By: Robert S. Whitman and Kyle D. Winnick

In Perry et al. v. City of New York, the Second Circuit upheld a large jury verdict in favor of a collective of workers regarding off-the-clock work.  In doing so, the Court reaffirmed the principle that employers will ordinarily not be liable under the FLSA when employees fail to follow a reasonable process to report time worked.

Many wage-and-hour lawsuits involve “off-the-clock” claims—allegations that employees performed work outside of their recorded working hours for which they were not compensated.   One issue that often arises in such cases is whether the employer is liable for work not recorded by employees in the timekeeping system. 

In Perry v. City of New York, a certified collective of 2,519 EMTs and paramedics for the New York City Fire Department sued under the FLSA, contending that they were not compensated for all overtime worked because their various pre- and post-shift activities was not counted as time worked.  After a rare collective action trial, the jury found these activities were compensable and awarded the plaintiffs $17,780,063 for unpaid overtime, liquidated damages, and attorneys’ fees. 

The City appealed, arguing that it was not liable because the plaintiffs did not record the time spent on these activities in the City’s timekeeping system, such that it could not have known that the plaintiffs performed such work or failed to receive compensation for it.

The Second Circuit upheld the jury award, but reaffirmed principles favorable to employers.  It explained that compensable work under the FLSA is work that employers require, know about, or should have known about.  Thus, employees’ failure to report overtime work, for example by failing to include it on their time sheets, “will in many circumstances allow the employer to disclaim the knowledge that triggers FLSA obligations.” 

One caveat to this principle is if the employer otherwise had notice of the work.  The court held that there was sufficient evidence for this caveat to apply in this case.  Specifically, there was evidence showing that the collective members could not have performed their jobs without completing these pre- and post-shift activities, and that they had complained to supervisors about being uncompensated for performing them.  Thus, according to the court, the City should have been aware that compensable work was being performed. 

The City made another argument: even if it had notice of the pre- and post-shift activities, it was unaware that collective members were not paid for such work.  The court rejected this argument, holding that “knowledge of non-payment is irrelevant to FLSA liability.”  In other words, if an employer is on notice that work is performed, the employer must ensure that such time is compensated. 

Perry is a good reminder that employers can protect themselves from FLSA liability through sound wage-and-hour practices.  One way discussed by the court is by establishing “a reasonable process for an employee to report work time,” because “an employer with such a system will not ordinarily be chargeable with constructive knowledge of unreported work.”  But the Second Circuit explained that such a process must be administered so as not to impede “employees’ ability to report their work, such as by surreptitiously deleting overtime requests, punishing workers who ask for overtime pay, or otherwise discouraging employees from reporting.”  It is therefore critical for employers to train supervisors and non-exempt employees on what work activities are compensable and how to report work time outside their normal work shifts, and to ensure that employees are not impeded from reporting work time.  By establishing robust reporting procedures, employers can protect themselves from liability for off-the-clock work.

By: A. Scott Hecker and Ted North

Seyfarth Synopsis:  This alert summarizes the IRS’s recent notice of proposed rulemaking on complying with prevailing wage and apprenticeship requirements under the Inflation Reduction Act and explains key provisions including (i) identification of a qualifying project’s applicable wage determination(s), (ii) penalties for non-compliance, and (iii) the new exception for incorporating Project Labor Agreements. Understanding these requirements and the IRS’s proposed rule is important to businesses seeking to claim the enhanced tax credits under the Act, as failure to comply can result in not only monetary penalties, but also loss of eligibility for the enhanced credits.

On August 30, 2023, the Federal Register published the IRS’s notice of proposed rulemaking (“NPRM”), “Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements,” which provides compliance guidance to employers seeking enhanced tax credits under the Inflation Reduction Act (“IRA”). Earlier in the week, the IRS had announced its NPRM and issued FAQs on the IRA’s prevailing wage and apprenticeship (“PWA”) compliance requirements. In its press release, the Treasury Department explained the NPRM’s guidance “marks the end of the first phase of [the Department’s] implementation of the Inflation Reduction Act’s clean energy provisions.”

