Co-authored by Kerry Friedrichs and Kyle Petersen

Seyfarth Synopsis: A common feature of many a commission plan is the recoverable draw that is offset against future commissions. The DOL has long held this is a permissible way to satisfy the minimum wage requirement. In a recent decision, the Sixth Circuit agreed, up to a pointthe point of termination. It concluded that requiring employees to repay the draw post-termination ran afoul of the FLSA’s requirement that the minimum wage be paid “free and clear” because the practice is akin to an unlawful kickback of paid wages. The Sixth Circuit punted the case back to the district court even though the employer had never actually enforced the repayment policy. The remanded case also includes Plaintiffs’ claims that they were pressured to work off the clock in order to lower the weekly draw payments.

Fall … traditionally a time for enjoying the changing season, watching falling leaves and football, preparing holiday meals, and—for employers across the country—updating annual sales commission plans in anticipation of the new year. In doing so, employers should bear in mind the Sixth Circuit’s timely decision that a “draw against commissions” pay structure for commissioned salespeople can be used to satisfy the minimum wage but that employees cannot be made to repay recoverable “unearned” draws post-termination.

In Stein v. hhgregg, Inc., the retail furniture and appliance store paid its sales employees on a commission-only basis. To ensure that the sales force was paid at least the minimum wage required by the FLSA, the employer paid plaintiffs a recoverable draw against future commissions in any workweek in which their commission earnings fell short of minimum wage. The draw was recovered from later pay checks when the commissions were high enough to exceed the minimum wage. As is often the case, the commission policy also required that any “unearned” draw balance be repaid at the time of termination, although the employer never actually sought repayment.

The plaintiffs challenged this pay structure, arguing that recovery of the draw was actually an unlawful “kick-back” of wages in violation of the FLSA’s requirement that minimum wages be paid “free and clear,” without condition. Plaintiffs also alleged that the draw policy led to pressure to work off the clock so as to minimize the minimum wage obligations and draw payments.

Adopting the long-standing position of the DOL, the Sixth Circuit rejected the plaintiffs’ contention that the draw structure violated the FLSA when advanced amounts were recovered during employment. They came to a different conclusion, however, with the provision in hhgregg’s compensation plan requiring that terminated employees repay “unearned” draw balances after termination. The court distinguished the pre- and post-termination recovery on their characterization of the post-termination recovery as a repayment of already earned and paid wages whereas they construed the pre-termination recovery as merely an offset against future unpaid and unearned commissions.

A particularly interesting aspect of that holding is the court’s rebuff of the employer’s argument that it had never actually sought repayment from a former employee and had since removed this provision from its plans. In so holding, the court noted the detrimental effects—including psychological effects—on employees who believed that they owed a debt to their former employer. It appears neither the court nor the parties addressed the potential standing issues or what sort of recovery the court envisioned plaintiffs might be able to obtain under the FLSA for the psychological harm they suffered by having a theoretical debt hanging over them.

The Sixth Circuit also held that the plaintiffs could bring their off-the-clock and overtime claims based on their theory that hhgregg’s managers encouraged employees to work off the clock in order to reduce or eliminate their commission draw by reducing their reported hours worked and increasing their earned commissions for the workweek.

While Stein v. hhgregg largely validates the common practice of advancing future commissions to meet the FLSA’s minimum wage requirement, there are some cautionary points for employers to keep in mind as they revise their commission plans. First, inclusion of a post-termination repayment provision—even if only there as a theoretical stick—could create liability, at least in the Sixth Circuit. Second, although the FLSA allows for recoverable draws during employment, be mindful of varying state laws that may preclude this practice. For example, California has a stricter minimum wage law that does not allow for “averaging” earnings to meet the minimum wage and restricts employers from taking unauthorized deductions from earned wages. California employers should work closely with counsel to develop commission plans that properly incentivize sales staff while complying with California law. Finally, the court’s decision on the off-the-clock claim reinforces the need for employers to implement clear policies against off-the-clock work, even for employees paid on a commission basis.

Authored by Andrew L. Scroggins, Noah A. Finkel, and David S. Baffa

Seyfarth Synopsis:  The NLRB has withdrawn the significant concession it offered at oral argument on the nature of the NLRA rights it seeks to assert in the face of employers’ mandatory arbitration programs.

As noted in our earlier blog post, the Supreme Court heard oral argument on October 2, 2017, on one of the most significant employment law cases in some time, to consider whether to permit employers to use mandatory arbitration programs that contain waivers of collective and class actions.

In the most dramatic moment of the morning, the NLRB’s General Counsel Richard Griffin made a significant admission.[1]

In response to a series of questions by a skeptical Chief Justice Roberts, Griffin agreed that it would not be an unfair labor practice for a mandatory arbitration program to require use of a forum whose rules did not allow class arbitration. Justice Alito quickly realized the significance of this point: “if that’s the rule, you have not achieved very much because, instead of having an agreement that says no class, no class action, not class arbitration, you have an agreement requiring arbitration before the XYZ arbitration association, which has rules that don’t allow class arbitration.” Griffin did not dispute this. He commented that “the provisions of the [NLRA] run to prohibitions against employer restraint.”

Next to the podium was counsel for the employees, Daniel Ortiz of the University of Virginia School of Law. Ortiz did not agree with that concession, thus seeming to highlight a fundamental dissent from the NLRB’s position. This gap was all the more notable for the fact that the Solicitor General already had abandoned the NLRB to side with the employers.

In an unusual development, just one day after the argument, the NLRB’s Griffin sent a short letter to the Court disavowing its argument and adopting the position staked out by Ortiz:

I am writing to correct an inaccurate response I gave at oral argument yesterday in response to the line of questioning by Chief Justice Roberts found at pages 47-50 of the transcript of the oral argument.  My responses, to the extent they indicated any difference from the responses given by employees’ counsel, Mr. Ortiz, to the questions of Chief Justice Roberts found at pages 60-64 of the transcript of the oral argument, were a result of my misunderstanding the Chief Justice’s questions and were inaccurate; Mr. Ortiz correctly stated the Board’s position and there is no disagreement between the Board’s and the employees’ position on the answers to those questions.

Such letters are not unprecedented. Still, it is a remarkable about face. For the justices who already seemed skeptical of the NLRB’s position, this change of position may only serve to highlight that the NLRB is not clear in the reasoning of its position or the effects such reasoning may have if ordered more broadly by the Court to apply to future cases.

