By: Vanessa Rogers, John Phillips, and Steve Shardonofsky

Seyfarth Synopsis:  Employers were handed a big win recently when the U.S. Court of Appeals for the Fifth Circuit held that a day rate can satisfy the salary basis requirement for overtime exemptions under FLSA and also advocated for an award of costs to the prevailing employer.  Specifically, the Fifth Circuit held that a sufficiently-high, guaranteed day rate no less than $455 paid on a weekly or less frequent basis can be used to satisfy the salary basis requirement under the highly compensated employee exemption.  The Fifth Circuit also remanded the lower court’s decision denying costs to the prevailing employer, and directed the court to either award costs or articulate its reasons for declining to do so.  Employers in the oil and gas industry and other sectors where day rates are common should read on, as should defense-side practitioners who can use this case to defend future overtime and contractor misclassification claims.

Summary of the Case

In Faludi v. U.S. Shale Solutions, L.L.C., the Fifth Circuit found that a former, unlicensed attorney who was paid on a day rate basis while doing consulting work as an independent contractor was exempt under the FLSA’s highly compensated employee (“HCE”) exemption and therefore not entitled to overtime even if he was misclassified.  The plaintiff was paid a guaranteed rate of at least $1,000 per day regardless of the number of hours worked.  He earned at least $1,000 every week he worked and was paid well over $100,000 annually.

On summary judgment, the district court found questions of fact about whether the plaintiff was an employee or an independent contractor, and whether the professional exemption applied. The lower court ruled, however, that the plaintiff was exempt under the HCE exemption, but nevertheless denied the company’s request for costs.

Because the parties did not dispute that the plaintiff was paid at least $100,000 annually and regularly performed exempt work, the Fifth Circuit focused on whether the plaintiff was compensated on a “salary basis” under 29 C.F.R. § 541.602(a).  Faludi argued he was not paid on a salary basis because he did not receive a salary and because his compensation was not calculated on a weekly or less frequent basis. The Fifth Circuit rejected these arguments, relying on the plain language of the regulation and the recent ruling in Encino Motorcars, LLC v. Navarro, where the Supreme Court made clear that FLSA exemptions must be given a “fair reading,” rather than being narrowly construed against the employer.

In particular, the Fifth Circuit found that the pay plan at issue met the salary basis requirement because the plaintiff’s day rate guaranteed he received at least $1,000 every week he performed any work at all and because he received each pay period, on a weekly or less frequent basis, a predetermined amount ($1,000 per day) as required under Section 541.602(a).  The Court also held that Faludi’s voluntary decision to reduce his own pay on days when he did not work a full day (and the Company’s payment of those prorated invoices) did not render the compensation plan subject to impermissible reduction under the salary basis test. “To hold otherwise,” the Fifth Circuit explained, “would permit employees to preclude reliance on [an] exemption by intentionally reducing their own pay.” Finally, the plaintiff argued that his pay did not comply with the “reasonable relationship” test under 29 C.F.R. § 541.604(b).  But the Fifth Circuit also rejected this argument, finding that Section 541.604(b) and its corresponding requirements do not apply to the HCE exemption.

On the issue of costs, the Fifth Circuit also ruled in favor of the putative employer.  Although the FLSA is silent on whether courts can award costs to prevailing defendants, the Fifth Circuit re-affirmed that defendants may recover costs under FRCP 54(d), which permits the recovery of costs by “the prevailing party” absent a federal statute, rule, or court order to the contrary.  With this backdrop, the Fifth Circuit directed the district court to award U.S. Shale its costs in the litigation or articulate good reason(s) for not doing so.

Case Highlights and Takeaways

The Fifth Circuit’s decision is a significant win for employers.  At least in the Fifth Circuit (which covers Texas, Louisiana, and Mississippi), assuming the other elements of the exemption are met, employers can now satisfy the HCE exemption by paying a sufficiently-high day rate (and remember that “catch up” payments at the end of the year are also permitted to meet the current $100,000 salary threshold under this exemption). This could prove to be a useful tool to mitigate wage-hour liability in the oil and gas industry and other sectors that regularly employ independent contractors.  The decision is also a good reminder that prevailing defendants may recover their costs in FLSA litigation. This can be a helpful lever for employers during settlement negotiations or at mediation, especially in collective actions where multiple depositions and other costs can have an outsized impact on a potential resolution.

By: Kevin M. Young, Kerry M. Friedrichs, and Ryan McCoy

Seyfarth Synopsis: On Tuesday, the Third Circuit issued a decision rejecting the U.S. DOL’s general position that incentive bonuses paid to employees by a third-party must be factored into overtime pay. While the decision merely endorses a more tempered “it depends” view, it provides welcome news and guidance for employers that provide labor to third-parties.

Imagine you’re an employer that staffs non-exempt employees to work on a project at a client site. Because you’re an avid reader of this blog, you are the Michael Jordan of wage-hour compliance, taking near-perfect steps to ensure employees record and are paid for each minute of work on the project, including overtime. Each week, you pay the employees their hourly rate for every hour worked, including time and a half for overtime hours.

