By: Alex Simon and Kyle Petersen

Seyfarth Synopsis: In a welcome turn of events, the Seventh Circuit has taken up the question of what is the appropriate standard for court-authorized notice in collective actions.

When this Blog wrote two weeks ago, “Swales, Clark, and Laverenz pave the way for additional district and appellate courts to depart from Lusardi,” we did not expect the Seventh Circuit to take up the issue so quickly.

But just eight days after Judge Griesbach’s blistering opinion came down in Laverenz, criticizing the still-predominant “modest factual showing standard” for being contrary to the FLSA’s text—the Seventh Circuit has authorized an interlocutory appeal to answer a question raised by an appellant-employer about when a court overseeing a collective action may authorize notice to “similarly situated” potential plaintiffs.

More specifically, in a pending collective action brought under the Age Discrimination in Employment Act (“ADEA”)—which explicitly incorporates the FLSA’s collective action procedure—the Seventh Circuit Court of Appeals will weigh in for the first time on whether a district court may order this notice upon a “modest showing” of similarity without regard to the evidence submitted by the defendant.

After ordering nationwide notice to a collective based on the lax Lusardi framework, the district courtcertified the matter for interlocutory review and stayed issuance of notice pending that review. Initially, the Seventh Circuit denied the petition for permission to appeal. While the  Court admitted that “certifying a collective action under the Fair Labor Standards Act is a recurring issue for district courts,” it concluded that it would be “better” to review that process on a more complete record (i.e. after the second step of the two-step process).

In response, the employer filed a petition for rehearing and petition for rehearing enbac—respectfully pushing back on the notion that review after the second step of the two-step process would be “better.” Specifically, the employer explained that a review at that time would be “impossible,” and completely defeat the purpose of their interlocutory appeal. After all, the very issue to be reviewed on appeal concerns the harms that district courts can cause when they authorize the distribution of notice to a collective on an undeveloped factual record—harms such as “soliciting baseless claims, imposing unfair settlement pressure, and subjecting defendants to costly merits discovery for ‘collectives’ that could never hold up.”

Fortunately, this persuaded the Court of Appeals to take up the cause. This means that it will now decide whether district courts in the Seventh Circuit will be required to determine whether plaintiffs have made a meaningful showing, under all of the evidence, that employees in a collective action are “similarly situated” before notice can be sent.

The lower court’s decision to authorize notice upon a mere “modest” factual showing highlights the harmful and unfair nature of that standard. The plaintiff successfully convinced the court that she should be able to send notice to all of the employer’s 40+ year old employees who had been denied promotions in the last three years, even though she had just four supporting affidavits, and the employer produced substantial evidence that the plaintiff was not similarly situated to anyone. While not every district court that uses the “modest” factual showing standard sets the bar so low, there are some that certainly do. New guidance from the Seventh Circuit clarifying what courts must consider and find before authorizing notice is certainly welcome.

Should the Seventh Circuit decide to follow the Fifth and Sixth Circuits in setting a higher evidentiary bar for plaintiffs to clear before sending notice to “similarly situated” employees—it would send a very clear signal across the country that the Lusardi framework must be discarded. Indeed, the very fact that the Seventh Circuit has taken on this appeal sends a message to district courts throughout the country that just because the “modest factual showing” standard may have been “endorsed” in the past, does not mean that it will hold up on appeal going forward.

In the end, the Seventh Circuit’s willingness to consider this very important issue at this stage of the litigation is a welcome development. We will continue to monitor the case for updates. In the meantime, if you are facing a collective action in the Seventh Circuit, it may be in your interest to seek a stay of the pre-notice proceedings pending a decision about the appropriate standard for notice moving forward. Courts in the Sixth Circuit were, by and large, willing to do this pending the decision on Clark.

Seyfarth Synopsis: On September 11, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit held in Mayfield v. U.S. Department of Labor that the Secretary’s salary tests for evaluating overtime exemptions are valid and do not exceed the Department of Labor’s authority under the Fair Labor Standards Act (“FLSA”).

Robert Mayfield, a Texas-based fast-food purveyor, challenged the U.S. DOL Wage and Hour Division’s 2019 rule, promulgated during the Trump Administration, regarding executive, administrative, and professional (“EAP”) exemptions from overtime under the FLSA. Mayfield argued the rule exceeded the Secretary of Labor’s authority because the FLSA only allows DOL to address a worker’s duties, not to set a salary threshold as part of the exemption analysis.

The district judge dismissed Mayfield’s case a year ago, holding that the FLSA gave DOL broad authority to “define and delimit” the EAP exemptions, which the DOL did not exceed with the 2019 rule. Mayfield appealed to the Fifth Circuit, which held oral argument just last month.

