSA claims with prejudice. Cheeks is a controversial decision. The majority of courts have held that releases of FLSA rights have to be approved by a court or the DOL in order for the release to be valid, which often means that parties have to file otherwise confidential settlement agreements in publicly-available electronic court filing systems. A number of employer and plaintiffs’ counsel in many circuits have managed to settle FLSA cases like they settle other cases—that is, without filing settlement agreements publicly—by agreeing to dismissal with prejudice, which results in later-filed claims being subject to dismissal by claim preclusion principles even if not by a release. Cheeks limited that practice in the Second Circuit.

But the Cheeks court left open two related questions: whether parties may settle without court or DOL approval by dismissing the case without prejudice, and whether approval is needed for a dismissal with prejudice before the opposing party serves either an answer or a motion for summary judgment.

In Martinez v. Ivy League School, Inc., Judge Denis Hurley of the Eastern District of New York answered the second question, holding that under Cheeks, court or DOL approval is required for a valid pre-answer dismissal with prejudice.

As is fairly common, the parties in Martinez reached an early settlement after engaging in limited discovery before the defendant filed an answer. The plaintiff informed the court of the parties’ agreement and filed a notice of voluntary dismissal “with prejudice” pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(i), which states, “the plaintiff may dismiss an action without a court order by filing…a notice of dismissal before the opposing party serves either an answer or a motion for summary judgment.” The plaintiff did not submit a copy of the parties’ agreement for the court’s approval or even describe the terms of the resolution of the case. Judge Hurley thereafter requested a copy of the settlement agreement and, in the alternative, issued an Order to Show Cause why court approval of the settlement is not required in light of Cheeks.

In response, the parties argued that court or DOL approval is not needed because Cheeks “is limited to cases where there has been a stipulated dismissal with prejudice…after the defendant has appeared in the case, thereby subjected itself to the jurisdiction of the court.”

Judge Hurley disagreed and held “the reasoning in Cheeks applies with equal force to the dismissal of an FLSA action with prejudice pursuant to Rule 41(a)(1)(A)(i).” Citing Cheeks, he said the FLSA is a “uniquely protective statute,” and as such, requiring judicial or DOL approval for a valid dismissal under Rule 41(a)(1)(A)(i) is consistent with its underlying purpose and helps eliminate potential abuse, such as exceedingly disproportionate attorneys’ fees payments. Accordingly, Judge Hurley ordered the plaintiff to “provide this Court with the specifics of the settlement to enable the Court to determine whether it is fair and reasonable.”

This decision, while not binding on any other court, underscores the need for litigants to give very careful consideration to the challenging issues raised by settlements in even the simplest of FLSA cases. As tempting as it may be for both sides to resolve cases with a handshake, basic settlement agreement, and one-line Stipulation of Dismissal with Prejudice, that practice is limited within the Second Circuit. Other circuits have not been as suspicious of the efforts of parties and their attorneys to amicably resolve cases.

PAGA Amendments Address Legislature’s Concerns, Not Employers’ Concerns

Posted in State Laws/Claims

Authored by Simon L. Yang

Seyfarth Synopsis: PAGA was amended earlier this week, in connection with the California legislature’s approval of the state’s annual budget. The legislation did not implement any of the more substantive changes that Governor Brown’s proposed budget had previously suggested—e.g., requiring PAGA plaintiffs to provide additional information when submitting pre-filing written notice to the LWDA or permitting the LWDA an opportunity to object to PAGA settlements. While some procedural changes are worth noting, they don’t alleviate any of employers’ main concerns with PAGA.

And that’s to be expected, since the Legislative Analyst’s Office previously recommended rejecting any substantive changes. In its view, such amendments should be considered only after (i) requiring additional information be provided to the LWDA about the actual results of PAGA litigation and (ii) increasing funding to the LWDA so that it could actually fulfill its role in PAGA enforcement. This week’s alterations to PAGA procedure attempt to address these two preliminary objectives.