As we have discussed before, the IRA incorporates prevailing wage requirements from the Davis-Bacon Act (“DBA”) and extends those requirements to private businesses seeking to claim enhanced tax credits worth up to five times as much as base credits. The proposed rule seeks to clarify implementation of the PWA requirements in several important areas, such as: (i) the applicable wage determinations; (ii) enforcement and penalty provisions for failing to comply with PWA requirements when claiming the IRA’s enhanced tax credits; and (ii) waivers of PWA penalties, including through the use of Qualified Project Labor Agreements (“PLA”). While businesses may claim enhanced tax credits for projects dating back to January 1, 2023 in their upcoming tax filings, key aspects of implementation remained unclear until the NPRM’s publication. The NPRM should help employers better understand IRS’s approach to PWA compliance, so they can successfully claim the IRA’s valuable tax credits.

Applicable Wage Determinations

The proposed rule clarifies the wage determination applicable to a qualifying project as “the wage determination in effect for the specified type of construction in the geographic area when the construction, alteration, or repair of the facility begins.” NPRM at 1.45-7(b)(2). The proposed rule indicates the wage determination applicable at the start of the project generally remains valid for the duration of the work being performed. Id.at 1.45-7(b)(5). Locking in historical wage determinations appears in at least some tension with U.S. DOL Wage and Hour Division’s recent final rule, “Updating the Davis-Bacon and Related Acts Regulations,” which, as we wrote previously, will obligate government contractors to more frequently incorporate updated wage determinations after contract awards.

Similarly, for businesses seeking tax credits for alteration or repair of a facility, the applicable wage determination is the one in effect at the time the alteration or repair work begins. Id.That said, businesses would have to apply a new wage determination when (i) work on a facility is changed to include additional construction, alteration, or repair work not within the scope of the original project; or (ii) work is performed for an additional time period not originally obligated (this includes exercising an option to extend the term of the underlying contract). Id.

In addition, the proposed rule identifies entities that can request supplemental wage determinations when no general applicable wage determination exists, or the relevant determination does not list all needed labor classifications. According to the proposed rule, as well as published FAQs, taxpayers, contractors, and subcontractors can all make requests for supplemental determinations to U.S. DOL’s Wage and Hour Division. See id. at 1.45-7(b)(3); see also IRS Wage Determination FAQ No. 3.

Penalties and Cures

The proposed rule establishes opportunities for businesses to cure non-compliance with PWA standards to remain eligible for the enhanced tax credits. In the event a business claiming the enhanced tax credit did not meet the prevailing wage requirements, the business may correct its non-compliance and claim the credit if it:

1. pays the affected workers the difference between what they were paid and the amount they were required to have been paid, plus interest at the Federal short-term rate plus 6 percentage points, and

2. pays a penalty to the IRS of $5,000 for each worker who was not paid at the prevailing wage rate in the year.

NPRM at 1.45-7(c)(1)(i)-(ii). If a business fails to meet the apprenticeship requirements, the business may correct its non-compliance and claim the credit if the business pays a penalty of $50 multiplied by the total labor hours for which the apprenticeship requirements were not met. Id.at 1.45-8(e)(2)(i). Penalties are more severe for non-compliance with PWA requirements when claiming the tax credit if the IRS determines a business intentionally disregarded its PWA obligations. See id.at 1.45-7(c)(3) and 1.45(e)(2)(ii).

However, penalties may be waived entirely if the business corrects the error within 30 days of becoming aware of its non-compliance or when the enhanced tax credit is claimed. Id. at 1.45-7(c)(6)(i). This option is only available in the event that the worker was being paid less than the prevailing wage for not more than 10% of all pay periods of the calendar year during the life of the project or if the difference between what the worker was paid during the calendar year and the amount they should have been paid is not greater than 2.5% of the amount the worker should have been paid.  Id.at 1.45-7(c)(6)(i)(A)-(B).

While the NPRM maintains a good faith exception regarding meeting apprenticeship requirements, “[t]he taxpayer will not be deemed to have exercised a Good Faith Effort beyond 120 days of a previously denied request unless the taxpayer submits an additional request,” id.at 1.45-8(e)(1)(i)(A)(2), so “[i]f a request was not responded to or was denied, the taxpayer must submit an additional request(s) to a registered apprenticeship program after 120 days to continue to be eligible for the good faith effort exception,” IRS Penalty and Cure Provisions and Recordkeeping FAQ No. 2.

Project Labor Agreement Exception

Businesses may also avoid penalties for non-compliance if there is a qualifying PLA for the project the business is claiming the enhanced tax credit. To qualify for this waiver, PLAs must:

1. Bind all contractors and subcontractors on the construction project through the inclusion of appropriate specifications in all relevant solicitation provisions and contract documents;

2. Contain guarantees against strikes, lockouts, and similar job disruptions;

3. Set forth effective, prompt, and mutually binding procedures for resolving labor disputes arising during the term of the project labor agreement;

4. Contain provisions to pay prevailing wages;

5. Contain provisions for referring and using qualified apprentices; and

6. Be a collective bargaining agreement with one or more labor organizations of which building and construction employees are members.