The Fifth Circuit panel issued a ruling upholding the district court’s opinion, finding that setting a minimum salary level for the EAP exemption is within DOL’s power to “define and delimit” the terms of the exemptions. That power, the panel held “is guided by the FLSA’s purpose and the text of the exemption itself.”

This decision, which stands (at least for now) as a win for the DOL, comes on the heels of multiple noteworthy decisions questioning and curtailing agency authority and action. This summer, in Loper Bright Enterprises v. Raimondo, the Supreme Court overruled the principle of Chevron deference. And just last year, the Court waded into the FLSA exemption arena in Helix Energy Solutions Group, Inc. v. Hewitt, with Justices Kavanaugh and Alito issuing a dissent effectively inviting litigants to challenge the EAP salary basis tests as exceeding DOL authority.

In reaching this holding, the Fifth Circuit explained that its precedent did not dictate the case’s outcome and that the major-questions doctrine is inapplicable. It then turned to “whether the Rule is within the outer boundaries of” Congress’s “uncontroverted explicit delegation of authority” to DOL.

The Fifth Circuit panel was “not persuaded” by Mayfield’s argument that, in defining and delimiting exemptions, the Department could address only work duties, since “[u]sing salary level as a criterion for EAP status has a far stronger textual foundation than Mayfield acknowledges.” Further, the Court approved “[u]sing salary as a proxy for EAP status . . . because the link between the job duties identified and salary is strong.” The Court cautioned, however, that where “the proxy characteristic frequently yields different results than the characteristic Congress initially chose, then use of the proxy is not so much defining and delimiting the original statutory terms as replacing them.”

The Fifth Circuit appeared to question whether Skidmore deference remains a viable analytical tool after Loper Bright, but unlike many post-Loper Bright opinions, the Fifth Circuit at least acknowledged Skidmore’s existence, suggesting

if Skidmore deference does any work, it applies here. DOL has consistently issued minimum salary rules for over eighty years. Though the specific dollar value required has varied, DOL’s position that it has the authority to promulgate such a rule has been consistent. Furthermore, it began doing so immediately after the FLSA was passed. And for those who subscribe to legislative acquiescence, Congress has amended the FLSA numerous times without modifying, foreclosing, or otherwise questioning the Minimum Salary Rule.

In approving DOL’s authority to promulgate the rule, the Fifth Circuit stated it was “join[ing] four of its sister circuits.”

Finally, the Court agreed with the District Court’s determination—and two of its sister circuits—that the “EAP exemption is guided by an intelligible principle,” so does not violate the nondelegation doctrine.

What’s Next?

Mayfield may request an en banc rehearing and/or seek Supreme Court review. But this decision could have ramifications for pending challenges to the DOL’s 2024 rule, which increased the salary level threshold for the EAP exemptions to $43,888 per year as of July 1, 2024, with another increase (to $58,656) taking effect on January 1, 2025.

The Mayfield ruling, as long as it stands, clears at least one impediment to the rulemaking, as the Fifth Circuit has blessed DOL’s authority to use the salary level tests within reason, i.e., so long as it serves as an acceptable “proxy.” That said, other challenges are still being litigated that focus on other aspects of the 2024 rule.

For now, employers should continue to prepare for the January 1, 2025 salary threshold increase. We will provide updates on further developments concerning the DOL’s new overtime exemption rule and the challenges to it.

The rules governing the employment relationship are always changing. Laws creating new employer obligations, technology solutions making work more efficient and more complicated, and rules governing the resolution of disputes between employers and their workers are around every corner.

Seyfarth’s Wage Hour Litigation Practice Group is excited to announce a new blog series, Wage and Hour Around the Corner, to help employers stay on the cutting edge of wage and hour changes happening now and those on the horizon. We encourage you to check out our first two posts: DOL Issues Guidance on Wage-Hour Risk Posed by Artificial Intelligence and Game, Set,… and On to the Match: Third Circuit Breaks Precedent, Recognizing That Collegiate Athletes May Assert a Claim Under the FLSA. More to come!

We hope you find these updates helpful. Do not hesitate to reach out to our authors if you ever need a longer explanation! Please note that Wage and Hour Around the Corner will be distributed only to those who subscribe to the Wage & Hour Litigation Blog. You can do so by clicking the following link:

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Seyfarth Synopsis: As reported by Seyfarth, the Fifth Circuit’s January 2021 decision in Swales v. KLLM Transport Services, LLC and the Sixth Circuit’s May 2023 decision in Clark v. A&L Homecare and Training Center, et al. represent significant shifts in the standard for court-authorized notice in Fair Labor Standards Act collective actions. Last week, the Eastern District of Wisconsin followed suit in Laverenz v. Pioneer Metal Finishing LLC, and adopted Swales, furthering the already-underway shift away from the long-standing “fairly lenient” two-step framework used in most FLSA cases. 

