By: Kyle Winnick & Andrew McKinley

Seyfarth Synopsis: On Monday, the Supreme Court agreed to hear a case addressing whether an employee paid on a day rate and earning over $200,000 a year is entitled to overtime under the FLSA

The U.S. Supreme Court has agreed to hear Helix Energy Solutions Group, Inc. v. Hewitt, a case addressing whether a supervisor who earned a day rate of $963, and more than $200,000 annually, was paid on a “salary basis” under the FLSA. This question affects the entire spectrum of highly paid white-collar workers whose compensation includes a guaranteed amount, plus additional payments based on an hourly, daily, or per-shift rate.

For background, the FLSA requires employers to pay covered employees one-and-one-half times their regular rate of pay for all hours worked over 40 in a workweek. This requirement, however, does not apply to certain exempt employees. One such exemption is the highly-compensated employee (“HCE”) exemption. Under the HCE exemption in effect when Helix was originally decided, an employee “with total annual compensation of at least $100,000 [was] deemed exempt,” as long as (1) their compensation included “at least $455 per week paid on a salary or fee basis” and (2) they customarily and regularly performed certain duties. (As noted here, effective January 1, 2020, the annual and weekly thresholds were increased to $107,432 and $684, respectively.)

At issue in Helix is when a highly-compensated employee is paid “on a salary basis.” The regulations define “salary basis” to mean that an employee “regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation[.]” 29 C.F.R. § 541.602(a).

The plaintiff in Helix, a highly skilled supervisor, received paychecks bi-weekly—i.e., he “received” pay “on a weekly, or less frequent basis”—and in any week in which he worked a single minute, he was guaranteed a “predetermined amount” that always exceeded the minimum weekly salary of $455 (i.e., his daily rate of $963). Following the plain text of § 541.602(a), the district court ruled that the plaintiff had received at least $455 per week paid on a salary basis.

On appeal, however, a three-judge panel of the Fifth Circuit held otherwise. Citing to 29 C.F.R. § 541.604(b), the Fifth Circuit found that there was no “reasonable relationship” between the plaintiff’s day-rate of $963 and his total weekly compensation, which could be thousands of dollars, and ruled as a result that he was not paid on a salary basis. The Fifth Circuit agreed to the hear the case en banc and, in a 12-6 split, affirmed.

Yet, the HCE regulation makes no mention of § 541.604(b). Rather, the HCE regulation only cites to § 541.602. The unequivocal inference from this omission has not been lost on other courts, including the First and Second Circuits, which have rejected the notion that § 541.604 applies to the HCE exemption. Moreover, superimposing § 541.604(b)’s “reasonable relationship” test on the HCE regulation makes little sense. After all, until 2020, the HCE regulation expressly contemplated an exempt employee earning $100,000 or more in total annual compensation, inclusive of just $455 per week in salary (the equivalent of $23,660 annually).

The question of whether the “reasonable relationship test” applies to day rate employees taking home over $200,000 per year could impact a wide spectrum of exempt-classified workers whose compensation encompasses hourly, daily, or per-shift wages. The Supreme Court’s decision, which we anticipate will be issued in the first half of 2023, should provide guidance to employers on when and under what circumstances they may rely on the HCE in determining how to pay these employees.

 

 

By: A. Scott Hecker and Scott Mallery

Seyfarth Synopsis: On March 30, 2022, the Senate voted down a cloture motion to advance the nomination of Dr. David Weil to return as U.S. DOL Wage and Hour Division (“WHD”) Administrator. This public rebuke – made possible by the defection of Democratic Senators Manchin, Sinema, and Kelly – leaves WHD without a politically-appointed leader for the foreseeable future.  The Biden Administration will need to go back to the drawing board to identify an alternative nominee who is palatable to moderate Democrats, as the party faces down uncertain prospects in the upcoming November midterms.

While perhaps not so terrifying as the Eye of Sauron, the potential enforcement gaze of Dr. David Weil motivated employers to lobby against another round of his leadership at WHD.  Dr. Weil has been a consistently outspoken critic of the gig economy, and he believes most workers should be viewed as employees, rather than classified as independent contractors.

With the economy continuing to claw its way back from the pandemic-related downturn, employers engaged in significant efforts to keep Dr. Weil from returning to the office he occupied during the Obama Administration (which, incidentally, has a magnificent view of the Capitol).  These efforts were rewarded when Senators Manchin, Sinema, and Kelly crossed the aisle to stop Dr. Weil’s nomination in its tracks.  Days later, Dr. Weil formally withdrew from consideration.

Administrations prioritize avoiding such public failings when it comes to their nominees, so we can infer that these “no” votes came as something of a shock to President Biden; indeed, prior scuttled Biden nominees withdrew before landing on the Senate floor.  Of course, Senator Manchin expressed reservations about Dr. Weil previously, and Senator Sinema sits toward the conservative end of the Senate Democrat spectrum, so Senator Kelly’s lack of support was likely the most difficult to foresee.

The next step for President Biden is to lick his wounds and identify a new nominee to lead an agency at the forefront of numerous Administration priorities.  Beyond the gig economy and alleged worker misclassification, WHD is involved in significant rulemakings (e.g., Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees; and Modernizing the Davis-Bacon and Related Acts Regulations), and is working to staff up to execute its enforcement obligations.  Jessica Looman has not appeared hindered by her “Acting” title, but lacking the political heft of Senate confirmation at the top of the organizational chart tends to limit what a government agency can accomplish.  Dr. Weil’s many fans within DOL likely feel some level of demoralization resulting from this outcome as well.

