By: John Phillips and Steve Shardonofsky

Seyfarth Synopsis: In an important decision for employers seeking to enforce arbitration agreements and limit wage and hour exposure and related defense costs, the U.S. Court of Appeals for the Fifth Circuit reaffirmed that district courts should rule on motions to compel arbitration and related jurisdictional questions before reaching issues on FLSA conditional certification.  The decision also provides a helpful roadmap for business executives and practitioners on the enforcement of arbitration agreements and the practical importance of so-called “delegation clauses.”  This case marks an important win for employers and is a must read for anyone seeking to enforce an arbitration agreement in the Fifth Circuit, particularly in the wage-hour context.

While wage and hour cases continue to proliferate in state and federal courts, many employers have turned to arbitration agreements with class/collective action waivers in an attempt to stem the tide. In response, savvy plaintiff-side attorneys often file motions for class or collective-action certification very early in the litigation, hoping to obtain a ruling on those issues before the court addresses issues related to arbitration.  The strategy has been successful in some jurisdictions, resulting in proverbial class- and collective-action bells that cannot be un-rung—even when the case is subsequently dismissed and moved to arbitration.  Fortunately, the Fifth Circuit affirmed that, in the collective action setting, questions regarding whether the plaintiff’s claims should be arbitrated must be decided prior to any issues regarding conditional certification.  Along the way, the Court provided a helpful analysis on the enforcement of arbitration agreements and the importance of delegation clauses in this context (i.e., a provision explaining that the arbitrator, not the court, must decide all issues regarding arbitrability, including whether the parties agreed to arbitrate and whether the claims at issues are subject to arbitration).

Background on the Case

In Edwards v. DoorDash, Incorporated, the plaintiff brought a purported FLSA collective action alleging that he and other delivery drivers were misclassified as independent contractors.  The same day the suit was filed, the plaintiff also moved for conditional certification of a nationwide collective.  In response, DoorDash filed an emergency motion to stay the briefing and any ruling on conditional certification, and it moved to compel arbitration pursuant to the plaintiff’s arbitration agreement, which included a class/collective action waiver provision and required the parties to arbitrate under the rules of the American Arbitration Association.

The district court delayed its ruling on conditional certification until it ruled on whether the lawsuit should be sent to arbitration.  The district court found ultimately that the arbitration agreement was valid and enforceable, dismissed the plaintiff’s lawsuit, and compelled him to arbitrate his claims, effectively denying the motion for conditional certification as moot. The plaintiff appealed to the Fifth Circuit, arguing that (1) the court should have decided conditional certification before ruling on the arbitration agreement, and (2) the district court erred in enforcing the arbitration agreement itself.  The Fifth Circuit upheld the district court in full; and in doing so, the Court provided a helpful analysis for any employer seeking to enforce arbitration agreements in the wage-hour context.

The Fifth Circuit’s Ruling

The Fifth Circuit reaffirmed its prior precedents and held that questions regarding arbitration are “threshold” matters that should be resolved “at the outset” and before any ruling on conditional certification under the FLSA.  This result, according to the Court, prevents certification of a collective or class action that should not have been brought in the court in the first place, and it also aligns with the “national policy favoring arbitration embodied in the FAA.”

In determining whether to compel arbitration, courts usually undertake a two-step inquiry to determine (1) whether there is a valid agreement to arbitrate, and (2) whether the dispute falls within the scope of the valid agreement.  But when there is a delegation clause, the Fifth Circuit re-affirmed, district courts should focus only on the first inquiry: whether an agreement to arbitrate was formed and whether it contains a valid delegation clause. The Fifth Circuit then noted:  “If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.”

In this case, the Court found that there was a valid arbitration agreement with a valid delegation clause. Applying California law, it rejected the plaintiff’s arguments that the arbitration agreement was illusory and never formed because DoorDash allegedly never signed the contract (although it did perform under the agreement) and did not give him a personal copy of the contract to keep. The Court also rejected the plaintiff’s argument that the agreement as a whole was unconscionable because questions regarding the underlying validity of the agreement (but not its formation) were questions for the arbitrator. Finally, the Court found that the agreement contained a valid delegation clause because it incorporated the rules of the American Arbitration Association, which provide that the arbitrator has the power to rule on his or her own jurisdiction, including all issues regarding arbitrability. Because the arbitration agreement was valid and also contained a valid delegation clause, the Fifth Circuit affirmed the district court’s order compelling the plaintiff’s claims to arbitration.

Takeaways and a Word of Caution About Delegation Provisions

This decision is a welcome ruling for employers, and it re-enforces the Fifth Circuit’s willingness for enforce arbitration agreements and give deference to the parties’ intentions—and in the correct procedural order. Importantly, it should help curb attempts by the plaintiffs’ bar to spur fast rulings on conditional certification before considering arbitration and other jurisdictional issues.