Your employees finish the project, and the client is thrilled with their work. The client is so pleased, in fact, that it includes your employees on production and safety bonuses that it issues to its own staff, remitting the payments through you, their employer. And that leads to a question: must you, a compliance-minded employer, now dig deeper into your own pocket to pay overtime on those bonuses, just as you would for a non-discretionary bonus that you establish and pay yourself?

While some courts and the U.S. DOL have answered this question in the affirmative, the Third Circuit rejected that position in a decision issued earlier this week. Instead, the court ruled, the question turns on the agreement between the employer and the employee.

The case was brought by the Secretary of the U.S. DOL against Bristol Excavating Inc., a small excavation contractor, and Talisman Energy, Inc., a natural gas production company. Bristol entered into an agreement with Talisman to provide equipment, labor, and other services at Talisman drilling sites. As part of the agreement, Bristol employees worked at Talisman’s sites.

After working on Talisman Energy projects, some Bristol employees learned that Talisman had a practice of paying its own employees bonuses for safety, efficiency, and completion of work. That led them to ask Talisman if they could get in on the action. After clearing it with Bristol, the employees’ employer, Talisman said yes. It paid the bonuses through Bristol.

Eventually the DOL conducted a routine audit of Bristol’s offices. After learning about the Talisman bonuses, the Department determined that Bristol’s failure to include them in its employees’ “regular rate” resulted in underpayment of overtime. For background, the “regular rate” is defined to include “all remuneration for employment,” and it’s well established that this encompasses non-discretionary bonuses. (As an example of a bonus that should be included, the Third Circuit cited National Lampoon’s Christmas Vacation, where Clark Griswold, upon receiving a jelly-of-the-month club membership in lieu of a bonus he’d received seventeen years in a row, decries, “You don’t want to give bonuses, fine. But when people count on them as part of their salary, well…”)

Here, the DOL took the position that the rule requiring inclusion of non-discretionary bonuses in the regular rate of pay applies irrespective of who pays the bonuses. Bristol disagreed. Ultimately the dispute landed in litigation, with the DOL filing suit against Bristol and Talisman for underpayment of overtime compensation in violation of the FLSA. After a magistrate judge sided with the DOL, the case wound its way to the Third Circuit’s docket.

On Tuesday, a three-judge panel sided with the employers on two of the three bonuses at issue. In a harsh rebuke, the Court opined that the DOL’s “recently discovered” reading of an “80-year-old statute“—a reading that requires all remuneration employees receive for their work from any source to be included in the regular rate—goes too far. To be clear, however, the Court did not go so far as to say that third-party bonuses will always steer clear of the regular rate. Instead, the answer is a classic, “it depends.”

Specifically, the Third Circuit ruled, whether a third-party payment qualifies as remuneration for employment that must be included in the regular rate depends on whether “the employer and employee have effectively agreed it will.” Simply allowing employees to participate in a third-party bonus program does not establish an implicit agreement. Instead, relevant factors to consider include:

  • Regular payment of the bonus. As a threshold matter, a bonus needs to be “regularly and actually received by the employee” for it to be potentially included in the regular rate.
  • Employer’s use of the bonus to drive behavior. Further, the Court explained, it would be “significant” to a finding that a bonus must be included in the regular rate if “an employer regularly and predictably relies on [the] bonus to induce certain behavior…”
  • Employer’s involvement in the bonus program. The Court also noted that “the deeper an employer gets into the creation, management, and payment of an incentive bonus program, the more those bonus payments begin to look like part of the regular pay structure to which the employer has agreed…”

While the Third Circuit’s decision is binding only on federal courts in Delaware, New Jersey, and Pennsylvania, it provides welcome guidance for employers grappling with potential unintended consequences of third-party bonus programs. Employers should continue to think carefully, and with an eye toward the law of their jurisdiction, about whether to allow employees to participate in such programs. If they do allow it, employers should consider taking a “hands off” approach to the program. Alternatively, another option might be to require that the third-party calculate bonuses, if any, as a percentage of total earnings (including overtime pay), which would avoid the need to calculate and pay additional overtime. (Of course, that alternative should be carefully weighed in light of the joint employment concerns it might raise.)

If you would like to discuss any issues addressed in this blog, please do not hesitate to reach out to your favorite Seyfarth Shaw attorney.

By: Howard M. Wexler and Lisa L. Savadjian

Seyfarth Synopsis: On August 6, 2019, Acting New Jersey Governor Sheila Oliver signed into law A-2903/S-1790, described as an Act “concerning enforcement, penalties, and procedures for law regarding failure to pay wages.”  The Act makes a number of critical changes to several New Jersey civil and criminal laws, adding a variety of increased employee protections and harsher penalties.  These additions make New Jersey’s anti-wage theft law one of the strongest anti-wage theft protection laws in the country. 

The primary and immediate impact of the Act’s amendments to various wage-payment laws is the institution of increased penalties for failure to pay wages, up to and including criminal punishments.  Below is a summary of the Act’s key provisions:

Liquidated Damages for Violation of Wage Payment Law

Among other changes, the Act primarily amends key provisions to the Wage Payment Law, the Equal Pay Act, and the Wage and Hour Law.  With amendments to each of these laws, the Act provides that if an employer is found to owe wages to an employee that is due unpaid wages or wages lost due to the retaliatory action, the employee is allowed to recover the wages owed plus liquidated damages in an additional amount equal to 200 percent of the unpaid wages, plus reasonable costs of the action and attorney’s fees to the employee.