[1] The New York Times highlighted Griffin’s concession:

The labor board’s general counsel, Richard F. Griffin Jr., argued for the workers. He made a concession at odds with the position of another lawyer on his side.

Mr. Griffin said that employment contracts could not require workers to give up collective action in arbitration but that the private entities that conduct arbitration could require that cases be pursued one by one.

If that is so, Justice Samuel A. Alito Jr. responded, “you have not achieved very much because, instead of having an agreement that says no class arbitration, you have an agreement requiring arbitration before the XYZ arbitration association, which has rules that don’t allow class arbitration.”

Daniel R. Ortiz, a law professor at the University of Virginia who also argued for the workers, took a different approach…

Co-authored by Noah A. Finkel, David S. Baffa, and Andrew L. Scroggins

Seyfarth Synopsis: Following oral argument, employers should be cautiously optimistic that the Supreme Court will allow mandatory arbitration programs containing waivers of the ability to bring collective and class actions.

In yesterday’s oral argument, in one of the most significant employment law cases we have seen in some time, a divided Supreme Court appeared more likely than not to give the green light to employers’ mandatory arbitration programs that contain waivers of collective and class actions. Our summary of the issues this case presents can be found here: http://www.wagehourlitigation.com/arbitration-agreements/will-the-supreme-court-finally-remove-doubt-that-an-employer-can-mandate-that-employees-enter-into-arbitration-agreements-with-class-waivers/

Reading tea leaves from oral argument is always a challenge, especially for those who have a stake in the matter.[1] But the three authors of this post attended yesterday’s argument and, judging from the questions from the Court, the various Justices’ reactions to the answers to those questions, and the prior rulings from the Court, are optimistic that the Court ultimately will issue a closely-contested ruling in favor of class waivers.

Four Justices Appear Ready to Invalidate Class Waivers in Employment Cases

While our prediction is somewhat uncertain, there is one aspect in which we are completely confident: there will not be a unanimous decision. Indeed, it appeared that there are four solid votes to hold that Section 7 of the National Labor Relations Act provides an employee with a right to bring a collective or class action, that requiring an employee to waive that right as a condition of employment violates NLRA Section 8’s prohibition against employer restraint of that right, and that, therefore, an employer’s arbitration agreement including a class waiver cannot be enforced either because the class waiver is illegal or because the NLRA constitutes a contrary congressional command to the general rule that, under the Federal Arbitration Act, arbitration agreements are to be enforced according to their terms.

Justice Ginsburg asserted in her questions that “the driving force of the NLRA was the recognition that there was an imbalance, that there was no true liberty of contract,” which is why concerted activity — including, in her apparent view, class and collective action — is protected against employer interference. She further contended that the Court’s prior precedents regarding the FAA concerned only commercial contracts and did not involve NLRA rights. (As the employers’ counsel Paul Clement rightly pointed out, however, the Court has twice reviewed the propriety of arbitration agreements between employers and employees, and neither time did the Court reason that arbitration agreements in the employment context are entitled to any less weight than those in the commercial context.)

Justice Kagan relied on the Court’s prior precedent to argue that the NLRA protects “employees seeking to improve working conditions through resort to administrative and judicial forums” and thus implied that filing a class action also is protected by the NLRA. But the employers’ counsel retorted that Court precedent merely protects “resort to” courthouses, and that “there is no right to proceed as a class once you get there.” Once in court, nothing prohibits an employer from asserting all available defenses to class treatment, including moving to enforce an agreement between an employer and employee to arbitrate all disputes on a bilateral basis.

Justice Sotomayor questioned that argument by maintaining that an employer cannot enforce a contract that is “illegal” even under the FAA. In response to that, employers’ counsel Clement retorted that the Court has decided two other cases (Circuit City v. Adams and Gilmer v. Interstate Johnson/Lane Corp.) in which employees had agreed to bilateral arbitration and in which it could have been argued that the NLRA makes such an agreement unlawful. “But no dog barked at that point . . . and that’s because the NLRA in no other context extends beyond the workplace to dictate the rules of the forum,” Clement told the Court.

The most vigorous questioner was Justice Breyer, who appeared offended by the idea of a class waiver. He went so far as to say that he is worried that the employers’ position “is overturning labor law that goes back to, for FDR at least, the entire heart of the New Deal” and that “I haven’t seen a way that you can, in fact, win the case, which you certainly want to do, without undermining and changing radically what has gone back to the New Deal.” Clement explained, however, that “for 77 years” — from the passage of the NLRA until its 2012 D.R. Horton decision — “the [NLRB] did not find anything incompatible about Section 7 and bilateral arbitration agreements” and the NLRB’s General Counsel issued a memorandum on the issue in 2010 in which it found that a mandatory class waiver does not violate the NLRA.

But From Where Does the 5th Vote Come?

Despite these fairly clear votes to invalidate class waivers, four votes does not a majority make.  And in questioning of counsel for the NLRB and counsel for the employees, it appeared that it will be difficult to find that fifth vote. Justice Thomas, in keeping with his usual demeanor, did not ask a question, but he has been in the Court’s majority in other cases enforcing arbitration agreements and is regarded as generally receptive to employer’s views. Nor did Justice Gorsuch ask a question. He, however, thus far has joined the Court’s conservative majority in all decisions in which he has been a part.

Chief Justice Roberts and Justice Alito clearly were skeptical of the NLRB’s position. Indeed, in questioning its General Counsel Richard Griffin, Chief Justice Roberts and Justice Alito led Griffin into a significant admission, providing the most dramatic moment of the morning. They asked Griffin a series of questions that led Griffin to agree that it would not be an unfair labor practice for a mandatory arbitration program to require use of a forum whose rules did not allow class arbitration. Justice Alito quickly realized the significance of this point: “if that’s the rule, you have not achieved very much because, instead of having an agreement that says no class, no class action, not class arbitration, you have an agreement requiring arbitration before the XYZ arbitration association, which has rules that don’t allow class arbitration.” Griffin did not dispute this.  He commented that “the provisions of the [NLRA] run to prohibitions against employer restraint.”

