Wage & Hour Litigation Blog

Northern District of California “Shuts Out” Minor League Ballplayers’ Experts

Posted in Decertification

Authored by Eric Lloyd

Seyfarth Synopsis: Minor league baseball players took a swing at class certification, and they missed—badly.

In Senne v. Kansas City Royals Baseball Corp., et al., minor league baseball players across the country asserted wage and hour claims under the Fair Labor Standards Act (“FLSA”) and various state laws against Major League Baseball (“MLB”), the Commissioner of MLB, and a number of MLB franchises. The players sought allegedly unpaid minimum wages and overtime for “work” performed during the baseball season (such as travel to and from games and pre-game activities) and during the offseason (such as participating in spring training and offseason conditioning). The U.S. District Court for the Northern District of California conditionally certified the Plaintiffs’ proposed collective under the FLSA in October 2015.

Plaintiffs moved to certify their state law wage and hour claims in April 2016. In support of their class certification motion, Plaintiffs submitted declarations and testimony from two experts. Plaintiffs proposed that one of their experts would offer a damages model at trial based on estimates of the number of hours worked by each player during each work week in the class period. They further posited that these estimates would be based upon players’ responses to a survey devised by another expert, which asked players to provide information concerning the amounts of time they spent performing purportedly work-related activities. The Defendants asked the court to exclude the experts’ declarations and testimony on the ground that the proposed survey was flawed and would collect unreliable data.

The court denied Plaintiffs’ motion to certify their state law claims, and, decertified the FLSA collective. While this was obviously a welcome development for class action-weary employers, Chief Magistrate Judge Joseph C. Spero’s opinion stands out from other recent certification decisions given its extensive discussion regarding the use of representative evidence in class actions.

Judge Spero granted the Defendants’ motion to exclude Plaintiffs’ experts’ declarations and testimony, finding the proffered survey evidence to be “fundamentally flawed.” The court was troubled that the players’ survey responses would be unreliable insofar as the survey asked players to provide information concerning “mundane events” that may have happened years in the past, such as when they arrived and departed from a baseball stadium on a given day, whether their baseball-related activities were “rained out,” or whether they missed a practice due to injury or illness. The fact that no time records which could verify the players’ responses existed cemented the court’s conclusion that the survey data would be unsound. In addition, the court expressed concern that the survey responses would be tainted by self-interest bias given that “virtually all minor league players have a vested interest in the outcome of this litigation.”

The court also rejected the Plaintiffs’ argument that the U.S. Supreme Court’s recent decision in Tyson Foods, Inc. v. Bouaphakeo permitted the use of survey evidence given the absence of time records for the players. As Judge Spero noted, the players who comprised the putative class were not at all similarly situated—for instance, they played for different organizations, with different work requirements, in different states, with different laws—making it inappropriate to “paper over significant material variations [among the plaintiffs] that make application of the survey results to the class as a whole improper.” In other words, Tyson Foods was inapplicable because the players’ working conditions were simply too different to draw any reliable conclusions about class members’ claims based on purportedly representative survey evidence.

Senne is the latest case showing that courts are reviewing trial plans based on representative evidence with increased scrutiny, as discussed previously here. Judge Spero’s thorough 104 page opinion exposes a number holes in the use of survey evidence to support a trial plan—for instance, that it may be unverifiable and contaminated by the respondents’ self-interest—and it therefore provides employers with strong arguments to present in opposition to class certification.

Should Franchisors Become BFFs with WHD?

Posted in DOL Enforcement

Authored by Alex Passantino

Seyfarth Synopsis:  WHD is seeking to enter into compliance agreements with, among others, franchisors.  Whether an employer should take WHD up on their offer to sign on the line depends on a variety of considerations.

Expanding upon a relationship started in 2012, the U.S. Department of Labor’s Wage & Hour Division and Subway announced a voluntary compliance agreement earlier this week. Billed as an effort at increasing Subway’s social responsibility, the agreement details the steps WHD and Subway have decided will be mutually beneficial, including the following:

  • WHD will develop, with Subway’s assistance, compliance assistance materials for the franchise restaurant industry, which Subway will distribute to, among others, its managers and franchisees.
  • WHD will assist Subway in understanding the enforcement data related to its franchisees.
  • Subway will provide WHD with its annual disclosures to other government agencies, including the FTC.
  • Subway and WHD will explore options for franchisee compliance, including building alerts into the payroll and scheduling platform that Subway offers its franchisees.
  • WHD and Subway will meet quarterly to discuss franchisee compliance.
  • Subway may advise its franchisees of their obligations to comply with WHD’s investigative process.

In press releases and media statements accompanying the announcement, WHD Administrator David Weil revealed that WHD attempted to enter into similar agreements with other franchisors, and will seek to do the same in the future.

Should a franchisor—or any employer for that matter—enter into a voluntary compliance agreement with WHD? Ultimately, the answer to that question depends on a number of factors, and different employers likely will reach different conclusions. A couple of things to consider include:

Wage and hour compliance history. If the employer and its franchisees have had a solid compliance history—considering both WHD investigations and private lawsuits—there may be no need to invite WHD into the fold. If, on the other hand, there have been significant violation—particularly violations that have been publicly reported, it may be worth exploring. Media outlets reported that Subway’s franchisees had been investigated around 800 times in a three-year period, resulting in back wages of approximately $2 million. That type of negative publicity for the brand may have prompted the desire to reach an agreement to make every effort to ensure the brand and demonstrate “social responsibility.”