The Act does provide for a good faith defense.  The payment of liquidated damages is not required for a first violation by an employer who demonstrates that the employer’s action was taken in good faith with reasonable grounds for believing that the action was not a violation, and the employer admits the violation and pays the amount owed within 30 days.

Increased Statute of Limitations

The Statute of Limitations for commencing an action to recover wages is significantly extended from two to six years.

Expansion of “Employer” to Include Successor Entity

The Act also expands the definition of “employer” to encompass any successor entity or successor firm of the employer, meaning that a successor entity can also now be liable for the purported wage violations of its predecessor.

Furthermore, with regard to a failure to pay employees pursuant to a contract, a client employer and a labor contractor providing workers to the client employer shall now be subject to joint and several liability and shall share civil legal responsibility for any violations of the provisions of the wage and hour laws, including provisions regarding retaliatory actions against employees for exercising their rights under the laws.

Penalties and Criminal Punishments

The Act also amends the violations provision of the Wage Payment Law.  A violation will be found if the employer knowingly fails to pay the full amount of wages to an employee agreed to or required by law; OR the employer takes a retaliatory action against an employee by discharging or in any other manner discriminating against the employee, because the employee either:

  • made a complaint to his/her employer, to the commissioner, or to an authorized representative, that the employer has not paid the employee the full amount of wages due, OR
  • testified or is about to testify in any proceeding relating to the wage-payment laws, OR
  • because the employee has informed any employee of the employer about rights under State laws regarding wages and hours worked.

Fines and punishments will be imposed as follows:

For First Violation: the employer shall be guilty of a disorderly persons offense and shall be punished by a fine of $500 to $1,000, or by imprisonment for 10-90 days, or by both the fine and imprisonment.

For Second Violation: the employer shall be guilty of a disorderly persons offense and shall be punished by a fine of $1,000 to $2,000, or by imprisonment of 10 to 100 days, or by both the fine and imprisonment.

For Third or subsequent Violation: the employer shall be guilty of a crime of the fourth degree, and be punished by a fine of $2,000 to $10,000 or by imprisonment of up to 18 months, or by both the fine and imprisonment.

Each week in which an violation of the Wage Payment Act occurs shall constitute a separate and distinct offense.

Anti-Retaliation Provisions

The Act also carves out an additional remedy in the case of an adverse action such as discharge or other discriminatory action taken against an employee in violation of the Wage Payment Law, the Wage and Hour Law, or a contract to pay employees.  Employers shall be required to offer reinstatement to the discharged employee and take other actions as needed to correct the retaliatory action.  In addition, an employer taking an adverse action against an employee within ninety days of the employee filing a complaint with the Department of Labor and Workforce Development, or a claim or action being brought for a violation of the wage payment laws, shall raise a rebuttable presumption that the employer’s action was taken in retaliation against the employee.  The presumption may be rebutted only by clear and convincing evidence that the action was taken for other, permissible, reasons.

Crime of Violation Of Contract to Pay Employees

The Act further amends the New Jersey Code of Criminal Justice to provide that it will constitute a disorderly persons offense if an employer agreed with an employee to pay wages, compensation or benefits and fails to pay wages when due or fails to pay compensation as required by law within thirty days due.  The Act further imposes a fine of $500, plus a penalty equal to 20% of the wages owed for the first offense.  Penalties for subsequent violations will be assessed at $1,000 plus a penalty of 20 percent of wages owed.  Employers who have been convicted of violating the law on two or more occasions are guilty of the crime of “pattern of wage nonpayment” which is a crime in the third degree.

Effective Date

The majority of the Law’s provisions take place immediately, except for the addition of the crime of pattern of non-payment of wages, which will take effect on the first day of the third month following enactment, which is November 1, 2019.

Conclusion

These are drastic changes to New Jersey wage and hour law, to which all employers with operations in New Jersey should be mindful of going forward.  Given the increased penalties, when coupled with the largely expanded statute of limitations period for wage and hour violations, a spike in wage and hour lawsuits in New Jersey may very well be forthcoming.  As such, a renewed review of pay, timekeeping, and classification practices and policies for employers with operations in New Jersey is well advised.

By: Cameron Van and Kyle Petersen

Seyfarth Synopsis: Earlier this year, in New Prime, the Supreme Court decisively held that the Federal Arbitration Act’s § 1 exemption for transportation workers engaged in foreign or interstate commerce applied to independent contractors and employees alike. While New Prime presented a bump in the road to arbitration, a recent appellate court decision in New Jersey provides a road map for enforcing arbitration agreements with transportation workers who are otherwise subject to FAA’s § 1 exemption. In Colon v. Strategic Delivery Solutions, LLC, the court held that even if the FAA § 1 exemption applied to the plaintiff delivery drivers, the parties’ arbitration agreement was enforceable under the state analog to the FAA.

