Co-authored by Abigail Cahak and Noah Finkel

Seyfarth Synopsis: The Ninth Circuit has created a circuit split by rejecting the DOL’s interpretation of FLSA regulations on use of the tip credit to pay regularly tipped employees, finding that the interpretation is both inconsistent with the regulation and attempts to create a de facto new regulation.

The Ninth Circuit Court of Appeals issued an important and restaurant-friendly decision rejecting the Department of Labor’s interpretation of FLSA regulations on the use of the tip credit when paying regularly tipped employees.

In Marsh v. J. Alexander’s, the Ninth Circuit addressed a number of actions brought by servers and bartenders who alleged that their employers improperly used the tip credit and thus failed to pay them the required minimum wage. Relying on DOL interpretive guidance, the plaintiffs asserted that their non-tip generating duties took up more than 20% of their work hours, that they were employed in dual occupations, and that they were thus owed the regular minimum wage for that time. The district court dismissed the case, holding that Marsh had not alleged a dual occupation and that deference to the DOL guidance underpinning his theory of the case was unwarranted. Marsh appealed.

Under the FLSA’s regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” Yet, current DOL guidance imposes time and duty-based limitations not present in the regulations: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating. The guidance goes on to state that an employer also may not take the tip credit for time spent on duties not related to the tipped occupation because such an employee is “effectively employed in dual jobs.” That guidance had been followed by the Eighth Circuit Court of Appeals and several lower courts. It created a feeding frenzy among some plaintiffs’ lawyers, causing restaurant employers to ask servers and bartenders to track their time spent on various activities down to the minute, or risk facing a collective action lawsuit in which they have to try to rebut a servers’ claims that they had spent excessive time on activities that arguably were not tip producing.

The Ninth Circuit, however, concluded in Marsh that the DOL’s guidance was both inconsistent with the FLSA regulations and attempted to create a de facto new regulation such that it did not merit deference. In particular, the court noted the regulations’ focus on dual occupations or jobs as contrasted with the DOL guidance: “[i]nstead of providing further guidance on what constitutes a distinct job, [the DOL] takes an entirely different approach; it . . . disallows tip credits on a minute-by-minute basis based on the type and quantity of tasks performed. Because the dual jobs regulation is concerned with when an employee has two jobs, not with differentiating between tasks within a job, the [DOL’s] approach is inapposite and inconsistent with the dual jobs regulation.” Moreover, the DOL guidance “creates an alternative regulatory approach with new substantive rules . . . [and] ‘is de facto a new regulation’ masquerading as an interpretation.”

In so holding, the Ninth Circuit broke with the Eighth Circuit’s 2011 decision in Fast v. Applebee’s International, Inc. and explicitly rejected the Eighth Circuit’s analysis in that case. We previously blogged about the Fast decision here.

Marsh creates a circuit split and is particularly notable coming from the frequently employee-friendly Ninth Circuit. There remains, however, contrary authority in many parts of the country, and the decision has no bearing on state laws, some of which may nonetheless follow the DOL’s reasoning. It’s also likely that this Ninth Circuit panel does not have the last word on this issue. This opinion could receive further review by the full Ninth Circuit or by the Supreme Court, and if the Supreme Court does not resolve the circuit split, other appellate courts are likely to weigh in. Regardless, the decision points out the absurdities of the DOL’s current position and demonstrates the need for guidance on the issue from the DOL once its’ appointees are in place.

Authored by Alex Passantino

The White House announced its intent to nominate Cheryl Stanton to serve as the Administrator of the U.S. Department of Labor’s Wage & Hour Division. Stanton currently serves as the Executive Director for the South Carolina Department of Employment and Workforce. Prior to that, she worked in private practice as a management-side labor and employment attorney. She also previously served as Associate White House Counsel for President George W. Bush, where she was the administration’s principal liaison to the U.S. Department of Labor, the National Labor Relations Board, and the Equal Employment Opportunity Commission.