Joint employment. Entering into an agreement with WHD in which a franchisor takes additional responsibility for wage and hour compliance has the potential to be fraught with peril when it comes to joint employment. Although both Subway and WHD seem to insist that the agreement does nothing to shift the balance in any joint employment inquiry, whether it be under the FLSA, the NLRA, or any other law, it’s hard to see how the compliance agreement will not be used by parties seeking to establish joint employment. Indeed, another government agency (such as the NLRB) or a private plaintiff’s attorney is completely free to ignore WHD’s understanding of an agreement’s impact on joint employment.

Though it may be true in many cases that the agreement itself makes no changes to the analysis, in others it very well may. Presumably, entities at either end of the spectrum of concern—either those employers who are totally confident there will be no joint employment finding or those employers who believe the “cake is baked” on the issue—will be more likely to enter into an agreement. Those who are somewhere in the middle may be rightfully concerned that the agreement may be used against them to prove joint employment; at the very least, it will be one more item that needs to be explained away.

Other Benefits. It’s also possible that an employer’s participation in a voluntary compliance agreement with WHD can be used to help establish a good faith defense to liquidated damages, or to help oppose a plaintiff’s attempt to establish willfulness and a third year of damages. These efforts will necessarily be dependent on the nature of any alleged violation and its relationship to the agreement, but it would be difficult to paint an employer who meets with WHD regularly to discuss compliance, and who engages in the types of training activities contemplated by the agreement, as being reckless or indifferent to its obligations under the FLSA.

The decision to enter into a voluntary compliance agreement with WHD if presented with the opportunity—or to reach out directly to WHD to get the process started—is one that should be carefully and thoughtfully considered. It remains to be seen whether the Subway agreement will be the beginning of a trend or an isolated example of an employer willing to go where others are not. As additional agreements are announced and publicized, we will, of course, keep you posted.

Another Federal Court Thinks the DOL Is Out to Lunch On Tip Credit Rule

Posted in DOL Enforcement, Service Charges/Gratuities

Authored by Noah Finkel and Cheryl A. Luce

Seyfarth Synopsis: New decision from Northern District of Georgia rejects the DOL’s interpretation of the FLSA tip credit law. Holds that the FLSA does not regulate tips received by employees who are paid at least minimum wage.

Imagine that you are a restaurateur. You employ servers and bartenders who receive tips, but you pay them at least the minimum wage instead of the lower, minimum cash wage of $2.13 per hour. You are not taking a “tip credit” based on the tips your servers receive to bring them up to minimum wage. Instead, you’re directly paying the servers minimum wage (or more). If you reallocate the tips your servers receive, are you violating the FLSA?

Section 3(m) of the FLSA states that employees must retain all tips they receive if the employer takes a tip credit towards their minimum wage obligation. Prior to April 2011, courts held that Section 3(m) does not require employers to return tip money to employees if the employer does not take a tip credit. You, as the restaurateur, do not have to return tips your servers receive under the FLSA because you pay your them at least  minimum wage and the FLSA does not regulate your tip pool.

That was the case before the Department of Labor tried to regulate what the FLSA does not: tips received by employees who are paid at or above minimum wage. In April 2011, the DOL issued a rule that states, “Tips are the property of the employee whether or not the employer has taken the tip credit under Section 3(m) of the FLSA.” 29 C.F.R § 531.52. This DOL rule has been rejected by many district courts and the Court of Appeals for the Fourth Circuit, who agreed that the rule is not entitled to deference under Chevron or otherwise because the FLSA does not regulate tips of employees who are paid at least minimum wage. As we reported in February, however, the Court of Appeals for the Ninth Circuit went against the grain and upheld the rule in Oregon Restaurant and Lodging Association v. Perez. The Ninth Circuit concluded that because Section 3(m) is silent on whether employees who do not take a tip credit can reallocate tips received by employees, the DOL retained authority to regulate all tips, and the rule is reasonable and entitled to deference.

Recently, in Malivuk v. Ameripark, LLC, the plaintiff asked the Northern District of Georgia to adopt the Ninth Circuit’s approval of the DOL rule for valet attendants who received tips that were then reallocated by Ameripark to pay for overhead expenses. Ameripark argued that the DOL regulation is invalid under Chevron. The Northern District of Georgia agreed with Ameripark—and did not mince words in doing so. The court labeled the Ninth Circuit’s reasoning in Oregon Restaurant as “flawed” and stated, “The DOL Regulation violates the plain language of Section 203(m).”

Malivuk reaffirms that the DOL cannot exceed what the FLSA regulates. The FLSA regulates minimum wage and overtime pay, not wage payment like the laws of many states. If the DOL rule regulating tips received for employees who are paid at least minimum wage were to stay, it would fundamentally transform the FLSA into a wage payment law. The FLSA is not “silent” on how tips received by employees who are properly paid the minimum wage and overtime should be paid out; rather, the FLSA does not regulate these employees because it has no other remedies to offer them. The FLSA’s remedies are for payments below minimum wage and failure to pay overtime; it is not a wage payment law.

As the hospitality and other industries search for ways to share the tips collected by front-of-the-house employees like servers and bartenders with back-of-the-house employees like cooks, dishwashers, and janitors, the DOL’s far-reaching tip pool rule is an encroachment. Rulings like Malivuk allow employers to allocate tips in ways that suit their business needs.

 

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

Seyfarth Synopsis: The U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises, in which the court rejected Plaintiff’s theory and affirmed a district court’s order granting summary judgment in favor of Defendants.

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!