Interestingly, counsel for the employees, Daniel Ortiz of the University of Virginia School of Law, did not agree with that concession, thus highlighting fundamental dissent from the NLRB’s position. These cases at the Supreme Court already were notable because the Solicitor General took a position opposite that of the NLRB. Oral argument added another layer of disagreement: even the employees urging the Court to adopt the Board’s view of the NLRA don’t agree with the concession made by Griffin. In other words, the employees and the NLRB are asking the Supreme Court to recognize a right that overrides the FAA, but they cannot agree on what that right is.

As in any close case recently at the Supreme Court, most eyes were on the swing vote, Justice Kennedy. Going into the argument, he appeared to be the Justice most likely to join Justices Ginsburg, Sotomayor, Kagan, and Breyer, the four justices who dissented from the Court’s enforcement of a bilateral arbitration agreement in the consumer context in AT&T Mobility v. Concepcion. Justice Kennedy did not tip his hand as much as the other Justices. But he did appear to be interested in the concession that NLRB General Counsel Griffin made (and clarified Chief Justice Roberts’ question that induced that concession), and his questioning of the Board and the employees’ counsel suggested that he believed that, even with a collective and class action waiver, employees still can exercise Section 7 rights in various ways, and that he did not wish to “constrain[] employers in the kind of arbitration agreements they can have.”

Little of the argument focused on the FAA and the nature of its saving clause or what constitutes a “contrary congressional command.” The Justices seemed more interested in exploring whether the NLRA contains a right to a class action in the first place.

What Next?

Our predicted close victory for the employers is just that: a prediction. After all, even the Justices who appeared to favor permitting class waivers did not strongly signal how they might reach that result or whether any guidelines or restrictions might accompany the rule. We do not recommend that employers bank on our prediction, because one never knows what is in the minds of the Justices or how they will come out after discussing the cases with each other. Until a decision is issued — which likely will be early 2018 — there will be no definitive answer as to whether a class waiver in an arbitration program provides a defense to an employment class or collective action. Employers should continue to consider whether an arbitration program with a class or collective action waiver is right for them and, if it is, be ready to implement one if the Supreme Court rules in the employers’ favor in these cases.

[1] Seyfarth Shaw LLP is counsel for Epic Systems Corporation — one of the three companies whose arbitration programs are at issue in the three consolidated cases at the Supreme Court — and represents Epic at the district court in this case, was counsel for Epic in the appellate court, and is co-counsel for Epic at the Supreme Court.  The views expressed in this blog post are Seyfarth Shaw’s and not necessarily those of Epic.

Co-Authored by Sheryl Skibbe, Jon Meer, and Michael Afar

Seyfarth Synopsis: A recent court decision credited Nike’s time and motion study showing employees spent mere seconds of time in off-the-clock bag checks, finding the checks to be too trivial and difficult to capture to require payment. In contrast, the class failed to present actual evidence showing any amount of compensable time spent by the class off-the-clock while managers inspected their bags or checked their jackets.

In Rodriguez v. Nike Retail Services, Inc., Nike defeated a class action alleging that hourly retail workers were owed money for the time they spent waiting for security inspections after they had clocked out and were exiting the store.

Nike hired an expert to conduct a study of exit inspections, which showed that the average inspection takes no more than 18.5 seconds and that 60.5 percent of all exits required zero wait time. Rather than submit contradictory evidence in response to Nike’s 700 hours of video, which the court found to be representative of the class period, Plaintiff Isaac Rodriguez relied on an expert declaration attempting to poke holes in Nike’s study.

Judge Beth Labson Freeman called Plaintiff’s strategy “misguided,” rejecting “Rodriguez’s attempt to equate this situation to a battle of experts sufficient to deny summary judgment.” “[P]oint[ing] out flaws in the other side’s evidence,” was not the same as “offering any conflicting evidence for the jury to consider at trial on the relevant claim or defense.”

Evaluating Nike’s evidence under the de minimis defense, and recognizing that daily periods of up to 10 minutes have been found to be de minimis, Judge Freeman ruled that the workers hadn’t shown that their off-the-clock exit time was close to meeting that threshold. Although Rodriguez pointed to testimony from three store managers who estimated that some employees may have had a few inspections with higher wait-times, the judge found that wait-times of two or five minutes were too trivial, irregular and administratively difficult to capture.

Judge Freeman also agreed that repositioning time clocks to the front of the store so that employees could clock out after the check was not required. Taking a practical view, the court noted that “brief exit inspections are a modern business reality that most retailers, like Nike, use for the legitimate reason of reducing theft.”

Although the California Supreme Court is considering the de minimis doctrine in Troester v. Starbucks Corp., Judge Freeman declined Rodriguez’s invitation to “predict how the California Supreme Court will rule.” Instead, she noted that the court was compelled to apply existing law to the case, finding the Ninth Circuit and other courts had applied the de minimis doctrine to California claims.

For the moment, this ruling is good news for employers who can put away their stop watches when small increments of off-the-clock time are irregular and difficult to record. But keep your eye on the ball because the California Supreme Court will be making the final call on the de minimis doctrine and whether or how it applies in the state.

Co-authored by John Giovannone, Noah Finkel, and Kyle Petersen

Seyfarth Synopsis: As previously discussed in this space, the Ninth Circuit recently chose to side with the Second Circuit, and not the Sixth Circuit, and ruled that mortgage underwriters fail to meet the FLSA’s administrative exemption from overtime test. In doing so, the Court artificially promoted and expanded a court-created paradigm for assessing job duties—known as the “administrative/production” dichotomy—far beyond its utility, and thereby increased confusion in the mortgage banking industry.  Fortunately, the Supreme Court now has the opportunity to remedy that confusion with the pending petition for writ of certiorari.

As our readers may recall, we took issue with the Ninth Circuit’s July decision in McKeen-Chaplin v. Provident Bank, which held that mortgage underwriters did not qualify for the administrative exemption from overtime under the FLSA, despite their critical role in assessing potential mortgage loans and making important decisions based on those assessments. As we discussed, the decision was the result of a concerted effort to narrowly construe the exemption through a strained application of the outdated “administrative-production dichotomy,” which is a judicially-created shorthand tool that some courts use to shove job duties into one of two artificial buckets. And, as we discussed, the decision demonstrates yet another example of oft-repeated but unsupported, illogical, and inconsistent dicta advocating that while the FLSA, in general, should be broadly construed, its provisions concerning exemptions should be construed narrowly.