By: Ariel D. Fenster & Rashal G. Baz

Seyfarth Synopsis: In a first impression case, the Eleventh Circuit held that an “opt-in” plaintiff is only required to file a written consent to become a party-plaintiff in a collective action under the FLSA, and that the lack of conditional certification does not affect that status. 

At or within a few weeks of the filing of a purported FLSA collective action, a plaintiff’s lawyer often files pleadings signed by other current or former employees in which they consent to join the case as “opt-in” plaintiffs.  Usually — but not always — a motion for conditional certification follows, with the opt-in plaintiffs providing supporting affidavits for that motion.

But what happens to those opt-ins if the case is never conditionally certified?  No appellate court had ever addressed this question until the Eleventh Circuit did so last week in Mickles et al. v. Country Club Inc.

There, Mickles worked as an exotic entertainer at the Goldrush Showbar and alleged that she and those allegedly similarly-situated were misclassified as independent contractors and consequently deprived of minimum and overtime wages.  After filing her complaint, three “opt-in” plaintiffs filed written consents to join the litigation.  The case continued on through discovery.  After discovery, Mickles moved for conditional certification, but the district court determined the motion was “nearly eight months” too late.

In his holding, Judge Jones reasoned that the Northern District of Georgia’s Local Rules require motions for conditional certification be filed within 30 days of the commencement of discovery unless court permission is secured, which did not occur here.

Following the denial of conditional certification, the company filed a motion for clarification, inquiring as to whether the opt-in plaintiffs remained parties in the action.  In response, Judge Jones ordered that the opt-in plaintiffs “were never adjudicated to be similarly situated to Mickles, and, therefore, were never properly added as party plaintiffs to the collective action.” (Mickles and the company then reached a settlement in which the three opt-in plaintiffs did not participate.)

The three opt-in plaintiffs appealed to the Eleventh Circuit, which reversed, holding that “those who opt in become party plaintiffs upon the filing of a consent and that nothing further, including conditional certification, is required.”  The Eleventh Circuit remanded the case to the district court to either (a) dismiss the opt-in plaintiffs without prejudice, so they could pursue individual claims, or (b) to continue with their individual cases since discovery had been completed.

The Eleventh Circuit upheld Judge Jones’ ruling, finding that he did not abuse his discretion in applying the local rule.  More broadly, the Eleventh Circuit made clear that opt-in plaintiffs are “parties” to a case regardless of conditional certification, and re-affirmed various Supreme Court and appellate authorities that a motion for conditional certification is not a required step in multi-claimant FLSA litigation and that conditional certification is merely a case management tool for a plaintiff to be able to send a court-approved notice to employees.

At first blush, Mickles is a defeat for an employer: a lawsuit it thought was over was revived.  But on closer examination, the Mickles case provides several helpful points for employers defending FLSA collective actions:

  1. The “party” is not over if an employer defeats conditional certification. Opt-ins continue to have party status even in the absence of conditional certification, so when an employer opposes conditional certification, it should ask that the opt-ins be dismissed without prejudice so that it would only have to defend the claim of the named plaintiff (dismissed opt-ins often will not bother to file their own individual lawsuits).
  2. An opt-in plaintiff in an FLSA case is not like a Rule 23 class member. Each one is a full-fledged “party” much like a named plaintiff.  As such, each one is a legitimate source of discovery from which an employer can learn more about the nature of the claims being brought against it and how similar the opt-ins and named plaintiffs are to each other, and from which it may be able to obtain helpful admissions in opposing certification, defend the case on the merits, and/or limit exposure.  In particular, this underscores that (a) a company expecting to oppose a motion conditional certification motion ought to take the deposition of not only the named plaintiff, but any early opt-in as well and (b) even after conditional certification, an employer should be able to cast a wide net in seeking discovery from opt-in plaintiffs, especially if it can do so in a cost-effective manner.
  3. The local rules can prove to be a helpful weapon. Depending on the jurisdiction, an employer may be able to raise a timeliness defense if plaintiff’s motion for conditional certification is filed more than 30 days after discovery commenced without securing court permission.  Some courts have local rules providing similar timelines for class certification motions.  These rules should not be forgotten.

By: Robert S. Whitman and Howard M. Wexler

Seyfarth Synopsis: The U.S. Department of Labor has announced the launch of the Payroll Audit Independent Determination program—or “PAID”— to facilitate the resolution of overtime and minimum wage claims under the FLSA without litigation.   New York Attorney General Eric T. Schneiderman recently called PAID “nothing more than a Get Out of Jail Free card for predatory employers,” and said his office “will continue to prosecute labor violations to the fullest extent of the law, regardless of whether employers choose to participate in the PAID Program.”

