Wage & Hour Litigation Blog

How Contemplated Changes to the White-Collar Exemptions’ Duties Tests Could Reward Your Poor Performers…and What You Can Do in Response

Posted in DOL Enforcement

Co-authored by Louisa Johnson and Alex Passantino

As you have no doubt heard, the Department of Labor’s Wage & Hour Division (“WHD”) has proposed revisions to the regulations defining which of your white-collar employees qualify as exempt from the Fair Labor Standards Act’s overtime pay and minimum wage requirements. In addition to proposing that the minimum salary level for exemption be more than doubled (from its current level of $23,660 per year to approximately $50,440 in 2016), the WHD has asked the public to comment on (among other things) whether it should adopt a California-style bright-line test that requires employers to pay overtime to employees who devote more than 50% of their time to non-exempt work.

Although we remain optimistic that WHD will make no changes to the duties tests, it would be foolish to view WHD’s proposal as taking such changes off the table. Accordingly, it is important for employers to be thinking about what WHD might do, based on the questions asked in the preamble. Thus, it is worth noting that WHD’s question with respect to the California standard lacks any reference to language similar to California’s regulations defining executive and administrative exempt employees: “The work actually performed by the employee during the course of the workweek must, first and foremost, be examined and the amount of time the employee spends on such work, together with the employer’s realistic expectations and the realistic requirements of the job, shall be considered in determining whether the employee satisfies this requirement.” (emphasis added).

The absence of any reference to this language is a good example of why WHD, in the event that it chooses to make changes to the duties tests, should propose—through a supplemental or additional rulemaking—specific regulatory language, complete with an explanation in the preamble and an appropriate economic impact analysis. These issues are far too important to be left to speculation.

The language we reference above is an important counterbalance to California’s requirement that an executive or administrative exempt employee spend more than 50% of her time on exempt tasks. Why? Because of poor performing employees.

More often than not, it is a poor performer who sues his employer. Because poor performers are failing or refusing to perform the duties expected of them, they can testify with a straight face that they spent a high percentage of their time performing the same tasks as the non-exempt employees that they supervise. Similarly, it is easy for them to say that they did not perform many, if any, of the exempt duties that the employer’s job descriptions, training programs, and performance evaluations made clear they should perform.

The WHD’s current duties test cautions courts not to focus exclusively on the percentage of time an employee actually spends on various tasks; instead, it counsels consideration of which of the employee’s duties are the most important or principal tasks. Yet, even under this current duties test, some courts have been willing to find that poor-performing employees have been misclassified based on their own testimony that they did not actually perform the duties they were supposed to perform. In other words, some courts have effectively ruled that an employer must pay overtime (and thus more total compensation) to a poor-performing employee—due to his inability or unwillingness to perform the exempt duties expected of him—than to an employee in the same job position who is performing the duties expected of the job position. To describe such an outcome as an unfair result for employers and high-performing employees alike would be an understatement.

If not counterbalanced by the requirement that courts consider the duties an employee is expected to or supposed to perform, a change to a California-style, quantitative duties test only increases the likelihood that a poor-performing employee could endanger the exempt classification of a job position due to his inability or unwillingness to actually perform the duties required of his position.

What Can You Do To Avoid Poor-Performing Employees Undermining the Exempt Status of Their Job Positions?

First, if you are planning to comment in response to WHD’s Notice of Proposed Rulemaking, and, if you plan to address the questions related to the duties tests, you should note that any revisions to the duties tests for the white-collar exemptions that place a quantifiable limit on the amount of time that exempt employees can spend on non-exempt work, should be accompanied by language to the regulations making clear that, in quantifying the number of hours an employee spends on exempt and non-exempt work, an employer’s expectations for the job position and the duties the employee should have performed must be considered because poor performance or the refusal to perform should not permit an employee to escape exempt status.

Second, because poor performers have been able to undermine the exempt status of job positions even under the current version of WHD’s regulations, and will continue attempting to do so even if WHD does not revise the duties tests of the white-collar exemptions, you should consider how to reduce the risks that poor performers present. While the best methods for doing so will depend on several circumstances specific to your employees, organizational structure, and work environment, one or more of the following options will prove beneficial to most employers:

  • Clearly communicate to employees on a recurring basis through dissemination and re-dissemination of job descriptions, acknowledgments of competency requirements, training materials, counseling, and discipline the exempt duties you expect the employee to perform;
  • Implement a written performance evaluation process that evaluates employees based on the exempt duties they perform;
  • Include in the evaluation process a self-evaluation component where, again, the employees are asked to evaluate themselves on their performance of the exempt duties expected of them; and
  • Do not permit poor performers who fail to improve to remain in the exempt position.

Seyfarth Attorneys Update the 2015 Definitive Guide to Litigating Wage and Hour Lawsuits

Posted in Uncategorized

Seyfarth Shaw has updated its definitive guide to the litigation of wage and hour lawsuits. Co-authored by three Seyfarth partners and edited by the chair of the firm’s national wage-hour practice, Wage & Hour Collective and Class Litigation is an essential resource for practitioners. The unique treatise provides insight into litigation strategy through all phases of wage & hour lawsuits, and is now updated with additional significant cases through early 2015.