Senate Democrats’ razor-thin majority may not survive midterms, so it could be that WHD remains without a confirmed Administrator for some time to come.  Employers should continue to monitor this leadership void because it will impact WHD’s policy-making and enforcement efforts under the Biden Administration.

For more information on this or any related topic please contact the authors, or your friendly, neighborhood Seyfarth attorney.

By: Emily J. Miller, Molly C. Mooney, Barry J. Miller, and Anthony S. Califano

We invite you to join us for a micro webinar where Seyfarth’s Boston Wage and Hour attorneys will discuss practical takeaways and considerations employers in Massachusetts should be aware of in light of this decision. Read more on the Massachusetts Supreme Judicial Court decision below.

Specific topics covered will include:

  • How employers should revamp payroll systems to operate in a zero-margin-for-error environment
  • How to deal with the settlement of disputed wages claims in the face of automatic multiple damages
  • The potential retroactive effect of the ruling to create liability based on payments that have already been made

Friday, April 8, 202212:30 p.m. to 1:00 p.m. Eastern11:30 a.m. to 12:00 p.m. Central10:30 a.m. to 11:00 a.m. Mountain
9:30 a.m. to 10:00 a.m. Pacific

Speakers
Barry J. Miller, Partner, Seyfarth Shaw LLPMolly C. Mooney, Partner, Seyfarth Shaw LLP

Register Here

 

On April 4, 2022, the Massachusetts Supreme Judicial Court adopted an even more employee-friendly approach to damages for Wage Act violations in the Bay State.  In Reuter v. City of Methuen, No. SJC-13121 (Mass. April 4, 2022), the SJC held that all Wage Act violations trigger treble damages, regardless of whether the employer remedies the violation prior to the employee filing suit.  This decision contradicts longstanding lower court precedent holding to the contrary.  Under the SJC’s holding in Reuter, any employee paid late – for whatever reason and even if remedied – is entitled to three times the total amount of the wages in question.  In short:  honest payroll errors and good faith disputes over what an employee may be owed just got much more expensive.

The Wage Act (M.G.L. ch. 149, § 150) provides that prevailing plaintiffs “shall be awarded treble damages, as liquidated damages, for any lost wages and other benefits and shall also be awarded the costs of the litigation and reasonable attorneys’ fees.”  It also provides that, “[t]he defendant shall not set up as a defen[s]e a payment of wages after the bringing of the complaint.”  Nearly two decades ago, in the first case to address this issue, Dobin v. CIOview Corp., then Superior Court Justice Gants interpreted this provision of the Wage Act to mean that when wages are paid late but before a complaint is filed, the only damages are interest on the delayed payment, trebled.  Since then, Justice Gants’ reasoning has been followed in a number of Superior Court and federal court decisions interpreting this provision of the Wage Act.

But yesterday, the SJC upended that precedent.  In Reuter, the City of Methuen terminated the plaintiff’s employment after she was convicted of larceny.  Three weeks after it terminated plaintiff’s employment, the City paid the plaintiff for her accrued, unused vacation time (totaling roughly $9,000).  Approximately a year later, having lost her bid to challenge her termination in front of the Civil Service Commission, Plaintiff sent the City a demand letter seeking treble damages for the late-paid vacation – plus attorney’s fees.  When the City sent her a check for the trebled interest instead (consistent with the holding of Dobin), the plaintiff filed the instant action.

The SJC determined that because the City of Methuen paid the plaintiff’s final wages late, it was strictly liable and therefore owed treble damages on the delayed wages.  In doing so, the Court rejected the holding in Dobin, and reasoned that “allowing a defense for late payments made before litigation is commenced would essentially authorize, and even encourage, late payments right up to the filing of a complaint.”  The SJC held that the statute imposes strict liability and that “employers rather than employees should bear the cost of such delay and mistakes, honest or not.”  Under the holding of Reuter, employers now have a substantially reduced financial incentive to attempt to settle wage disputes before they are filed in the courts.

This decision carries harsh penalties for inadvertent and potentially unavoidable payroll mistakes.  Under this standard, payroll errors beyond an employer’s control will automatically result in liability for three times the amount of the wages actually owed.  For systemic payroll errors or system outages affecting a large number of employees, this will mean potentially catastrophic liability for payments that are even one day late.  The SJC was unmoved by the draconian nature of these penalties for employers, and instead singularly focused on the impact on employees whose wages may be detained upon termination.

In some respects, these harsh remedies imposed by the Reuter decision are arguably not well calibrated to the mischief that the Court sought to remedy.  First, while the Court repeatedly emphasized consequences that might befall employees from the abrupt interruption of their usual wages, the amount at issue in the case pertained exclusively to vacation pay, and not all employees will have accrued vacation to use as an economic cushion when terminated.  Further, the SJC even identified a means by which employers can avoid immediate payments to an employee who is subject to termination, noting that employers in that situation may need to suspend an employee to buy time to determine their final wages before actually terminating them.  Most employees lawfully can be suspended without pay, leaving an employee in exactly the situation from which the Court sought to protect the plaintiff in Reuter – having her stream of income interrupted.  An employee might be left in that limbo status for an extended period of time before the termination was formalized and final wages paid, and such a circumstance seems no better for the employee than the harm that troubled the Court.

As if treble damages for inadvertent payroll errors is not harsh enough, in his concurrence, Justice Georges also highlighted the Wage Act’s provision authorizing those aggrieved to recover “any damages incurred, and for any lost wages.”  Under Justice Georges’ reading of the Wage Act, plaintiffs are entitled to consequential damages in addition to treble their late-paid wages.  He suggests plaintiffs who “face catastrophe due to an employer’s withholding of wages” should be able to recover for those damages, citing hypothetical instances in which employees may miss mortgage or tuition payments and seek to hold their employers responsible for such consequences.  The majority did not take a position on this issue, as it was not properly before the Court in Reuter.