As we previously reported, the U.S. Department of Labor has announced the launch of the Payroll Audit Independent Determination program—or “PAID”— to facilitate the resolution of overtime and minimum wage claims under the FLSA without litigation.  Employers that avail themselves of PAID will still have to make payment of all back wages due under the FLSA, but the DOL “will not require additional payment of liquidated damages or civil monetary penalties when employers choose to participate in the program and proactively work with WHD to fix and resolve the compensation practices at issue.”

While PAID looks like welcome news to those employers seeking to resolve wage and hour disputes before being sued, New York employers may wish to curb their enthusiasm.  Attorney General Eric T. Schneiderman recently called PAID “nothing more than a Get Out of Jail Free card for predatory employers,” and said his office “will continue to prosecute labor violations to the fullest extent of the law, regardless of whether employers choose to participate in the PAID Program.”

Given that, under the PAID program or otherwise, the U.S. DOL “may not supervise payments or provide releases for state law violations,” Schneiderman’s comments have little substantive significance.  However, his comments may cause employers, especially those in New York, to think twice before availing themselves of PAID out of fear of putting themselves on the radar of aggressive state and local government enforcement agencies.  The agency Schneiderman supervises, the New York Attorney General’s Labor Bureau, has a long track record of active enforcement of Labor Law violations in the state.

PAID remains a pilot program that will operate for the next six months, at which point the U.S. DOL will evaluate its effectiveness and decide whether to make it permanent.  The DOL has scheduled a webinar for April 10, 2018 to explain “how the PAID program works, determining eligibility for the program, and how to participate in PAID.”  For now, the decision whether to use PAID is not as easy or straightforward as it may seem.  While employers may view it as a way to do the right thing and move forward with compliant wage-payment practices, officials in New York State may not be impressed.  Contact counsel if you have any questions about the PAID program or the planning or execution of a proactive wage-hour audit.

Authored by Colton Long and Noah Finkel

Seyfarth Synopsis: Employers seeking to show that they correctly have classified an employee as exempt from the FLSA’s overtime requirements often have faced hostility from courts under the misimpression that FLSA exemptions must be “construed narrowly.” Today the United Supreme Court put to rest the “narrow construction” doctrine, signaling to district and appellate courts that FLSA exemptions should be construed plainly as written and without a thumb tilting the scales toward a non-exempt finding.

Today, in a 5-4 opinion (Justice Thomas writing for the majority) the Supreme Court reversed the Ninth Circuit in Navarro et al. v. Encino Motorcars LLC, holding that car dealership “service advisors” are “salesm[e]n . . . primarily engaged in . . . servicing automobiles” and therefore are exempt from the FLSA’s overtime requirements under 29 U.S.C. § 213(b)(10)(A). We have been tracking this case since January 2016, as the outcome of this decision is likely to have a significant impact on the nation’s 18,000 franchised car dealerships and estimated 45,000 service advisors. While this opinion surely gives a sigh of relief and much needed certainty to automobile industry dealerships, one particular point made by Justice Thomas likely will provide significant help to all employers asserting the application of any FLSA exemption.

In its underlying decision denying exempt status to dealership service advisors, the Ninth Circuit had reasoned that the FLSA and its exemptions under Section 213(b) should be “construed narrowly,” citing a line of several appellate cases to support this construction of the FLSA (without delving into the basis for the cited language itself). The Supreme Court, however, took this reasoning head on in Navarro, “reject[ing] this principle as a useful guidepost for interpreting the FLSA.” Justice Thomas noted in his opinion that the FLSA “gives no ‘textual indication’ that its exemptions should be construed narrowly” and there is therefore “no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.” Further, Thomas noted that “the FLSA has over two dozen exemptions in § 213(b) alone . . . . Those exemptions are as much a part of the FLSA’s purpose as the overtime pay requirements.” Justice Thomas made no bones about picking apart this “cannon” of statutory construction, noting that “the narrow-construction principle relies on the flawed premise that the FLSA ‘pursues’ its remedial purpose ‘at all costs.’” Rather, Thomas noted, the FLSA and its exemptions should be construed plainly, as they are written, with no bent one way or the other (“[w]e thus have no license to give the exemption anything but a fair reading.”)

Justice Thomas’s direct repudiation of the “narrow construction” argument aligns with our recent analysis from August 2017, which concluded that the FLSA and its exemptions should not be construed any more narrowly than how they are written. Courts frequently insist that the FLSA’s exemptions “are to be construed narrowly” while the FLSA’s remedial provisions should “be construed liberally to apply to the furthest reaches consistent with Congressional intent.”  We further asserted that no reasoned analysis of the FLSA should conclude that the Act and its exemptions should be interpreted lopsidedly in favor of employees and against employers and that the “narrowly” vs. “liberally” dichotomy derives from unsubstantiated and conclusory language from a 1945 Supreme Court case. At best, we said, the language constitutes an imprecise assertion that the FLSA’s exemptions should not be so broad as to swallow the remedial nature of the FLSA and, at worst, the language amounts to unsupported dicta never intended as a grand pronouncement of how courts should interpret the FLSA.  Our analysis further concluded that courts tend to quote this language to justify a decision’s outcome; when a court decision favors an employee, a court is more likely to cite the “narrowly/liberally” language, when a decision favors an employer, a court is less likely to cite this language.