Among many other topics, the treatise’s authors examine how employers in multiple industries are targeted for wage-hour lawsuits and provide substantive, procedural and practical considerations that determine the outcome of such actions in today’s courts. Principally designed to assist employment litigators and in-house counsel, the treatise also proves useful to senior management seeking to fend off wage-hour actions before they strike.

Authors Noah Finkel, Brett Bartlett and Andrew Paley, who practice in the firm’s Chicago, Atlanta and Los Angeles offices respectively, as well as Boston-based Richard Alfred, who is Chair of Seyfarth’s National Wage & Hour Litigation Practice Group, are each experienced wage and hour litigators who have handled numerous collective and class actions asserting violations under both state and federal law.

Wage & Hour Collective and Class Litigation covers the complex rules surrounding all types of wage and hour lawsuits. These include claims under the Fair Labor Standards Act, claims under state wage and hour laws, or hybrid cases involving both, as well as special issues involving government contractors. It provides readers guidance around: how to respond to a wage and hour complaint; what to consider when deciding whether to remove a case to federal court; how to assess the particular merits of a claim; whether to settle; how to oppose plaintiffs’ motion to facilitate notice for conditional certification; what kinds of affirmative defenses are best; and how to tilt the odds in favor of the defense.

In its fifth update to the treatise, Wage & Hour Collective and Class Litigation features discussions of recent decisions from appellate and trial courts and their effect on wage and hour litigation, emphasizing the following developments:

  • The United States Supreme Court’s decision in Integrity Staffing Solutions v. Busk in which the Court held that time spent by employees going through anti-theft metal detectors at the end of their shifts was not compensable because it was not integral or indispensable to the employees’ principal activities.
  • The United States Supreme Court’s decision to hear Tyson Foods v. Bouaphakeo, a case that will provide the Supreme Court with the opportunity to clarify the extent to which Wal-Mart Stores, Inc. v. Dukes applies to FLSA collective actions.
  • Federal District Court decisions refusing to follow the California Supreme Court’s decision in Iskanian and ruling that the FAA preempts California’s rule against the waiver of PAGA claims.
  • The Ninth Circuit joining the First, Second and Third Circuits in requiring allegations that a plaintiff worked more than 40 hours in a given work week without being compensated for those additional hours to avoid a motion to dismiss, and the Eighth Circuit requiring proof of such conduct to avoid summary judgment.
  • A number of Federal District Court cases specifying how notice of conditional certification must be provided and what must be contained in the notice, including notifying potential class members that they could be liable for costs.

The 2015 update to Wage & Hour Collective and Class Litigation is published by American Lawyer Media’s Law Journal Press.  It is available online at www.lawcatalog.com.

The DOL’s New Proposed Overtime Rules and Part-Time White Collar Employees: Can the Fluctuating Workweek Method Solve the Problem?

Posted in Misclassification/Exemptions

Authored by Jacob Oslick

The big questions often have surprisingly simple solutions, staring right back at us:

  • If a tree falls in the forest, and no one hears it, does it make a sound? Sound exists as a mechanical wave of pressure, regardless of whether anyone hears it. 
  • What came first, the chicken or the egg? The egg. Evolution shows that, whatever came before the chicken, it assuredly hatched from an egg.
  • What is the answer to life, the universe, and everything? 42.  

Employers should keep this lesson in mind, when considering how to respond to the Department of Labor’s new proposed rules concerning the Fair Labor Standards Act’s so-called “white collar” exemptions (e.g., the executive, administrative, and professional employees). Many employers fear that the DOL’s proposed rules will make it impossible to pay part-time managers or administrative employees on a salary basis. This is because the DOL has proposed doubling the minimum salary needed to qualify for a white collar exemption from the current $455 a week ($23,660 a year) to $970 a week ($50,440). And very few part-time managers or administrative employees earn that kind of money, particularly in the retail and hospitality industries (think store or restaurant managers). Thus, many believe, the DOL’s rules might require employers to reclassify part-time white collar employees as hourly, non-exempt employees. This, in turn, would deprive employers of one of the major benefits to paying a salary: predictable, non-fluctuating wage costs. But if the DOL adopts its proposed rules, a little-used, largely ignored piece of the FLSA’s regulatory framework may provide a solution to employer fears: the “fluctuating workweek” method of calculating overtime.

The fluctuating workweek method permits employers to pay non-exempt employees a fixed salary, even if the employee’s hours fluctuate from week-to-week. 29 C.F.R. § 778.114. This method also permits employers to pay fluctuating workweek employees overtime at an additional one-half the regular rate of pay, instead of by dividing the salary by 40 and then multiplying that number by 1.5 for all overtime hours worked. To take advantage of this method, an employer need only: (1) tell the employer that the “fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number”; and (2) pay a salary large enough to ensure that fluctuating workweek employees earn more than the minimum wage. Id.