Ms. Stanton is nominated to join a Labor Department in which only Secretary of Labor Alexander Acosta has successfully navigated the Senate confirmation process. Deputy Secretary nominee Patrick Pizzella was formally nominated in June 2017; his nomination remains pending in the Senate. With a full Fall agenda including Hurricane Harvey (and likely Irma) relief, the debt ceiling, tax reform, border wall funding, and potential immigration-related issues, it is unclear when the Senate might confirm Ms. Stanton. It would not be surprising to see her nomination linger until the end of the year–or even into 2018.

When she does arrive at WHD, she’ll be facing a full plate of issues as the agency tackles a new rulemaking process increasing the salary level required for exemption under the FLSA’s white-collar exemptions, a proposal revising the rules surrounding tipped employees and the use of tip credit, and, presumably, filling the vacuum left by the Department’s withdrawal of the Administrator Interpretations on independent contractors and joint employment. In addition, with the Department’s announcement that it would once again be issuing opinion letters, there’s likely to be quite a queue of requests awaiting Ms. Stanton’s review.

We’ll keep you posted as Ms. Stanton’s nomination works its way through the confirmation process.

 

Co-authored by Brett Bartlett, Alex Passantino, and Kevin Young

Seyfarth Synopsis: On Thursday afternoon, a federal judge in Texas issued an order officially invalidating the U.S. Department of Labor’s 2016 overtime rule, which would have more than doubled the minimum salary level for most overtime-exempt employees. While the long awaited ruling brings a measure of closure for employers, the possibility of appeal, as well as the new administration’s efforts to revise the existing overtime exemption rules, will be critical issues for employers watch in the weeks and months to come.

For nearly a year, employers have been watching and waiting as litigation challenging the Obama administration’s revision to the FLSA’s executive, administrative, and professional (“EAP”) exemptions—a revision intended to make millions of more Americans eligible for overtime pay—wound its way through litigation in the Eastern District of Texas and the Fifth Circuit of Appeals. As of Thursday afternoon, the waiting is over: District Judge Amos Mazzant issued an order invalidating the revised rule.

The Obama DOL’s revised rule, which was finalized in the summer of 2016 and slated to take effect on December 1, 2016, would have increased the salary level required for EAP employees from $455 per week (i.e., $23,660 per year) to $913 per week (i.e., $47,476 per year). The rule also called for automatic, inflation-indexed updates to the salary level every three years. Ultimately, the revised rule did not become effective on December 1, however, because Judge Mazzant issued an order days prior that preliminarily enjoined it from going into effect.

District Judge Mazzant issued his order in two consolidated lawsuits challenging the DOL for acting beyond its rulemaking authority. The order was the result of a motion filed by a group of state attorneys general who argued that the DOL’s rulemaking was invalid, in part because it exceeded the authority Congress gave DOL to define who is a “bona fide” EAP employee who should not be entitled to overtime pay. At about the same time that the “state plaintiffs” filed their motion for preliminary injunction, which the district court granted, another set of plaintiffs—a group of business associations (“business plaintiffs”)—filed an expedited motion for summary judgment, advancing similar arguments that the DOL’s rulemaking was unlawful.

After Judge Mazzant granted the state plaintiffs’ preliminary injunction motion, the Obama DOL filed an interlocutory appeal in the Fifth Circuit attacking the injunction order. Importantly, however, this was just before the Trump Administration took office. Ultimately, briefing in the appeal was delayed as a new president settled into office and his new Labor Secretary, Alexander Acosta, took the helm at DOL. In doing so, Secretary Acosta and his Acting Solicitor were required to assess how to maneuver a proceeding involving an injunction order that on the one hand blocked the implementation of an overtime rule championed by the prior administration, but on the other hand suggested that the DOL might not have authority to set any salary level for the EAP exemptions, despite having done so for nearly eighty years.

In the meantime, the business plaintiffs’ motion for summary judgment lingered before the district court.