Consistent with the reasoning noted above, the Supreme Court in Navarro forever repudiated the argument that the FLSA’s exemptions should be construed narrowly. Employers accordingly will be well served by the Supreme Court’s reasoned denunciation of this baseless and oft-cited pronouncement. Further, the logical consequence of the Supreme Court’s Encino Motorcars opinion should serve to banish the “construed liberally” corollary as well. Indeed, as Thomas noted in the opinion, the FLSA should be given nothing but a fair reading. As we noted in our August 2017 analysis, there is no sound basis for maintaining that the FLSA should be construed liberally in favor of employees based alone on the fact that the FLSA is “humanitarian and remedial” legislation (which forms the sole ostensible basis for construing the FLSA broadly in favor of employees). “What piece of legislation passed by Congress is not intended as remedial or humanitarian? It would seem that one has to presume that Congress is always attempting to benefit the public, and that it does not classify its legislation as though some is for the public good, some is for the benefit of lobbying or business groups, and some is to score political points. All legislation is aimed in some way at benefitting the public interest (or at least we would like to, and have to, assume).”

With sound reasoning, the Supreme Court has disposed of an oft-cited yet fundamentally flawed method for construing the FLSA’s exemptions under § 213(b) and provides employers with a compelling counter to litigants seeking to apply the FLSA in a manner broader than the statutory text allows.

 

Co-authored by Christopher Truxler and Coby Turner

Seyfarth Synopsis: Earlier this month, a California federal court dismissed the misclassification claims of 7-Eleven franchisees on the pleadings, finding they did not and could not plead facts sufficient to show that they were employees of their franchisor.

All is well with one of America’s most beloved convenience stores. In October 2017, four 7-Eleven franchisees filed a class action lawsuit alleging the company misclassified franchise owners in California as independent contractors instead of employees. The plaintiff-franchisees sought hundreds of thousands of dollars in overtime pay and business expenses for each franchisee. But on March 14, 2018, the presiding judge put the plaintiffs’ Big Gulp gamble to rest, ruling that the franchisees are, in fact, independent contractor franchisees, and not employees, under California law or the FLSA.

As with most misclassification lawsuits, the heart of the dispute concerned the right to control. The plaintiff-franchisees claimed that 7-Eleven’s franchise agreement created an employment relationship because, they alleged, the company exerts control over certain details of store operations, such as temperature, operating hours, and other matters. The plaintiffs also focused on franchisees’ time spent in initial training.

The court was unmoved. Finding the alleged facts “wholly insufficient” to create an employment relationship under the Martinez v. Combs test, District Judge John Walter ruled that the plaintiffs failed to show that 7-Eleven exerted control over their day-to-day operations. Instead, 7-Eleven and the franchisees entered a “business format” franchising relationship—similar to that which the California Supreme Court ruled on in Patterson v. Domino’s Pizza—which permitted 7-Eleven to exercise the control necessary to protect its trademarks, brand, and goodwill.

Not only did the plaintiffs’ allegations regarding improper control all relate to 7-Eleven’s right to protect and control its brand, service standards, merchandise selection, and hours of operation, but, the court found, such uniformity ultimately benefitted the franchisees because of the increased goodwill it brought to the brand.

Of particular note, the court looked to factors under Martinez to conclude the franchisees were properly classified as independent contractors. The court noted that franchisees were generally entrepreneurial people, willing to commit time and money and assume a risk of loss in order to own and profit from their investment. Some operated multiple locations. The court found it significant that there was no cap on how much plaintiffs could earn on their investment, that they had complete discretion to do things like hire and fire employees, and that they had complete control over the day-to-day operation of their store(s). The fact that franchisees could terminate their agreement with 72 hours’ notice, while 7-Eleven could only terminate “for cause,” further weighed against a common-law employment relationship.

The court thus took a Big Bite out of potential liability for franchisor companies in holding that even standards and guidelines that require a franchisee to follow a list of marketing, production, operational, and administrative tasks is not enough to transform a franchisor into an employer. Other companies engaging independent contractors should also take note. Even though this case was analyzed with regard to a franchisee-franchisor relationship, the court took a view of “control” over independent contractors that is, “thank heaven,” quite practical and positive.

Authored by Cheryl Luce

Seyfarth Synopsis:  If it becomes law, a new bill will expand the FLSA’s tip provisions into areas traditionally regulated by state law and create new areas of ambiguity that could be a breeding ground for yet more wage-hour litigation.