It remains to be seen whether the holding will be applied retroactively, but if so, it will impact ongoing litigation and past disputes.  For purposes of avoiding future liability, employers in the Commonwealth should take all available steps to minimize the potential for payroll errors or delays, including creating contingency plans for unavoidable and unexpected payroll issues.

By: John R. Skelton, Anthony Califano, Keval D. Kapadia

Introduction

On March 24, 2022, the Massachusetts Supreme Judicial Court (“SJC”) issued a much-anticipated decision in Patel, et al. v. 7-Eleven, Inc., et al. answering a certified question from the United States Court of Appeals for the First Circuit concerning the application of the Massachusetts independent contractor law (“ICL”) to franchise relationships.  The SJC found there is no conflict (and thus no preemption) between the “freedom from control” requirement under Prong A of the ICL and the Federal Trade Commission (“FTC”) Franchise Rule (the “FTC Franchise Rule”) which includes franchisor control as a potential element of a franchise relationship.

While some may see the SJC’s ruling as a boon for potential franchise misclassification claims, the SJC was careful to limit the scope of the ruling and actually offers useful guidance for franchisors.  First, the SJC confirmed the importance and protection of legitimate franchise relationships. Second, and significantly, it made clear that before any consideration of the ICL’s three prongs, there is a threshold question: a franchisee claiming to be a misclassified employee must first establish that the franchisee is an “individual performing any service” for the franchisor.  Patel v. 7-Eleven, Inc., No. SJC-13166, 2022 WL 869486, at *1 (Mass. Mar. 24, 2022). This is significant because franchisors don’t pay franchisees for services. Rather, franchisees pay franchisors, commonly through an upfront fee and ongoing royalties, for a license to use the franchisor’s trademarks and business format to operate an independent business associated with the franchisor’s brand.  Indeed, as defined under both the FTC Franchise Rule and various state franchise relationship laws, a “franchise” (and thus a franchise relationship) is an ongoing commercial relationship where a franchisee operates an independent “business” associated with the franchisor’s trademark.  Thus, this threshold providing services question should mean that for franchisors with true franchise relationships where franchisees operate independent businesses (as opposed to those designed to evade wage and hour laws) the ICL’s three–prong test simply will not apply.

Case Background and Decision

The Massachusetts ICL establishes a three-pronged “ABC” test to determine whether someone is an employee or an independent contractor. If an individual performs services for the putative employer, the ICL presumes employment status, which the putative employer can overcome by establishing:

  1. the individual is free from control and direction in performing services;
  2. the service performed is outside of the putative employer’s usual course of business; and
  3. the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

In Patel, several 7-Eleven franchisees allege they are actually employees misclassified as independent contractors.  See Patel v. 7-Eleven, Inc., 8 F.4th 26, 28 (1st Cir. 2021). On cross motions for summary judgment, citing Monell v. Boston Pads, LLC, 471 Mass. 566 (2015), the Federal District Court found that the ICL did not apply to a franchisor / franchisee relationship because “there is an ‘inherent conflict” between Prong A which requires the “worker” be “free from control in connection with the performance of the service” and the FTC Franchise Rule which contemplates a franchisor will “exert or [have] authority to exert a significant degree of control over the franchisee’s method of operation . . . .” Patel v. 7-Eleven, Inc., 485 F. Supp. 3d 299, 309 (D. Mass. 2020).  Plaintiffs appealed.  Focusing on that conflict, the First Circuit certified the following question:  “[w]hether the three-prong test for independent contractor status set forth in [G. L. c. 149, § 148B,] applies to the relationship between a franchisor and its franchisee, where the franchisor must also comply with the FTC Franchise Rule [16 C.F.R. § 436.1, et seq.].”  Patel, 8 F.4th at 29.  The Court of Appeals recognized the broader policy implications at stake, noting, in its certified question: there are “unique policy interests at stake,” the resolution of which impacts “untold sectors of workers and business owners across the Commonwealth.” Id. The SJC also saw the significant policy implications and took the opportunity to offer additional guidance which actually offers significant protections for franchisors. Patel, 2022 WL 869486 at *9.

On the conflict question, the SJC noted the importance of proper classification and how the ICL reflects “the Legislature’s broad, remedial intent ‘to protect workers by classifying them as employees, and thereby grant them the benefits and rights of employment, where the circumstances indicate that they are, in fact, employees.’”  Id. at *3 (quoting Depianti v. Jan-Pro Franchising Int’l, Inc., 465 Mass. 607, 620 (2013)).  Excluding franchise relationships from the ICL could potentially “permit employers to evade obligations under the wage statutes merely by labeling what is actually an employment relationship as a “franchise” relationship.” Patel, 2022 WL 869486 at *9.

The SJC ultimately found no conflict because the FTC Franchise Rule “is a pre-sale disclosure rule” that “does not regulate the substantive terms of the franchisor-franchisee relationship.” Id. at *6.  Given the FTC definition of a franchise, the SJC found that “control” is not necessarily the defining element because a franchisor can either exert “a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation”.  It could be just “significant assistance” to the franchisee.

Even where the franchisor chooses to exercise control over the franchisee’s method of operation, however, the SJC found that the FTC Rule disclosure obligations “do not run counter to proper classification of employees and, importantly, does not necessary make the franchisee an employee under Prong A.”  Id. at *6-7.  “Indeed, ‘significant control’ over a franchisee’s ‘method of operation’ and ‘control and direction’ of an individual’s ‘performance of services’ are not necessarily coextensive,” the SJC reasoned.  Id. at *7 (quoting Goro v. Flowers Foods, Inc., No. 17-CV-2580 TWR (JLB), 2021 WL 4295294 (S.D. Cal. Sept. 21, 2021)).  Similarly, the SJC noted that the “controls required under the Lanham Act, 15 U.S.C. § 1064(5)(A),” also do not preclude compliance with the first prong of the ABC test.  Patel, 2022 WL 869486, at *7 n.16.