Thursday’s ruling was preceded by a recent flurry of activity. On Wednesday, for example, Judge Mazzant issued an order confirming no further argument was necessary on the summary judgment motion. The court also collapsed the state plaintiffs’ and business plaintiffs’ cases together and joined the state plaintiffs to the business plaintiffs’ pending summary judgment motion. Nevertheless, it seemed unlikely that Judge Mazzant would rule on the summary judgment motion before hearing from the Fifth Circuit regarding his earlier preliminary injunction order. After all, an appellate ruling on whether it was proper to preliminarily enjoin the new rule certainly could have impacted or at least informed Judge Mazzant’s reasoning on whether the rule should be declared invalid, as the summary judgment motion argued it should.

Meanwhile, at the Fifth Circuit, oral argument was slated for October 3, and the parties were jockeying for an opportunity to be heard. The business plaintiffs, who were not parties to the appeal, requested permission to appear as amici at the oral argument. Soon thereafter, all parties filed a motion to stay proceedings while they attempted to negotiate a deal that would eliminate the need for further proceedings. Indeed, even on Thursday as the district court was issuing its final judgment, the parties on appeal were filing various submissions with the Fifth Circuit.

So perhaps all were surprised when District Judge Mazzant issued orders finding that the DOL’s 2016 rulemaking was invalid, and that the AFL-CIO would not be joined to the case. The district court’s ruling on both of these issues is fairly straightforward. On the motion for summary judgment, which collapsed all parties and remaining issues into its walls, the court ruled as follows:

  • As associations and similar groups, the business plaintiffs had standing to challenge the DOL’s rulemaking.
  • The FLSA does in fact apply to state governments, contrary to the state plaintiffs’ arguments.
  • Applying Chevron deference analysis, the DOL exceeded its authority by setting a salary level test that in effect eliminated the need to consider whether employees performed duties that demonstrate their roles working in a bona fide EAP capacity, based on definitions that Congress would have understood at the time it enacted the FLSA.
  • The automatic updating provided by the DOL’s final 2016 rule was unlawful for similar reasons.
  • Clarifying an area of concern for the DOL and other stakeholders, the court did not rule on the question of whether the DOL has authority to set any salary level for the EAP exemptions. The court’s ruling concerned only the 2016 rulemaking, finding the heightened salary level under the revised rule goes too far.

In denying the AFL-CIO’s motion to intervene as a necessary or permissive party, the court reasoned:

  • The union’s motion was untimely, as it had been aware of the litigation and the issues on which it bore. Yet it waited to file its motion to intervene until material events had occurred in the litigation.
  • The union failed to show that the DOL and related defendants were not adequately representing the interests that it purported to protect.
  • The union had argued among its primary points that Secretary of Labor nominee Andrew Puzder would not protect those interests; but Alexander Acosta was confirmed as Secretary of Labor, meaning that Mr. Puzder’s potential actions never became a reality.
  • And the court would nevertheless not exercise its discretion to allow the union to join the case.

The question on everyone’s mind is: where does this leave us?

One easy answer is that with respect to the EAP exemption itself, the 2004 rule remains in place. Employees making $455 per week (i.e., $23,660 per year) and whose primary duty satisfies one of the EAP duties tests may be classified as exempt.

Beyond that, there are no easy answers. The parties are no doubt considering whether the district court’s summary judgment order, which purports to withdraw all prior rulings, renders the pending appeal moot or requires its dismissal. After all, the summary judgment motion decided by the district court presents largely the same issues currently before the Fifth Circuit—namely, the validity of the new overtime rule. Some commentators have already exclaimed that the district court’s order mooted the interlocutory appeal entirely. Our view is that the question could be more complicated. Suffice it to say, there’s a lot to digest.

Either way, it also remains unclear whether either side will appeal Thursday’s rulings. While one would assume that DOL will not, we can’t slam the door on the possibility. As we saw with the appeal of the preliminary injunction, even the new Administration’s policy differences may not override DOL’s desire to defend itself against court orders limiting its authority, as the preliminary injunction did and as the court’s summary judgment order appears to do. If DOL determines that there is an institutional need to preserve its rulemaking authority, then it is possible we might see a DOL-initiated appeal, which would further complicate the question of how the union might agitate the proceedings.