Using the fluctuating workweek method, employers could continue to pay part-time managers and administrative employees in the same way they do now, even if the DOL adopts its proposed rules. Like now, employers could continue to pay these employees a fixed salary (say, $500 a week), could continue to schedule them for 20, 30, or 35 hours week, could continue to schedule them for variable hours, and could even continue not paying these employees additional compensation if they work a few more hours than usual in a given week. Additionally, because fluctuating workweek employers are not technically overtime exempt, employers who use this method can avoid making mistakes about tricky, fact-intensive classification questionssuch as whether a particular employee exercises enough discretion and independent judgment to qualify for the administrative exemption.

From a human resources perspective, this kind of reclassification should not prove disruptive. Employers would just need to make clear, in writing, what these employees already knowthat their salaries cover all hours worked. Employers will, however, need to address some other complications. But most or all of these should be solvable.

For example, employers may need to carefully track hours for newly-classified fluctuating workweek employees, and they will need to pay overtime (albeit at just a half-time rate) if those employees exceed 40 hours a week. Yet neither of these concerns will pose a problem if employers schedule their fluctuating workweek employees comfortably below 40 hours a week, such as by limiting this method to part-time employees who regularly work only 25 or 30 hours a week. Similarly, the time-tracking requirements would not otherwise differ from reclassifying these workers as non-exempt hourly employeesexcept that, as hourly employees, small errors in tracking hours are more likely lead to liability. This is because, under the fluctuating workweek method, it is irrelevant whether an employee worked 23.2 hours or 23.4 hours in a given week. The salary covers everything.

One concern, however, may not be surmountable: the fluctuating workweek method is not available in every state. Some states, such as California, have expressly determined that the method does not comply with state wage-and-hour laws. In other states, such as Pennsylvania, negative case law makes relying on the fluctuating workweek a risky proposition at best. Accordingly, before adopting a fluctuating workweek method, employers should ensure that the method complies with all applicable state and local laws. Additionally, in states where the method is available, employers will need to ensure that they satisfy any state or local procedural peculiarities that might be impactedsuch as, for example, state laws requiring employers to provide notices, on wage statements, regarding a non-exempt employee’s hourly rate of pay.

The fluctuating workweek method also might not makes sense for everyone. For example, the weight of authority suggests that employers should not use the fluctuating workweek for employees who receive premium rates for work done on nights, weekends, holidays, and other undesirable shifts. Some creative plaintiff’s attorneys have further argued, based on an “out of context” DOL statement, that commissions and performance bonuses also invalidate the fluctuating workweek method. Wills v. RadioShack Corp., 981 F. Supp. 2d 245, 259 (S.D.N.Y. 2013) (rejecting this argument, and finding that employers who use the fluctuating workweek method can pay performance bonuses). Most of these attorneys have not had success with this argumentso far. But there is relatively little case law on the subject, leaving the issue somewhat unsettled. Employers who adopt the fluctuating workweek method should keep an eye out, as more courts address this issue.

On the whole, however, many employers will find that the fluctuating workweek method’s advantages will be well-worth these hassles. At least in most states, the answer to the question, How do we classify part-time white collar employees, if the DOL adopts its proposed new rules?, could be very simple: pay them a salary, just like you do now, but call them fluctuating workweek employees.

DOL Independent Contractor Guidance Targets “On-Demand” Companies

Posted in Independent Contractors

Co-authored by Robert S. Whitman and Adam J. Smiley

Last week, this blog reported on the guidance from the Department of Labor (DOL) regarding the classification of independent contractors under the FLSA. The 15-page Administrator’s Interpretation (AI) seeks to restrict the use of independent contractors by reading the FLSA’s definition of “employ” as broadly as possible and by tightening the requirements of the “economic realities” test used to evaluate worker classification.

While applicable to all businesses, the AI seems to specifically target the “on-demand” business model.

For instance, despite the fact that no one factor is supposed to be controlling, the DOL now finds “compelling” the first factor of the economic realities test: “the extent to which the work performed is integral to the employer’s business.” This may be problematic for many on-demand companies, as the service provided by their contractors may be deemed to be at the heart of the enterprise. This is the argument pursued in many pending legal challenges, including those against ride services and home cleaning businesses.

On-demand companies have argued that their core business is technology and that they simply connect customers with service providers through an app or website. Plaintiffs’ lawyers have disagreed, and the AI appears to side with the latter view by elevating the importance of this factor.

The AI also stresses that a “worker’s investment must be significant in nature and magnitude relevant to the employer’s investment … to indicate that the worker is an independent businessperson.” The AI does not include an acceptable ratio, and says only that a worker’s investment should not be “relatively minor.” It cites one case where a worker’s investment of $35,000 to $40,000—roughly the amount required to purchase and maintain an automobile—was dismissed as an inconsequential amount. This may be the DOL’s subtle way of taking aim at any on-demand company that utilizes drivers to provide transportation or delivery services, where the worker’s investment may be limited to an automobile.

Finally, given the spike in independent contractor lawsuits, many on-demand companies have chosen to decrease the amount of control they exercise over independent contractors as a preventative measure to avoid being sued (or better defend themselves if they are sued). However, the AI goes out of its way to minimize the importance of the “nature and degree of control” factor—seemingly in an effort to downplay the importance of the factor that on-demand businesses have worked to solidify.