Raising the Bar for FLSA Certification: From Lusardi to Swales and Clark

In Hoffmann-La Roche, Inc. v. Sperling (1989), the Supreme Court allowed courts to send notice of an FLSA collective action to potential opt-in plaintiffs. Courts initially followed the Lusardi v. Xerox Corp. (1987) two-step process fashioned by the District of New Jersey: conditional certification based on minimal evidence, followed by a stricter decertification stage after discovery. Under Lusardi’s approach, stage one certification has historically been a “lenient standard” under which the plaintiff must make only a “modest showing” to clear the “low burden” necessary to send notice. While many employers are successful on decertification, any win can taste bittersweet due to the expenditures of time and money involved in litigating a collective action through discovery and decertification briefing.

The Fifth Circuit’s 2021 Swales decision rejected Lusardi, requiring proof of similar situation, and discovery on issues affecting that determination if necessary, before certifying a collective action.  The Sixth Circuit in 2023 also decried Lusardi’s leniency at the “conditional” certification stage, but did not reject outright the sending of notice prior to a final determination about whether plaintiffs are similarly situated. Instead, Plaintiffs in the Sixth Circuit now must demonstrate a “strong likelihood”—a standard Clark likened to that for granting a preliminary injunction—that they are similarly situated to the potential collective members to justify court-authorized notice.

The Western District of Wisconsin Adopts Swales, Tightening FLSA Certification Standards

Laverenz adopted Swales and its bright line prove-similarity-before-notice-issues rule in a case involving an employer rounding employees’ time punches to the nearest quarter hour and compensating them based on the rounded time values. The plaintiff moved for conditional certification of a collective action, arguing that she and all hourly employees subject to time rounding were similarly situated.

The court first noted that the Seventh Circuit has never required a specific certification procedure, with district courts generally following the lenient Lusardi framework.  It then identified a key issue with the Lusardi process: it risks notifying and including employees who are not “similarly situated,” as required by the FLSA. Although decertification can occur at the second stage, said Laverenz, by then many employees may have joined the suit, potentially without valid claims, which contradicts the FLSA’s plain text and intent.

Laverenz also found that Lusardi can compromise the appearance of judicial neutrality and conflicts with the Portal-to-Portal Act, which aimed to reduce the financial burden on employers from extensive data requests. Lusardi, the court reasoned,leads to notice and significant discovery before a final similarly situated determination, forcing employers to litigate the case as if it were a certified collective, thus favoring plaintiffs and increasing settlement pressure on employers.  Citing Seyfarth’s Workplace Class Action Report, Laverenz noted that courts granted 81% of conditional certification motions in 2021, but later decertified the majority (53%) of those. This suggests many notices go to employees who are not similarly situated, contrary to the FLSA’s intent.

A more rigorous initial review like that mandated by Swales, by contrast, would ensure efficiency and fairness. Adopting that approach, the court permitted pre-certification discovery into facts and legal considerations relevant to the similarly situated inquiry. Thereafter, it applied a preponderance of the evidence standard and assessed three factors—factual and employment settings, individual defenses, and fairness. 

Laverenz ultimately found that the plaintiff had not met her burden to show her similarity to other employees. Significant individual differences in how the rounding policy affected employees, Lavarenz’s personal de minimis damages, the employer’s individualized defenses, and the inefficiency and unfairness of litigating such personalized claims in an aggregate setting led the court to deny the plaintiff’s certification motion. 

Takeaways From Swales, Clark, and Laverenz

Swales, Clark, and now Laverenz pave the way for additional district and appellate courts to depart from Lusardi and apply a certification rubric that adheres more closely to the FLSA’s text and does not create perverse incentives in favor of one side or the other, minimizes untoward settlement pressure on employers, and limits the costs of litigating collective actions to those cases that in fact involve similarly situated plaintiffs. 

The rules governing the employment relationship are always changing. Laws creating new employer obligations, technology solutions making work more efficient and more complicated, and rules governing the resolution of disputes between employers and their workers are around every corner. Wage and Hour Around the Corner is a new blog series for employers, in-house lawyers, and HR, payroll, and compensation, that helps employers stay on the cutting edge of wage and hour changes happening now and those on the horizon.

Seyfarth Synopsis: The viable use cases for Artificial Intelligence are skyrocketing as AI models become capable of more and more. Some of those include various applications in remote work environments, like tracking employees’ time worked and work activities. According to the DOL, however, using AI-driven surveillance software to track time worked poses risks under the Fair Labor Standards Act.

Working remotely is here to stay.  Although declining from pandemic-era levels, telework remains popular, especially hybrid-style arrangements where employees work remotely part of the time.  That poses certain problems from a wage-hour perspective.  Generally, under the Fair Labor Standards Act, employers have an obligation to pay employees for all work the employer knows or should know has been performed.  But it is not always clear when an employer “should know.”  As the Department of Labor has noted, this is especially so with respect to telework, when employees are working without any direct oversight.  This has important implications for employers who use Artificial Intelligence tools to monitor and track time worked by remote employees.   