As for the AFL-CIO, next steps are even foggier at this moment. Given that the DOL has already signaled the commencement of new rulemaking on the EAP exemptions, the AFL-CIO may take the view that even a complete victory on appeal—i.e., one that would permit its inclusion in the case and the reversal of the district court’s summary judgment decision—would ring hollow, as it could be undone by the DOL’s efforts to formulate a new rule that would take the place of the Obama rule.

Without question, the Eastern District of Texas’s order invalidating the 2016 overtime rule brings a large measure of closure for employers waiting to learn whether the rule would ever go into effect. The completeness and finality of that closure will depend largely on whether the AFL-CIO seeks appeal, as well as the DOL’s anticipated efforts to implement a new rule altogether. We will, of course, continue to monitor and update you on these important events.

Co-authored by Steve Shardonofsky and Kevin A. Fritz

Seyfarth Synopsis: As employers begin to pick up the pieces following Hurricane Harvey, management will likely encounter questions about employee pay, benefits, and leaves of absence during and after this disaster, and may also have questions about how to help their workers get by during this difficult time. After making sure your workers are safe, and as you start to rebuild and repair, read on for practical guidance on these pressing issues.

This past weekend Hurricane Harvey made land fall, causing unprecedented and catastrophic flooding in southeastern Texas. Our thoughts go out to our colleagues, clients, and friends affected by this natural disaster. We are thinking of you during this difficult and trying time.

Pay for Non-Exempt Employees

The General Rule

Under the Fair Labor Standards Act (FLSA), an employer is only required to pay non-exempt employees for hours actually worked. In other words, businesses are not required to pay non-exempt employees if they are not working, including times when the employer closes its doors or reduces hours of operation, whether or not forced to do so by inclement weather. Moreover, while some states require some minimum “reporting” or “show up” pay for employees who show up for work and are either turned away at the door or dismissed before the end of their scheduled shifts, Texas is not one of those states.

An important exception to this general rule exists for non-exempt employees who receive fixed salaries for fluctuating hours from week to week. Because these employees must be paid a “fixed” salary, employers must pay these workers their full weekly salary for any week in which any work was performed and may not dock their pay for days when the office is closed due to inclement weather.

Even if your business is not open during inclement weather days, you always are free to pay employees for that time, and may also permit them to use their paid leave time, if applicable.

Inclement Weather Delays and Traffic

Flooding and severe weather often cause unpredictable traffic delays, and may even result in employees becoming stranded on the road. Employees who perform work while stranded—for example, by taking phone calls or answering e-mails on their way to work—must be compensated for that time even if done away from the office. Similarly, an employee who is stranded in an employer’s vehicle on their way to work and instructed to safeguard the vehicle or other property is generally entitled to pay for time beyond their ordinary home-to-work commute (i.e., once their scheduled shift begins).

With respect to inclement weather, the general and most practical advice is to pay for any extra time spent getting to work during a scheduled shift, particularly when employees are stranded for reasons outside their control. It is likely that the Department of Labor or even a court would find that all of the time the employee was stranded within their regular shift is compensable time. Even where reasonable minds could differ on these questions, since the costs of defending these claims often exceed the underlying payroll costs, it often makes sense to pay employees for this time in the first place.

Pay for Exempt Employees

The General Rule

Exempt employees under the FLSA must be paid on a “salary basis” and earn a full day’s pay when they work any part of the day, regardless of the quality or quantity of the work performed. Thus, if a business is closed because of inclement weather and an exempt employee is ready, willing, and able to work, she must be paid for that day. On the other hand, if the exempt employee does not work for an entire workweek (for personal reasons or because the business is closed), the exempt employee need not be paid for that time—that is, the employer may “dock” her salary for the full workweek.

If the business is open and an exempt employee elects to stay home to make repairs or volunteer at a local shelter, the employer may “dock” their salary in full day increments (but perhaps consider not doing so to encourage volunteerism and aid in recovery efforts). In these instances, and including situations when exempt employees elect to arrive late or leave early for personal reasons, employers may also deduct accrued leave time in full or partial day increments as long as the employee receives his or her full pay for the week. In the event that the employee does not have any accrued time, an employer may also simply pay him or her for the day or allow the employee to take an advance on accrued paid leave and make it up at a later time. This practice is not allowed for non-exempt employees, who must be paid overtime for all hours worked over 40 in a work week. See here for more information on the FLSA salary basis rules.

