Misclassification/Exemptions

coins-currency-investment-insurance-128867Co-authored by Robert S. Whitman and Howard M. Wexler

With employers about to ring in 2017, the New York State Department of Labor—with only two days to spare—has finalized regulations to increase the salary threshold for exempt status. The regulations, originally introduced on October 19, 2016, take effect on December 31, 2016.

Employers were hopeful that the State would abandon (or delay) these regulations given the now-enjoined U.S. Department of Labor’s overtime exemption rules that were set to go into effect on December 1, 2016. In response to such concern, however, the State DOL noted, “this rulemaking is not based on, or related to, the federal rulemaking concerning salary thresholds…this rulemaking is required by law and non-discretionary. Its purpose and effect is to maintain the longstanding historical relationship between minimum wage and salary threshold amounts…”

In keeping with the upcoming gradual increase in the State’s minimum wage levels, the new tiered salary thresholds for exempt status across the state will be:

Large Employers (11 or more employees) in New York City

  • $825.00 per week on and after December 31, 2016;
  • $975.00 per week on and after December 31, 2017; and
  • $1,125.00 per week on and after December 31, 2018.

Small Employers (10 or fewer employees) in New York City

  • $787.50 per week on and after December 31, 2016;
  • $900.00 per week on and after December 31, 2017;
  • $1,012.50 per week on and after December 31, 2018; and
  • $1,125.00 per week on and after December 31, 2019.

Employers in Nassau, Suffolk, and Westchester Counties

  • $750.00 per week on and after December 31, 2016;
  • $825.00 per week on and after December 31, 2017;
  • $900.00 per week on and after December 31, 2018;
  • $975.00 per week on and after December 31, 2019;
  • $1,050.00 per week on and after December 31, 2020; and
  • $1,125.00 per week on and after December 31, 2021.

Employers Outside of New York City, Nassau, Suffolk, and Westchester Counties

  • $727.50 per week on and after December 31, 2016;
  • $780.00 per week on and after December 31, 2017;
  • $832.00 per week on and after December 31, 2018;
  • $885.00 per week on and after December 31, 2019; and
  • $937.50 per week on and after December 31, 2020.

In addition to the increased salary levels, the new regulations adjust the amount employers can deduct for employees’ uniforms and claim as a meal and tip credit in line with the gradual increase of the minimum wage toward $15. There is a tiered system for these changes as well depending on the employer’s location.

Authored by Alex Passantino

It’s the week before Christmas; ’16’s nearly done.
As we sit back and ponder the Year of 541.
The journey’s been long; it’s taken some time.
What’s happened thus far? Let us tell you in rhyme.

As the year drew anew, we sat with breath bated,
While within DOL they discussed and debated.
Should we take our proposal and set it on fire?”
“Take the percentage of time test and set the bar higher?”

“No, we meant what we said and we said what we meant,
We’ll still increase the salary, but we’ll change the percent.”
“Messing with duties will cause us nothing but trouble,
So just take the old salary, and make the new one be . . . double.”

From the moment it published, the rule came under attack.
Even Congress started plotting to take it all back.
But summer it came, then autumn did too.
And raises or OT would be in on 12/2.

With communications all drafted . . . maybe one last correction,
The narrative changed with November’s election.
Might the rules be undone by a Trump Administration?
Or would December’s due date cause such plans great frustration?

We considered . . . while preparing for our Turkey Day function,
When a court in East Texas stopped the rules by injunction.
A week before kickoff. For some ‘twas too late.
For others, they scooped up their plans and yelled “Wait!”

With more motions, appeals, and attempts to intervene,
We look at it all and ask “What does this mean?”
There’s gossip, speculation, and some wack-a-doo theories.
Apropos for a year when the Cubs won the Series.

We’ll know when we know, maybe a few days before.
More excitement is what ‘17 has in store.
But before we look forward, we’ll take one last look back.
Because wage-hour issues this year did not lack.

Some employers may feel there’s less cause for concern
When facing a lawsuit filed by an intern.
And as they consider which students their program will host,
Pay special attention to who benefits most.