Having a PLA in place does not exempt a business from PWA requirements, but may allow the business to avoid penalties for non-compliance if the PLA meets the conditions listed above, and the business corrects the failure to pay the prevailing wage in a timely manner.

Employers should seek competent counsel when considering entering into collective bargaining with labor organizations.

Comment Period and Effective Date

The published NPRM lists a 61-day comment period, which will remain open until October 30, 2023. Comments and requests to appear at a scheduled November 21 public hearing must both be submitted by that date. After the comment period closes, the agency will review and analyze all comments it receives. This may result in changes to the NPRM – or it may not.  In either event, the agency will eventually publish its final rule with an effective date no less than 30 days after its official publication in the Federal Register.

The NPRM suggests there may be some nuanced differences between DBA and IRA PWA obligations, so impacted employers must remain aware of these compliance considerations. For any clarification of the proposed rule, or assistance with submitting comments or requests prior to October 30, please do not hesitate to connect with Scott, Ted, or your friendly, neighborhood Seyfarth attorney.

By: Kevin Young, Brett Bartlett, Scott Hecker, Noah Finkel, and Leon Rodriguez

Just days before Labor Day, the U.S. Department of Labor (“DOL”) unveiled its Notice of Proposed Rulemaking (“NPRM”), aimed at revising the Fair Labor Standards Act’s overtime exemptions for executive, administrative, and professional employees. While the proposal—the cornerstone of which is a minimum salary increase to slightly more than $55,000 per year (up from $35,568)—is more measured than many anticipated, it could still have a massive impact across industries and commands employers’ attention.

The Proposed Changes

Contrary to the whirlwind of speculation, the DOL’s proposed changes are more evolutionary than revolutionary. If finalized, the changes would entail:

  1. Increased salary for “white collar” employees: The proposed rule would increase the minimum salary level from $684 per week ($35,568 per year) to $1,059 per week ($55,068 per year). Note, however, that, as explained in the Preamble to the proposed rule, the final rule likely will provide for an even higher minimum salary level because, when the final rule is issued, it will use updated wage data.
  2. Increased total compensation threshold for the “HCE” exemption: The proposed rule would raise the total annual compensation requirement for the highly compensated employee exemption from $107,432 to $143,988.
  3. Automatic updating every three years: The proposed rule would implement a triennial automatic update to these thresholds, designed, the DOL says, to align with shifts in worker salaries and provide employers with a predictable timetable for future adjustments.
  4. Additional updates for certain territories and industries: The DOL proposes to update salary levels in U.S. territories and for employees in the motion picture industry.

Notably, the proposed changes would leave the “duties” tests for the exemptions untouched.

The NPRM’s Road Ahead

The NPRM process includes a 60-day public comment period, set to commence once the proposals are formally published (which they have not yet been as of the time of this post). We would anticipate that a final rule will not be published until at least several months after that comment period ends. Then, if the new rules are not subjected to any other delay—whether because of court or congressional challenges—employers would most likely be provided between 60 and 90 additional days to prepare for the rules’ official effective date.

With respect to court challenges, it is worth remembering that the Obama Administration’s 2016 attempt to overhaul these exemptions in a similar fashion—i.e., an increased salary threshold with automatic, inflation-based increases—was stymied by legal challenges and never came into effect. The DOL’s new proposal is not immune to similar challenges, particularly as we approach another election cycle where compensation issues often become political footballs.

Next Steps for Employers

As the DOL opens the floor for public comment, employers have an opportunity to weigh in on these proposed changes and begin preparing for their potential implementation.

While it is possible that a final rule will look different in some ways than the proposed rule, businesses should not wait to start planning. At a minimum, it is important for employers to develop an accurate picture and understanding of their exempt workforce—i.e., what roles it comprises, how many incumbents occupy the roles, where they are located, what functions they perform, and, of course, how much they are paid. Understanding the contours of the exempt population will allow employers to begin thinking strategically to identify and triage the roles that are most likely to be impacted by the new rule or that otherwise command attention during this time of change.

In short, while the DOL’s proposed changes may not be the seismic shift some had predicted, they nonetheless represent a significant evolution in this area of the law that employers will need to plan for, monitor, and be ready to act upon.

Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.


By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: After a trial court upheld the validity of the Department of Labor’s 2021 regulation codifying the 80/20 rule following an initial remand from the Fifth Circuit, the plaintiffs filed an appeal of the final judgment, sending the case back to the Fifth Circuit.

As we previously wrote about here at TIPS, an ongoing lawsuit brought on behalf of national and local restaurant industry associations seeks to invalidate the Department of Labor’s new regulation codifying the “80/20” rule—the Department’s longstanding enforcement position that an employer cannot take a tip credit when an employee spends more than 20% of their hours on non-tip-producing activities.  Under the previous administration, the Department issued an opinion letter walking back the 80/20 approach, but that rule never went into effect and the Department withdrew the regulation in 2021. The new rule largely codifies the existing 80/20 enforcement guidance, but it adds a new, potentially onerous requirement: non-tipped work could not be performed for continuous periods in excess of thirty minutes even if that work does not exceed 20% of the employee’s hours worked.

On appeal from the trial court’s denial of a preliminary injunction, the Fifth Circuit issued an opinion in April of 2023 that evinced, shall we say, a healthy dose of skepticism regarding the new regulation’s validity. On remand, though, the trial court issued a decision upholding the regulation’s validity under the Chevron doctrine of agency deference.  We predicted that the plaintiffs would appeal.  After some initial confusion, the appeal has now been filed in the Fifth Circuit, and will go forward.

So, dear readers, stay tuned as we continue to follow the latest developments in this ongoing case.

Though the 80/20 rule deals with the tip credit under federal law, restaurant and hospitality employers face a patchwork of state laws, too. Luckily, the team at Seyfarth has a repository of nifty survey charts — available for free to our clients — that map out the various federal and state requirements. Reach out to the authors if you’d like to learn more about these survey resources. And, of course, if you want more in-depth analysis of the rules of the road for taking the tip credit, do not hesitate to reach out to the authors or your favorite member of Seyfarth’s Wage and Hour Practice Group.

Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.


By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: The Connecticut General Assembly failed to pass a proposal to eliminate the tip credit for restaurant and hospitality workers before the end of the 2023 legislative session, but restaurant and hospitality employers in the Nutmeg State—and nationwide—should expect advocates to continue their efforts in years to come.

For today’s edition of Tips, we posit the following scenario. The owner of a small restaurant nestled in a bucolic New England town wakes up one morning to learn that her state legislature has just introduced a bill that (if enacted) would, overnight, more than double her labor costs for servers and bussers, likely forcing her to consider cutting those workers’ hours or eliminating some of their jobs altogether. Inconceivable, right?

Wrong. It almost happened this year in Connecticut, and similar proposals are gaining ground in other states, too.

In most states, businesses that employ workers who customarily and regularly receive tips—such as servers and bartenders in restaurants and places of lodgingmay pay those workers a minimum hourly wage below the minimum wage that applies to all other workers, provided that the employee receives enough in tips to make up the difference. If, as it turns out, the worker’s actual tips plus cash wages do not equal or exceed the state’s minimum wage, then the employer must make up the difference.  An employer that uses some or all of its employees’ tips toward its minimum wage and overtime obligations is said to take a “tip credit.” The tip credit has been a part of federal wage and hour law since 1966.  It is a long-established practice in these industries, one that recognizes that service employees’ earnings in cash and tips usually far exceed the minimum wage.

A proposal introduced at the beginning of the 2023 session of the Connecticut General Assembly, though, would have abolished the state’s tip credit, requiring restaurants and hotels to pay their tipped employees the current state minimum wage ($15.00 per hour) before tips. That’s more than double the current hourly cash wage for servers in Connecticut ($6.38). And, heading into the spring, it looked like the effort had momentum: the legislature’s Labor and Public Employees committee approved the bill, advancing it for consideration and a possible vote in the state’s House and Senate later in the year.

Last month, though, the legislature wrapped up the 2023 session for the beginning of the summer, and it appears that lawmakers left the abolition of the tip credit on the table, so to speak.

While this means that our small New England restaurateur can (for now) breathe a sigh of relief, we fully expect that advocates of the measure will push for it to be reintroduced next year. Moreover, similar proposals to eliminate the tip credit have been or are under consideration in other states, too, including Illinois, Maryland, and the District of Columbia—where a voter initiative phasing out the tip credit took effect late last year.  Some states, such as California, Minnesota, Washington, and Oregon, already require restaurants and hotels to pay tipped employees the full state minimum wage before tips.