Those tools have made it easier to work remotely.  Increasingly, AI is also being used for automated timekeeping in which software tracks when workers sign in and out of work and then determines an employee’s “active” and “idle” time.  ‎These tools capture data such as application and website usage, mouse and keyboard activity, and even physical movement.  Some AI tools act as a fully digital time clock that allows businesses to calculate an employee’s weekly, bi-weekly, or monthly pay.     

But as noted here, reliance on AI also poses certain risks from a wage-hour perspective.  While AI-driven software allows employees to monitor and record when employees login and logout, employers may face FLSA exposure if the software fails to account for all time worked, including offline tasks.  According to the DOL, “[a]n AI program that incorrectly categorizes time as non-compensable work hours based on its analysis of worker activity, productivity, or performance could result in a failure to pay wages for all hours worked.”  AI-powered monitoring software can potentially fail to fully account for the time employees spend working away from their workstation, offline time spent thinking about or reviewing a document, or offscreen engagement with clients or co-workers. 

Other risks include if AI-monitoring tools automatically code all non-productive work as non-compensable time.  Short breaks lasting 20 minutes or less are generally deemed to be for the employer’s benefit and, therefore, compensable.  29 C.F.R. § 785.18.  If AI-monitoring tools automatically deduct from pay all time deemed non-productive time, even non-productive time of short duration, employers may unwittingly run afoul of the FLSA.    

These are not hypothetical concerns.  In a case brought in the Western District of Texas, a plaintiff brought a proposed collective action under the FLSA for unpaid off-the-clock work and her purported former employer.  The plaintiff, who primarily worked remotely, alleged that she and others similarly-situated were monitored through tracking software and compensated based on the software’s tracking of her activities.  For example, she claimed that if the surveillance software did not see her working, she would not be paid for that interval of inactivity, such as “10-minute time frame[s].”  The plaintiff claimed that the system failed to account for various offline work, including reviewing and annotating hard copy documents, receiving work-related phone calls away from her computer webcam, and participating in online conferences on her mobile phone away from her workstation.  The parties eventually settled for an undisclosed amount.     

The upshot is that reliance on AI-powered monitoring software may provide insight into employees’ work habits, but it should not be used as a panacea for time tracking.  Best practices include auditing any AI-powered software to ensure it does not lead an employer to unwittingly violate the FLSA.  Best practices also include implementing a reasonable reporting system that allows non-exempt employees to report hours worked that they believe were not captured by the software.  By doing so, employers will help guard against potential off-the-clock claims.       

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.

Seyfarth Synopsis: In a unanimous decision, a panel of the Fifth Circuit invalidated the DOL’s 2021 rule codifying the 80/20 rule.

As we here at TIPS predicted not too long ago, the Fifth Circuit on Friday issued an opinion striking down the DOL’s December 2021 regulation codifying the Department’s longstanding “80/20 rule.” The Fifth Circuit’s decision roundly rejects the 80/20 rule’s focus on whether employees’ discrete work activities are tip-producing or not, and instead concludes that the plain meaning of the statute is clear: an employer may claim the tip credit for any employee who, when engaged in her job—whatever duties the job entails—customarily and regularly receives more than $30 per month in tips.

To back up for a moment, the 80/20 rule, as we’ve explained, stems from a provision the DOL added to its 1988 Field Operations Handbook (“FOH”)—guidance that itself purported to synthesize enforcement positions taken in opinion letters dating back to 1979.  Under the DOL’s guidance, employers could take a tip credit, and therefore pay a service rate of pay (currently $2.13/hour under federal law), for tipped workers—but only for time spent engaged in “tip producing” work and work that “directly supports” the tip producing work. And, only if the time spent on the directly supportive work was not “a substantial amount,” which the DOL said was time in excess of 20% of total hours in a workweek for which the employer sought to take a tip credit.  Then, in the 2021 rulemaking, the DOL largely codified the 80/20 Rule, but added a new onerous limitation: employers would also not be able to take a tip credit for any directly supporting work performed for more than 30 continuous minutes.

Organizations representing the national and local restaurant industries promptly sued to enjoin enforcement of the new 80/20 regulation.  After an initial battle over whether a preliminary injunction should issue ended up at the Fifth Circuit, the District Court upheld the new rule, concluding that it was a permissible construction of the relevant statutory text under the Supreme Court’s Chevron doctrine of agency deference.

The challengers appealed again. Back at the Fifth Circuit, the panelists seemed more than a little skeptical of the 80/20 rule’s validity. Then, while the appeal was pending, the Supreme Court overruled Chevron, instructing lower federal courts that they need not defer to agency rules construing federal statutes even when those statutes are ambiguous.