California, of course, continued its wage-hour saga.
Whether sitting or standing or some thing they call PAGA.
And if plaintiffs have no trial plan, make sure you get your shots in,
Before calculating piece rate using IBM’s Watson.

Turning back east, we recall how DOL’s year went,
Beginning with January’s missive about joint employment.
A description of vertical and horizontal relations,
Should it “meet with an accident,” there’ll be standing ovations.

Spring brought a trip to SCOTUS for the service advisor.
DOL changed the reg; its explanation? “We’re wiser.”
But for positions the agency has held very long,
The Supremes told the Department “Hey, you’re doing it wrong.”

The rest of the year deserves more time to expound.
From exempt underwriters to permission to round.
And here’s hoping that someday the world will just get it,
And create a singular rule that involves the tip credit.

Decertification. Half-time. Franchise compliance.
A wide breadth of issues that appear with reliance.
But the future’s a mystery, so with great anticipation,
Happy New Year, and Thank You — Love, wagehourlitigation.

Authored by Seyfarth’s Wage & Hour Litigation Practice Group

Late Tuesday afternoon, Judge Amos Mazzant of the United States District Court for the Eastern District of Texas issued an order enjoining the U.S. Department of Labor’s implementation and enforcement of the new overtime exemption rules that were set to go into effect on December 1, 2016. The court granted a motion for preliminary injunction filed by the attorneys general of 22 states, in which the states argued among other things that the new rules were unlawfully promulgated and would be likely to cause irreparable harm to the states that requested the injunction. The court also considered amicus arguments made by various chambers of commerce and trade associations, which filed a companion case asserting similar and separate grounds for overturning the DOL’s new rules. Although the court’s order leaves some room for confusion on this point, it appears to apply to all public and private sector employers nationwide.

Although an important and exciting step in the right direction, this is not the final word.

First, this is a temporary injunction. It contains strong suggestions of what the court might ultimately do with a final determination regarding whether to invalidate the new rules. It explains various reasons why the rules are unlawful. But, at this time, all of those reasons and the results they might ultimately justify are preliminary.

Second, unlike most pre-judgment orders, an order granting or denying a preliminary injunction is immediately appealable. On appeal, the appellate court applies an abuse of discretion standard. Generally speaking, a court abuses its discretion by (1) committing an error of law, such as applying an incorrect legal standard, (2) basing the preliminary injunction on a clearly erroneous finding of fact, or (3) issuing an injunction that contains an error in form or substance. There are aspects of the court’s order that the federal government might argue prove each of these points. But it is fair to say that the Fifth Circuit Court of Appeals, which is the court that would hear the government’s appeal, rarely overturns orders granting preliminary injunctions. Within the past several decades, it has done so very few times.

Third, if it does not win reversal of the district court’s order in this case, it is conceivable that the government would seek review by the U.S. Supreme Court. Even if the Court of Appeals were to reverse, the States and Associations could petition the Supreme Court for review. Given the current composition of the Court, a 4 – 4 decision would leave the Fifth Circuit’s decision intact, leaving open the possibility that other Circuits, when confronted with the issue, could rule differently. That would create a difficult dilemma for employers that operate in multiple states across the country.

Fourth, if the plaintiffs ultimately prevail in securing the court’s judgment that the DOL’s new rules are unlawful, the federal government will have another opportunity to appeal. With the passage of time necessary for the parties to litigate their respective positions through judgment and then to wind their way through the appellate process, it is hard to predict whether an appeal would actually follow. The new administration, its new Secretary of Labor, and its new Solicitor of Labor would likely have much to consider by that point. And this sets aside for the moment the possibility that the congress will successfully pass—and the new president will sign—a Congressional Review Act resolution, mooting the need for further litigation at all.

To put it simply, the court’s ruling on Tuesday creates a significant amount of uncertainty that is going to last for a while longer. And it begs the enormous question: What should businesses do in reaction to the court’s preliminary injunction?