Ultimately, the DOL’s intent to more aggressively police the classification of independent contractors will only heighten the scrutiny placed on the on-demand business model. We’ve already seen one major casualty: Homejoy, an on-demand cleaning service, recently announced that it was shutting down, saying that the “deciding factor” behind this decision was the four pending independent contractor lawsuits filed against the company.

The extent to which courts will defer to the AI, if at all, is likely to be the subject of much debate and litigation. But we anticipate that the plaintiffs’ bar will soon try to use the guidance as a binding precedent, especially in New York and California federal courts, where many on-demand tech companies are based. Company attorneys will likely argue that the DOL cherry-picked cases to support its argument, cite more reasonable interpretations of the FLSA and economic realities test, and ultimately argue that the AI should receive minimal deference. We will keep readers apprised as the courts have their say.

DOL Issues Guidance On Independent Contractor Classification Interpreting FLSA Broadly to Cover Most Workers as Employees

Posted in Independent Contractors

Co-authored by Richard Alfred, Alex Passantino, Patrick Bannon, and Adam Smiley

Today, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued its first Administrator’s Interpretation (AI) on the Fair Labor Standards Act (FLSA) in more than a year. As the Administrator, Dr. David Weil, had forecast in a speech last month, today’s AI discusses the important topic of independent contractor and employee classification under the FLSA. The AI is an unapologetic effort to restrict the use of independent contractors: “[M]ost workers,” the Administrator concludes, “are employees under the FLSA’s broad definitions.”

As background, an AI is an agency interpretation, and is not subject to the notice and comment process required for rulemaking, such as the Department of Labor’s proposal to amend the “white collar” exemption regulations. The extent to which courts should defer to the AI, if at all, is likely to be the subject of debate and litigation. It is clear, however, that the AI does not have the force of a regulation properly issued after notice and comment. The AI does not announce a new test for employee, as opposed to independent contractor, status. Rather, it grafts the multi-factor “economic realities” test that courts commonly use onto an extremely expansive reading of the FLSA’s “suffer or permit to work” definition of “employ.” In so doing, the Administrator’s analysis and examples further WHD’s recent efforts to investigate the use of independent contractors. Combined, WHD’s efforts indicate a significant hostility towards the use of independent contractors.

The result that the Administrator seeks is to severely restrict the use of independent contractors and to require businesses to reclassify those workers as employees subject to the minimum wage and overtime requirements of the FLSA as well as to other federal and state laws applicable to the employment relationship. The Administrator also notes that the same analysis of independent contractor versus employee status under the FLSA applies to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act.

The Administrator’s Interpretation relies on the “economic realities” test to assess whether an entity “suffers or permits to work” individuals who are entitled to the FLSA’s statutory protections. At the highest level, the AI states this test as “whether the worker is really in business for him or herself (and thus is an independent contractor) or “is economically dependent [on the business for which he or she provides services] (and thus is its employee).”

In the AI, WHD continues its use of six factors typically included in an analysis of the “economic realities” test, and restates its belief that no one factor is controlling or should be given “undue weight.” And, additional factors relevant to any particular situation may also be considered. The key is to determine whether workers have sufficient economic independence by operating a business of their own. These six factors include:

  1. The extent to which the work performed is integral to the employer’s business;
  2. Whether the worker’s managerial skills affect his/her opportunity for profit and loss;
  3. The relative investments in facilities/equipment by worker and the employer;
  4. The worker’s skill and initiative;
  5. The permanency of the worker’s relationship with the employer; and
  6. The nature and degree of control exercised by the employer.

Starting from the premise that “most workers are employees under the FLSA’s broad definition,” WHD rejects the parties’ understanding of their relationship, as well as whether they have an agreement regarding the nature of their relationship. As the AI states: “[A]n agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status.” (Emphasis supplied).

Instead, today’s AI reviews and considers each of these factors—emphasizing the extent to which the services at issue are integrated into the business of the entity receiving them and de-emphasizing whether the business has control over the service provider. Rather than simply restating the factors, however, WHD cherry-picks court decisions to support its position, ultimately concluding that the most important question is whether an individual runs a “truly independent business.”

Here are the key points made by WHD regarding each factor of the test:

Integral To Business: 

  • Although the AI notes that no one factor is controlling, this factor is described as “compelling,” and appears to have a heightened importance in the analysis.
  • Work can be found to be integral to a business “even if the work is just one component of the business and is performed by hundreds or thousands of other workers.”
  • How this factor applies will be especially important to the growing “on-demand” business model, which often involves an attempt to redefine the structure of an industry so that services that were once performed by employees are performed by independent service providers.

Potential For Profit/Loss: 

  • The guidance explicitly rejects the theory that a worker’s ability to work fewer or more hours at their own discretion equates to an opportunity for profit or loss.
  • An independent contractor’s opportunity for loss appears to now be a requirement under the test: “it is important not to overlook whether there is an opportunity for loss, as a worker truly in business for him or herself faces the possibility of a loss.”