Suffice it to say, we are not only concerned that McKeen-Chaplin v. Provident Bank decision is substantively wrong, but that it will lead to less certainty and a spike in misapplication of the administrative exemption test under the FLSA (a fact we discussed further, in the context of the strain the decision creates between the federal and state law).

Fortunately, Provident Bank shares our concerns and has petitioned the United States Supreme for review of the decision (and in fact, cited our blog in the process). The petition rightly and persuasively argues that the decision is important, was wrongly decided, and creates a Circuit split between the Ninth, Second, and Sixth Circuits: “The issue impacts thousands of banks, and tens of thousands of employees nationwide…. Underwriters assess the potential borrowers income, assets, and credit history and decide whether their respective institutions should risk their own financial capital by making the loan. [T]hey play a crucial role in managing their institution’s overall exposure to risk and promoting its overall financial success.” As the petition persuasively points out, when the Department of Labor “promulgated the relevant regulations [concerning the administrative exemption] in 2004, it [also] issued a regulatory impact notice making clear its view that ‘underwriters’ do generally qualify as exempt ‘administrative’ employees.”

Thus, decisions like McKeen-Chaplin v. Provident Bank constitute judicial legislation concerning the ever-shifting contours of the exemption, which has morphed out of the court-created administrative-production dichotomy and an overriding but unfounded desire to narrowly construe the exemption. But such judicial legislation does not align with the original expectations of the drafters for the scope and impact of the exemption regulations. Yet, by way of Provident Bank’s cert petition, the Supreme Court now has the opportunity to right that wrong and definitively bring mortgage underwriters back within the scope of the administrative exemption, as originally envisioned. Hopefully, the Supreme Court will accept Provident Bank’s invitation.

 

Co-authored by Noah Finkel and David Baffa

Seyfarth Synopsis: In the first argument of the first day of its new term, the U.S. Supreme Court will hear oral argument in three cases presenting the issue of whether an employer may require employees to enter into arbitration agreements containing a waiver of the ability to join a class or collective action. The Court’s decision — expected in early 2018 — could significantly alter the landscape of multi-claimant employment litigation more than any other development in recent memory. Employers should start preparing now.

Whether for claims of discrimination, ERISA violations, or, most frequently, wage-hour violations, employers have faced an increasing number of employment lawsuits brought as class or collective actions, and have spent more and more to defend and settle them. As a result, some employers have enacted mandatory arbitration programs for their employees, with a key feature of the arbitration program being a waiver of the ability to participate in a class or collective action.

The Supreme Court’s Embrace of the Federal Arbitration Act

Enforcing arbitration agreements with class waivers has been successful for the most part in recent years, at least with respect to arbitration programs that are carefully drafted to avoid state contract defenses such as claims of lack of consideration or procedural unconscionability. This is largely due to the U.S. Supreme Court steadily removing the most significant hurdles to enforcement of class waivers in arbitration agreements.

At first, many argued that a class waiver violates public policy. But in 2011, the Supreme Court made clear in AT&T Mobility v. Concepcion that California’s Discover Bank rule that effectively barred enforcement of class action waivers in consumer arbitration contracts is preempted by the Federal Arbitration Act (“FAA”). Then, some tried to distinguish Concepcion by arguing that it merely elevated the federal FAA above state law, and that a class waiver of a federal claim cannot be enforced. But the Supreme Court rejected that argument in 2012 in CompuCredit Corp. v. Greenwood and held that arbitration agreements must be enforced according to their terms “even when federal statutory claims are at issue.” Next, some argued that class waivers should not be enforced because if small claims cannot be pooled together in a class or collective action, then there is no way effectively to vindicate rights, especially where the costs to pursue individual claims exceeds the potential recovery. The Supreme Court rejected that theory too, in 2013, in American Express Co. v. Italian Colors Restaurant.

The net effect of these favorable rulings could have caused most employers to adopt arbitration programs with class waivers. Many held back, however. One reason is that, in the employment context, a significant hurdle remained to the enforcement of class waivers in arbitration agreements: the National Labor Relations Board (“NLRB”) and its D.R. Horton decision in 2012.

The NLRB — and Some Circuit Courts — Fight Back

The NLRB’s theory, first articulated in D.R. Horton, is that the pursuit of class or collective actions constitutes protected concerted activity under Section 7 of the National Labor Relations Act (“NLRA”). Just as Section 7 protects the right to form a union, picket, strike or engage in other concerted activities for mutual aid or protection, it also protects the right of employees to band together to participate in a class or collective action, or so has said the NLRB. The Fifth Circuit, however, refused to enforce the NRLB’s decision, and shortly thereafter, the Second and Eighth Circuits rejected similar arguments premised on the NLRB’s theory. Similarly, all but a handful of district courts rejected the D.R. Horton theory even while the NLRB continued to espouse it.

That changed in May 2016 when the Seventh Circuit issued its decision in Lewis v. Epic Systems Corp. There, the Seventh Circuit endorsed the theory that bringing a class or collective action (Lewis brought both) is a form of protected concerted activity under the NLRA, and that because of that, an arbitration agreement that requires a class waiver is illegal. Accordingly, said the Seventh Circuit panel, the arbitration agreement cannot be enforced under the saving clause of the FAA (the “saving clause” provides that arbitration agreements “shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract”).[1] A few months later, in May 2016, the Ninth Circuit followed the Seventh in Morris v. Ernst & Young (as did the Sixth Circuit a year later in May 2017 in NLRB v. Alternative Entertainment, Inc.).

The Supreme Court Steps In to Tackle the Most Significant Employment Case in Years

Due to the circuit split, the Supreme Court granted cert to three case presenting the issue of whether an employer may require its employees to arbitrate all claims against it on an individual (i.e., non-class) basis, despite the provisions of the NLRA: Epic Systems Corp. v. Lewis from the Seventh Circuit, Ernst & Young v. Morris from the Ninth Circuit, and NLRB v. Murphy Oil Co. out of the Fifth Circuit.

Oral argument will take place on October 2, the first day of the Supreme Court’s term. Indeed, the three cases constitute the first matter the Court will take up that day. The Court does not announce when opinions will be issued, but it is expected that the decisions in these cases likely will be issued in January or February 2018.