First, California employees used to be able to threaten employers with the prospect of PAGA litigation for the mere $3 cost of sending a written notice via certified mail. Effective today, hopeful PAGA plaintiffs must now pay a $75 filing fee and submit written notice via online filing. The filing fee and online system aim to assist the LWDA manage its PAGA burdens. But the 25x filing-fee increase likely won’t curb employers’ PAGA burdens, since employees often demand PAGA settlements that are 2,500x greater than even the new filing fee.

Second, courts now have to approve all settlements in PAGA actions—and not just settlements involving PAGA penalties. Contrary to some rumors, the amendments do not provide the LWDA an opportunity to object to PAGA settlements. The amendments do require PAGA plaintiffs to provide the LWDA with copies of any filed PAGA complaint, proposed settlements, and final judgments, but this week’s revisions merely assist the LWDA in being informed of PAGA litigation.

Third, employees also now have to wait 65 (as opposed to 33) days after sending their written notice before filing suit, as the LWDA has 60 (instead of 30) days to potentially respond. Both employees and the LWDA generally do nothing during this period, so employers may be further annoyed that they still have but 33 days to potentially cure certain Labor Code violations.

Still, maybe the LWDA will become more involved in PAGA enforcement. The LWDA has launched a new PAGA website, though it notes that the statutorily required online filing system is not yet developed. It also notes the prior reality about the LWDA’s role in PAGA enforcement—that employees and employers ordinarily won’t hear anything from the LWDA.

Only time will tell if the LWDA is ready to become more involved. What remains certain—and what the PAGA amendments do not alter—is that California employers will continue to face an abundance of PAGA litigation.

 

SCOTUS Says DOL Needs to Explain Itself If It Wants Deference to its Regulations

Posted in DOL Enforcement, Misclassification/Exemptions, Overtime

Authored by Abigail Cahak

Seyfarth Synopsis: The Supreme Court dealt a blow to the Department of Labor’s rulemaking procedures, criticizing the agency for explicitly changing its long-standing treatment  of automobile service advisors as overtime exempt while saying “almost nothing” regarding the reasons for the abrupt change.

This week, the Supreme Court dealt a blow to the Department of Labor’s rulemaking procedures, criticizing the agency for explicitly changing its long-standing treatment  of automobile service advisors as overtime exempt while saying “almost nothing” regarding the reasons for the abrupt change.

The decision, echoing earlier criticisms of the DOL by the Court for taking new positions on who is and isn’t exempt in Christopher v. SmithKline Beecham Corp. when considering the exempt status of pharmaceutical sales representatives, may be of use to employers in challenging other recent DOL regulatory changes.

The Encino Motorcars Decision

Automobile service advisors employed by dealerships are generally responsible for meeting with customers, listening to their concerns about their cars, suggesting repair or maintenance services, selling new accessories or replacement parts, recording service orders, following up with customers as services are performed, and explaining repair and maintenance work when customers return for their vehicles.

The exempt status of such employees flip-flopped throughout the 1960s and 1970s; however, in 1978 the DOL issued an opinion letter specifically taking the position that service advisors could be overtime exempt under 29 U.S.C. § 213(b)(10)(A). The DOL confirmed this position nine years later when it clarified in its Field Operations Handbook that service advisors were to be treated as exempt. Finally, in 2008, the DOL issued a notice of proposed rulemaking stating that it intended to revise its regulations to reflect the overwhelming court authority on the matter and its own long-standing practice on the issue.

In 2011, DOL issued a final rule addressing service advisors, as well as a number of other issues on a broad range of topics.  Many of these reversed course from previous long-held DOL positions, including the DOL’s announcement that its 2008 proposal on service advisors would be rejected and the final rule would state the exact opposite: that service advisors are not exempt because they do not themselves sell automobiles.

In Encino Motorcars, LLC v. Navarro, the Supreme Court concluded that the Ninth Circuit improperly accorded Chevron deference to the DOL’s 2011 final rule in a suit alleging that the defendant dealership had improperly classified its service advisors. The Ninth Circuit had previously reversed, based on deference to the 2011 regulation, the District Court’s dismissal of the case as to the exemption of service advisors.