Finally, the SJC dismissed both the franchise industry’s concern that a literal application of the ICL prongs would render virtually all franchisees employees and any thought of the “apocalyptic end of franchise arrangements.” Id. at *8.  Signaling an opportunity for franchisors to defend the legitimacy of their business models and the resulting franchise relationship, especially through the now clearly applicable threshold providing services question, the SJC noted that “any analysis of whether the ABC test is met must be done on a case-by-case basis”, citing numerous cases where franchise relationships were found to satisfy the three prongs of the ICL.  Id. *8 n.17.

Patel provides a roadmap for franchisors defending misclassification claims.

The SJC made clear that application of the ICL to franchise relationships would not “result in every franchisee being classified as an employee of the franchisor”. Id. at *9.  This was obviously important given the recognition by the First Circuit that there are “unique policy interests at stake” which impacts “untold sectors of workers and business owners across the Commonwealth.”  Patel, 8 F.4th 29. The SJC’s decision, especially the additional guidance, provides a roadmap for franchisors facing misclassification claims.

Patel recognizes and protects legitimate franchise relationships.

First, Patel confirms that nothing in the ICL prohibits legitimate franchise relationships that have not been created to evade obligations under the wage statutes.  Patel, 2022 WL 869486 at *9.  The SJC quotes a Massachusetts Attorney General Advisory Opinion which expressly states “there are legitimate independent contractors and business-to-business relationships in the Commonwealth [which] . . . are important to the economic wellbeing of the Commonwealth and, provided that they are legitimate and fulfill their legal requirements, they will not be adversely impacted by enforcement of the [ICL].”  Id. (citing Advisory 2008/1 at 5) (emphasis added).  While the Court did not want a blanket exemption leading to putative employers seeking to avoid the ICL simply by labeling relationships as a franchise, the underlying message of the decision is that legitimate franchise relationships are valid and are to be protected.

The SJC’s endorsement of legitimate franchise relationships is important because franchising is a “ubiquitous, lucrative, and thriving business model” which has “existed in this country in one form or another for over 150 years.” Patterson v. Domino’s Pizza, LLC, 333 P.3d 723, 725, 733 (Cal. 2014).  Maybe the most common form of franchising is business-format franchising (e.g., restaurants, hotels, gyms, and convenience stores) where the franchisee buys the right to use the franchisor’s trademarks, service marks, trade names, logos, proprietary business format, and methods to establish and operate their own independent business.  See id. at 733 (“Under the business format model, the franchisee pays royalties and fees for the right to sell products or services under the franchisor’s name and trademark.”).  As noted, the FTC Franchise Rule embodies the notion that franchisees are not “workers” but rather individuals who want to own and operate their own independent businesses. See 16 C.F.R. § 436.1(h)(1) (franchise is a “continuing commercial relationship or arrangement” where the franchisee obtains “the right to operate a business that is identified or associated with the Franchisor’s trademark”) (emphasis added).  Indeed, a franchisee is “an entrepreneurial individual who is willing to invest his time and money, and to assume the risk of loss, in order to own and profit from his own business.”  Patterson, 60 Cal. 4th at 490 (emphasis added).  Instead of opening a non-branded convenience store, restaurant, hotel, or other retail business, franchisees see the benefit of using the franchisor’s “brand” and business format because it provides the franchised business instant credibility, a customer base, and the “good will” associated with the franchisor’s brand.  The SJC recognizes franchising as a legitimate business model that is to be protected.

Franchisees must prove they are an “individual providing any service” to the Franchisor and not operating an independent business.

Second, and most significantly, the SJC confirmed that before any consideration of the individual ICL prongs, there is a threshold question that should render the ICL inapplicable to legitimate franchise relationships.  As the Court held, “distinguishing between legitimate arrangements and misclassification requires examination of the facts of each case, which begins with a threshold determination whether the putative employee ‘perform[s] any service’ for the alleged employer.” Patel, 2022 WL 869486 at *9 (citing G. L. c. 149, § 148B) (emphasis added).  In the franchisor -/- franchisee context, this threshold determination should turn on whether the franchisee is actually operating an independent business, or the franchise relationship is a subterfuge to outsource workers by classifying them as independent contractors instead of employees. Id. (citing Sebago v. Boston Cab Dispatch, 471 Mass. 321, 329-331 (2015)).

Significantly, the putative employee challenging the nature of the franchise relationship carries the burden of proof on this threshold question.  Also, per the SJC, the franchisee cannot meet that burden merely by showing there is a mutual economic benefit between the franchisor and franchisee which, of course, is the case.  Patel, 2022 WL 869486 at *9.  Similarly, mere compliance with relevant regulatory obligations by the franchisor is also not dispositive of the “performs any service” question.  Id.