A decision in favor of the plaintiffs and the NLRB likely would preclude enforcement of class waivers as to the vast majority of employment claims and would allow to continue, if not further amplify, the wave of collective and class actions that have plagued employers. Those groups of employees not covered by the NLRA, including supervisors and independent contractors, likely could be compelled to enter into class waivers, but all other employees would remain free to lead or participate in class or collective proceedings.

A decision in favor of the companies, however, probably would clear the last foreseeable hurdle to the enforcement of arbitration agreements containing a waiver of the ability to participate in a collective or class action. It is even possible that the Court’s reasoning could allow for class waivers outside of an arbitration agreement, as the Fifth Circuit held earlier this year in Convergys Corp. v. NLRB.

A green light for class waivers in arbitration agreements thus likely would cause many employers to adopt arbitration programs with class waivers. Those waivers likely would be enforced by courts under a favorable Supreme Court decision, provided the waivers and the arbitration agreements are carefully drafted to comport with state contract laws.

There are some narrow exceptions for certain claims or employees that would not be covered. For example, claims under California’s Private Attorneys General Act (“PAGA”) cannot be compelled to arbitration, and certain transportation workers are exempt from the FAA (though arbitration agreements potentially could be enforced as to them under state arbitration acts). Also, employees must remain free to file administrative charges, and lawsuits initiated by the EEOC or Department of Labor would be unaffected by arbitration agreements with class waivers. There also could be multi-claimant actions brought in different ways, such as the assertion of serial arbitration demands on behalf of dozens of employees at a time. But on the whole, a favorable Supreme Court decision could enable employers to largely avoid the employment class action epidemic.

“So Should Our Company Have One of These Arbitration Agreements?”

Because of the potential significance of the Court’s ruling, the October 2 oral argument is likely to receive a lot of media attention over the next few weeks. Company executives are likely to ask their in-house lawyers and human resource professionals some variant of the following question: “I just read about this case about arbitration agreements and class waivers. Do we have that? Should we have that?”

The answer to that question, in the short term, probably is to wait and see how the Court rules, which should be within a few months. But if the Court rules in favor of employers, the answer still will vary from company to company, as an arbitration program may not be right for every employer even though it may free a company from the burdens of an expensive class or collection action.   There are several other advantages to consider, but also several disadvantages.

On the one hand, companies that implement such an agreement could avoid runaway jury verdicts, reach decisions on the merits more quickly than is typical in court, and likely count on greater confidentiality given the non-public nature of arbitration proceedings. On the other hand, an arbitration agreement means that, for covered claims, employment disputes are before an arbitrator rather than a judge. Arbitrators often are less predictable than judges, usually disfavor motions to dismiss or summary judgment motions, and issue binding decisions from which there is often limited opportunity for appeal. Arbitrations also can be more expensive: arbitrator fees can be high and generally must be borne by the employer. Also, arbitrations more typically result in an evidentiary hearing (rather than ending by a dispositive motion), meaning that attorneys’ fees for arbitrations may be higher as well. Finally, many companies are concerned that employees may perceive an arbitration program with a class waiver to be a takeaway, potentially leading to a drop in employee morale or even giving a boost to a union organizing effort.

In addition to the above considerations, drafting and implementing an arbitration agreement requires great care. For example, employers need to ensure that they not give a court any basis on which to find that the provisions of an arbitration agreement could be unconscionable. Thought must be given to what claims are covered (e.g., should the agreement cover wage-hour claims but not discrimination claims?). Questions often arise about whether a mutual exchange of promises to arbitrate constitutes sufficient consideration, or whether consideration beyond continued employment must be provided in some states. Above all, a thoughtful communications plan must be prepared to minimize employee relations risks.

Although a ruling in these cases is not likely until early 2018, it is not too early to start thinking of next steps now. Please join us for a webinar on October 4, 2017 at 1:00 p.m. Eastern, during which we will provide our analysis of the Court’s oral argument, predict what employers may expect from the Court’s ruling, and whether, when, and how employers should enact or modify their arbitration programs. Click here to register.

[1] Seyfarth Shaw LLP is counsel for Epic in the Lewis case at the district court, was counsel for Epic in the appellate court, and is co-counsel for Epic at the Supreme Court. The views expressed in this article are Seyfarth Shaw’s and not necessarily those of Epic.

Co-authored by Abigail Cahak and Noah Finkel

Seyfarth Synopsis: The Ninth Circuit has created a circuit split by rejecting the DOL’s interpretation of FLSA regulations on use of the tip credit to pay regularly tipped employees, finding that the interpretation is both inconsistent with the regulation and attempts to create a de facto new regulation.

The Ninth Circuit Court of Appeals issued an important and restaurant-friendly decision rejecting the Department of Labor’s interpretation of FLSA regulations on the use of the tip credit when paying regularly tipped employees.

In Marsh v. J. Alexander’s, the Ninth Circuit addressed a number of actions brought by servers and bartenders who alleged that their employers improperly used the tip credit and thus failed to pay them the required minimum wage. Relying on DOL interpretive guidance, the plaintiffs asserted that their non-tip generating duties took up more than 20% of their work hours, that they were employed in dual occupations, and that they were thus owed the regular minimum wage for that time. The district court dismissed the case, holding that Marsh had not alleged a dual occupation and that deference to the DOL guidance underpinning his theory of the case was unwarranted. Marsh appealed.

Under the FLSA’s regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” Yet, current DOL guidance imposes time and duty-based limitations not present in the regulations: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating. The guidance goes on to state that an employer also may not take the tip credit for time spent on duties not related to the tipped occupation because such an employee is “effectively employed in dual jobs.” That guidance had been followed by the Eighth Circuit Court of Appeals and several lower courts. It created a feeding frenzy among some plaintiffs’ lawyers, causing restaurant employers to ask servers and bartenders to track their time spent on various activities down to the minute, or risk facing a collective action lawsuit in which they have to try to rebut a servers’ claims that they had spent excessive time on activities that arguably were not tip producing.