In the Fifth Circuit’s view, though, the 80/20 rule would fail under any test, Chevron or not, because the relevant statutory text, 29 U.S.C. § 203(t), is not ambiguous.  That provision says that employers may take a tip credit for any employee “engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”  The court rejected the DOL’s position, codified in the 80/20 rule, that determining whether an employee is “engaged” in such an occupation for hours worked depends upon how much of that time is spent doing tasks for which the employee receives tips.  Instead, the court held, “engaged in an occupation” means something much more straightforward: employed in a job. As the court put it, the statutory definition “indicates a focus ‘on the field of work and the job as a whole,’ rather than on specific tasks.”

Additionally, the Fifth Circuit was unmoved by the fact that the 80/20 rule has reflected the DOL’s interpretation of § 203(t) for most of the period since at least 1988. Although courts should pay attention to longstanding agency interpretations of the law, the Fifth Circuit explained, the court in this case was “not persuaded that the 80/20 standard, however longstanding, can defeat the FLSA’s plain text.”

After finding the 80/20 rule to be contrary to the FLSA and therefore invalid, the court vacated the rule and set it aside. Simply put, the 80/20 rule—for now—is dead, at least in the Fifth Circuit (which encompasses the federal district courts in Texas, Louisiana, and Mississippi). Although we don’t pretend to know the future, we think it is a pretty safe bet that this case is now on a fast track to the Supreme Court.

In an upcoming TIPS post, we will discuss how restaurant and hospitality employers should respond in the wake of the Fifth Circuit’s decision. Stay tuned.

By: Alex Simon

Seyfarth Synopsis: The Seventh Circuit held that out-of-state plaintiffs must be dismissed from FLSA collective actions when the court lacks personal jurisdiction over them.

In a 2-1 decision reversing the lower court, the Seventh Circuit last week joined the Third, Sixth, and Eighth circuits in holding that the Supreme Court’s 2017 decision in Bristol-Myers Squibb Co. v. Sup. Ct. of Cal. applies to FLSA collective actions. This means that four of the five circuit courts to analyze this issue agree that out-of-state plaintiffs must be dismissed from FLSA collective actions when the court lacks personal jurisdiction over them.

Ultimately, this means that a “nationwide FLSA collective action” can only proceed in jurisdictions where the employer is “essentially at home,” or where the employer otherwise consents to the Court’s general jurisdiction. A court must establish its jurisdiction over claims one at a time—and every employee who participates in an FLSA collective action has an independent claim.

This ruling does not act as a complete bar against nationwide collective actions. What it does do is disincentive forum shopping: absent the employer’s consent, a plaintiff cannot bring a nationwide collective action in a court within the Seventh Circuit where the employer has only “minimal contacts.”

For example, if an Illinois based employee wants to sue her Georgia-based employer for an overtime violation, she will be required to (a) pursue her claim individually in Illinois, (b) pursue a statewide collective action in Illinois, (c) pursue the case as a nationwide collective action in Georgia, or (d) convince the employer to consent to the Illinois courts’ jurisdiction with respect to out-of-state plaintiffs. In Luna Vanegas, a Wisconsin-based employee overreached in his bid to invite other out-of-state H-2A construction workers to join his case against his Texas employer in the Western District of Wisconsin.

Although this decision represents an emerging consensus, defining exactly what an FLSA collective action is supposed to be continues to confound courts. In BMS, the Court recognized that in true class actions, the court would not have to re-establish personal jurisdiction over absent class members. But as the Seventh Circuit observed, FLSA collective actions are not class actions. Although they are a form of “aggregate litigation,” every participant in a collective action becomes a “party plaintiff.” Each party plaintiff is entitled to present their own evidence at trial, and the outcome is not binding on absent plaintiffs. Unlike in class actions, the court is not required to undertake a “rigorous analysis” before conditionally certifying a collective action. That means, the named plaintiff in an FLSA collective is not required to prove that she will “fairly and adequately protect the interests of the class.” So while in a true class action, the “class as a whole is the litigating entity,” the FLSA collective action is not afforded any independent legal status. And because of this, BMS requires a claim-by-claim personal jurisdiction analysis in the FLSA context.

In the end, this is a well reasoned opinion that is favorable to employers. Undoubtedly, district courts in the circuits that have yet to decide this issue will look to Luna Vanegas for guidance, just as they have done for the last three years with the conforming decisions in Fischer (3d Cir. 2022), Canaday (6th Cir. 2021), and Vallone (8th Cir. 2021). The anomalous decision in Waters (1st Cir. 2022) will now appear as an even greater outlier—its persuasiveness outside of the First Circuit is now diminished even further.