This threshold independent business -/- providing services question actually has been central to many cases.  See, e.g., Athol Daily News v. Bd. Of Rev. Of Div. Of Emp. And Training, 439 Mass. 171, 181, 786 N.E.2d 365 (2003) (Court needs to determine “whether the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.”); Boston Bicycle Couriers, Inc. v. Deputy Director of the Div. of Employment & Training, 56 Mass.App.Ct. 473, 480, 778 N.E.2d 964 (2002).  See also Sebago, 28 N.E.3d at 1149 (holding that the trial court erred in failing to award summary judgment to defendant taxi garages where the record showed plaintiffs received service from, and did not provide services to, garages); Gallagher v. Cerebral Palsy of Massachusetts, Inc., 86 N.E.3d 496, 501 (Mass. App. Ct. 2017) (“Gallagher did not provide services to CPM and cannot be deemed its employee for the purpose of the Wage Act or the overtime statute.”).  Further, while decided in the context of the ABC prongs, Awuah v. Coverall N.A., Inc., 707 F. Supp. 2d 80 (D. Mass. 2010) and Coverall N.A. Inc. v. Comm’r of Div. of Unemployment Assistance, 447 Mass. 852, 857 N.E.2d 1083 (2006) also turned on this threshold question.  In each case, the courts concluded, based on the actual relationship and business structure, that the franchisees were not operating independent businesses but instead providing cleaning services for their franchisors.  Because Coverall provided the initial equipment and supplies; solicited and contracted directly with customers; set prices; invoiced customers and collected payments; and paid the putative franchisees after deducting fees, the Awuah and Coverall courts concluded those franchisees were not operating true independent businesses but rather were simply being paid for the cleaning services they were providing. Awuah, 707 F. Supp. 2d at 84; Coverall N.A. Inc., 447 Mass. at 859.

Even though the franchisee has the burden of proof on this threshold question, franchisors should be prepared to demonstrate how and why their franchisees are operating independent businesses. Franchisors should take the opportunity to review their presale disclosures, franchise agreements, and operations manuals and policies, to make sure that nothing reflects that franchisees are providing services and instead confirm that the franchisee is operating an independent business.  Franchisors should have a robust presale disclosure and acknowledgment concerning the nature of the relationship, including that the franchisee, by executing the franchise agreement is agreeing to establish and operate an independent business, the success of which depends on, among other things, the franchisee’s individual entrepreneurial ability. The specific terms of the franchise agreement will also be important, especially the franchisee’s authority and responsibility to manage and control customer relationships, pricing, profits, etc. All should demonstrate that when franchisees execute the franchise agreement they are not applying for a job, but rather entering into a commercial relationship pursuant to which they will establish and operate their own business.

Patel also offers useful guidance beyond the franchisor-franchisee relationship.

The threshold question of whether the individual claimant is performing services for the putative employer is not unique and certainly not limited to franchisor-franchisee relationships.  Patel reflects that various business arrangements involving legitimate independent contract relationships may indeed satisfy the ICL.

Also, while the ICL is intended to protect Massachusetts workers and provides a presumption of employment status once applicability is determined, Patel confirms that the considerations under the ABC prongs are more nuanced than many suggest.  Indeed, because the ABC test involves intricate, fact-specific inquiries, Patel recognizes that businesses establishing proper independent contractor arrangements can prevail under each prong of the ICL’s ABC test.

As an example, the SJC acknowledges that the specific nature of the control being exerted matters, and not all control precludes a finding of an independent contractor relationship.  While “control and direction in connection with the performance of the service” may reflect an employment relationship, the Patel decision confirms such control is distinct from control over a worker’s “method of operation.”  Patel, 2022 WL 869486 at *7.  According to the SJC, these two types of control “are not necessarily coextensive.”  Id.  Patel indicates that a business can exert control over the method of operation, and perhaps in other areas, and still satisfy prong A. Id.

Patel also reflects that neither prong B nor C is an insurmountable obstacle to a finding of a valid independent contractor relationship.  In a lengthy footnote, the SJC acknowledges, without criticism, numerous decisions where franchisors were held to have satisfied prongs B and C. Id. at *8. While those cases involved franchise arrangements, the Court’s rationale and observations should apply to other independent contractor business relationships.  Because “distinguishing between legitimate arrangements and misclassification requires examination of the facts of each case,” id. at *9, Patel reflects that businesses in Massachusetts—even those involving certain elements of control, synergy, and reliance—can establish legitimate independent contractor relationships.

John Skelton is co-chair of Seyfarth’s Franchise and Distribution Practice Group, Anthony  Califano is a partner in the firm’s Labor and Employment department and routinely represents clients concerning employee classification. Keval Kapadia, is an associate and a member of the Franchise Practice Group.

By: John Phillips and Andrew Scroggins

Seyfarth Synopsis:  On March 17, the House of Representatives passed the “Forced Arbitration Injustice Repeal Act of 2022” or the “FAIR Act,” which would ban the use of mandatory arbitration agreements and class and collective action waivers in the employment context (as well as for consumer, antitrust, and civil rights disputes).  If the Act were to pass the Senate and be signed into law, it would represent a sea change for employers, overturn decades of Supreme Court case law, and require employers to completely rethink their arbitration programs.  Although the Act’s prospects for passing the Senate are very uncertain, employers should pay close attention to developments in Washington, D.C., because, if passed, the Act would upend employers’ settled expectations with regard to their arbitration programs—not to mention impact businesses with regard to consumer and antitrust claims.

As we reported previously (here, here, and here), there has been a push in Congress and several states to ban enforcement of mandatory arbitration agreements for employment claims.  State efforts have largely—although not in every instance—been stymied by the Federal Arbitration Act, which provides that most arbitration agreements are enforceable according to their terms and which preempts states’ efforts to limit the enforceability of arbitration agreements.  And at the federal level, at least until recently, there was not a bipartisan majority in Congress sufficient to pass bills limiting the enforceability of arbitration agreements.

Nonetheless, there has been more and more support for arbitration agreement reform in Congress over the last several years.  For example, in April 2019 the Senate Judiciary Committee held a hearing entitled “Arbitration in America.”  The hearing was chaired by Senator Lindsey Graham (R-SC), and the Committee heard detailed testimony both for and against mandatory arbitration.  At the hearing, although they differed on how to address the issue, Senators in both parties expressed support for making arbitration more transparent.