Simply put, the laws in this area are more varied than it might seem at first, and the landscape is quickly changing. Luckily, Seyfarth’s Wage and Hour Practice Group is keeping tabs on all of the latest developments. If you have questions about how tip credit requirements may affect your business, feel free to reach out to the authors, your favorite Seyfarth attorney, or Seyfarth’s Wage and Hour Practice Group.

Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.


By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: After a remand from the Fifth Circuit, a trial court has upheld the validity of the Department of Labor’s 2021 regulation codifying the 80/20 rule, raising the possibility of another appeal.

Welcome to the inaugural edition of Tips from Seyfarth, where we discuss developments in the world of wage and hour law of particular importance to the restaurant and hospitality sectors.  We hope you find the content useful; if you do, and would like to receive our regular updates, we invite you to subscribe to Seyfarth’s Wage and Hour Litigation Blog.

For our kickoff of Tips, we write with an update in the latest challenge to the federal Department of Labor’s “dual jobs” regulation codifying the job duties requirements for employers who seek to use the tip credit to satisfy their minimum wage and overtime obligations for tipped workers.

By way of background, under federal law (and many states’ wage and hour laws), employers may take a tip credit to satisfy their minimum wage and overtime obligations for tipped employees. The tip credit is a longstanding and common component of compensation for service workers in the restaurant and lodging sectors. One thorny question that often arises: who counts as a tipped employee? The Fair Labor Standards Act (FLSA) defines a tipped employee as an “employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” Simple enough in theory, but the concept can be hard to apply in practice, because service workers often engage in both tip-generating work and non-tip-producing work. For example, a server performs non-tip-producing work when he or she cleans the restroom, or rolls silverware at the end of a shift. How the law deals with these scenarios matters a great deal, because a restaurant or hotel can only take a tip credit if an employee is considered to be engaged in a tipped “occupation.”

Beginning in 1988, the federal DOL sought to address this situation by updating the enforcement guidance in its Field Operations Handbook (FOH) to include the so-called “80/20 rule”:  DOL field investigators were advised that the tip credit is not available when tipped employees spend more than 20% of their hours worked on non-tip-producing activities.  In November of 2018, the Department issued an opinion letter walking back the 80/20 rule approach, stating that there was no ceiling on the amount of non-tip-producing work an employee could perform so long as the tasks were performed at the same time as the employee’s direct tip-producing work (or for a reasonable amount of time immediately before or after). In December of 2020, DOL issued a final rule adopting largely the same approach, but that rule never went into effect—DOL withdrew the regulation in 2021.

Then, on October 29, 2021, DOL issued a new regulation that codified the 80/20 rule that had been featured in the FOH since 1988.  It also added a new requirement of great concern to the restaurant and lodging industries: in addition to the requirement that non-tipped work be no more than 20% of work performed in the workweek, non-tipped work could not be performed for continuous periods in excess of thirty minutes.

In February of 2022, organizations representing the national and local restaurant industries sought a preliminary injunction against the DOL’s new 80/20 regulation. The District Court denied the preliminary injunction after concluding that the plaintiffs’ members would not suffer irreparable harm from being forced to comply with the new rule. On appeal, the Fifth Circuit reversed in a decision issued on April 28, 2023, concluding that plaintiffs showed irreparable harm in the form of unrecoverable compliance costs. So, the case went back the District Court to consider the merits of the plaintiffs’ challenge to the 80/20 regulation.

Despite the Fifth Circuit’s evident skepticism of the new 80/20 rule’s validity, the District Court worked promptly on remand, and on July 6, 2023, it issued a decision upholding the regulation’s validity. In short, the court concluded that the statutory text— “engaged in an occupation”—is ambiguous.  Accordingly, under the Supreme Court’s Chevron doctrine of agency deference, the court upheld the DOL’s 80/20 rule because it was based on what the court determined to be a “permissible construction of the FLSA.” We expect that the plaintiffs will appeal once again to the Fifth Circuit, this time placing the validity of the regulation squarely before a federal appellate court. In the meantime, though, restaurant and hospitality employers should carefully review their current practices for monitoring compliance with then new 80/20 rule – especially the new 30-minute limitation on continuous performance of non-tip-producing work. Feel free to contact the team at Tips From Seyfarth, or your favorite attorney in Seyfarth’s Wage and Hour Practice Group, for guidance on how your business can best position itself for compliance under the new regulation.