The Supreme Court started by noting that it must defer to a federal agency’s interpretation of ambiguous law if that interpretation is a “reasonable” one. But deference is not warranted when the agency does not give “adequate reasons for its decisions” and “where the agency has failed to provide even the minimal level of analysis, its action is arbitrary and capricious and so cannot carry the force of law.” This is particularly important where an agency is changing an existing policy and as such it must “provide a reasoned explanation for the change.”

Under these principles, the Court concluded that the Department’s 2011 regulation was not entitled deference because it offered “barely any explanation” for the change in interpretation. The Court stressed that “[t]he retail automobile and truck dealership industry had relied since 1978 on the Department’s position that service advisors were exempt from the FLSA’s overtime pay requirements” and had “negotiated and structured their compensation plans against this background understanding.” Therefore, “[i]n light of this background, the Department needed a more reasoned explanation for its decision to depart from its existing enforcement policy.” Accordingly, the Court vacated the Ninth Circuit’s decision an instructed it “to interpret the statute in the first instance.”

Potential Implications of the Supreme Court’s Decision

The Court’s ruling won’t have a direct impact on most employers — only a few employ automobile service advisors.  But its reasoning could have wide-ranging implications. The Court commanded that, when reversing course with new regulations, the DOL must show good reasons for the new policy. The automobile service advisor regulation was only one part of a 2011 series of regulations from the DOL in which the DOL changed its regulations, including several proposed interpretations on other FLSA issues from the DOL during the Bush Administration, including the tip credit, tip pooling, and fluctuating workweek.  To the extent the DOL’s explanation for the change is wanting, those changes are now subject to challenge.

The Spirit of the FLSA Haunts a Highly Paid Employee

Posted in Overtime

ghost-582113_1920Authored by Jeff Glaser

 

Seyfarth Synopsis: The Eleventh Circuit Court of Appeals cites to the FLSA’s purpose and spirit in upholding the dismissal of a minimum wage and overtime claim brought by a highly paid computer software and hardware engineer.

As we’ve discussed on this blog before, the Supreme Court’s decision in Christopher v SmithKline Beecham Corp. had many layers. In holding that pharmaceutical sales representatives were subject to the FLSA’s outside sales exemption, the Court touched on the purpose and spirit of the Act. Justice Alito, the author of the majority opinion, explained that highly paid employees, such as pharmaceutical sales representatives, are “hardly the kind of employees that the FLSA was intended to protect.” This dicta could apply well beyond the confines of pharmaceutical representatives and the outside sales exemption. It could suggest an additional consideration in any FLSA lawsuit involving highly paid individuals.

Last week, the Eleventh Circuit picked up and expanded this line with its decision in Pioch v. Ibex Engineering Services, Inc. Pioch worked at Ibex for almost ten years as a computer software and hardware engineer. Ibex paid him on an hourly basis, ranging from $50 to $85.40 per hour. He received straight time for any hours he worked over 40 in a week, but, based on the computer professional exemption, Pioch did not receive an overtime premium. The computer professional exemption applies to employees who perform certain computer-related duties and are paid at least $455 per week or, if compensated on an hourly basis, $27.63 per hour.

Pioch resigned from Ibex after an internal investigation concluded that he improperly collected per diem payments amounting to nearly $150,000. As a result of the investigation, Ibex withheld Pioch’s final paycheck of $13,367.20, which represented three weeks of work. Pioch brought suit in the Southern District of Florida, alleging, among other things, that Ibex violated the FLSA’s minimum wage and overtime requirements by withholding his last paycheck and failing to compensate him at all for three weeks of employment.

The district court granted Ibex summary judgment on Pioch’s FLSA claims, finding that the computer professional exemption applied to Pioch’s entire employment with Ibex, including the last three weeks of employment when he didn’t receive any pay at all.