We have been covering the saga of a controversial 2011 DOL regulation that gave employees the right to receive tips even when they were paid the federal minimum wage of $7.25 per hour. As courts agreed again and again, the rule was contrary to the FLSA’s plain language and inconsistent with its remedies. In late 2017, the DOL proposed to rescind the rule, noting concerns about its scope. But that proposal has been highly politicized and labeled an attack on workers, authorizing employers to pocket employees’ tips (even though federal law never regulated an employee’s right to receipt of tips, even before the rule).

Ultimately, the fallout around the DOL’s 2017 proposal has resulted in a proposed law amending the FLSA called the Tip Income Protection Act of 2018, announced in principle on March 6, 2018 and receiving bipartisan support in Congress as well as from Secretary of Labor Alex Acosta. The bill has been added to the omnibus budget spending bill that the House passed yesterday and the Senate passed this morning. (The Tip Income Protection Act’s text begins on page 2,025 of the bill.) Barring a presidential veto, the bill will become law.

The Tip Income Protection Act amends the FLSA by adding a provision to 29 U.S.C. § 203(m) that states:

An employer may not keep tips received by its employees for any purpose, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.

The Act further creates a remedy for violating this provision “in the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and an additional equal amount in damages” and imposes a civil penalty of up to $1,000 for each violation.

As currently written, § 203(m) only regulates tips when the employer has taken a tip credit against its minimum wage obligations, and the FLSA only provides a remedy for the unpaid minimum wage (not for the amount of the tips retained). The Tip Income Protection Act thus expands the FLSA’s tipping provisions from ensuring tipped employees are properly notified of any tip credits and paid minimum wage to guaranteeing that employees are paid the tips they receive in full.

The proposed Tip Income Protection Act is a major deviation from the FLSA’s core purpose. Since its enactment in 1936, that purpose has been to: (i) ensure that all employees are paid at least the federal minimum wage, (ii) ensure that employees are paid at a rate of at least 1.5 times their regular rate of pay for all hours worked over 40 in a workweek, unless an exemption applies, and (iii) prohibit unlawful child labor. Never has it been the FLSA’s aim to ensure that employees are paid all of their wages. That historically has been left to the states. Indeed, if an employee makes at least the minimum wage and overtime according to the FLSA’s requirements, the FLSA can provide no further relief. The FLSA’s monetary remedies are currently limited to “unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.” 29 U.S.C. § 216(b). By allowing employees to recover the full amount of tips, the Tip Income Protection Act represents a major departure from the purposes of the FLSA.

Perhaps the bigger concern with the Tip Income Protection Act as written is that it is vague and will leave employers scrambling to understand how the new law applies to them. First, the bill states “managers and supervisors” are prohibited from sharing any portion of employees’ tips and thus cannot participate in a tip pool. But the bill does not define “managers and supervisors,” and there are various ways in which these terms are interpreted in different contexts: does a lead bartender who can’t hire or fire employees, but serves as a manager-on-duty when the owner is not around and who also primarily serves customers, get to share in the tip pool? when he is acting as a manager? or never? Additionally, the bill selects the ambiguous word “to keep” as the operative commanding verb. Restaurants and their agents are not allowed “to keep” employees’ tips. Is “keeping” tips limited to circumstances in which the employer actually uses the tips for its own purposes? Or would it also apply to the distribution of tips to other employees, as appears to be the case for tips distributed to “managers and supervisors”? Would “improper” tip pools be subject to the new standard or the old one?

The Tip Income Protection Act appears to respond to fears that no federal regulation of tips opens the floodgate to pocketing employee tips. But tips have and will continue to be regulated by state law; indeed, federal law has never regulated wage payment generally and the source of that protection has been state laws. Although its sponsors are characterizing the bill as restoring a right for employees that was created by the Obama DOL, that right never existed in federal law (and apparently has not needed to exist in federal law until now). It only existed in the form of an administrative rule that exceeded agency authority and was largely rejected by courts.

Finally, the bill appears not to disturb the DOL regulations’ definition of a tip and guidance that “a compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip.” 29 C.F.R. § 531.55. No new definition of “tip” would be added to the FLSA as a result of the bill, and service charges should be spared from the bill’s new rules.

By: Kyle Petersen and Ariel Fenster

Seyfarth Synopsis: A recent decision by the Southern District of New York clarifies common questions arising from the use of the fixed salary for a fluctuating workweek method of compensation (the “FWW”): (1) Do isolated pay deductions undermine the fixed salary requirement; (2) Must the employee’s hours fluctuate above and below 40 hours; and (3) Do employees have to subjectively understand the overtime pay calculations for there to be a mutual understanding that the fixed salary was intended to cover all hours worked at straight time? Spoiler Alert: This court answered no to each of these questions.