By: Bailey K. Bifoss, Andrew M. Paley, and Michael Afar

Seyfarth Synopsis: The California Supreme Court held that a plaintiff whose individual PAGA claims are compelled to arbitration retains standing to pursue representative PAGA claims in court in Adolph v. Uber Technologies, Inc., meaning that their claims may live on way past the first volley.

Wimbledon may be over but, on Monday, the California Supreme Court returned Viking River’s serve and took the match with its highly anticipated decision in Adolph v. Uber. The headline? A plaintiff whose individual PAGA claims are compelled to arbitration retains standing to pursue representative PAGA claims in court.

Game

Those following the play at home may remember the California Supreme Court’s 2014 decision in Iskanian v. CLS TransportationIskanian set the rules of play that PAGA claims could not be split into their individual and representative parts. It also said the right to bring a PAGA claim in court was unwaivable, using the dropshot to make otherwise enforceable arbitration agreements inapplicable to these claims. As a result, for many years California employers were forced to defend against PAGA claims in Court even where employees signed arbitration agreements with class and representative action waivers.

Set

Iskanian lasted nearly a decade as good law—a lifetime in PAGA litigation—until the U.S. Supreme Court issued last year’s decision in Viking River. As we previously blogged about, SCOTUS held that the FAA preempted California’s rule preventing courts from dividing PAGA actions. PAGA actions could be split, and an employee’s individual PAGA claims could be compelled to arbitration. Without the individual claims though, a PAGA plaintiff lacked standing to pursue the representative claims and those claims had to be dismissed.

But Justice Sotomayor noted in dissent that the majority’s foot may have been on the line when it issued its decision. She warned that California law would govern what happens to a PAGA plaintiff’s representative claims after the individual claims are compelled to arbitration and, under the right circumstances, California courts would “have the last word.”

Match

Taking Justice Sotomayor up on her invitation, the California Supreme Court held in Adolph that an order compelling a PAGA plaintiff’s individual claims to arbitration does not strip the plaintiff of standing to pursue representative claims in court. The Court relied heavily on the legislative purpose of PAGA, as well as statutory language establishing (in the Court’s view) that a worker achieves PAGA standing if they have had one Labor Code violation committed against them by their employer.

In sending Uber’s volleys back to their side of the net, the Court also resolved several other points concerning the litigation of PAGA actions, including:

  • The outcome of a PAGA plaintiff’s individual arbitration will be binding on issues of standing. If the plaintiff prevails at individual arbitration, they get to keep the representative claims and pursue them. If the plaintiff loses, they do not.
  • Sending an employee’s individual PAGA claims to arbitration does not split the underlying PAGA action into two cases. The PAGA action remains a single case that is subject to the mandatory stay provisions of applicable California statutes.

Takeaways For Those In The Stands

Although California may have taken the match, points were scored for employers.

15 – Under Adolph, employers can (and ought to) vigorously defend against individual PAGA claims in arbitration knowing that, if they prevail, the plaintiff will be unable to proceed with their representative PAGA claims. Going to individual arbitration first should allow employers the chance to defeat an individual PAGA plaintiff’s claim without facing the burden and expense of responding to overbroad discovery and fishing expeditions requesting information as to every non-exempt employee.

30 – Even if the individual defense in arbitration is unsuccessful, employers retain the ability to challenge a plaintiff’s representative claims on substantive and/or procedural (e.g., manageability) grounds.

40 – Because the Court specifically held that ordering an employee’s individual claims to arbitration does not sever a PAGA action, trial courts should apply a mandatory stay to the representative PAGA claims pending the outcome of individual arbitration, potentially tying up any kind of representative litigation for an extended period of time.

The winner of the game thus remains undetermined.

Workplace Solutions

The fight over PAGA claims is far from over, and the next tournament is right around the corner. Other important decisions are still pending from the California Supreme Court and talk of proposed ballot measures that would make wholesale changes to the PAGA framework. Employers wanting to stay up to date on the latest should be in touch with their Seyfarth attorney to ensure they do not miss any important updates in this developing area of the law.

By: Scott Hecker and Ariel Fenster

On this episode of the Policy Matters Podcast, Seyfarth attorneys Scott Hecker and Ariel Fenster discuss the U.S. DOL Wage and Hour Division’s (“WHD”) resource limitations, and how those are impacting WHD priorities, like child labor law investigations and various significant rulemakings. The low number of investigators leads to high stress and low morale for those remaining, and WHD workers may feel overburdened and under-resourced. Join Scott and Ariel as they share their thoughts on these developments, including how employers may be affected.