The Eleventh Circuit agreed. In reaching this decision, the court followed the Supreme Court’s lead in Christopher, and engaged in its own analysis of the purpose and spirit of the FLSA. It explained that “read[ing] the FLSA blindly, without appreciation for the social goals Congress sought, would … do violence to the FLSA’s spirit.” After reviewing these goals, the court concluded that Congress intended the FLSA to “aid the unprotected, unorganized, and lowest paid of the nation’s working population”—not “a highly-paid hourly employee typically earning over six figures a year,” like Pioch.

Guided by this interpretation, the Eleventh Circuit held that Pioch’s exempt status did not “evaporate” simply because Ibex withheld his final paycheck. Ibex promised to pay Pioch many times more than the minimum amount required under the computer professional exemption. Ibex’s alleged failure to follow this promise by withholding Pioch’s final paycheck is a matter for state contract law, not the FLSA. To this point, the court explained that “[w]hat Mr. Pioch is essentially trying to do is assert a state-law breach of contract claim, for his agreed-to hourly rate, through the FLSA.” The FLSA, though, is “not a vehicle for litigating breach of contract disputes,” and therefore Pioch’s FLSA claim was properly dismissed.

Like Christopher, the Pioch decision is helpful to employers on multiple levels. Narrowly, it finds that the withholding of a final paycheck does not invalidate the exempt status of an hourly employee otherwise subject to the computer professional exemption. More broadly, it indicates, as the Supreme Court did, that the spirit and purpose of the FLSA is a valid consideration when determining the Act’s application to highly paid employees.

Tweeting With the DOL

Posted in DOL Enforcement

Image for Promotion 06_16_16We have harnessed a number of special avenues to connect with you regarding the new overtime rule, including our FLSA Exemption Resource Center, a live Facebook interview with USA Today and our recent testimony before the U.S. House Education and the Workforce Committee.

Now, for our latest avenue: Twitter. For those who use Twitter to keep up with current events, join Brett Bartlett tomorrow, Thursday June 16, at 2:00 PM EST for a “chat” about the new FLSA exemption rule. Wage and Hour Division Administrator David Weil, Solicitor of Labor Patricia Smith, and Michael Hancock of Cohen Milstein will be joining him to answer questions focused primarily on the impact that the new rule will have on businesses nationally. You can join the conversation on Twitter using the hashtag: #OTRuleChat.

We look forward to your tweets!

They’re Here: White Collar Exemption Revisions Announced

Posted in DOL Enforcement, Overtime

Authored by Alex Passantino

Tomorrow, the Department of Labor’s long-awaited revisions to the Fair Labor Standards Act’s white collar exemption will be announced. Although there certainly will be additional nuance identified once the entire package has been made available, here are the bottom line changes:

  • The new salary level required for the executive, administrative, and professional exemptions will be $913 per week, which translates to $47,476 per year.
  • Up to 10% of the salary level can be met with bonuses and commissions. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, however, such payments must be paid on a quarterly or more frequent basis and the employer is “permitted” to make a “catch-up” payment. More specific details of this new development are still unclear.
  • The new salary level required to take advantage of the highly-compensated employee provision of the exemptions will be $134,004 per year. Of that, $913 per week must be paid on a salary basis.
  • The new levels will be effective on December 1, 2016. December 1 is a Thursday, which means that salary increases to ensure continued use of the exemption for weekly/biweekly employees must be made for the workweek (or pay period) that includes December 1.
  • The salary level will be increased automatically every three years, starting in 2020. The amount will be based on the 40th percentile of full-time salaried workers in the region in which the salary level is lowest (historically, the South). The Department will publish the information in the Federal Register in advance of the increase. It is expected that the salary will be $51,000 per year on January 1, 2020.

The salary level represents a slight reduction from the expected level of $50,440 per year, which was identified by the Department in its proposed rule last year. In addition, although an automatic increase was proposed and expected, doing so every three years—instead of annually—provides a small relief for the compensation planning process.