Relative Investments: 

  • The “relative” investments between the worker and a business “matter” under the AI, and “the worker’s investment must be significant in nature and magnitude relevant to the employer’s investment…to indicate that the worker is an independent businessperson.”
  • This adds a quantitative analysis to the equation, but fails to provide an acceptable ratio—only that a worker’s investment should not be “relatively minor”; WHD then proceeds to dismiss the investment of $35,000 to $40,000 by a worker as, essentially, an inconsequential amount.

Skill/Initiative Requirement: 

  • The DOL’s guidance emphasizes a worker’s “business skill, judgment, and initiative” and not his or her technical skills under this factor.
  • This language seems to explicitly dismiss any consideration of a worker’s technical ability and would focus the analysis solely on the worker’s business acumen.

Permanency Of Relationship: 

  • The AI states that “the key is whether the lack of permanence … is due to the operational characteristics intrinsic to the industry.”
  • As an example, staffing agency workers were viewed as employees given the nature of the industry and the permanency in the working relationship.

Degree Of Control: 

  • The AI specifically de-emphasizes the importance of this factor and says it “should not play an oversized role in the analysis.”
  • A company’s exercise of control due to the nature of their business, regulatory requirements, or their desire to maintain high customer satisfaction are not permissible reasons to exert control over independent contractors and still indicate an employee relationship.
  • The fact that workers control the hours they work is “largely insignificant” where such freedom is typical in the worker’s specific industry.

Taken collectively, these views—supported by cases cited by WHD, but dismissing virtually all contrary authority—represent an effort to expand dramatically the “economic realities” test. Coupled with WHD’s proposed massive increase to the salary level required for the “white collar” exemptions—published less than 10 days ago—WHD’s actions have the potential to fundamentally alter countless business models, without Congressional activity, without proposed language (in the case of the duties tests for the exemptions), and, in this case, without any opportunity for the regulated community to provide its comments on WHD’s position.

Any business that uses independent contractors extensively or to receive services that are important to its success should review this AI and consider carefully how the WHD and courts applying the economic realities test would view its independent contractor relationships. A business that misclassifies an individual as an independent contractor may face significant exposure under the FLSA, including liability for any failure to pay at least the minimum wage for all time worked, failure to pay overtime for work in excess of 40 hours per week, violations of the FMLA and other statutes that borrow the FLSA’s definition of “employee,” and violation of the FLSA’s recordkeeping requirements. Failing the FLSA economic realities test may also indicate possible misclassification under other federal and state statutes, which may carry even greater exposure, including liability for failure to reimburse employee expenses, provide various employee benefits, withhold income taxes and FICA, pay unemployment insurance contributions, or provide workers compensation insurance coverage.

Lawsuits challenging workers’ classifications under the FLSA have become common; plaintiffs’ lawyers have challenged both individual classification decisions and new and old industry models involving independent contractors. The broad guidance issued by WHD today will likely be used by the plaintiffs’ bar to try to chip away at independent contractor classifications. Businesses and management-side practitioners should take inventory of those decisions that have a more reasoned and neutral application of the “economic realities” test and be prepared to use those cases—and not those cited in the AI—as a more appropriate view of the standard.

In addition, WHD has aggressively sought to enforce independent contractor standards through investigations and audits, which may ultimately give rise to lawsuits filed by the DOL. Indeed, WHD has requested budget increases for more than 300 new full-time enforcement positions, and has provided millions of dollars for worker misclassification detection and enforcement initiatives. On top of that, of course, are the back wages WHD has recovered for newly-determined employees. And as we’ve previously reported, the spike in “on demand” services available via smart phones has created a wave of independent contractor misclassification lawsuits that has greatly increased the visibility of this issue.

Taking the long view, Dr. Weil’s guidance is also in keeping with the WHD’s apparent goal of affecting widespread change in the manner in which U.S. businesses designate workers as independent contractors. Indeed, Dr. Weil has previously written that, “we need to create ripple effects that impact compliance far beyond workplaces where we physically conduct investigations, or organizations to which we provide outreach directly. We need to continue to find ways to make our investigations of one employer resonate throughout that particular sector and influence the behaviors of employers across the entire industry … .”

Ultimately, the AI is consistent with the DOL’s stated intent to aggressively challenge independent contractor classifications. The guidance  now makes it likely that DOL investigations and enforcement actions and private litigation contesting the classification of such workers will intensify. Businesses should, therefore, carefully evaluate the DOL’s guidance and its potential impact on their operations. We will continue to inform our clients and the broader employer community about the effect of the AI and to blog about these issues at www.wagehourlitigation.com.

“On-Demand” Litigation Heats Up This Summer

Posted in Independent Contractors

Co-authored by Robert S. Whitman and Adam J. Smiley

This blog recently reported on the first wave of lawsuits challenging the classification of independent contractors in the “on-demand” economy. The second wave has now arrived, as numerous tech companies have been hit with class or collective action lawsuits alleging misclassification of their workers, most filed by the same plaintiffs’ attorney who avoided summary judgment against Uber and Lyft earlier this year.