Strategic Delivery Solutions (“SDS”) is a freight forwarder and freight broker that coordinates local delivery services of general merchandise and pharmaceutical companies. Several of the delivery drivers with whom SDS contracted brought wage and hour claims premised on the allegation that SDS had misclassified them as independent contractors. SDS sought to enforce their arbitration agreements, arguing that the FAA § 1 exemption did not apply because the drivers only provided “local delivery services.” The trial court agreed, dismissed the complaint, and compelled the plaintiff drivers to individually arbitrate their claims. The drivers appealed.

The three-judge appellate panel thought the lower court rushed to judgment with respect to application of the FAA § 1 exemption and remanded for further consideration. That victory, however, is a hollow one for the drivers because the court went on to hold that, even if the FAA § 1 applies, the parties’ arbitration agreement is nevertheless enforceable under the New Jersey Arbitration Act (NJAA), which does not have an exclusion for transportation workers.

The court rejected the plaintiffs’ argument that the FAA preempted the state arbitration statute. In reaching its conclusion, the panel relied on prior Supreme Court pronouncements that the FAA does not occupy the entire field of arbitration, as well as Third Circuit case law specifically addressing FAA preemption and the NJAA.

Plaintiff next tried to avoid arbitration by arguing that the NJAA did not apply here because it was not mentioned anywhere in the parties’ arbitration agreement. The court disagreed, explaining that “the parties should have understood that the NJAA would apply to their agreement” because the agreement “expressly provided that it was governed by the state law where the vendor resided,” which in this case is New Jersey. Also helpful to the court’s analysis was language in NJAA stating it applies to all independent arbitration agreements “made on or after January 1, 2003.”

Finally, in their appeal the drivers also argued that they had not waived their right to have their statutory wage claims heard by a jury or the ability to pursue their claims on a class or collective basis. The appellate panel disagreed, holding that the drivers’ contracts at issue had clear language indicating that plaintiffs “unambiguously waived any right to a trial by jury in a suit” and “agreed to adjudicate any dispute” in bilateral arbitration, even statutory wage claims (Internal marks omitted).

Before taking a victory lap, it bears noting that one day after Colon was released, a different New Jersey three judge appellate panel held in an unpublished decision (Arafa v. Health Express Corp.) that the plaintiff truck driver’s arbitration agreement was not enforceable under the FAA and his claims could proceed in court. The Arafa panel did not reference the NJAA nor whether it applied in that case.

Even with the Arafa decision, Colon offers a roadmap for drafting and enforcing arbitration agreements with transportation workers. As the court in Colon reminds us,  the FAA does not necessarily preempt state arbitration statutes. While best practice is to incorporate applicable state arbitration statutes into agreements with transportation workers, the absence of such reference may not foreclose enforcement. Arbitration agreements should also include language reflecting the workers’ clear and unambiguous waiver of a jury trial on covered claims and wavier of the ability to proceed on a class or collective basis.

For more tips on managing transportation contractors post New Prime, see our previous blog here.

 

By: Rachel Hoffer

Seyfarth Synopsis: In 20/20 Communications, Inc. v. Crawford, the Fifth Circuit joined eight other circuits in holding that the availability of class arbitration is a “gateway” issue for courts, not arbitrators, to decide—unless there is “clear and unmistakable language” in the arbitration agreement to the contrary.  No circuit court has ruled to the contrary, and only the First, Second, and Tenth Circuits have yet to weigh in.  In 20/20 Communications, the latest decision to address this issue, the district court, over the employer’s objection, had held that the arbitration agreement authorized the arbitrator, rather than the court, to determine the class arbitrability issue.

The Fifth Circuit had no trouble finding that class arbitrability is a gateway issue for courts to decide because class arbitration is a completely different animal from individual arbitration.  In a class arbitration, the arbitrator’s award binds not just the individual named parties but absent parties as well.  Due process requires that those absent parties be given notice, an opportunity to be heard, and the right to opt out.  As a result, according to the Fifth Circuit, class arbitrations are bigger, costlier, more complicated, and less efficient than individual arbitrations.  And while arbitration is often desirable because it protects the privacy and confidentiality of the parties, those privacy interests become much more difficult to protect when arbitration proceeds on a class basis.  Because of these key differences, the Fifth Circuit held that the availability of class arbitration, like the question of whether the parties ever entered into a contract to arbitrate in the first place, is presumptively a question for the courts, not arbitrators.

Having determined that class arbitration is presumptively a threshold question for the courts, the Fifth Circuit next considered whether the parties in this particular case “clearly and unmistakably agreed to allow the arbitrator to determine that issue.”  The panel found no such “clear and mistakable language” here, emphasizing the following language from the parties’ agreement, which limited the arbitrator’s authority to hear only individual claims:

[T]he parties agree that this Agreement prohibits the arbitrator from consolidating the claims of others into one proceeding, to the maximum extent permitted by law.  This means that an arbitrator will hear only individual claims and does not have the authority to fashion a proceeding as a class or collective action or to award relief to a group of employees in one proceeding, to the maximum extent permitted by law.