Nonetheless, when confronted with a potential nationwide FLSA collective action, employers would still be well advised to invoke Luna Vanegas cautiously. While precluding a single court from overseeing a nationwide collective action will be the right choice in many instances—especially in hostile jurisdictions—it is not necessarily costless. In the absence of a single, consolidated court proceeding, employers could easily become embattled with fragmented litigation over the same minimum wage or overtime claims across many courts across the country. Whether this is preferable to a single nationwide collective can depend on many factors, including but not limited to the state of the case law in the original forum, and opposing counsel’s ability to independently recruit case participants absent the formal “collective action notice” procedures. But again, this is overwhelmingly a favorable decision.

By: Phillip J. Ebsworth and Brian B. Gillis

Seyfarth Synopsis: The California Supreme Court held that PAGA does not apply to public entity employers.

The California Supreme Court overturned the Court of Appeal and prior appellate court decisions to conclude that the PAGA statute, legislative history, and public policy support the conclusion public entity employers are not subject to PAGA actions for civil penalties. In doing so, the Supreme Court considered PAGA’s statutory language, which provides for penalties against “the person [who] employs one or more employees,” along with “person” defined by the Labor Code as “any person, association, organization, partnership, business trust, limited liability company, or corporation.” Labor Code § 2699(b); Labor Code § 18. The Supreme Court noted that a public entity does not fit the Labor Code’s definition of “person.”

The Court of Appeal, agreeing with prior appellate decisions, had held that Labor Code § 18’s definition of “person” was limited to alleged Labor Code violations where PAGA’s default penalties applied but not for Labor Code violations where a civil penalty is already provided. However, the Supreme Court held that Labor Code § 18’s definition of “person” applied to PAGA as a whole and not just default penalties such that public employers are not subject to PAGA. In doing so, the court noted that PAGA penalties could impose a significant financial burden on public entities, and in turn taxpayers, which would ultimately serve to hinder public employers’ ability to carry out their public missions.

Seyfarth Synopsis: While reversing a grant of summary judgment in favor of an employer based on the de minimis doctrine, the Ninth Circuit held that the doctrine still can apply under the FLSA.

As readers of this blog, and particularly fans of The Princess Bride, know well, the de minimis doctrine is considered by many to be “mostly dead” in wage-hour litigation.

Indeed, the doctrine was feared to be close to its demise last week when it was considered by the Ninth Circuit Court of Appeals in Cadena v. Customer Connexx, LLC, a long-running case in which call center employees claim that they are owed additional overtime pay for time spent booting up and shutting down their computers. 

Nearly two years ago, the Ninth Circuit reversed a district court grant of summary judgment to the employer, holding that time these call center workers spent booting up their computers is an integral and indispensable part of their duties. But on remand last summer, the district court granted summary judgment to the employer yet again, this time on the grounds that time spent booting up and shutting down a computer is de minimis. 

The call center workers appealed, this time urging the Ninth Circuit to hold that the de minimis doctrine should no longer be recognized under the FLSA, particularly in light of Justice Scalia’s passage in Sandifer v. U.S. Steel Corp. (U.S. 2014) that the “de minimis doctrine does not fit comfortably within the [FLSA], which, it can fairly be said is all about trifles.” The workers’ contention stood a good chance of gaining acceptance, as the Ninth Circuit often is regarded as more protective of workers than several other circuits. Indeed, an intermediate appellate court in California and the Supreme Court of Pennsylvania both recently invalidated the de minimis doctrine under their state wage-hour laws.

The Ninth Circuit, however, did not take the bait, holding that the de minimis doctrine remains a potentially viable defense to a claim for overtime wages. In doing so, the court cabined Justice Scalia’s Sandifer language to the FLSA Section 203(o) concerning clothes changing time and relied on its prior precedents on the de minimis doctrine. At least in the Ninth Circuit, the de minimis doctrine remains, in the words of Miracle Max, “slightly alive,” taking into account in each case the practical administrative challenges of recording the time spent on the activity at issue, the aggregate amount of payable time, and the regularity of the activity in question.

The Ninth Circuit’s ruling also makes clear that the de minimis doctrine remains in a precarious position, as it reversed the district court’s grant of summary judgment to the employer. First, it reiterated that, within the Ninth Circuit, it is the employer’s burden to show that the time spent on the activity at issue is de minimis. Second, it stressed that employers may have to compensate employees for even small amounts of daily time, especially if it occurs regularly, unless that time cannot, as an administrative matter, be recorded for payroll purposes.

Third, in applying those principles to this case, the court concluded that disputed questions of material fact necessitate reversal of the district court’s decision because there exists evidence that all workers engaged in booting up, and shutting down, their computers each and every shift; that while some workers spent only seconds on such activities, others testified that the process could take even more than ten minutes each day; and that there are methods the employer potentially could have used to estimate time spent booting up computers or that it could have recorded time on that activity through a separate time clock.