The rundown:

  • Washio, an on-demand laundry service, was sued in San Francisco federal court by a driver alleging California state law wage violations;
  • A group of bike and vehicle couriers for Shyp, a package delivery company, brought a claim for arbitration alleging California state law wage violations;
  • Handy, a cleaning and “handyman” service provider, was sued in Massachusetts federal court by a Boston-area cleaner who alleges violations of the FLSA and Massachusetts wage laws;
  • Postmates, a general delivery service, was sued by a group of foot, bicycle, and vehicle couriers in San Francisco federal court alleging violations of the FLSA, as well as California, New York, and Massachusetts wage laws; and
  • Lyft is immersed in litigation on two fronts, as a former driver just filed a class and collective lawsuit in Florida federal court alleging violations of the FLSA and Florida law.

These legal actions come on the heels of an eye-opening decision by the California Labor Commissioner, who ruled in June that a former Uber driver was an employee, not an independent contractor. This decision, which is not binding on any court and applies only to a single employee (and is subject to appeal), still created shockwaves and has led to widespread speculation about a similar ruling in the class-action lawsuits pending against Uber and Lyft in federal court. (Uber is opposing class certification in its litigation and on July 9 submitted statements from over 400 drivers.)

Meanwhile, the U.S. Department of Labor, fresh off its proposed amendments to the FLSA’s “white collar” exemptions, has indicated that it will issue guidance regarding the independent contractor classification. This guidance will come sometime this summer in the form of an “Administrator’s Interpretation,” according to David Weil, head of the DOL’s Wage and Hour Division. While we can’t predict the exact content, we anticipate that the AI will tighten the requirements of the independent contractor classification, which would be consistent with the DOL’s aggressive enforcement in this area.

These developments are critical if you’re an on-demand business, or are thinking of rolling out on-demand services. If you utilize independent contractors, it is imperative to properly evaluate the service relationship to ensure compliance with the law.

Stay tuned for more developments.

Fifth Circuit Fires at the Department of Labor with Colorful, Precedential Prose

Posted in DOL Enforcement

Authored by Kevin Fritz

“Erroneous”
“Vindictive”
“Indefensible”
“Disruptive”
“Debacle”
“Belligerent”
“Botched”
“Dubious”

. . . and these words are only from the first seven pages of the opinion.

The Fifth Circuit Court of Appeals recently slammed the United States Department of Labor with a finding of abusive conduct and ordered an award of significant monetary sanctions for bad faith, harassment, and abusive litigation. In what is notably a colorful opinion, a unanimous three-judge panel of the Fifth Circuit Court of Appeals found that the Department of Labor acted in bad faith during its 2010 probe and subsequent litigation with Gate Guard Services: a Texas security company that provides guards at oil drilling sites.

Backdrop

In 2010, the Department began a formal investigation after a government investigator received a tip from a drinking companion and former employee of Gate Guard. The “tip” led to a $6.2 million penalty, claiming the Company misclassified its employees as independent contractors and owed back pay for minimum wage and overtime violations to its 400 gate attendants. The Department later lowered the back wages to $2 million, but that did not prevent the Company from suing the government in the U.S. District Court for the Southern District of Texas to overturn the penalty.

Claiming that the labor department investigator failed to ask basic questions, improperly interviewed workers, and shredded/burned handwritten notes, in 2013, the district court sided with the Company and ruled that the gate attendants were independent contractors – not employees entitled to minimum wage and overtime. Soon after, the department was ordered to pay Gate Guard nearly $600,000 to cover legal fees.

Enter the Fifth Circuit and its Colorful Prose

$600,000 was the wrong amount according to the Court of Appeals. Writing for the unanimous panel, Judge Edith Jones descriptively noted that at nearly every turn, the investigation and prosecution violated the Department’s internal procedures and ethical litigation practices.

From the deliberate destruction of evidence and ambushing low level employees for interviews without counsel to demanding inflated penalties and unnecessarily opposing routine motions, the Fifth Circuit fired – and hit – the bull’s-eye of the government’s abuses, and pulled out all the stops in describing the government’s misconduct.

“The government’s extraordinarily uncivil and costly litigation tactics strongly suggest that it hoped to prevail by oppressively pursuing a very weak case,” Judge Jones wrote. The government pressed on even after it discovered its lead investigator based his conclusions on just three interviews, destroyed evidence, and demanded a “grossly inflated” multimillion-dollar penalty, according to the ruling. Once in litigation, the government opposed routine motions, refused to produce evidence, and “stonewalled” the deposition of its lead investigator, the appeals court found.

Gate Guard will now return to the lower court to determine how much more money it will receive.

Repercussions

Coming on the heels of the Second Circuit’s recent rulings in intern wage cases against the Hearst Corp. and Fox Entertainment Group Inc., last week was not a good week for the Department of Labor.

Assuming the Department’s investigators and attorneys follow its own procedures, hopefully a colorful ruling like this won’t again be necessary. But in the Fifth Circuit at least, the ruling will likely lower the bar to bring bad faith claims against the government when its investigators or attorneys do not comport with the standards expected of them.