Many businesses are very far along in their plans to comply with the new rules by December 1. Many have already begun their communications with employees whose pay or classification would be impacted because of the new rules. Some have already effected changes impacting those employees. Further, those businesses that had not taken steps to comply have employees who have almost certainly heard about the rules and have assumed they would soon receive raises or become overtime eligible.

In that light, the injunction—though heralded as a positive development for businesses—has the potential to create significant risk and disruption. A careful hand is required. Obviously there is much to consider and much more to do. But here is a deft starting point:

  • If changes are about to be made, consider whether they can be postponed while stakeholders decide what further steps should be taken. The decision whether to postpone changes and what further steps to take must account for any payroll, timekeeping, and human resources changes are in progress. Can those changes be stalled as well, without unacceptable costs and other business disruptions?
  • If communications are set to be distributed to employees who would be impacted by the December 1 rule, postpone them while stakeholders develop their next steps plan.
  • If changes have not been made but communications have been distributed or begun, consider whether a revised communication plan can be executed while postponing the changes that have not yet been made. Any revised communications plan should begin with the fundamental explanation that: A federal court in Texas has issued an order that makes it uncertain how the FLSA’s overtime pay exemptions apply to employees who would be impacted by the new rules that were to go into effect on December 1. Because of the court’s order, those rules will not go into effect as expected. To ensure that it is able to follow the laws that govern how employees are paid under the FLSA, the company has revised its plans and will be reporting back to you soon about how this will impact you.
  • If communications have been distributed and changes have been made, stop and consider carefully how to proceed. Because this is an extremely positive result achieved by the plaintiffs in Texas, some business may be excited to quickly undo the changes that they made. Caution and care are advisable.
  • Employees who have been reclassified from exempt to nonexempt status or who have received pay raises will have begun to acclimate to their new status and pay. An abrupt change could cause them to seek assistance from a plaintiff’s lawyer, and could open a Pandora’s Box of potential (hopefully unjustifiable) claims.

For businesses that have not done anything to prepare for the December 1 rule, keep your eyes and ears open for further developments.

Of course, these are also not the final words on how businesses should adapt their actions to the turbulence that this otherwise positive court ruling could cause. What is important is that business stakeholders consider carefully what their next steps will be and to weigh carefully the costs and benefits of available options. A careful plan will help to avoid further business disruptions, unhappy workforces, and plaintiffs’ lawyers.

Capitol HillAuthored by Alex Passantino

As the nation waited for the final states to be called in the early morning hours on Wednesday, we here at the Wage & Hour Litigation Blog focused on our one thing:  what impact would the result have on the DOL’s overtime exemption regulations scheduled to go into effect on December 1, 2016?  How does the election of a Republican House, a Republican Senate, and President-Elect Donald Trump change what employers should be doing as we speed towards the December 1 deadline?

The short answer is that — at least for the near-term — employers should continue the same way as they have been, with a laser focus on being in compliance by December 1.

That being said, there are a couple of ways that the regulations can be stopped before December 1.  And there are a couple of others that may change the game after December 1.

The first path is through the Eastern District of Texas.  As we have reported previously, 21 states and dozens of trade associations filed separate lawsuits (which since have been consolidated) challenging the overtime exemptions rules on a variety of grounds.  A hearing on the states’ motion for injunctive relief is scheduled for next week, on November 16.  The trade associations are being permitted to participate as amici in the states’ case, and also have filed an expedited motion for summary judgment.  It is possible that the judge will enjoin the rules in advance of the December 1 effective date.  As is the case with most litigation, however, that result is less than certain.

A second pre-December 1 path to stopping — or at least delaying — the overtime exemption regulations is through Senator Alexander’s Overtime Reform and Review Act, S. 3464.  That bill would — by statute, not by regulation — increase the salary level to $692 per week on December 1, 2016, then increase it again in 2018, 2019, and 2020 until it hit $913/week.  The bill also contains special provisions protecting nonprofit, state and local government, and education employers from salary increases unless certain conditions are met.  Although the Senate has been expected to take up the bill upon return to Capitol Hill, the short legislative calendar and the threat of a veto by President Obama pose significant hurdles to relief before the December 1 deadline.