A Quick FWW Primer

The FWW method is one of two approved methods of calculating a salaried employee’s “regular rate” for overtime pay and may be used where a nonexempt salaried employee’s hours vary from week to week. The weekly salary covers all hours worked at straight time. When the hours fluctuate above 40 in a given week, the employee is then due an addition half-time compensation for the overtime hours. Like the hours worked, the overtime rate fluctuates from week to week and is the quotient of the weekly salary divided by the week’s hours worked. So, as the number of hours worked goes up, the regular rate goes down. If this doesn’t take you back to fourth grade math class, this example should:

Assume Donna’s Weekly Salary is $1,000 and her hours vary week to week.

  Hours Worked Salary Paid Regular  Rate for OT Overtime Pay Due
Week 1 50 $1,000 $20 ($1,000/50 hours) $100 [($20 x .5) x 10 hours)]
Week 2 40 $1,000 $25 ($1,000/40 hours) $0
Week 3 55 $1,000 $18.18 ($1,000/55 hours) $136.34 [($18.18 x .5) x 15 hours)]
Week 4 35 $1,000 $38.57 ($1,000/35 hours) $0

In order to use the FWW method, the regulations require that (1) the employee’s hours fluctuate from week to week; (2) the employee receives a fixed weekly salary regardless of the number of hours worked; (3) the fixed salary pays the employee at least minimum wage for all hours worked; and (4) the employer and employee have a clear mutual understanding that the employer will pay the employee a fixed salary regardless of the number of hours worked. If each of these factors is satisfied, the employer then need only pay the employee for overtime hours at a rate of 50% the regular rate for that week.

The Case

In Thomas v. Bed Bath and Beyond, Inc., several managers challenged the company’s implementation of the FWW method of pay, arguing that their weekly salaries were docked for absences (and thus were not “fixed”), their work hours did not fluctuate above and below 40 hours, and that there was not a “clear and mutual understanding” that the fixed weekly salary was intended to compensate the managers for all of their hours worked in a week. On each of these points, a federal district court sided with Bed Bath and Beyond, Inc’s (“BBB”).

First, the plaintiffs challenged whether they received a “fixed weekly salary” because the record contained a handful of occasions where a plaintiff’s salary was docked for absences. While the court acknowledged that the FWW method does not allow for salary deductions for time off, it ultimately took a practical approach that did not penalize BBB for isolated (and later rectified) instances of payroll errors.  The court also held that the company’s negotiated agreement with one plaintiff that she could take pre-planned vacation unpaid before she accrued paid time off did not undermine the FWW method because it did not call into question BBB’s intention to pay the employee on a fixed salary basis. Rather, it was an accommodation made during the hiring process for the benefit of the employee. This negotiated agreement before the employee took the job, the court explained, should not forever after preclude BBB from using the FWW method of pay. The real takeaway for employers here is that one-off incidents of payroll errors will not invalidate an employer’s use of the FWW.  Employers, however, should promptly rectify improper deductions when they are discovered.

Second, plaintiffs argued their hours did not actually fluctuate week to week within the meaning of the FWW regulations because their hours never dropped below forty hours per week.  In relying on the text of the regulation, the Court held the FWW requires only that an employee’s hours vary week to week.  Fluctuating does not mean the hours must go above and below forty hours. This interpretation opens the FWW method up to workers whose hours are regularly above 40, so long as they fluctuate above the 40-hour threshold.

Third, plaintiffs’ final argument is that they did not have a clear mutual understanding that they would be paid based off the FWW.  Plaintiffs advanced this argument even though they did not dispute signing acknowledgement forms that spelled out the method of pay FWW and did not dispute receiving documents informing them of their weekly salary (and sample overtime calculations), annual notices about their pay rate and method, and paystubs showing that their overtime pay was calculated under the FWW.

Despite the many ways in which BBB explained their method of pay to them, Plaintiffs argued that they didn’t really understand it. The court rejected their position, holding that an employee’s subjective lack of understanding of the details of the pay plan is irrelevant; rather, it’s an objective test as to whether employee knows they will be paid on a fixed based salary regardless of the hours worked. Given all of the notices and their own acknowledgements that they received (and understood) all the facts about their method of compensation, the court concluded that there was “no genuine dispute that the [plaintiffs] knew they would be paid a fixed based salary regardless of their hours worked.”  From this, employers can take comfort in establishing the clear and mutual understanding by providing notices that the base weekly salary is intended to compensate employees for all hours worked in a week. A particular employee’s later-claimed lack of understanding should not undermine the FWW if the communications and acknowledgments clearly laid out the facts establishing the FWW method of pay.

The FWW contains several traps for the unwary (and some state overtime laws do not permit its use), but at least here a court took a common-sense approach in assessing whether an employer fell into any of those traps.

Co-authored by Alex Passantino and Kevin Young

On Tuesday, the Wage & Hour Division announced a new program for resolving violations of the FLSA without the need for litigation. The Payroll Audit Independent Determination program—or “PAID”—is intended to facilitate the efficient resolution of overtime and minimum wage claims under the FLSA. The program will be conducted for a six-month pilot period, after which time WHD will review the results and determine how best to proceed.