The employees cited several provisions to support their position that the arbitrator should decide the question of class arbitrability:

  • “If Employer and Employee disagree over issues concerning the formation or meaning of this Agreement, the arbitrator will hear and resolve these arbitrability issues.”
  • “The arbitrator selected by the parties will administer the arbitration according to the National Rules for the Resolution of Employment Disputes (or successor rules) of the American Arbitration Association (‘AAA’) except where such rules are inconsistent with this Agreement, in which case the terms of this Agreement will govern.”
  • “Except as provided below, Employee and Employer, on behalf of their affiliates, successors, heirs, and assigns, both agree that all disputes and claims between them . . . shall be determined exclusively by final and binding arbitration.”

The panel agreed with the employees that, standing on their own, these provisions might support their argument that the arbitration agreement authorized arbitrators to decide gateway issues of arbitrability, including class arbitration.  But these provisions could not be divorced from the rest of the arbitration agreement, particularly the clause emphasized in the court’s decision that limited arbitration to individual claims.  As the panel explained, “it is difficult for us to imagine why parties would categorically prohibit class arbitrations to the maximum extent permitted by law, only to then take the time and effort to vest the arbitrator with the authority to decide whether class arbitrations shall be available.”  Indeed, two of the provisions cited by the employees include exception clauses, meaning that, when they conflict with other provisions of the arbitration agreement, like the class action bar, they have no effect.  And even if the court ignored the exception clauses, the provisions cited by the employees were general, and did not specifically address class arbitrations, while the class arbitration bar specifically prohibited arbitrators from arbitrating disputes on a class basis.  In light of the specific arbitration bar, the Fifth Circuit held that the three provisions cited by the employees weren’t enough to “clearly and unmistakably overcome” the presumption “that courts, not arbitrators, must decide the issue of class arbitration.”

Employers with class and collective action waivers in their arbitration agreements have reason to celebrate.  Under the Fifth Circuit’s holding in 20/20 Communications, when an arbitration agreement prohibits class arbitration, class arbitrability will almost always be a question for the courts, not for arbitrators.  To be sure, it’s difficult to imagine when an arbitration agreement prohibiting class arbitration would include language that clearly and unmistakably allows the arbitrator to decide the issue of class arbitrability, when language broadly authorizing the arbitrator to decide issues of arbitrability is not enough.  Of course, even when the agreement is silent on the issue of class arbitration (which has other important implications, as the Supreme Court recently held in Lamps Plus), the court’s holding favors employers:  class arbitration is presumptively a question for the courts, unless the agreement’s language clearly and unmistakably vests the arbitrator with authority to decide that gateway issue.

By Pamela Vartabedian and Noah Finkel

Seyfarth Synopsis: Employers are starting to consider “on demand” pay for employees. Before considering whether to implement an “on demand” pay program, employers should consider laws on wage deduction, wage assignment, and wage statements, as well as the administrative support needed for such a program.

Instant gratification is a fact of daily life, and there is no denying we have come to expect it. When we pay bills, we go online instead of to the post office. When we need a ride, we tap a button on our phones. When we watch movies, we go online instead of to a video store. This expectation has infiltrated our daily lives and, now, it has shown itself in the workplace.

Some gig companies offer “on demand” pay through a variety of technology solutions. To stay competitive, other employers are considering flexible pay structures for their own employees. But because the law treats contractors differently than employees, it is important to think through the various laws that may come into play, and to consider the administrative burdens these programs create. Below we describe some common on-demand pay programs and some key issues to consider when analyzing whether to implement on-demand pay for employees.

What is On-Demand Pay?

“On demand” pay refers to programs or “technology solutions” that allow employees to “withdraw” wages that they have already earned for work performed in a pay period before their regular pay date.

How Does On-Demand Pay Work?

On-demand pay programs come in various forms. Two main variations are (1) internal advancements directly from the employer to an employee and (2) advancements from a third party to an employee.

Under the first variation, an employer advances an employee’s wages upon request by the employee. At the end of the pay period, the amount advanced during the pay period is reconciled against the employee’s pay and the employee receives the balance of the net wages.

Under the second variation, a third party advances an employee’s wages upon request by the employee (after receiving information regarding hours worked from the employer). At the end of the pay period, the employer pays the employee the balance of net wages owed and pays the third party the amount previously advanced to the employee.

In addition to the above variations, some third parties have come up with creative accounting arrangements to avoid direct repayment from the employer to the third party.

Considerations?

In analyzing on-demand pay programs, employers should consider not only the administrative costs but the laws governing wage deductions, wage assignments, and wage statements. The laws are different depending on the state you’re in.

Wage Deduction and Wage Assignment Laws

Many states require employee authorization for deductions from pay in connection with advances or overpayments. Because of these requirements, employers should consider whether and when internal advances amount to “deductions” from wages that are subject to state law restrictions. This is an important consideration for employers with employees in many states, as wage deduction laws vary from state to state, and employers need to understand the wage deduction authorization requirements for each state (for example, in some states, a blanket authorization at the time of hire is permissible, while in other states it is not). When advances are provided by a third party (as opposed to internally), other issues may arise. Employers need to think about whether re-payment to a third party is an “assignment” of wages. Similar to wage deduction laws, wage assignment laws are complex and state-specific. Some states significantly limit how much money an employee can assign to a third party, or require specific authorizations. For example, in California, a wage assignment must be memorialized in writing signed by the employee and the employee’s spouse, and notarized. In New York, a wage assignment must be memorialized in a signed writing and, among other things, filed with the county clerk. Such detailed regulations make wage assignment laws another important consideration to keep in mind when evaluating on-demand pay programs.