Once we get into 2017, there are additional tools at the disposal of Congress and a Trump Administration.  With the new salary level taking effect nearly eight weeks before Inauguration Day, however, there will be substantial political calculations involved in any use of those tools.

One tool is the seldom-used Congressional Review Act, a law that allows Congress to review and disapprove new agency regulations within prescribed time periods.  Congress could pass a “resolution of disapproval” of the new regulations that would have the effect of rescinding the rules.  Under the CRA, any regulation issued within the final 60 legislative days before Congress adjourns sine die is treated as having been issued on the 15th legislative day of the next session of Congress.  This allows the CRA resolution to be considered by the new Congress and, in this case, the new President, which makes it much more likely that the resolution will be successful.  Because the final 60 legislative days can be counted only in retrospect, the regulations that might be subject to this procedure are unknown.  An early estimate placed the “deadline” at May 16, 2016.  The overtime exemption rules were issued on May 23, 2016, which would place them within the review period.  Whether they actually fall within that period depends on how much Congress is in session over the coming weeks.  Assuming the overtime exemption rules fall within the relevant period, in the next session of Congress, and after January 20, 2017, President Trump could sign the CRA resolution, which would make it as if the rules never existed.

Finally, we could see rulemaking by the Trump Administration, such as a notice-and-comment rulemaking revising the salary level downward and/or eliminating the three-year automatic update provision.  Going through the notice-and-comment process would be time-consuming and likely would not result in any relief on the salary level until well into 2017, at best.

Ultimately, employers should continue their efforts to be compliant by December 1.  There are far too many variables at this point to conclude otherwise.

NYDOLAuthored by Robert S. Whitman and Howard M. Wexler

As we all know, the revisions to the FLSA’s “white collar” exemptions will take effect December 1 and will increase the salary level required for the executive, administrative, and professional exemptions to $913 per week (or $47,476 per year).  Avid wage and hour practitioners in New York have been waiting to see if the State DOL would propose a similar increase for exempt status under the NY Labor Law.

The wait is over.

On October 19, State DOL proposed amendments to its existing wage orders that would increase the salary threshold from the current $675 per week.  In keeping with the upcoming gradual increase in the State’s minimum wage levels, the proposal would raise the salary threshold in tiers:

Large Employers (11 or more employees) in New York City

  • $825.00 per week on and after 12/31/16;
  • $975.00 per week on and after 12/31/17; and
  • $1,125.00 per week on and after 12/31/18;

Small Employers (10 or fewer employees) in New York City

  • $787.50 per week on and after 12/31/16;
  • $900.00 per week on and after 12/31/17;
  • $1,012.50 per week on and after 12/31/18; and
  • $1,125.00 per week on and after 12/31/19;

Employers in Nassau, Suffolk, and Westchester Counties

  • $750.00 per week on and after 12/31/16;
  • $825.00 per week on and after 12/31/17;
  • $900.00 per week on and after 12/31/18;
  • $975.00 per week on and after 12/31/19;
  • $1,050.00 per week on and after 12/31/20; and
  • $1,125.00 per week on and after 12/31/21;

Employers Outside of New York City, Nassau, Suffolk, and Westchester Counties

  • $727.50 per week on and after 12/31/16;
  • $780.00 per week on and after 12/31/17;
  • $832.00 per week on and after 12/31/18;
  • $885.00 per week on and after 12/31/19;
  • $937.50 per week on and after 12/31/20

If these salary thresholds are adopted, the minimum requirement for exempt employees in New York will surpass the federal threshold of $973 at various points in time, the earliest on December 31, 2017 for “large” New York City employers.  However, the FLSA salary levels are subject to automatic revision every three years, beginning in 2020, based on the 40th percentile of full-time salaried workers in the region in which the salary level is lowest (historically, the South).

In addition to the increased salary threshold, the proposed Wage Orders also adjusts the amount employers can deduct for a uniform allowance and claim as a meal and tip credit in line with the gradual increase of the minimum wage toward $15.