PAID should be welcome news for compliance-minded employers. In the vast majority of cases, FLSA claims must be resolved through litigation or under WHD’s supervision. Given the proliferation of FLSA litigation, many employers have, in recent years, conducted proactive audits with legal counsel to ensure compliance with the Act. Oftentimes, employers who identified past issues through those efforts were reluctant to approach an enforcement-happy WHD to request supervision of back wage payments due to concern that doing so would trigger litigation. Employers were stuck between a rock and a hard place.

By providing a mechanism for proactively resolving wage-hour issues without the need for litigation, the PAID program should increase the incentive for employers to conduct formal audits of their wage-hour practices.

While we expect details on the PAID program, including an official launch date, to crystallize in the weeks to come, the WHD has already provided guidance on the contours of the program. According to WHD, an eligible employer who wishes to participate in the program must:

  • Specifically identify the potential violations,
  • Identify which employees were affected,
  • Identify the timeframes in which each employee was affected, and
  • Calculate the amount of back wages the employer believes are owed to each employee.

The employer must then contact WHD to discuss the issue(s) for which it seeks resolution. Following that discussion, WHD will inform the employer of the manner in which the employer must provide required information, including:

  • Each of the calculations described above—accompanied by evidence and explanation;
  • A concise explanation of the scope of the potential violations for possible inclusion in a release of liability;
  • A certification that the employer reviewed all of the information, terms, and compliance assistance materials;
  • A certification that the employer is not litigating the compensation practices at issue in court, arbitration, or otherwise, and likewise has not received any communications from an employee’s representative or counsel expressing interest in litigating or settling the same issues; and
  • A certification that the employer will adjust its practices to avoid the same potential violations in the future.

At the conclusion of the process, the employer must make back wage payments. That process may look similar to the end of a WHD investigation in which violations are found. If an employee accepts the back wages, she will waive her rights to a private cause of action under the FLSA for the identified issues and timeframe. An employee who chooses not to accept the back wages will not be impacted.

We will share more as additional information becomes available. If you have any questions about the PAID program, the planning or execution of a proactive wage-hour audit, or any related issues, please do not hesitate to contact us.

By: Joshua A. Rodine and Christopher J. Truxler

Seyfarth Synopsis: California employers must use the formula prescribed by the Division of Labor Standards Enforcement Manual to calculate overtime on flat sum bonuses, not the bonus overtime formula used under federal law.

California law generally follows federal law as to how employers should calculate overtime pay on nondiscretionary bonuses for non-exempt employees. But California law on calculating bonus overtime has been somewhat unclear in relation to “flat sum” bonuses. On March 5, 2018, in Alvarado v. Dart Container Corp., the California Supreme Court decided that a formula invented by the Division of Labor Standards Enforcement—without engaging in any administrative rulemaking—is the proper method for calculating bonus overtime pay, and that the DLSE’s formula applies retroactively.

The Facts

Hector Alvarado worked as an hourly employee for Dart Container, which makes cups, plates, and other food service products. Alvarado earned an attendance bonus of $15 for each full weekend shift he worked. Dart, in calculating overtime pay generated by the bonus, followed the method established by the federal Wage Hour Division in 29 C.F.R. § 778.110. Under the federal formula, the regular rate for a weekly bonus would be the amount of the bonus divided by all weekly hours worked (both straight hours and overtime hours), and the regular rate would divided by two before multiplying it by the number of weekly overtime hours worked to calculate the amount of overtime pay generated by the bonus.

Alvarado sued Dart for unpaid bonus overtime. Alvarado argued that, for “flat sum” bonuses, California employers must determine the regular rate by dividing the bonus by only the straight time hours worked, as specified in the DLSE Manual, and not by the total hours worked.

The trial court granted Dart summary judgment, holding that Dart properly used the federal method. The Court of Appeal affirmed, opining that while the DLSE Manual’s formula represented a reasonable effort to prevent dilution of the regular rate by overtime hours, the Manual is not binding legal authority. Because no California law required otherwise, the Court of Appeal affirmed Dart’s use of the federal method.

The Supreme Court Decision

The Supreme Court, reversing the lower courts, adopted the formula proposed in the DLSE Manual, on a theory that the DLSE’s formula was necessary to discourage employers from requiring employees to work overtime hours. The Supreme Court announced that an employer, in determining the regular rate on a flat sum bonus, must divide the bonus by only the straight-time hours worked during the period, not by all hours. Moreover, the Supreme Court announced that the regular rate must be multiplied by 1.5, not 0.5, when applied to the number of overtime hours worked during the week. Adding insult to injury, the Supreme Court rejected Dart’s request that this judicially unprecedented holding apply prospectively only.