This increased support in Congress recently culminated in a broad bipartisan agreement to limit the arbitrability of sexual assault and sexual harassment claims.  Last month, Congress passed H.R. 4445 or the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” and President Biden signed the bill into law on March 3.  A synopsis of that bill is available here.

Now, Congress’s push to limit the scope of arbitration continues—albeit on a much more party-line basis.  On March 17, the House of Representatives took up and passed the “Forced Arbitration Injustice Repeal Act of 2022” or the “FAIR Act” (H.R. 963).  When doing so, numerous members referenced testimony that Congress heard previously at the “Arbitration in America” hearing.  Representatives also relied on many of the same fairness arguments invoked recently to support the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.  Ultimately the FAIR Act passed the House by a vote of 222-209, with 1 Republican joining 221 Democrats in voting yes, and no Democrats voting no.

In a nutshell, the Act would prohibit, among other things, mandatory pre-dispute arbitration agreements in the employment, consumer, antitrust, and civil rights contexts.  The Act’s impact on consumer and antitrust claims are beyond the scope of this article, but, relevant here, it would prohibit mandatory arbitration of employment claims, including wage-hour and discrimination claims.  It would also preclude employers from maintaining class and collective action waivers.  Thus, the Act represents an attempt to overturn decades of pro-arbitration decisions applying the Federal Arbitration Act in the employment context, including a number of seminal Supreme Court decisions.

The FAIR Act would amend the Federal Arbitration Act as follows:

  • The Act would prohibit pre-dispute agreements that require arbitration of employment, consumer, antitrust, or civil rights disputes.
  • The Act would prohibit stand -alone class and collective action waivers for employment, consumer, antitrust, or civil rights disputes.
  • The Act defines employment and civil rights disputes broadly, to cover most employment-based claims, including discrimination and wage-hour claims.
  • The Act covers all arbitration agreements on the covered topics, regardless of whether the individual at issue is an employee or an independent contractor.
  • The Act specifically covers employment and civil rights disputes brought as class or collective actions under Federal Rule of Civil Procedure 23 or Section 216(b) of the Fair Labor Standards Act.
  • Federal law determines whether the Act applies to any particular dispute, and a court, not an arbitrator, decides the applicability of the Act to any specific arbitration agreement, even if the parties have delegated questions of arbitrability to an arbitrator.
  • The Act does not apply to most arbitration provisions in a contract between an employer and a labor organization or between labor organizations, such as grievance and arbitration provisions in labor contracts. However, the Act precludes such arbitration agreements from waiving the right of a worker to seek judicial enforcement of a right arising under the Constitution, a state constitution, or a federal or state statute or public policy.
  • The Act is effective on the date it is enacted—if that were to occur—and it would apply with respect to any dispute or claim that arises or accrues on or after the enactment date.

The Act now goes to the Senate.  It is unknown whether the Act can garner the support it needs to pass the Senate.  Although several Republican senators have expressed support for arbitration reform, the Act would need the support of at least 10 Republicans to survive a filibuster, if one were to be made.  Currently, it is unclear whether the Act has that amount of support.  By way of comparison, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act had 10 Republican co-sponsors before it came to vote, while the FAIR Act currently has none. That being said, opponents of mandatory arbitration for employment claims currently have momentum.  As such, employers should continue to monitor events in Washington, D.C., as change may happen quickly, and, if passed, the FAIR Act would change employment arbitration as we know it.

By: Robert Whitman and John Phillips

If Appraisal Is Governed by the Federal Arbitration Act, What Is the Process? | Property Insurance Coverage Law Blog | Merlin Law GroupSeyfarth Synopsis: Recently, Congress passed significant new legislation amending the Federal Arbitration Act and precluding employers from mandating that employees arbitrate sexual harassment or sexual assault claims.  Importantly for employers, however, this new law does not impact employers’ ability to require arbitration of wage-hour claims, which, for most employers, is benefit of employment arbitration programs.

Mandatory arbitration agreements with class and collective action waivers play an important role in managing workplace disputes.  As a condition of employment, the employee and the employer agree that any claims will be resolved in arbitration, which is the less formal and usually more expeditious than court.  The Supreme Court has consistently supported the use of arbitration agreements in employment, and explicitly upheld employment-related class and collective waivers in its 2018 decision in Epic Systems Corp. v. Lewis.

Last week, Congress passed H.R. 4445, known as the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021.”   The legislation, which is now awaiting President Biden’s signature, permits any person alleging sexual harassment or sexual abuse, at his or her election, to invalidate an arbitration agreement or class/collective action waiver that otherwise would require the harassment/abuse claim to be arbitrated.

The law is the culmination of years of scrutiny and criticism of arbitration, especially in light of the “Me Too” movement.  Several states have passed laws either limiting the use of mandatory arbitration agreement in employment altogether (such as California), or limiting the arbitrability of certain harassment- and discrimination-type claims (such as New Jersey and New York).  While these laws were vulnerable to preemption by the Federal Arbitration Act, H.R. 4445, an amendment to the FAA, may undermine or eliminate the preemption defense for such claims.

The good news for employers is that H.R. 4445 does not undermine the main reason that many companies find arbitration agreements useful:  limiting potential class/collective action exposure from wage-hour claims.  Because H.R. 4445 applies only to claims concerning sexual harassment or sexual assault, and does not apply to wage and hour claims, employers can continue to maintain (or roll out) mandatory arbitration programs that cover wage-hour claims, which are often asserted on a putative class/collective action basis.  And employers can continue to include class and collective action waivers in their arbitration agreements for those claims.