Click here to listen to the full episode.

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By: Andrew McKinley, Kyle Winnick & Alex Simon

Seyfarth Synopsis: This latest installment in our series on the Department of Labor’s proposed independent contractor rule under the Fair Labor Standards Act focuses on proposed changes to the profit-or-loss analysis as it relates to workers’ investments in their businesses.

A hallmark of independent contractor status is the ability to exercise entrepreneurial opportunity to effectuate a profit (or loss).  Independent contractors do this by making capital investments in their businesses, including through marketing, hiring others, purchasing equipment (or software), expanding capacity, or any number of things to increase their competitiveness.  If these investments fail to attract new customers or to reduce inefficiencies, they may lead to a loss.  In other words, independent contractors can increase their profits, or risk a loss, through investments.

It may seem odd, therefore, that some courts analyze a workers’ opportunity for profit-or-loss separately from their investments when determining if a worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”).  But others, such as the Second Circuit and D.C. Circuit, recognize that the profit-or-loss and investment inquiries are inherently intertwined and best analyzed together.  As the Second Circuit explained in Saleem v. Corporation Transp. Group, Ltd., “[e]conomic investment, by definition, creates the opportunity for loss, [and] investors take such a risk with an eye to profit.” 

In 2021, the DOL under the Trump Administration promulgated an interpretive regulation defining employee versus independent contractor status under the FLSA (the “2021 Rule”), which would have adopted the approach of the Second and D.C. Circuits. More specifically, as part of the profit or loss inquiry, the 2021 Rule considered the “management of [a worker’s] investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”

The DOL has now reversed course.  In its most recent notice of proposed rulemaking (“NPRM”), the DOL seeks to return to analyzing investments separately from profit or loss.  The DOL justifies doing so by citing cases that have historically analyzed the two inquiries separately, which according to the DOL, “have found both opportunity for profit or loss and investment to be independently probative.”  For example, the DOL cites Fifth Circuit authority finding workers did not have any meaningful investment but did have an opportunity for profit or loss.

But the very cases that the DOL cites highlight the dangers of unmooring the investments inquiry from the profit or loss inquiry.  The Fifth Circuit and other courts, for example, consider the “relative” investment made by the worker compared to the investments made by the putative employer.  The NPRM adopts this approach.  But this type of comparison will almost always result in the investment prong favoring employee status: businesses tend to be much larger than the contractors they engage.  This begs the question why a factor which will almost invariably tilt in favor of employee status should be used to determine employee status.  Such a standard will either improperly tilt the analysis in favor of employee status or be ignored.  Indeed, in the very Fifth Circuit case the DOL cites, the Court gave the investment factor “little weight” because the plaintiffs were small businesspersons who necessarily worked for much larger companies.  It therefore did not help the ultimate inquiry of ascertaining whether the workers were economically independent of or dependent on the putative employer. 

There is the added problem of the DOL’s lack of guidance on how to calibrate the relative investments inquiry.  Consider an independent contractor with multiple clients.  Is a court supposed to compare the relative investments between the contractor and each client?  Or should it do so on a pro rata basis?  Or should it compare the contractor’s investments with the collective investments of his or her clients?  In the case of an employer with multiple product service lines (PSLs), do investments in all PSLs count?  Or does just the one to which the putative employee provides services?  These unaddressed questions are likely to add confusion, not clarity, to the analysis.

Assessing investments apart from profit or loss also risks overlooking that many independent contractors have made minimal capital investments.  As Judge Easterbrook remarked decades ago, “possess[ing] little or no physical capital . . . is true of many workers we would call independent contractors.  Think of lawyers, many of whom do not even own books.  The bar sells human capital rather than physical capital, but this does not imply that lawyers are ‘employers’ of their clients under the FLSA.”   This statement is doubly true today, where freelancers and “gig” workers often invest in themselves—their training, skills, and experience—as opposed to physical capital.   

There is also the related problem of what specific investments are probative of independent contractor status.  Tying investment to profit or loss would sharpen the inquiry by focusing on those investments—and only those investments—which are designed to return a profit (or risk a loss), which will generally be probative of contractor or employee status.  Indeed, it is hard to imagine a relevant investment that will not affect profit or loss.  The NPRM appears to take the position that only those investments which further the independent contractor’s work for the putative employer are relevant.  But that is just another way of saying investments which relate to profit or loss within the relevant line of business.  At best, then, the NPRM creates a duplicative inquiry.  At worst, it opens the door for consideration of investments that have nothing to do with whether or not a worker is economically dependent on a particular business. One of the NPRM’s stated goals is to bring clarity to determining employee status under the FLSA.  But by returning to a standard which analyzes investments separate and apart from profit or loss, it risks the opposite.