Agents Can’t Insure Class Treatment – Varied Experiences Require Decertification

Posted in Independent Contractors, Overtime, Rule 23 Certification, State Laws/Claims

Authored by Kara Goodwin

Last week, a federal district court decertified a Rule 23 class of more than 1,000 insurance agents who claimed that Bankers Life and Casualty Co. misclassified them as independent contractors, and, as a result, they were entitled $16.9 million in overtime damages under the Washington Minimum Wage Act. In decertifying the class, the court held that “[d]etermining whether class members are employees or contractors under the economic-dependence test” — the same “economic reality” factors typically applied under the Fair Labor Standards Act — “would require an individualized inquiry into each agent’s experience,” meaning “individualized fact questions predominate over common ones” and “[c]lass treatment would be unmanageable.”

Although the procedural history of David et al. v. Bankers Life & Casualty Co. is unique —initially brought in state court; removed under CAFA; remanded where the amount in controversy was not established; state-wide class of 1,000 agents certified, after which plaintiffs asserted a claim for damages exceeding $16.9 million; removed again under CAFA; defendant moved to decertify class — the underlying class certification issues are familiar: whether the common evidence presented provides for a class-wide answer to resolve the misclassification issue “in one stroke” and whether common questions predominate.

Plaintiffs offered the standard form contract that all agents were required to sign and 21 declarations to show that agents operated under a “common regime of control,” which, they argued, supported class certification. Bankers, in turn, relied on declarations from 50 current agents and several managers to demonstrate that many agents had very different experiences from those described by the plaintiffs. Bankers also explained why its declarants had such different experiences from plaintiffs’ declarants, including that the more successful and established agents enjoy greater independence, and that the named plaintiffs and certain declarants enjoyed less independence because of the management style of a particular former supervisor, a style not shared by other supervisors.

As a preliminary matter, the court rejected the plaintiffs’ argument that the defendant’s so-called “happy camper” declarations should be discounted because the declarants were current employees presumably testifying in a light favoring their employer to avoid professional reprisal. Instead, the court relied heavily on the varied experiences described in the declarations, especially as to each agent’s ability to regulate his own hours, to conclude that there was no commonality and that determining whether class members were employees or contractors would require a “mini-trial” on each agent’s experience — i.e., “common issues cannot predominate.”

Also significant was the court’s rejection of the standard form contract as “common evidence,” stating that such evidence is insufficient to support class certification “in light of agents’ varied experiences.” The court also rejected the argument that class certification was appropriate because, even if at differing levels, Bakers had some level of control over all of the agents, concluding that such control “does not strongly suggest that all agents are employees” because any company using a contractor will have “some control over his performance by nature of its power to fire him.”

This case is a powerful testimonial for the use of targeted declarations to highlight differences among class members. The decision undoubtedly will help many employers build their strategy and defenses to class and collective certification.

From Stanley Cup to Ante Up: Minimum Wage Increase Sweeps Chicagoland

Posted in City/Local Ordinances

Authored by Abad Lopez

Starting July 1, 2015, the minimum wage in the City of Chicago is $10 per hour. The Chicago City Council approved an ordinance that also increases the city’s minimum wage in successive increments through July 1, 2019. By enacting this ordinance, Chicago becomes one of the largest U.S. cities to adopt such a measure—following a trend that threatens to sweep the nation. This substantial wage increase adds to an already complex and burdensome landscape for employers in the Chicagoland area, which includes a recently enacted Cook County Wage Theft Ordinance that can strip employers of their business license for violating any wage laws.

In the Chicago Ordinance, the coverage for employees is broad—including all individuals and business entities that maintain a business within the city limits and/or are subject to license requirements of Chicago. What’s more, the ordinance applies to employers employing as few as one covered employee, which is defined as any person who spends two or more hours working in the City of Chicago in any two-week period. And with respect to “working,” travel time to sales calls and for deliveries is compensated time if done within Chicago’s city limits.

Going forward, the City minimum wage will increase all the way up to $13 per hour by July 1, 2019. Tipped employees also get a raise—the ordinance increased their new rate based on the state or federal minimum wage—whichever is greater—plus $.50. This increases to an additional $1 per hour starting July 1, 2016. Starting each July 1 from 2017 and onward, tipped employees are entitled to the highest of federal, state, or city minimum wage for tipped workers from the year prior. Practically, the tipped minimum wage, which is currently $4.95 at the state level, will increase to $5.95 by 2016. The Ordinance also mandates that employers post a notice of these changes at their business facility. A copy of that notice can be found here. Employers face civil fines of between $500 to $1,000 for each offense. Employees can also file civil lawsuits under this Ordinance, in which they can recover up to three times the amount of underpayment, in addition to attorney fees and costs. What’s more, the City can deny a business license to any employer for committing three violations of this Ordinance within the last 24 months.