Over the past year, there has been a great deal of discussion about what the Final Rule might contain. Given those discussions, it is notable that the final rule does not:

  • change the regulatory text for primary duty;
  • revise the tests for the duties required of executive, administrative, or professional employees;
  • amend the salary basis test;
  • apply any new compensation standards to doctors, lawyers, teachers, or outside sales employees; or
  • make any changes to the computer professional exemption (other than the salary increase, as may be applicable).

We will keep you updated once the Final Rule is available in its entirety.

You can register for our webinar discussing the changes here.

UPDATE (5/18/16): The Final Rule is posted.

Plaintiffs’ Bar Sets Sights on New Lawsuits Following DOL Rule Amendments

Posted in DOL Enforcement, Misclassification/Exemptions

Co-authored by Richard Alfred, Brett Bartlett, and Noah Finkel

The Department of Labor’s release of the new exemption regulations appears imminent. As we have reported in a number of posts, these new rules are expected to nearly double the minimum annual salary level required for employees under the administrative, executive, and professional exemptions (currently $23,660 to between $47,000 – $50,440); impose an automatic annual (or, possibly, less frequent) indexing to inflation; and significantly increase the highly compensated employee exemption (now set at $100,000). Once issued, these new rules will significantly change employee eligibility for overtime and will impact virtually all employers operating in the United States. The rules are likely to become effective within 60 – 120 days, or possibly longer.

The overtime rule amendments will be the first major revisions to the “white collar” exemptions since 2004. Those modest changes in the regulations resulted in a dramatic increase in wage and hour litigation at that time. Consider this: in 2003, the year before the last amendments, the number of federal court wage and hour filings stood at 2,751, according to the Annual Report of the Director, Judicial Business of the United States Courts; a year later, in 2004, that number jumped to 3,617, an increase of almost 32%, followed by another double-digit percentage increase in 2005 to 4,039, up nearly 12%.[1]

With that as a backdrop, we have been predicting another surge in new wage and hour lawsuits following the anticipated new rules this month. That prediction has now been underscored by an article published late last week by the Bloomberg BNA Daily Labor Report. That article, “Plaintiffs’ Bar Plans Outreach on Overtime Changes,” leads with the not-so-subtle statement by an attorney at a well-known plaintiff-side law firm, “Once the regulation’s done, that’s only the beginning…” Reportedly, these lawyers are planning to “educate” employees about the requirements of the regulatory changes through techniques that may include “using radio, television and online advertising.” We can only assume that the aim of such “education” is to find new clients, who then become plaintiffs against employer-defendants.

Where Plaintiffs’ Counsel Are Looking

This effort may initially focus on previously exempt employees who, because of the minimum salary level increases, are reclassified as non-exempt. In some cases, these employees may continue to be paid a set weekly salary but for work limited to 40 hours per week, a perfectly lawful method of pay for non-exempt employees. Both employers and employees paid in this manner may not realize, however, that an overtime premium is due for work over 40 hours in a week, notwithstanding the salary method of pay.

Additionally, reclassified employees may feel that they are expected to continue performing the same duties they had as exempt employees, when they regularly worked more than 40 hours a week. As non-exempt employees, company policies may prohibit them from working beyond 40 hours without supervisory approval and will typically require them to keep track of and record their work time accurately. Those who fail to do so may be disciplined and may also later argue that they were denied overtime pay and seek compensation for such time, as well as liquidated damages, attorneys’ fees, and, under some state laws, penalties and interest.

As plaintiff-side attorneys “switch their focus from outreach to enforcement,” this article reports, new lawsuits will be filed for past alleged violations uncovered from increased scrutiny given to wage and hours issues more generally, in addition to alleged overtime violations seen as arising from the new rules. This is likely to result in claims alleging exempt status misclassification and off-the-clock unpaid work. “[T]his will only add to the recent swelling of private FLSA litigation,” and a further “surge in overtime pay lawsuits,” commented one labor and employment lawyer for this story.