Safe Harbor

Remember, improper or inadvertent deductions from pay will not typically result in the loss of exemption status if the employer reimburses the employees for the improper deductions, has a clearly communicated safe harbor policy prohibiting improper deductions, and a complaint mechanism for exempt employees to use if improper deductions are made.

Telework or Working from Home

Allowing employees to work from home during this time will aid recovery efforts and help families recover faster. Regardless of exemption status, employees who work from home during inclement weather, even if only a few hours per week, must be paid for that time. Thus, employers who will keep their businesses up and running during the aftermath of Hurricane Harvey should clearly communicate to employees who is and who is not permitted to work from home, when that work can be done, whether overtime is permitted, and how to record time worked outside of the company’s premises. It is also important to remind employees to record all hours worked, even when the work is done away from the employer’s premises. Employers should be sensitive to the fact that not all employees will be able to work remotely, and therefore should consider alternative arrangements like temporary or shared offices.

On-Call and Waiting Time

Power outages are common during natural disasters, and many employers will require their employees to wait out or work through such power failures. In most cases, any employee who is required to remain at the employer’s premises or close by and therefore unable to use that time for his own benefit (even if not working) must be compensated for that time. For example, employees who are onsite to perform emergency repairs and who are not free to leave the company’s premises must be compensated for time even if they do not ultimately perform any work. Similarly, if an employee is onsite and required to wait through a power outage, the time waiting for the power to resume is typically considered time worked and is therefore compensable.

Volunteer Time for Company Repairs

Employers should generally be cautious about having employees “volunteer” to assist during an emergency, particularly if those duties benefit the company and are regularly performed by employees. Exempt employees who volunteer to help will not be entitled to any additional compensation. But remember that too much time spent on manual tasks or other tasks unrelated to their regular job duties could invalidate their exempt status and allow them to claim overtime compensation. Conversely, non-exempt employees must be paid for all time worked, even if they offer to work and help make repairs for “free,” with one exception:  Employers may accept free work from employees of government or non-profit agencies who volunteer out of public-spiritedness to perform work that is not at all similar to their regular duties.

Leaves of Absence After a Natural Disaster

Otherwise eligible employees affected by a natural disaster may elect to take leave under the Family and Medical Leave Act (FMLA) for a serious health condition caused by the disaster. Additionally, employees affected by a natural disaster who must care for a child, spouse, or parent with a serious health condition may also be entitled to leave. This includes job-protected leave to care for a family member who is a current service member with a serious injury or illness. FMLA leave for this purpose is called “military caregiver leave.”

Adding to the difficulty, employers may encounter uncommon FMLA issues during and after severe storms, including absences caused by an employee’s need to care for a family member who requires refrigerated medicine or medical equipment that is not operating properly because of a power outage. What’s more, under the Americans with Disabilities Act, an employee who is physically or emotionally injured as a result of a disaster may be entitled to leave as a reasonable accommodation, so long as it would not place undue hardship on the operation of the employer’s business.

Employees who are part of an emergency services organization may also have rights under the Uniformed Services Employment and Reemployment Rights Act (USERRA). Under certain conditions, USERRA provides job-protected leave for U.S. service-members. Although USERRA does require advance notice of military service, there are no strict time limits for notice after a natural disaster as long as it is reasonably “timely.” Employers should be prepared to receive and assist employees giving notice under USERRA and other laws allowing for job-protected leave.

Many counties in Texas have been declared in a state of emergency following Hurricane Harvey. While this does not provide pay or other protections for Texas employees, the Texas Workforce Commission advices that “absences due to closure of the business based on bad weather or other similar disaster or emergency condition should not count toward whatever absence limit a business has” —particularly for nonessential employees. On the other hand, if other employees are able to make it in to work (including workers from similar areas), absences for personal reasons may count toward an absence limit. On balance, however, it is always advisable to discourage the discipline of any nonessential employees who are unable to report to work during a state of emergency.