Given these developments, now is a good time for employers to reconsider their arbitration programs, and the purposes behind those programs, to ensure that their arbitration policies continue to further the company’s objectives and comply with existing law.  One possibility, for example, would be for employers to scale back mandatory arbitration programs to cover only wage-hour and similar claims with a high probability of class/collective action treatment.  But such considerations should be made based on the nature of the employer’s business and the particular legal risks facing the company, and in consultation with all stakeholders, including the company’s attorneys.  At the same time, employers should also continue to monitor developments at the federal and state level.

The bottom line: rumors of the death of employment arbitration have been greatly exaggerated.  With respect to wage-hour claims—for many employers, the greatest hotbed of potential legal liability—arbitration agreements, including class/collective action waivers, remain alive and well.

 

 

 

By: Robert S. Whitman and Kyle D. Winnick

Seyfarth Synopsis: The Second Circuit held that dismissals without prejudice of FLSA claims are subject to the same judicial or agency scrutiny as dismissals with prejudice of FLSA claims.

Settling Fair Labor Standards Act claims in the Second Circuit just became harder.

In Cheeks v. Freeport Pancake House, the Second Circuit held that stipulated dismissals with prejudice of FLSA claims require approval of the district court.  The court reasoned that the requirement of judicial approval furthers the “remedial purpose” of the FLSA.  However, the court deferred, “for another day,” the issue of whether parties may settle such claims without court approval when the dismissal is without prejudice.

“Another day” has now arrived. In Samake v. Thunder Line, Inc., a split panel of the Second Circuit extended Cheeks and held that FLSA dismissals without prejudice require court approval.

The plaintiff in Samake sued for unpaid overtime wages under the FLSA and other statutes.  The employer moved to compel arbitration.  In response, the plaintiff filed a notice of voluntary dismissal without prejudice under Federal Rule of Civil Procedure 41(a)(1)(A), which provides that the plaintiff—without a court order—may dismiss an action without prejudice by filing a notice before the defendant answers or moves for summary judgment, or by filing a stipulation of dismissal signed by all parties who have appeared.

Instead of automatically dismissing the lawsuit, the district court entered an order inquiring whether the parties had entered into a settlement, adding that, if so, such an agreement was subject to judicial review under Cheeks.  The plaintiff subsequently withdrew his dismissal, and the district court granted the former employer’s motion to compel arbitration.

The plaintiff appealed and argued, among other things, that the district court lost jurisdiction the moment he filed his notice of voluntary dismissal, despite his subsequent change of heart.  In a 2-1 decision, the Second Circuit panel disagreed.  It held that the district court acted properly and that Cheeks applies to dismissals of FLSA claims with­out­ prejudice.

The two-judge majority reasoned that the holding of Cheeks did not depend on whether the dismissal was with or without prejudice.  Rather, it said that the holding of Cheeks was grounded in policy concerns—to remedy the disparate bargaining power between employer and employees—that apply regardless of whether a dismissal is with or without prejudice.  It supported its ruling with observations that litigants could circumvent Cheeks and mandatory court oversight merely by dismissing FLSA claims without prejudice.

In a separate opinion, Judge Steven Menashi concurred in the judgment (because he thought the district court’s order compelling arbitration was not appealable), but disagreed with the majority’s extension of Cheeks.  He offered two principal reasons: “[n]either the text of Rule 41 nor that of the FLSA provides any reason to take away a litigants’ usual right to dismiss his case without prejudice,” and there is a fundamental difference between dismissals with and without prejudice.  As to the latter, he noted that, while a dismissal with prejudice “is—literally—an agreement to waive the right to pursue a cause of action,” a dismissal without prejudice does not operate as an adjudication on the merits.  Thus, unlike the situation in Cheeks, the plaintiff in Samake would not have been foreclosed from re-asserting his FLSA claim.

Unless the majority’s decision in Samake is reversed on en banc review or by the Supreme Court, all dismissals of FLSA claims under Rule 41 will now be subject to judicial scrutiny in the Second Circuit.  It therefore appears that the only route to avoid court review of such settlements is a Rule 68 Offer of Judgment, which the court held does not require or permit judicial review.

The volume of FLSA case filings in the district courts of the Second Circuit remains extremely high.  Although the courts encourage prompt settlement of such claims, those settlements face a significant roadblock with the requirement of court review under Cheeks, which not only imposes a requirement of court approval but significantly restricts the provisions that parties may include in their settlements. With Samake now extending that rule to dismissals without prejudice, parties must be mindful of how they structure their agreements if they wish to resolve FLSA cases with finality.

 

Seyfarth Shaw does it again with the 21st Edition of its annual publication Litigating California Wage & Hour Class And PAGA Actions. This latest iteration continues to be a valuable resource for employers who are navigating the nuances of wage and hour class and PAGA actions in California. As in past editions, the 21st edition covers top legal developments and wage and hour trends in the Golden State, including updates devoted to strategies for defeating class certification, defending against PAGA representative actions, issues affecting classification of workers as independent contractors and much, much more.

To request your eBook copy of the 21st Edition, click here.

By: Alison Silveira and Barry Miller

Massachusetts Supreme Judicial Court - WikipediaSeyfarth Synopsis: The Massachusetts Supreme Judicial Court answered longstanding questions about which entities may be jointly responsible for wage violations under Massachusetts law, and in so doing, highlighted the perils for employees of joining a federal collective action and failing to assert any related state law claims in that proceeding.  The Court aligned the Massachusetts standard for joint employment with federal law and held that employees who join a federal case may not later bring state law claims against their employer in a separate action.