Further adding to this expected spike in new wage and hour lawsuits is likely to be dissatisfaction among newly reclassified non-exempt employees who may see their reclassification as a form of demotion and reduction in status. Morale issues may follow, which could adversely impact productivity and may also provide an incentive among those workers to seek legal redress.

What Happened the Last Time the Regulations Changed?

It is no surprise to employers that wage and hour laws—both federal and state—are complicated, often difficult to apply, and the source of potentially crippling exposure from collective and class actions. In the decade following 2005, lawsuits under the FLSA and state laws have continued to increase in record numbers, more than doubling in federal court filings, alone (from 4,039 to 8,781 in 2015). We have discussed the causes contributing to this escalation in previous posts. As discussed, the 2004 amendments and the publicity that surrounded them led to an increase in awareness of the FLSA and state wage and hour laws. Other causes include:

  • The vague and ambiguous text of the FLSA and DOL regulations, adopted in 1938 and amended just nine years later with the Portal-to-Portal Act of 1947;
  • The workplace and our economy at that time were extremely different from now, and applying those legal requirements to today’s businesses is difficult and presents issues, the answers to which are often unknown and unknowable as courts struggle to reach consistent decisions; and
  • Large settlements and verdicts have given employee attorneys an incentive to focus more on procedurally advantageous collective actions in which the plaintiffs’ burden in obtaining conditional certification is lower than Rule 23 class certification and often easier to prove than claims of employment discrimination.

The same ingredients that led to the sharp increases in wage and hour litigation a dozen years ago are present today. The plaintiffs’ bar is gearing up by aiming its attention on the risks and hurdles that employers will face in complying with the soon-to-be released new regulations. The challenge for employers is to understand their current wage and hour policies, practices, and job classifications and how the new rules are likely to impact them. The opportunity is to plan for the implementation of the likely changes to the law so that necessary workforce adjustments can be made thoughtfully and consistently based on business goals and culture.

As we near the release of the new regulations, we repeat what we have said many times before: employers should assess their pay practices and classification decisions through an audit conducted by experienced in-house or outside wage and hour counsel. As plaintiff-side lawyers plan for another wave of wage-hour lawsuits, employers are well advised to take steps now to reduce their chances of becoming future litigation targets. We also invite you to visit Seyfarth Shaw’s FLSA Exemption Resource Center for more information and resources for employers on the new regulations.

[1] The source for all statistics of case filings in federal courts reported in this article is the Annual Report of the Director, Judicial Business of the United States Courts, available at http://www.uscourts.gov/statistics-reports/caseload-statistics-data-tables?tn=c-2.

New FLSA Overtime Exemption Rules Expected Imminently

Posted in DOL Enforcement

By: Seyfarth Shaw’s Wage Hour Litigation Practice Group

Seyfarth Synopsis: As early as next week, the Department of Labor is expected to issue its final rule implementing revisions to the regulations governing the application of the FLSA’s “white collar” exemptions from overtime and minimum wage. 

The culmination of more than two years’ worth of work by the Department, the final rule has the potential to impact the exempt status of a wide variety of positions in virtually every industry and impose the most significant changes to those regulations in at least a decade.

In this Client Alert, we bring you the latest intelligence on the content and timing of the final rule, as well as what you can expect from your team at Seyfarth Shaw in the coming weeks.

We have also created a special update series on the new FLSA overtime exemption rules. To receive this special series, please subscribe by clicking here.

Do we know what the final rule contains?

Not yet.  The substance of the final rule will not be known to the public until the Department announces the rule.  That announcement will not take place until after the final rule has been approved by the White House’s Office of Management and Budget (OMB).  OMB has been meeting with a wide range of stakeholders since it began its review on March 14.

OMB does not reveal the contents of the final rule during its meetings.  Nevertheless, stakeholder attendees often leave the meeting with definite ideas of what the rule will contain.  And, government officials sometimes leak information to the media. Here’s what the Department proposed on the key issues and what we’ve been hearing we might expect in the final rule.