Wage Statement Compliance

An open question in some states is whether each advance payment would need to be accompanied by a wage statement. If this were to be required, there are additional practical challenges to consider. It may not always possible, for example, to allocate the proper amount of taxes and benefits deductions each day—these amounts depend on the total actual wages per pay period. Similarly, in a fluctuation work week situation under the FLSA, the overtime rate is not determined until the end of the workweek (because the overtime rate is based on the amount of hours worked in a week). Wage statement laws are therefore another important consideration.

Administrative Burdens

Employers should also consider the administrative burdens that on-demand pay programs entail. These burdens can include such annoyances as obtaining required authorizations from employees; ensuring compliance with various state laws regarding deductions, advancements, and wage statements; and transmitting employee data to a third party.

Workplace Solutions

On-demand pay requires an analysis of many state specific laws, some of which are onerous. Employers should also consider the administrative support needed to employ such a program safely and should weigh the benefits of such a program against the burdens imposed. We are here to help you if you have any questions or need assistance analyzing a specific program.

By: Ryan McCoy and Kyle Petersen

Seyfarth Synopsis: Following the Federal Motor Carrier Safety Administration’s determination in December 2018 that federal law preempts California’s meal and rest break rules, observers questioned what deference courts would give to the agency’s determination.  This week, a Los Angeles Superior Court was the first California state court to apply the determination, dismissing armored truck drivers’ claims against a security company because federal hours of service rules governing commercial truck drivers preempt California’s meal and rest break rules for both long- and short-haul drivers.  While this state court ruling is favorable, all eyes remain on how the Ninth Circuit will address this preemption issue in a pending appeal brought by the State of California and several other groups, arguing the federal agency overstepped its authority.  Employers should proceed with caution until the Ninth Circuit resolves the preemption issue.

The FMCSA’s Preemption Determination:

On December 21, 2018, the FMCSA concluded that federal transportation law preempts California’s onerous meal and rest break rules when a driver is subject to federal hours-of-service requirements.  In plain language, the FMCSA found that California’s rules “are incompatible with the federal hours of service regulations and that they cause an unreasonable burden on interstate commerce.”  Consequently, “California may no longer enforce the [state meal and rest break rules] with respect to drivers of property-carrying [commercial motor vehicles] subject to FMCSA’s [hours of service] rules.”  Given the ramifications of this preemption determination, observers questioned whether, and to what extent, California courts would defer to the federal agency’s determination in future meal and rest break cases brought by drivers.  Indeed, the determination appears to contradict binding authority from the Ninth Circuit as recently as 2014, holding federal law does not preempt California state law mandating meal and rest breaks for drivers.

The State of California and several other groups responded to the FMCSA’s determination, immediately filing petitions with the Ninth Circuit to challenge the FMCSA’s authority to invalidate California’s rules.  These petitions are pending and no opinion from the Ninth Circuit is imminent.

Absent Appellate Authority, Courts Begin Applying The FMCSA’s Preemption Determination

In May 2019, a federal district court in California first applied the FMCSA’s determination and dismissed a truck driver’s meal and rest break claims.  The court concluded that it “currently has no authority to enforce the [meal and rest break] regulations,” as it was “bound by the FMCSA Order and will apply the Order unless and until it is invalidated by the Ninth Circuit.”

Then, last week, a Los Angeles Superior Court made public its order dismissing armored truck drivers’ meal and rest break claims against a security company on the ground that federal rules governing the hours of service for both long- and short-haul drivers preempt California’s state rules.  While noting the controversial nature of the determination, the Court ruled it was “obligated to recognize the supremacy of federal law under the United States Constitution and the oath of judicial office” and the Court “has no choice but to respect and enforce the FMCSA Administrator’s preemption Determination without trying to second-guess its legal or policy correctness.”  This order amounts to first time a California state court agreed with the FMCSA’s preemption determination.

Employers Still Should Proceed With Caution

While these recent court orders are welcome news to employers with drivers subject to federal rules, employers should proceed with caution until the Ninth Circuit addresses the critical issue raised by the FMCSA’s determination: whether federal law preempts California’s state meal and rest break claims, or whether the FMCSA exceeded its authority in issuing the determination.

By: Holger Besch

Seyfarth Synopsis: News Flash: “Caveat Propraetor” or “Proprietor Beware” might soon replace “Eureka” as the state motto of California.  Okay, that’s just melodramatic hyperbole, but one can imagine that business owners in the state might feel similarly given California’s increasingly hostile business environment. Ever expanding litigation exposure, particularly with regard to labor and employment class actions, weighs heavily on the minds of businesses operating in California, and increasingly nationwide.  It should come as no great surprise that class action costs to U.S. companies are at their highest in a decade. According to a recent report by Carlton Fields, spending on class action litigation has reached its highest level in the United States since 2008, and that figure is expected to climb even further. [1]  Of the $2.46 billion spent in 2018, labor and employment matters account for a full quarter of the total, with most legal departments highlighting wage and hour class actions as their chief area of concern.[2] Private equity firms should thus take note as these escalating expenses pose increased risks to their investments, particularly because of labor and employment law.