While these are proposed amendments, we expect they will be implemented given that they track the forthcoming minimum wage increases.  The Department of Labor will receive public comments until December 3, 2016.  We will update you once the regulations become effective.

 

Authored by Alex Passantino

Seyfarth Synopsis: Two lawsuits related to the Department of Labor’s revisions to the white-collar exemptions have been filed in East Texas.

The first lawsuit, citing (among other things) the severe impact the impending salary increase will have on state and local government budgets, was filed by the Attorneys General of Nevada, Texas, and 19 other states (the “State AG case”). The State AG case makes a Tenth Amendment-based challenge to Congressional application of the FLSA to states. It also argues that the DOL exceeded Congressional authority with respect to the salary test, the highly-compensated employee exemption level, and indexing. The State AG case also argues that the DOL failed to follow the Administrative Procedure Act and/or that the Department exceeded its Congressional delegation of authority.

The second lawsuit was filed by a broad coalition of Texas and national business groups and trade associations. This case alleges that the DOL exceeded its statutory authority under the FLSA, both by the dramatic increase in the minimum salary level required for exemption and by the provision that would require automatic updating of that level every three years.

Both cases seek a variety of declarations regarding the unlawfulness of the DOL’s actions, as well as temporary and permanent injunctive relief preventing the rule from becoming effective on December 1, 2016.

The filing of these cases, as well as recent efforts in Congress to stop the rule (or at least to revise it), may tempt some employers into taking their foot off the pedal with respect to ensuring compliance with the new salary level by December 1. As many have learned the hard way, however, legislation and litigation are less-than-certain solutions.

Employers should continue their efforts to be compliant by December 1. If we receive legislative or judicial relief at some point, it will be much easier to stop the process than it would be to start it much closer to the effective date. In other words, Congressional or judicial relief should not be your compliance strategy.

We will, of course, continue to keep you updated on the litigation and legislative efforts. In the meantime, keep your eyes on the December 1 deadline.

Authored by Rob Whitman

Seyfarth Synopsis: Unpaid interns for Hearst magazines have been rebuffed again in their effort to be declared eligible to receive wages under the FLSA and the New York Labor Law.

In an August 24, 2016 ruling, Judge J. Paul Oetken of the Southern District of New York held that six interns, who worked for Marie Claire, Seventeen, Cosmopolitan, Esquire, and Harper’s Bazaar, were not employees as a matter of law and granted summary judgment to Hearst. After reviewing each of their circumstances individually, the court held:

These interns worked at Hearst magazines for academic credit, around academic schedules if they had them, with the understanding that they would be unpaid and were not guaranteed an offer of paid employment at the end of the internships. They learned practical skills and gained the benefit of job references, hands-on training, and exposure to the inner workings of industries in which they had each expressed an interest.

The six named plaintiffs were the only ones remaining after the Second Circuit, in July 2015, denied their bid for class and collective certification. The court in that decision also articulated a new set of factors for determining whether unpaid interns at for-profit companies are “trainees” (who are not entitled to compensation) or “employees” (who must receive minimum wage and overtime premiums).

The Second Circuit’s decision adopted the “primary beneficiary” test to determine internship status—i.e., whether the “tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer’s operation.” Applying that test to the Hearst interns, Judge Oetken concluded, “[w]hile [the six plaintiffs’] internships involved varying amounts of rote work and could have been more ideally structured to maximize their educational potential, each Plaintiff benefited in tangible and intangible ways from his or her internship, and some continue to do so today as they seek jobs in fashion and publishing.”

Among the factors he relied on: the relatively brief duration of the internships, typically limited to college semesters or summer breaks; the interns’ opportunities for observation and learning, such as “Cosmo U,” a program in which senior editors spoke about their career paths; and the receipt of or opportunity for academic credit.