By: A. Scott Hecker and Noah A. Finkel

Seyfarth Synopsis: On June 13, 2023, the Biden Administration announced the release of its Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions (the 2022 Fall Agenda was issued in January 2023). In connection with the Administration’s new regulatory agenda, the U.S. Department of Labor’s Wage and Hour Division continues to pursue a number of significant rulemakings, many of which have experienced delays to their target publication dates. These include a potential increase in the minimum salary level for the white-collar exemptions, the proposal for which is now scheduled for August 2023.

Even though the judiciary seems primed to continue chipping away at the authority of what some call the “administrative state” — is Chevron still a thing? — the Biden Administration’s executive agencies remain focused on rulemaking. When we posted on the 2022 fall agenda, we noted the Department of Labor’s Wage and Hour Division (“WHD”) had a number of impactful standards on its plate. That remains the case, as none of the rules we discussed have issued in the meantime.

DOL’s most recent deadline to issue a Notice of Proposed Rulemaking (“NPRM”) on “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” had been May 2023, and “we anticipate[d] WHD will strive to timely meet its goal” after a number of delays. We’re sure there was plenty of striving, but WHD has — again — pushed its NPRM target, this time to August 2023. If we were betting men, we might take the over. But the NPRM has to issue someday, right? We may see changes to other parts of the rule, but one likely change we should all bet on is an increase in the minimum salary for exempt status — currently $684 per week, which annualizes to $35,568.

Given the interest in this rule, DOL will likely receive a ton of input once the NPRM is issued, so a final rule could be months (or even years) away. At this point, the Administration needs to worry about potential Congressional Review Act implications, an upcoming presidential election, and legal challenges if and when WHD publishes a final rule.

WHD’s “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” has moved from the proposed to final rule stage. After receiving more than 54,000 comments to its NPRM, DOL also pushed its target for this rule from May to August. On June 9, the U.S. Court of Appeals for the Fifth Circuit granted DOL’s unopposed motion for a 120-day stay to allow the Department to complete this rulemaking, making it more likely DOL will publish the rule by fall. The parties must submit a status report within 60 days, so further movement on publication remains possible. For more information on what to expect when you’re independent contracting, see our prior blog.

Government contractors should also stay mindful of the following WHD activities:

  1. WHD is still working on regulations to implement Executive Order 14055, “Nondisplacement of Qualified Workers Under Service Contracts,” requiring contractors and their subcontractors awarded Federal Government service contracts “to offer jobs to qualified employees who worked for the previous contractor and performed their jobs well.” The regulatory agenda now suggests a final rule should issue this month.
  2. WHD’s rule “Updating the Davis-Bacon and Related Acts Regulations,” designed “to update and modernize the regulations implementing the Davis-Bacon and Related Acts to provide greater clarity and enhance their usefulness in the modern economy,” remains with the White House’s Office of Information and Regulatory Affairs (“OIRA”). While OIRA has had the rule since mid-December 2022, before the 2022 fall agenda came out, the 2023 spring agenda suggests DOL could publish a final rule this month. We previously blogged and podcasted on the issuance and impacts of this proposed rule, so we commend you to the preceding resources for more on how the rulemaking may change DOL’s Davis-Bacon prevailing wage processes. You’re probably already aware the proposed revisions are likely to increase prevailing wage rates.

Why so many delays? First, that’s the nature of rulemaking. The targets in regulatory agendas aren’t binding, i.e., they are not deadlines, but estimates. Various factors impact timing, including how many comments the Department receives on any given rule. As noted above, WHD’s independent control NPRM received 54,000+ comments.

Second, the Office of Information and Regulatory Affairs (“OIRA”) seems to be reviewing rules, e.g., the Davis-Bacon rule, longer than it has in the past, and rules need OIRA clearance before final publication.

Finally, Acting Secretary of Labor Julie Su is in the middle of a bruising confirmation process to ascend to the permanent Secretary role. It’s been suggested that the Department does not want to negatively impact her already-tenuous nomination status by issuing controversial rules before she receives Senate approval.

Whatever the case, the regulated community should remain aware of these rulemakings to ensure ongoing compliance.