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What’s the expected timing for all of these changes?
Due to the impact of a seldom-used, but potentially significant law known as the Congressional Review Act (CRA), it is widely believed that the Department wishes to publish the final rule (and provide the required notices to Congress) by May 16, 2016.  Regulations submitted to Congress after that date are expected to be subject to the CRA’s “clawback” provision, which would push the deadline for Congress to vote to “repeal” the rulemaking into the next–and possibly more employer-friendly–Administration.

In the spring of 2015, OMB completed its review of the proposed rule in 55 days.  As of today, the final rule has been under OMB review for 50.  With OMB stakeholder meetings on the rule scheduled as late as May 10, it is not likely that the final rule will be published before then, but it is entirely possible that the Department will announce the rule within a day or two of those meetings.

Once the rule is announced, will there be some type of grace period for implementation?

The final rule will almost certainly be a “major” rule, which, as a matter of law, means that the rule cannot be effective for at least 60 days following its publication in the Federal Register.

One of the major concerns raised by employer groups in their meetings with OMB, however, has been the difficulty they will have implementing a change to the salary threshold in such a short period of time, particularly when no employer knows what that salary threshold will be.  Upon learning the salary level, employers will need to determine the set of impacted positions and assess whether to convert each position to non-exempt, raise the salary level, and/or engage in some restructuring of the organization to better accommodate the new salary requirement.  In addition, employers will need to consider how the decisions with respect to the impacted positions have further effects on positions outside the impacted population.

Compounding the difficulty in implementing salary threshold changes are (among other things) the technical requirements for implementing such changes in payroll systems, the need to train newly non-exempt employees on timekeeping matters (and, potentially, to add more timeclocks to account for the new population), and state law requirements to notify an employee of changes to the amount and/or method of pay in advance (in some states a pay period in advance).  Add to that the preparation of communications plans to implement each of these elements, and it is clear that a 60-day implementation would be extremely difficult.

As a result, the employer community has asked OMB to provide for a longer effective date period.  In 2004, the Department gave employers 120 days to implement a far more modest salary increase, and we are hopeful that it will do the same here.

What should I be doing now?

Whether the effective date is 60 or 120 days or even 180 days, implementation of the Department’s changes is going to require prompt and focused action by employers.  Employers would be wise to identify now, if they have not already done so, the positions that may be subject to the salary threshold increase, whether the new level will be $45,000 or $50,000, or somewhere in between.  Such a review should consider how operations would be impacted by reclassification to non-exempt status and/or a salary increases to ensure compliance and the impact of those changes on other employees in addition to those directly impacted.

Employers also may take this time to determine how much lead time will be necessary to implement any changes by their payroll and timekeeping vendors and to assess whether training regarding timekeeping practices and general management of newly reclassified non-exempt employees is desirable (and, if so, when and how to provide it).

What can I expect from Seyfarth in the coming weeks?

Seyfarth Shaw will be keeping you up-to-date on the latest developments through a number of resources.  As soon as the substance of the new rules are known, we will issue another  Management Alert.  This Alert will be sent to you by email and updates to our social media outlets. Additional analysis will be sent during the weeks after its release through our special series that can be subscribed to by clicking here.  In addition, we will make information available on our Wage Hour Blog at www.wagehourlitigation.com.

Anticipating the announcement of the new regulations next week, we are scheduling a webinar on Monday, May 16, at 2:00 p.m. EDT (11:00 a.m. PDT, 12:00 p.m. MDT, 1:00 p.m. CDT).  Alex Passantino, former Acting Wage & Hour Administrator, along with other of our most experienced wage and hour practitioners will be discussing these rules and their impact on employers.  You may sign up for this webinar immediately by clicking here or through an invitation that you will receive shortly.

Be on the lookout for the announcement of our Exempt Status Resource Center that will be available online and will provide easy and instant access to a host of materials about the new rules and to help organizations think through the many business and legal issues arising from them.

Of course, if you and your organization would like help thinking through any of these issues, we encourage you to reach out to the Seyfarth attorney with whom you work and/or any member of our wage-and-hour team listed here.