Weathering the Storm Together

While legal compliance is important, there are other practical ways employers can help workers weather the storm and get back on track. Business owners should consider relaxing the usual telecommuting rules to allow affected employees to work from home as much as possible. To minimize financial hardship, employers should continue to process payroll in a timely manner. Consider providing pay advances, loans, or even advances for paid time off/vacation time to help employees offset unanticipated expenses for repairs and insurance deductibles.

To the extent possible, employers may consider offering employees paid leave for time spent volunteering to assist with disaster relief efforts. Employers can also implement a leave donation/sharing policy to allow employees to donate paid leave to employees who will use it to volunteer in relief services or for those otherwise affected by this terrible disaster.

For more information on this topic, please contact the authors, your Seyfarth Attorney, or any member of Seyfarth Shaw’s Wage and Hour Team.

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

Seyfarth Synopsis: By resurrecting reliance on the administrative/production dichotomy in FLSA administrative exemption cases, the Ninth Circuit is at odds with the California Supreme Court’s application of the state’s administrative exemption. California employers thus find themselves in a strange new world where the state construct is easier to understand and perhaps even provides a more favorable environment for California employers, particularly those with a service-oriented workforce.

Readers of the blog know that the Ninth Circuit recently exalted the status of the administrative/production dichotomy as an analytical tool for assessing whether employees satisfy the FLSA’s administrative exemption test. In doing so, the Ninth Circuit has created a peculiar situation in which California employees may satisfy the state’s administrative exemption—which the California Division of Labor Standards Enforcement says “shall be construed in the same manner as … under the Fair Labor Standards Act”—but be found nonexempt under the FLSA. Strange days indeed.

As we recently discussed, in McKeen-Chaplin v. Provident Bank, the Ninth Circuit applied the administrative/production dichotomy to invalidate the bank’s determination of exempt status. In doing so, the court stretched the definition of production work to encompass anyone whose job is “not so distinct from production” and concluded that the salient “question is not whether an employee is essential to the business, but rather whether her primary duty goes to the heart of internal administration—rather than marketplace offerings.”

In addition to setting up a circuit split begging for Supreme Court clarification, Provident Bank also stands in contrast to the California Supreme Court’s unanimous 2011 decision in Harris v. Superior Court and creates an intrastate conflict for California employers.

In Harris, the California Supreme Court considered the exempt status of insurance claim adjusters and, to the delight of many an employer, downplayed the administrative/production dichotomy as an analytical tool. Taking a more enlightened view, the Harris Court acknowledged that the dichotomy was outdated and not particularly useful in the context of a modern-day, post-industrial, service-oriented workplace. The case was ultimately remanded to the trial court for further proceedings in which the exempt status of the claims adjuster role was assessed in the context of the statutory language and appropriate federal regulations and with an understanding that “the [administrative/production] dichotomy is a judicially created creature of the common law which has been effectively superseded in this context by the more specific and detailed statutory and regulatory enactments.”

And while Harris left open the possibility that the administrative/production dichotomy could have some limited utility in the certain circumstances, Harris emphasized the dichotomy is “not a dispositive test” and should only be considered after the language of the statutes and regulations are assessed and compared to the specific duties and responsibilities at issue. But any state-gained peace of mind from Harris’s deemphasizing of the administrative/production dichotomy now appears short-lived as it stands in stark contrast to the murky federal fortification of the dichotomy in Provident. California employers now find themselves in a curious and frustrating position with no clear guidance on how to reconcile the divergent views of the state and federal courts.

Authored by Cheryl Luce

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Historically, Underwriters Have Been Found Exempt Under The Administrative Exemption

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

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

Ninth Circuit Denies Underwriters’ Administrative Exemption

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Authored by Alex Passantino

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

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

The issues on which the Department seeks comment are:

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

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

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

Authored by Holger G. Besch 

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

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

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