Potential class action exposure may not even be immediately evident under the existing state of the law. Witness California’s recent judicial and subsequent legislative erosion of piece-rate compensation methods (including mandating complex separate calculations for rest periods and potentially nonproductive time) in favor of hourly pay.  Another example is the recent California Supreme Court decision in Dynamex Operations v. Superior Court, 4 Cal. 5th 903 (2018), which created a brand new standard for determining whether workers are misclassified as independent contractors in the state.  The Supreme Court in Dynamex wove its opinion out of new cloth, imposing a never-before imposed standard that makes the classification of a worker as an independent contractor far more difficult. The subject is also presently before the California legislature as Assembly Bill 5 and awaits possible codification.  Might such dramatic shifts in the law have been predicted? Perhaps not, but they were certainly in keeping with the judicial trend over the years to protect workers’ base pay and to favor employment relationships over independent work—all the more reason for private equity firms to seek the advice of seasoned labor and employment counsel familiar with upcoming trends in the law.

So what are wary private equity firms and other proprietors in the state to do to guard against the growth in class-action costs? As part of the pre-investment due diligence process, investors seeking to mitigate class action risks should scrutinize potential labor and employment liabilities (and potential trends) at target companies ranging from such topics as exempt / nonexempt employee and independent contractor classification issues to compensation methods and pay equity issues. Post-acquisition, when more detailed information is available, investors can reduce potential exposure by conducting thorough labor and employment audits of acquired entities, particularly on wage and hour topics. Companies should also strongly consider implementing enforceable arbitration agreements with class action waivers (particularly in light the Supreme Court’s Epic Systems decision)- which can often substantially reduce potential exposure associated with class and collective action litigation. Even then, companies should be aware that California exempts Private Attorney General Act representative actions from such class action waivers.  In short, the principle of Caveat Propraetor applies – so it is imperative to know what potential liabilities are being bought in evaluating the terms of a deal.

[1] 2019 Carlton Fields Class Action Survey, available at https://ClassActionSurvey.com

[2] Id.

By: Jeff Glaser and Katy Smallwood

Seyfarth Synopsis: The Motor Carrier Act exemption to the FLSA (“MCE”) is a powerful defense against overtime claims brought by interstate truck drivers and others involved in the interstate shipment of goods.  Importantly, the exemption is not limited to drivers who cross state lines.  Instead, numerous courts have made clear that the exemption applies to intrastate drivers, so long as the drivers complete one leg of a larger interstate transport of goods and, thus, the goods they transport are part of the “continuous stream of interstate travel.”  Plaintiffs’ attorneys, however, continue to test the limits of the application of the MCE, particularly as it relates to drivers who complete trips solely within a single state.  One frequent angle of attack is to argue that the goods transported by intrastate drivers are not in the continuous stream of interstate travel, unless the shipper identified the final customer of the goods at the time of shipment.  The Eleventh Circuit Court of Appeals recently rejected this argument in a favorable decision for employers.

In Ehrlich, et al. v. Rich Products Corporation, the Eleventh Circuit affirmed the district court’s order finding that the plaintiffs, who worked for Rich Products as Route Sales Representatives, were exempt pursuant to the MCE.

The plaintiffs delivered frozen dessert products from a storage facility in Florida to retail locations throughout Florida.  The products, which were manufactured in Connecticut and other locations outside of Florida, arrived in Florida after what the Court described as a “long journey from their place of manufacture to the ultimate consumer.”  A third-party trucking company transported the products from the manufacturing facilities to a Florida warehouse where another third-party company loaded them onto shuttle trucks to take them from the warehouse to the delivery trucks driven by the plaintiffs.

The plaintiffs argued that the products’ journey ended at the warehouse, before being transported by the plaintiffs, because, at the time of shipment, Rich Products had not received specific orders from the customers who ultimately received the products.  The Court rejected this argument, explaining that “no such strict requirement applies” to the application of the MCE.

Rich Products, the Court concluded, intended a continuity of movement of the products through the warehouse and to the final customers because it made shipment decisions based on its projections of the demand for the products, and shipped only the volume of products that it reasonably expected to meet immediate customer demands.

Despite the fact that some products remained at the warehouse for several months, the Company’s “fact-based forecasting” confirmed its fixed and persisting intent, at the time of shipment, that the goods continue on in interstate commerce to the ultimate retail consumer.  Accordingly, the final leg of that journey, completed by the plaintiffs, constituted travel in interstate commerce.

In reaching its conclusion, the Court conclusively shut the door on the argument that a shipper must intend to deliver the product to a specific customer at the time of shipment in order to claim the MCE with respect to drivers who complete one leg of the journey.  In fact, the Court indicated that storage for up to six months would not necessarily defeat the fixed and persistent intent when the shipper made its shipment decisions based on fact-based projections.

This decision is a welcome addition to the growing body of case law affirming the application of the MCE to intrastate drivers who complete part of an interstate shipment of goods.