The Ninth Circuit, however, concluded in Marsh that the DOL’s guidance was both inconsistent with the FLSA regulations and attempted to create a de facto new regulation such that it did not merit deference. In particular, the court noted the regulations’ focus on dual occupations or jobs as contrasted with the DOL guidance: “[i]nstead of providing further guidance on what constitutes a distinct job, [the DOL] takes an entirely different approach; it . . . disallows tip credits on a minute-by-minute basis based on the type and quantity of tasks performed. Because the dual jobs regulation is concerned with when an employee has two jobs, not with differentiating between tasks within a job, the [DOL’s] approach is inapposite and inconsistent with the dual jobs regulation.” Moreover, the DOL guidance “creates an alternative regulatory approach with new substantive rules . . . [and] ‘is de facto a new regulation’ masquerading as an interpretation.”

In so holding, the Ninth Circuit broke with the Eighth Circuit’s 2011 decision in Fast v. Applebee’s International, Inc. and explicitly rejected the Eighth Circuit’s analysis in that case. We previously blogged about the Fast decision here.

Marsh creates a circuit split and is particularly notable coming from the frequently employee-friendly Ninth Circuit. There remains, however, contrary authority in many parts of the country, and the decision has no bearing on state laws, some of which may nonetheless follow the DOL’s reasoning. It’s also likely that this Ninth Circuit panel does not have the last word on this issue. This opinion could receive further review by the full Ninth Circuit or by the Supreme Court, and if the Supreme Court does not resolve the circuit split, other appellate courts are likely to weigh in. Regardless, the decision points out the absurdities of the DOL’s current position and demonstrates the need for guidance on the issue from the DOL once its’ appointees are in place.

Authored by Alex Passantino

The White House announced its intent to nominate Cheryl Stanton to serve as the Administrator of the U.S. Department of Labor’s Wage & Hour Division. Stanton currently serves as the Executive Director for the South Carolina Department of Employment and Workforce. Prior to that, she worked in private practice as a management-side labor and employment attorney. She also previously served as Associate White House Counsel for President George W. Bush, where she was the administration’s principal liaison to the U.S. Department of Labor, the National Labor Relations Board, and the Equal Employment Opportunity Commission.

Ms. Stanton is nominated to join a Labor Department in which only Secretary of Labor Alexander Acosta has successfully navigated the Senate confirmation process. Deputy Secretary nominee Patrick Pizzella was formally nominated in June 2017; his nomination remains pending in the Senate. With a full Fall agenda including Hurricane Harvey (and likely Irma) relief, the debt ceiling, tax reform, border wall funding, and potential immigration-related issues, it is unclear when the Senate might confirm Ms. Stanton. It would not be surprising to see her nomination linger until the end of the year–or even into 2018.

When she does arrive at WHD, she’ll be facing a full plate of issues as the agency tackles a new rulemaking process increasing the salary level required for exemption under the FLSA’s white-collar exemptions, a proposal revising the rules surrounding tipped employees and the use of tip credit, and, presumably, filling the vacuum left by the Department’s withdrawal of the Administrator Interpretations on independent contractors and joint employment. In addition, with the Department’s announcement that it would once again be issuing opinion letters, there’s likely to be quite a queue of requests awaiting Ms. Stanton’s review.

We’ll keep you posted as Ms. Stanton’s nomination works its way through the confirmation process.

 

Co-authored by Brett Bartlett, Alex Passantino, and Kevin Young

Seyfarth Synopsis: On Thursday afternoon, a federal judge in Texas issued an order officially invalidating the U.S. Department of Labor’s 2016 overtime rule, which would have more than doubled the minimum salary level for most overtime-exempt employees. While the long awaited ruling brings a measure of closure for employers, the possibility of appeal, as well as the new administration’s efforts to revise the existing overtime exemption rules, will be critical issues for employers watch in the weeks and months to come.

For nearly a year, employers have been watching and waiting as litigation challenging the Obama administration’s revision to the FLSA’s executive, administrative, and professional (“EAP”) exemptions—a revision intended to make millions of more Americans eligible for overtime pay—wound its way through litigation in the Eastern District of Texas and the Fifth Circuit of Appeals. As of Thursday afternoon, the waiting is over: District Judge Amos Mazzant issued an order invalidating the revised rule.

The Obama DOL’s revised rule, which was finalized in the summer of 2016 and slated to take effect on December 1, 2016, would have increased the salary level required for EAP employees from $455 per week (i.e., $23,660 per year) to $913 per week (i.e., $47,476 per year). The rule also called for automatic, inflation-indexed updates to the salary level every three years. Ultimately, the revised rule did not become effective on December 1, however, because Judge Mazzant issued an order days prior that preliminarily enjoined it from going into effect.

District Judge Mazzant issued his order in two consolidated lawsuits challenging the DOL for acting beyond its rulemaking authority. The order was the result of a motion filed by a group of state attorneys general who argued that the DOL’s rulemaking was invalid, in part because it exceeded the authority Congress gave DOL to define who is a “bona fide” EAP employee who should not be entitled to overtime pay. At about the same time that the “state plaintiffs” filed their motion for preliminary injunction, which the district court granted, another set of plaintiffs—a group of business associations (“business plaintiffs”)—filed an expedited motion for summary judgment, advancing similar arguments that the DOL’s rulemaking was unlawful.

After Judge Mazzant granted the state plaintiffs’ preliminary injunction motion, the Obama DOL filed an interlocutory appeal in the Fifth Circuit attacking the injunction order. Importantly, however, this was just before the Trump Administration took office. Ultimately, briefing in the appeal was delayed as a new president settled into office and his new Labor Secretary, Alexander Acosta, took the helm at DOL. In doing so, Secretary Acosta and his Acting Solicitor were required to assess how to maneuver a proceeding involving an injunction order that on the one hand blocked the implementation of an overtime rule championed by the prior administration, but on the other hand suggested that the DOL might not have authority to set any salary level for the EAP exemptions, despite having done so for nearly eighty years.

In the meantime, the business plaintiffs’ motion for summary judgment lingered before the district court.

Thursday’s ruling was preceded by a recent flurry of activity. On Wednesday, for example, Judge Mazzant issued an order confirming no further argument was necessary on the summary judgment motion. The court also collapsed the state plaintiffs’ and business plaintiffs’ cases together and joined the state plaintiffs to the business plaintiffs’ pending summary judgment motion. Nevertheless, it seemed unlikely that Judge Mazzant would rule on the summary judgment motion before hearing from the Fifth Circuit regarding his earlier preliminary injunction order. After all, an appellate ruling on whether it was proper to preliminarily enjoin the new rule certainly could have impacted or at least informed Judge Mazzant’s reasoning on whether the rule should be declared invalid, as the summary judgment motion argued it should.