Aside from its detailed discussion of the facts of the plaintiffs’ internships, the court’s decision, Wang v. The Hearst Corporation, is notable for two reasons:

  1. It shows the practical impact of a denial of class and collective certification. Although the court addressed the six named plaintiffs’ claims in a single opinion, it was effectively a series of rulings on each intern’s individualized circumstances. As the court noted, some of the factors—such as the receipt of college credit for the internships—weighed differently for the different plaintiffs. But in the end, the result for each of them, given the “totality of the circumstances” in their particular cases, was the same.
  2. The court’s decision applied equally to the plaintiffs’ claims under the FLSA and the NY Labor Law. This issue was left somewhat unsettled after the Second Circuit’s 2015 decision, which noted the similarities in the definitions of “employee” under the two statutes but did not explicitly say that the ruling pertained to both. Judge Oetken, following the earlier lead of a Southern District colleague, held that his ruling decided the claims under federal and NY law.

The Hearst decision is not the first to grant summary judgment under the Second Circuit’s factors. In March 2016, a Southern District Judge found that an intern for the now-late Gawker website was properly treated as such and was not entitled to wages. Despite the positive trend, these cases are highly fact-driven and do not foreclose the possibility that interns will be deemed to be employees, nor should they make for-profit employers complacent about not paying interns. But they signal that, where interns have a bona fide learning experience in coordination with their academic pursuits, they need not be paid as a matter of law.

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.

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

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

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

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

Where Plaintiffs’ Counsel Are Looking

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

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

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

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

What Happened the Last Time the Regulations Changed?

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

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

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

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

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

Authored by Hillary J. Massey

Employers have a new tool for opposing conditional and class certification of overtime claims by financial advisors and other exempt employees—last week, a judge in the District of New Jersey denied conditional and class certification of such claims because the plaintiffs failed to show that common issues predominated. The court, pointing to other decisions denying class status to financial advisors in recent years, concluded that the advisors’ duties varied significantly and required individual treatment. While recent headlines have announced large settlements of class claims by financial advisors, this decision bolsters employers’ opposition to those and other purported wage and hour class and collective claims.

The four named plaintiffs brought suit under the FLSA and the laws of New Jersey, New York, and Connecticut, claiming that they and the purported class members were entitled to overtime pay and business expenses, and proposing three classes and an opt-in federal collective. Plaintiffs contended the bank’s uniform categorization of financial advisors as exempt was improper because the advisors regularly made sales “cold calls,” regularly attended networking events to attract new clients, were paid based on their ability to generate sales, were heavily supervised, and had no role in managerial decisions affecting the bank’s business.

Denying plaintiffs’ motions, the judge first concluded that plaintiffs failed to establish their claims were typical and they were adequate representatives of the class because, unlike the plaintiffs, many proposed class members had signed releases of all claims.  The court explained it was unclear how the class representatives would challenge releases they did not sign.

On predominance, the judge concluded that the bank’s policies, plaintiffs’ depositions, and the declarations submitted with the bank’s opposition demonstrated that financial advisors varied in:

  • how often they sold financial products;
  • how they were supervised;
  • how they were paid;
  • what types of clients they served; and
  • how much autonomy they enjoyed.

For example, one plaintiff testified that some advisors did cold calling while others did not, and plaintiffs testified that as their business became more established, they spent less time generating sales.  The record also showed that some managers were involved in the day-to-day work of their financial advisors, but others were more hands off.  Thus the court concluded that common questions did not predominate.

As in another case we recently discussed, where the Sixth Circuit upheld the dismissal of a proposed collective action of bank loan underwriters, the court here also rejected plaintiffs’ heavy reliance on the DOL’s 2010 Administrative Interpretation concerning mortgage loan officers’ non-exempt status, noting that that the Interpretation did not apply to financial advisors.

Finally, despite a “lenient standard,” the judge denied plaintiffs’ motion for conditional certification under the FLSA.  Plaintiffs could not meet their burden by merely showing that the bank had a uniform policy of treating financial advisors as exempt, and the significant class discovery record revealed that financial advisors’ duties varied greatly.

The case will now proceed on the merits of the claims of the four individual plaintiffs only.