By James M. Hlawek, Shireen Wetmore, Gena Usenheimer, and Richard L. Alfred

Seyfarth Synopsis: Today the Supreme Court issued a 5-4 decision in the Lamps Plus, Inc. v. Varela class action arbitration case.  The holding and rationale are important to employers because the Court decisively ruled that class arbitration “fundamentally” changes the nature of the “traditional individualized arbitration” envisioned by the Federal Arbitration Act and, for that reason, requires an express agreement of the parties to be compelled.  In so ruling, the Court rejected the basis of the Ninth Circuit’s contrary ruling, which had found the arbitration agreement at issue to be ambiguous and, applying California state contract law that contractual ambiguities should be construed against the drafter, held that the agreement allowed for class arbitration.  Relying on its prior class action arbitration decisions, the Court found that such an approach is “flatly inconsistent with the ‘foundational FAA principle that arbitration is a matter of consent.’”  How this part of today’s decision will impact Plaintiffs’ efforts to use state laws to invalidate arbitration agreements will undoubtedly be the subject of future litigation, but it is now clear that courts can no longer order class arbitration unless there is an arbitration agreement expressly authorizing it. 

What Did The Supreme Court Hold?

The Supreme Court held today that courts cannot order an arbitration to be conducted on a class-wide basis unless there is an arbitration agreement that expressly authorizes class arbitration.  The Supreme Court previously held in its Stolt-Nielsen decision that a court may not compel class arbitration when an agreement is “silent” on the availability of such arbitration.  Now the Supreme Court has gone a step further.  Courts cannot compel arbitration when an arbitration agreement is ambiguous about the availability of class arbitration.

The parties — Lamps Plus and Varela, an employee of Lamps Plus — had an arbitration agreement that was ambiguous about the availability of class arbitration.  Certain phrases, particularly the use of “I” and “my” throughout the agreement, seemed to contemplate purely individual arbitration.  Other phrases, such as one stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment,” the employee argued, were broad enough to suggest class arbitration.  The employee sued Lamps Plus on behalf of a class of employees whose personal information had allegedly been compromised.

The Ninth Circuit affirmed the district court’s order compelling not individual arbitration, as the company had sought, but class arbitration.  In deciding whether to compel class arbitration, the Ninth Circuit relied on California state law principles in applying a doctrine know as contra proferentem, which means that ambiguous terms in a contract should be construed against the drafter.  In applying this doctrine, the Ninth Circuit found that the ambiguous terms of the parties’ agreement should be interpreted against Lamps Plus — the drafter of the agreement — and in favor of the employee, who argued for class arbitration.

The Supreme Court reversed the Ninth Circuit’s decision with five justices joining in the opinion.  Relying on its past decisions in Stolt-Nielsen, Concepcion, and Epic Systems, the Court made clear that class arbitration “fundamentally changes” the nature of “traditional individualized arbitration” envisioned by the Federal Arbitration Act in several ways, including making the process slower, more costly, and “more likely to generate procedural morass than final judgment.”  Because arbitration under the Federal Arbitration Act is strictly a matter of the parties’ consent, the Court found that applying contra proferentem to allow class arbitration under an ambiguous agreement is “flatly inconsistent with the ‘foundational FAA principle that arbitration is a matter of consent.’”  The Court, therefore, found that the Ninth Circuit decision ordering class arbitration was improper and reversed.

No Decision On Who Should Decide Whether An Agreement Allows For Class Arbitration  

In a footnote, the Court stated that it was not deciding whether the availability of class arbitration is a “question of arbitrability” that is presumptively for courts (rather than arbitrators) to decide.  The Court pointed out that the parties had agreed that a court should decide the issue, and therefore concluded that the question was not at issue.  Thus, while every circuit court that has addressed the issue has found that the availability of class arbitration is a “question of arbitrability” for courts to decide in the absence of an express agreement to the contrary, the Supreme Court still has not decided the issue.

What Does The Lamps Plus Decision Mean For Employers?

The decision is an important victory for employers.  Courts can no longer order class arbitration under the Federal Arbitration Act unless the employers’ arbitration agreement unambiguously authorizes class arbitration.  Under the Lamps Plus decision, employers no longer face the risk that ambiguous phrases in their agreements will lead to class arbitration.  Only express agreements can lead to class arbitration.  While many employers have revised existing arbitration agreements or adopted new ones since Epic Systems that include express class arbitration waivers, those employers with older clauses using generic language to the effect that all employment disputes are subject to arbitration benefit from today’s opinion.

The decision did not, however, close the door on future litigation as far as the availability of class arbitration.  Plaintiffs will likely continue attempts to use principles of state contract laws to invalidate arbitration agreements.  Lamps Plus, however, should significantly narrow the successful use of such laws to the extent they “target arbitration either by name or by more subtle methods…”  In this light, even general contract principles such as unconscionability cannot stand in the way of arbitration enforcement if they over-ride the “foundational FAA principle that arbitration is a matter of consent.”

Additionally, Justice Ginsburg argued in her dissenting opinion that Congress should act to “correct” the elevation of the FAA over “the rights of employees and consumers” to bring class actions.  Congress could, therefore, someday pass legislation that would make class arbitration more widely available.

Thus, despite the fact that the Lamps Plus decision makes it less likely that employers will face class arbitration, we continue to urge employers to have their employment agreements reviewed by experienced counsel and revised consistently with this and prior Supreme Court opinions.