Employers must bear in mind that several of these factors could apply in many call center environments and in several other contexts and make it difficult to sustain a de minimis defense.

The district court, perhaps through a jury, is now tasked with reconsidering the difficulty for the employer in tracking its workers’ boot up and shut down time and how much time booting up and shutting down a computer really takes (everyday experience suggests that jurors may believe that, while there are occasions after outages or system updates that booting up can take a bit of time, it usually takes only seconds to type CTRL+ALT+DELETE, a username, and a password).

This decision’s impact on employers underscores the importance of accurately recording and compensating all time employees spend on job functions, including preparatory activities such as booting up a computer. Although the de minimis doctrine still has a place in litigation under the right circumstances, the trends of recognizing such preparatory activities as compensable time, as well as questioning time rounding practices, suggests that employers only rarely should rely on the doctrine as a defense.

Instead, they should review timekeeping practices to ensure compliance with the FLSA to avoid potential litigation; ensure they mandate compensation for all hours worked, including delays encountered by slow computer boot-ups due to software updates, bugs, or other issues; include a method for employees to report any delays that may impact their duties; train employees and their supervisors about their timekeeping policies and practices; and evaluate the startup process for essential applications to understand the actual time required for employees to be ready to work.

By: Alison Silveira and Lilah Wylde

The rules governing the employment relationship are always changing. Laws creating new employer obligations, technology solutions making work more efficient and more complicated, and rules governing the resolution of disputes between employers and their workers are around every corner. Wage and Hour Around the Corner is a new blog series for employers, in-house lawyers, and HR, payroll, and compensation, that helps employers stay on the cutting edge of wage and hour changes happening now and those on the horizon.

On Thursday, the Third Circuit held that collegiate athletes may assert a claim under the Fair Labor Standards Act.  The decision in Johnson v. National Collegiate Athletic Ass’n, — F.4th –, 2024 WL 3367646 (3d Cir. July 11, 2024) is the first of its kind at the federal appellate level, as it breaks from the precedent of its sister circuits which have historically dismissed such claims over the past 30 years by “grant[ing[] the concept of amateurism the force of law.” Id. at *6.  That these athletes may continue to pursue their claims under the FLSA and state wage laws, however, is akin to winning a tennis set – but far from finishing the match.  The ball is now back in the athlete-plaintiff’s court, to see whether the economic reality of their athletic endeavors is sufficient to establish that they are employees of either the NCAA or the universities for which they competed. 

The Game …

In 2019, six then-current and former collegiate athletes filed a putative collective and class action against the NCAA and 25 NCAA Division 1 universities.  The plaintiffs, who competed in football, swimming/diving, baseball, tennis, and soccer, allege that they and all other similarly situated collegiate athletes were jointly employed by the defendants and 100 additional NCAA Division 1 universities.  According to the district court, the premise of their claim is that “student athletes who engage in interscholastic activities for their colleges and universities are employees who should be paid for the time they spend related to those athletic activities.” Johnson v. Nat’l Collegiate Athletic Ass’n, 556 F. Supp. 3d 491, 495 (E.D. Pa. 2021).  Defendants moved to dismiss the Complaint on the ground that they do not employ the plaintiffs (whether directly or under a joint employer theory of liability), but the court denied that motion.

In reaching its decision, the district court first addressed the concept of amateurism, which has historically served as the foundation upon which collegiate athletics are distinguishable from anything akin to a business or employment model.  The idea that amateurism – i.e., the practice of participating in athletics on an unpaid as opposed to professional basis – exempts collegiate athletes from the federal wage laws grew out of the Supreme Court’s opinion in NCAA v. Board of Regents, 486 U.S. 85, 120 (1984), which recognized that “[t]he NCAA plays a critical role in the maintenance of a revered tradition of amateurism in college sports.”  However, in 2021, just two months before the district court’s denied the motion to dismiss, the Supreme Court revisited this language, explaining:

Board of Regents may suggest that courts should take care when assessing the NCAA’s restraints on student-athlete compensation, sensitive to their procompetitive possibilities. But these remarks do not suggest that courts must reflexively reject all challenges to the NCAA’s compensation restrictions. Student-athlete compensation rules were not even at issue in Board of Regents.

National Collegiate Athletic Ass’n v. Alston, 594 U.S. 69, 92 (2021); see also id. at 108 (“The Court makes clear that the decades-old ‘stray comments’ about college sports and amateurism made in [Board of Regents] were dicta and have no bearing on whether the NCAA’s current compensation rules are lawful.”) (Kavanaugh, J., concurring) (citation omitted). 

Relying on this new guidance, the district court rejected the concept of amateurism as an exemption to the FLSA, and handed plaintiffs a win in the first game of their (legal) set.