The Supreme Court justified its decision by emphasizing California’s longstanding policy of discouraging employers from imposing overtime work. To effectuate this policy, the Supreme Court reasoned, a flat sum bonus must be treated as if it were earned on an hourly basis throughout the relevant pay period. The Supreme Court rejected the Court of Appeal’s reasoning that no state law governed the issue, because the DLSE’s Manual, though not binding legal authority, was interpreting the underlying statutory law, and because courts interpreting that law are free to adopt the DLSE’s view if courts find that view persuasive.

In a remarkable concurring opinion, four of the Supreme Court’s seven justices acknowledged that the “spare language” of statutory law could have left employers “somewhat uncertain about how to proceed,” and that the DLSE Manual was not an “authoritative construction by a state agency.” The four concurring justices further acknowledged that employers who “fully intended to comply with state overtime laws” “may now be faced with substantial penalties”—an “unfortunate” state of affairs that “conceivably could have been avoided had an interpretative regulation of this subject been promulgated through formal APA rulemaking.” The concurring justices nonetheless agreed that the Supreme Court’s new interpretation should apply retroactively, even if, “[r]egrettably,” “more was not done to help employers meet their statutory responsibilities.”

What Alvarado Means For Employers

Alvarado is an unwelcome decision that takes a poorly reasoned DLSE provision in a nonbinding manual and declares it to be the law, applied retroactively. This development arguably might visit “substantial penalties” on employers who were not using the DLSE’s flat sum bonus formula, as four justices sadly acknowledge. Now would be a good time to revisit nondiscretionary bonuses for non-exempt employees with the lessons of Alvarado in mind.

Co-authored by Robert A. Fisher and Christina Duszlak

Seyfarth Synopsis: A recent decision by the Massachusetts Supreme Judicial Court limits the scope of the Wage Act to exclude sick time payments and potentially other types of contingent compensation.

The Massachusetts Wage Act has been a boon to plaintiffs, as it provides for automatic treble damages for late or unpaid wages. As a result, plaintiffs’ lawyers have sought to cram every form of compensation into the scope of law. A recent decision by the Massachusetts Supreme Judicial Court seemingly curtails those efforts by limiting the scope of what is a wage under the Wage Act and the availability of triple damages. In that case, an employee manipulated the terms of his employer’s generous sick leave policy and then sought to claim that the employer’s late payment of over $46,000 in unused sick time entitled him to triple damages under the statute. Demonstrating that there is still justice in the world, the Court shut the door on that theory, holding that unused sick time payments do not count as “wages” under the Massachusetts Wage Act.

The case Mui v. Massachusetts Port Authority began when a Massport employee, Tze-Kit Mui, was indicted for attempted murder and arson. Not surprisingly, his employer was not impressed by his alleged off-duty conduct and initiated proceedings to terminate Mui’s employment. Under the terms of Massport’s sick leave policy, an employee who is terminated for cause is not entitled to a payout of unused, but accrued sick time. In Mui’s case, the value of his unused sick time exceeded $46,000. In order to avoid the loss of this windfall, Mui basically said, “You can’t fire me, I quit” and applied for his retirement. When Massport went ahead and fired him anyhow, Mui took the issue to arbitration. Ultimately, the arbitrator overturned Mui’s termination, concluding that Massport could not fire an employee who had already quit. As a result, Massport paid Mui the value of his unused sick time a year after his “retirement.”

Rather than accept his victory at arbitration, Mui sued Massport for treble damages, claiming that his sick time payment qualified as “wages” and that the one year delay in payment violated the Wage Act. The superior court allowed Mui’s motion for judgment on the pleadings, and Massport appealed.

On appeal, the Massachusetts Supreme Judicial Court held that accrued, unused sick time payouts did not fall within the definition of “wages” because an employee had to meet certain conditions to receive the payment. The court compared sick pay with vacation pay (which is covered by the statute) and contingent bonuses (which are not covered by the statute). Unlike vacation pay, which could be used for any purpose, sick time was limited to a specific type of use—illness of the employee or a family member. Thus, employees did not have a right to be compensated for not using sick time. The Court found that Massport’s sick time payment was more like a contingent bonus because it was paid as a reward to employees for not using all of their accrued sick time and not behaving in a manner that justified termination for cause.

Importantly, the Court went out of its way to explain that except for commissions (which are expressly covered by the statute), contingent compensation generally is not covered by the Wage Act. Thus, because payment of sick time under the Massport policy was contingent on meeting the eligibility criteria, Mui could not bring a Wage Act claim based on the delay in the sick time payout.

Mui is significant because it seemingly limits the scope of Wage Act claims—and the risk of automatic treble damages—in connection with contingent compensation not specifically enumerated in the statute. Plaintiffs’ lawyers have tried to expand the scope of the Wage Act, claiming that the statute should be interpreted broadly, but this decision signals that these arguments may not be successful in the future.