Meanwhile, at the Fifth Circuit, oral argument was slated for October 3, and the parties were jockeying for an opportunity to be heard. The business plaintiffs, who were not parties to the appeal, requested permission to appear as amici at the oral argument. Soon thereafter, all parties filed a motion to stay proceedings while they attempted to negotiate a deal that would eliminate the need for further proceedings. Indeed, even on Thursday as the district court was issuing its final judgment, the parties on appeal were filing various submissions with the Fifth Circuit.

So perhaps all were surprised when District Judge Mazzant issued orders finding that the DOL’s 2016 rulemaking was invalid, and that the AFL-CIO would not be joined to the case. The district court’s ruling on both of these issues is fairly straightforward. On the motion for summary judgment, which collapsed all parties and remaining issues into its walls, the court ruled as follows:

  • As associations and similar groups, the business plaintiffs had standing to challenge the DOL’s rulemaking.
  • The FLSA does in fact apply to state governments, contrary to the state plaintiffs’ arguments.
  • Applying Chevron deference analysis, the DOL exceeded its authority by setting a salary level test that in effect eliminated the need to consider whether employees performed duties that demonstrate their roles working in a bona fide EAP capacity, based on definitions that Congress would have understood at the time it enacted the FLSA.
  • The automatic updating provided by the DOL’s final 2016 rule was unlawful for similar reasons.
  • Clarifying an area of concern for the DOL and other stakeholders, the court did not rule on the question of whether the DOL has authority to set any salary level for the EAP exemptions. The court’s ruling concerned only the 2016 rulemaking, finding the heightened salary level under the revised rule goes too far.

In denying the AFL-CIO’s motion to intervene as a necessary or permissive party, the court reasoned:

  • The union’s motion was untimely, as it had been aware of the litigation and the issues on which it bore. Yet it waited to file its motion to intervene until material events had occurred in the litigation.
  • The union failed to show that the DOL and related defendants were not adequately representing the interests that it purported to protect.
  • The union had argued among its primary points that Secretary of Labor nominee Andrew Puzder would not protect those interests; but Alexander Acosta was confirmed as Secretary of Labor, meaning that Mr. Puzder’s potential actions never became a reality.
  • And the court would nevertheless not exercise its discretion to allow the union to join the case.

The question on everyone’s mind is: where does this leave us?

One easy answer is that with respect to the EAP exemption itself, the 2004 rule remains in place. Employees making $455 per week (i.e., $23,660 per year) and whose primary duty satisfies one of the EAP duties tests may be classified as exempt.

Beyond that, there are no easy answers. The parties are no doubt considering whether the district court’s summary judgment order, which purports to withdraw all prior rulings, renders the pending appeal moot or requires its dismissal. After all, the summary judgment motion decided by the district court presents largely the same issues currently before the Fifth Circuit—namely, the validity of the new overtime rule. Some commentators have already exclaimed that the district court’s order mooted the interlocutory appeal entirely. Our view is that the question could be more complicated. Suffice it to say, there’s a lot to digest.

Either way, it also remains unclear whether either side will appeal Thursday’s rulings. While one would assume that DOL will not, we can’t slam the door on the possibility. As we saw with the appeal of the preliminary injunction, even the new Administration’s policy differences may not override DOL’s desire to defend itself against court orders limiting its authority, as the preliminary injunction did and as the court’s summary judgment order appears to do. If DOL determines that there is an institutional need to preserve its rulemaking authority, then it is possible we might see a DOL-initiated appeal, which would further complicate the question of how the union might agitate the proceedings.

As for the AFL-CIO, next steps are even foggier at this moment. Given that the DOL has already signaled the commencement of new rulemaking on the EAP exemptions, the AFL-CIO may take the view that even a complete victory on appeal—i.e., one that would permit its inclusion in the case and the reversal of the district court’s summary judgment decision—would ring hollow, as it could be undone by the DOL’s efforts to formulate a new rule that would take the place of the Obama rule.

Without question, the Eastern District of Texas’s order invalidating the 2016 overtime rule brings a large measure of closure for employers waiting to learn whether the rule would ever go into effect. The completeness and finality of that closure will depend largely on whether the AFL-CIO seeks appeal, as well as the DOL’s anticipated efforts to implement a new rule altogether. We will, of course, continue to monitor and update you on these important events.

Co-authored by Steve Shardonofsky and Kevin A. Fritz

Seyfarth Synopsis: As employers begin to pick up the pieces following Hurricane Harvey, management will likely encounter questions about employee pay, benefits, and leaves of absence during and after this disaster, and may also have questions about how to help their workers get by during this difficult time. After making sure your workers are safe, and as you start to rebuild and repair, read on for practical guidance on these pressing issues.

This past weekend Hurricane Harvey made land fall, causing unprecedented and catastrophic flooding in southeastern Texas. Our thoughts go out to our colleagues, clients, and friends affected by this natural disaster. We are thinking of you during this difficult and trying time.

Pay for Non-Exempt Employees

The General Rule

Under the Fair Labor Standards Act (FLSA), an employer is only required to pay non-exempt employees for hours actually worked. In other words, businesses are not required to pay non-exempt employees if they are not working, including times when the employer closes its doors or reduces hours of operation, whether or not forced to do so by inclement weather. Moreover, while some states require some minimum “reporting” or “show up” pay for employees who show up for work and are either turned away at the door or dismissed before the end of their scheduled shifts, Texas is not one of those states.

An important exception to this general rule exists for non-exempt employees who receive fixed salaries for fluctuating hours from week to week. Because these employees must be paid a “fixed” salary, employers must pay these workers their full weekly salary for any week in which any work was performed and may not dock their pay for days when the office is closed due to inclement weather.

Even if your business is not open during inclement weather days, you always are free to pay employees for that time, and may also permit them to use their paid leave time, if applicable.

Inclement Weather Delays and Traffic

Flooding and severe weather often cause unpredictable traffic delays, and may even result in employees becoming stranded on the road. Employees who perform work while stranded—for example, by taking phone calls or answering e-mails on their way to work—must be compensated for that time even if done away from the office. Similarly, an employee who is stranded in an employer’s vehicle on their way to work and instructed to safeguard the vehicle or other property is generally entitled to pay for time beyond their ordinary home-to-work commute (i.e., once their scheduled shift begins).