…The Set…

Defendants appealed to the Third Circuit, and while the matter was argued in early 2023 it took nearly 15 months for the Court to declare that the plaintiffs are entitled to assert a claim for employment status under the Fair Labor Standards Act.

The Third Circuit’s opinion begins with an interesting and instructional summary of the  history of college athletics, reasoning that it is necessary to understand how collegiate sports generate revenues to answer the question of whether the amateur status of a collegiate athlete renders them ineligible for payment of the minimum wage.2024 WL 3367646, at *2-*4.  The 1843 Boat Race between Harvard and Yale was the first college athletic contest designed for profit that set the stage for what has become a multi-billion dollar industry.[1] College athletics steadily evolved to increase institutional prestige through revenues[2] and increased applications for admission following highly publicized football or basketball games.[3]

Ultimately, the Third Circuit’s decision in Johnson upholds the district court’s decision and announced a new “test” to determine what constitutes an employee in the world of collegiate athletics, finding:

“[C]ollegiate athletes may be employees under the FLSA when they (a) perform services for another party (b) necessarily and primarily for the other party’s benefit, (c) under that party’s control or right of control, and (d) in return for express or implied compensation or in-kind benefits.”

2024 WL 3367646, at *11 (internal citations and quotations omitted).  This test stems from what the Third Circuit saw as a “need for an economic realities framework that distinguishes college athletes who ‘play’ their sports for predominantly recreational or noncommercial reasons from those who play crosses the legal line into work protected by the FLSA.” Id. at *13.

… And On to The Match

Johnson is the first appellate court to find that collegiate athletes can assert a claim to employment status under the FLSA.  As any tennis player knows, however, winning a set is a far cry from winning the match.  In issuing its opinion, the Third Circuit (without having before it any facts, given that no factual record has been developed below) recognized that the application of its test will be fact dependent, and may vary among sports, universities, and even individual athletes, opining “merely playing sports, even at the college level, cannot always be commercial work integral to the employer’s business in the same way that the activities performed by independent contractors or interns are assumed to be” in other contexts. 2024 WL 3367646, at *9.  The Court further acknowledged that under both Supreme Court precedent and the Department of Labor’s regulations, “the FLSA does not cover a person who, ‘without promise or expectation of compensation, but solely for his personal purpose or pleasure’ performs ‘activities carried on by other persons either for pleasure or profit.’” Id. (quoting Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947)).  It remanded the matter back to the district court to undertake this factual inquiry.

Depending on how the factual record develops, these distinctions are likely to create roadblocks against Johnson proceeding in the manner that it is currently pled.  For example, whether an individual collegiate athlete’s “services” are for their own benefit, or for the benefit of either the NCAA or the university that they attend, is the type of individualized inquiry that could preclude class certification.  Even if “benefit” were interpreted to mean strictly financial benefit (which is very much an open issue), revenue is by definition inconsistent year over year.  And while some sports may historically drive more revenue than others (i.e., football and men’s basketball), this is only true at certain universities – and certainly not all 125 Division 1 schools that are covered by the putative class that the plaintiffs seek to represent.  Further, even among teams that historically generate significant revenue, not all athletes on a particular team in a given year will be able to establish that they engaged in athletic endeavors with an expectation of compensation; some will have walked on to teams in the hopes of having the opportunity to compete, as opposed to being recruited to play.  And for universities that have historically never provided compensation to athletes (i.e., Ivy League schools which do not offer scholarships), an argument that any athlete who competes for those teams does so with an expectation of compensation or in-kind benefits is likely to face a steep uphill climb.

What Johnson does provide is a new lens to evaluate the unique characteristics of the NCAA and the individual universities’ student athletes and athletic programs.  The entire landscape of compensation for collegiate athletes is currently in flux, including with respect to name, image and likeness rights, collective bargaining rights,  and a pending settlement in House v. NCAA which, as currently reported, will open the door, for the first time, to direct compensation to collegiate athletes in the form of revenue sharing. There are years of litigation to come before we see whether there will be further appellate review, how the trial court applies Johnson to the individual plaintiffs in that case, whether any subset of those plaintiffs will prevail on an employment claim, and whether the decision may have implications beyond just those plaintiffs.  Only then will we be able to declare who has won this match. 

[1] The race was actually not proposed or organized by the students of Yale or Harvard, but instead by a railroad superintendent who hoped to increase ridership by staging a regatta on his rail line. 2024 WL 3367646, at *3.

[2] At least 38 NCAA member colleges currently gross more than $100 million annual in sports revenue. Id. at *3.

[3] Boston College applications jumped 30% the year following an exciting football game won by Boston College with a 48-yard Hail Mary touchdown pass with six seconds on the clock. Id. at *2.