Joint Employment

In Jinks v. Credico (USA) LLC, the plaintiffs argued that they were employees of not only the direct sales company that hired and paid them but also a third-party sales broker that facilitated their work selling products or services for nationally recognized brands.  Plaintiffs argued that the expansive and stringent ABC test found in the Commonwealth’s Independent Contractor statute, G.L. c. 149, § 148B, also determined whether a third-party can be liable for wage-related violations.  The result of that theory would have made an entity the joint employer of any and every individual in Massachusetts who performed work within the entity’s “usual course of business” (Prong B of the test), regardless of whether the entity had any direct contact with or control over those employees.

The SJC, in a December 13, 2021 decision which can be found here, rejected plaintiffs’ theory, finding that the ABC test answers only the question of “who, if anyone, controls the work” performed by a worker and holding that joint employer status turns on who controls a given employee.  In order to determine who controls an employee – and is therefore a joint employer – the Court adopted the four-prong “totality of the circumstances” test applicable to joint employment claims under the federal Fair Labor Standards Act.  That test looks to “whether the alleged employer (1) had the power to hire and fire the employees; (2) supervised and controlled employee work schedules or conditions of employment; (3) determined the rate and method of payment; and (4) maintained employment records.”  The SJC reasoned that application of this framework “will capture both the nature and structure of the working relationship as well as the putative employer’s control over the economic aspects of the working relationship.”  Because Credico, which Seyfarth represented in this case, performed none of these functions in relation to the plaintiffs at issue in the Jinks case, the Court found that Credico was not their joint employer under the Massachusetts wage laws and had no liability for any violations by its corporate business partners relating to their Massachusetts-based employees.

In addition to aligning Massachusetts with federal law, the Jinks opinion provides helpful guidance, which could be used in defending against joint employment claims under both state and federal law, as to what companies may do to ensure that quality control standards and other commercial expectations are met, without being deemed to control the workers who will be expected to comply with those standards or expectations.  The Court noted that measures such as requiring workers to comply with regulatory requirements, mandating that workers receive proper training, monitoring to prevent fraudulent activity, providing workers with hardware or access to software for purposes of processing transactions, or maintaining records of workers’ background checks and drug test are insufficient to establish joint employment.

Claim Preclusion for Collective Action Participants

Another, more subtle feature of the Jinks decision may be helpful in defending a variety of wage-related claims that relate to the subject matter of an FLSA collective action.  One of the Jinks plaintiffs had participated in an earlier FLSA collective action in New York against the defendant before joining the Massachusetts state law class action.  The SJC held that this plaintiff’s claims were separately doomed by the doctrine of claim preclusion based on his participation in the earlier case.  In other words, the SJC concluded that FLSA opt-ins who do not assert their Massachusetts claims in a federal collective action forfeit their state law claims relating to the same subject matter.  Notably, while the SJC performed its analysis under a claim preclusion analysis because the federal action had been fully litigated, it also recognized that the doctrine of claim splitting may result in the same outcome even where the federal action remains pending.  In reaching this conclusion, the Court was not swayed by arguments from the plaintiffs’ attorney that such a rule would require plaintiffs’ counsel to engage in burdensome diligence with respect to the potential claims of every individual who joins a collective action.  This holding thus protects employers from serial litigation by aggressive plaintiffs’ attorneys and may provide support for arguments that opt-in notices in collective actions should include warning language regarding the potentially preclusive effect of joining a collective action.

By Kevin Young, Noah Finkel, and Brett C. Bartlett

Seyfarth Synopsis: On December 10, 2021, the White House and U.S. Department of Labor confirmed their plan to propose new rules to increase the salary threshold for exempt employees under the FLSA and “modernize” the prevailing wage rules that apply to many federal government contractors and subcontractors. The rulemaking process will be a relevant focus for virtually all employers in 2022.

The announcement comes by way of the Biden-Harris Administration’s semi-annual agenda, which lists regulatory actions under “active consideration” by the USDOL for the coming year. Such actions, the Administration explained, are meant to “advance our mission to foster, promote and develop the welfare of the wage earners, job seekers and retirees….”

As reflected in the agenda, the new overtime rule would increase the salary level requirement for overtime-exempt employees under Section 13(a)(1) of the FLSA. Increase to what? It’s not clear yet, but it’ll be something more than $684 per week, which is the current threshold for salaried-exempt administrative, executive, and professional employees.

Based on the agenda, we also expect modifications to the “highly compensated employee” exemption, which is currently available for employees who satisfy a relaxed duties test and earn at least $107,432 in annual compensation, inclusive of the minimum weekly salary of $684.

While clearly impactful, these developments are not surprising. This summer, USDOL Secretary Marty Walsh told a Congressional committee that the current salary threshold is “definitely” too low. And much further back, when President Biden was Vice President Biden, the DOL rolled out an even higher (and automatically increasing) threshold, though that rule was ultimately invalidated by a federal court in Texas before it took effect.

The DOL, per its regulatory agenda, also intends 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.” It is unclear what changes the DOL has in store for these laws, which generally require contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 (for the construction, alteration, or repair of public buildings or public works to pay laborers and mechanics) no less than a local prevailing wage that the USDOL sets.

So what happens next? The USDOL still needs to propose new rules, provide an opportunity for notice and comment, and ultimately publish a final rule. That process could easily take 9 months or more. Employers should continue to follow the current rules until they are changed. Beyond that, however, now may be a good time for employers to consider whether the new rules provide a good opportunity to audit “close call” jobs in their exempt workforce to ensure they remain properly classified (and, if need be, to sync any necessary changes with the implementation of a new rule).

Additionally, employers should remain attuned to the regulatory process. The notice-and-comment period will provide an opportunity for interested employers and their advocates to communicate with the DOL about the impact of the DOL’s proposals, a process that Seyfarth has been involved with in numerous prior DOL rulemakings.