This adds to the pitfalls in the Cook County Wage Theft Ordinance, which threatens stiff sanctions for any wage law violations. Under this ordinance, effective since May 1, 2015, any employer who has violated state and federal wage laws, including the Illinois Minimum Wage Law or other federal or state laws (including from other states) will be ineligible to hold a Cook County business license. There is a five-year look back period, so any violations in the preceding five years carry the same consequences. What does this mean? According to the Cook County Ordinance, if there was a wage violation outside of Cook County or even in another state, employers could lose their Cook County business license, among other potential consequences.

To avoid liability and harsh penalties, employers should determine which employees will be affected by both ordinances, revise pay ranges for any covered employees, and comply with the notice requirements. Employers should also take heed—and generally be wary of local wage ordinances—which are likely to be enacted throughout the U.S. with greater frequency and, like the Chicagoland ordinances, may include traps for the unwary with potentially drastic consequences.

Second Circuit Teaches Unpaid Interns a Lesson

Posted in DOL Enforcement, Misclassification/Exemptions

Co-authored by Robert Whitman, Adam Smiley, and Meredith Kurz

In a closely watched case affecting the viability of unpaid internship programs at for-profit employers, the Second Circuit held that the “primary beneficiary” test should be used to decide whether interns should be deemed employees or trainees. The court also held that this test requires highly individualized inquiries — a conclusion that may deal a blow to plaintiffs’ abilities to obtain class or collective certification in these cases.

The plaintiffs in Glatt v. Fox Searchlight Pictures, Inc., served as unpaid interns for the film production company, including on the movie Black Swan. 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 entitled to compensation 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.

The Second Circuit vacated those rulings. On the question of employee status, the court declined to defer to the Department of Labor’s 6-factor test, holding that it is “too rigid” since it was based on a 68-year old Supreme Court decision involving railroad trainees and was not entitled to special deference. The court also declined to adopt the interns’ proposed test, under which employee status would exist whenever the employer receives an “immediate advantage from the interns’ work.”

Instead, the Second Circuit held that the primary beneficiary test provides a more appropriate framework by focusing on “what the intern receives in exchange for his work” and providing “the flexibility to examine the economic reality as it exists between the intern and the employer.”

Rather than using a rigid set of factors to evaluate the internship, the court fashioned a flexible, non-exhaustive set of considerations:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee – and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The court specifically noted that courts may consider relevant evidence beyond the specified factors in appropriate cases. Further, these considerations require a “weighing and balancing [of] all the circumstances,” no one factor is dispositive, and “every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage.”

At the heart of the decision is the notion that a legitimate internship program must “integrate classroom learning with practical skill development in a real world setting,” and that focusing on the academic aspect of an internship program is critical and better reflects the modern workplace. The court also appeared to recognize that for any meaningful internship experience, the intern must do some “work.” With this understanding, the court said that interns may perform work so long as it “complements” rather than “displaces” the work of the company’s regular employees.

On the question of class and collective certification, the court held that “the question of an intern’s employment status is a highly individualized inquiry” given the nature of the primary beneficiary test. Even under the FLSA’s more lenient standard, it said, the interns were not “similarly situated” to each other because of the “individualized aspects of [their] experience,” especially given the nationwide scope of the proposed collective action.

Through a summary order, the Second Circuit also upheld a Southern District of New York decision that denied class certification in Wang v. Hearst Corp., a tandem internship case.  Putting a finer point on the certification issue than in Glatt, the court held:

As we have framed the relevant inquiry, courts must analyze how the internship was tied to the intern’s formal education, the extent of the intern’s training, and whether the intern continued to work beyond the period of beneficial learning. Irrespective of the type of evidence used to answer them, these questions are individual in nature and will require individual analysis. . . . Therefore, because of variation in the proposed class and the need for individual analysis of each intern’s situation, common questions do not predominate over individual ones.

***

So what does this all mean?

First, the DOL’s 6-factor test, at least in the Second Circuit, is no longer valid. As the court said, “[B]ecause the DOL test attempts to fit [the Supreme Court’s railroad decision’s] particular facts to all workplaces, and because the test is too rigid for our precedent to withstand, we do not find it persuasive, and we will not defer to it.”

Second, the decision makes clear that interns may perform some “work” so long as the work does not displace an employee. While no bright line exists, interns may likely be assigned projects that help current employees do their work more effectively. However, the amount of work should be weighed in the context of the entire intern program to ensure that the scale still tips toward the intern being the primary beneficiary of the program.

Third, the educational component of the internship is a critical factor. Companies’ programs should emphasize training and educational opportunities, such as speaker series, mock projects, information sessions, open door policies to ask questions about the industry, and attendance at industry conferences or events. The greater the educational component of the program, the more likely that the interns will be the primary beneficiaries.

Fourth, the recent wave of internship cases may have crested and crashed, based not only on the Second Circuit’s decision on the merits, but as much or more because class and collective certification has become more difficult. Plaintiffs’ lawyers may now decide to forego cases where the inherent individual inquires necessary to evaluate interns’ experiences mean that certification will be difficult or impossible.

Stay tuned for more developments as we see how courts in the Second Circuit implement this decision and how it affects lawsuits currently filed, as well as the frequency of new lawsuits.