With respect to inclement weather, the general and most practical advice is to pay for any extra time spent getting to work during a scheduled shift, particularly when employees are stranded for reasons outside their control. It is likely that the Department of Labor or even a court would find that all of the time the employee was stranded within their regular shift is compensable time. Even where reasonable minds could differ on these questions, since the costs of defending these claims often exceed the underlying payroll costs, it often makes sense to pay employees for this time in the first place.

Pay for Exempt Employees

The General Rule

Exempt employees under the FLSA must be paid on a “salary basis” and earn a full day’s pay when they work any part of the day, regardless of the quality or quantity of the work performed. Thus, if a business is closed because of inclement weather and an exempt employee is ready, willing, and able to work, she must be paid for that day. On the other hand, if the exempt employee does not work for an entire workweek (for personal reasons or because the business is closed), the exempt employee need not be paid for that time—that is, the employer may “dock” her salary for the full workweek.

If the business is open and an exempt employee elects to stay home to make repairs or volunteer at a local shelter, the employer may “dock” their salary in full day increments (but perhaps consider not doing so to encourage volunteerism and aid in recovery efforts). In these instances, and including situations when exempt employees elect to arrive late or leave early for personal reasons, employers may also deduct accrued leave time in full or partial day increments as long as the employee receives his or her full pay for the week. In the event that the employee does not have any accrued time, an employer may also simply pay him or her for the day or allow the employee to take an advance on accrued paid leave and make it up at a later time. This practice is not allowed for non-exempt employees, who must be paid overtime for all hours worked over 40 in a work week. See here for more information on the FLSA salary basis rules.

Safe Harbor

Remember, improper or inadvertent deductions from pay will not typically result in the loss of exemption status if the employer reimburses the employees for the improper deductions, has a clearly communicated safe harbor policy prohibiting improper deductions, and a complaint mechanism for exempt employees to use if improper deductions are made.

Telework or Working from Home

Allowing employees to work from home during this time will aid recovery efforts and help families recover faster. Regardless of exemption status, employees who work from home during inclement weather, even if only a few hours per week, must be paid for that time. Thus, employers who will keep their businesses up and running during the aftermath of Hurricane Harvey should clearly communicate to employees who is and who is not permitted to work from home, when that work can be done, whether overtime is permitted, and how to record time worked outside of the company’s premises. It is also important to remind employees to record all hours worked, even when the work is done away from the employer’s premises. Employers should be sensitive to the fact that not all employees will be able to work remotely, and therefore should consider alternative arrangements like temporary or shared offices.

On-Call and Waiting Time

Power outages are common during natural disasters, and many employers will require their employees to wait out or work through such power failures. In most cases, any employee who is required to remain at the employer’s premises or close by and therefore unable to use that time for his own benefit (even if not working) must be compensated for that time. For example, employees who are onsite to perform emergency repairs and who are not free to leave the company’s premises must be compensated for time even if they do not ultimately perform any work. Similarly, if an employee is onsite and required to wait through a power outage, the time waiting for the power to resume is typically considered time worked and is therefore compensable.

Volunteer Time for Company Repairs

Employers should generally be cautious about having employees “volunteer” to assist during an emergency, particularly if those duties benefit the company and are regularly performed by employees. Exempt employees who volunteer to help will not be entitled to any additional compensation. But remember that too much time spent on manual tasks or other tasks unrelated to their regular job duties could invalidate their exempt status and allow them to claim overtime compensation. Conversely, non-exempt employees must be paid for all time worked, even if they offer to work and help make repairs for “free,” with one exception:  Employers may accept free work from employees of government or non-profit agencies who volunteer out of public-spiritedness to perform work that is not at all similar to their regular duties.

Leaves of Absence After a Natural Disaster

Otherwise eligible employees affected by a natural disaster may elect to take leave under the Family and Medical Leave Act (FMLA) for a serious health condition caused by the disaster. Additionally, employees affected by a natural disaster who must care for a child, spouse, or parent with a serious health condition may also be entitled to leave. This includes job-protected leave to care for a family member who is a current service member with a serious injury or illness. FMLA leave for this purpose is called “military caregiver leave.”

Adding to the difficulty, employers may encounter uncommon FMLA issues during and after severe storms, including absences caused by an employee’s need to care for a family member who requires refrigerated medicine or medical equipment that is not operating properly because of a power outage. What’s more, under the Americans with Disabilities Act, an employee who is physically or emotionally injured as a result of a disaster may be entitled to leave as a reasonable accommodation, so long as it would not place undue hardship on the operation of the employer’s business.

Employees who are part of an emergency services organization may also have rights under the Uniformed Services Employment and Reemployment Rights Act (USERRA). Under certain conditions, USERRA provides job-protected leave for U.S. service-members. Although USERRA does require advance notice of military service, there are no strict time limits for notice after a natural disaster as long as it is reasonably “timely.” Employers should be prepared to receive and assist employees giving notice under USERRA and other laws allowing for job-protected leave.

Many counties in Texas have been declared in a state of emergency following Hurricane Harvey. While this does not provide pay or other protections for Texas employees, the Texas Workforce Commission advices that “absences due to closure of the business based on bad weather or other similar disaster or emergency condition should not count toward whatever absence limit a business has” —particularly for nonessential employees. On the other hand, if other employees are able to make it in to work (including workers from similar areas), absences for personal reasons may count toward an absence limit. On balance, however, it is always advisable to discourage the discipline of any nonessential employees who are unable to report to work during a state of emergency.

Weathering the Storm Together

While legal compliance is important, there are other practical ways employers can help workers weather the storm and get back on track. Business owners should consider relaxing the usual telecommuting rules to allow affected employees to work from home as much as possible. To minimize financial hardship, employers should continue to process payroll in a timely manner. Consider providing pay advances, loans, or even advances for paid time off/vacation time to help employees offset unanticipated expenses for repairs and insurance deductibles.

To the extent possible, employers may consider offering employees paid leave for time spent volunteering to assist with disaster relief efforts. Employers can also implement a leave donation/sharing policy to allow employees to donate paid leave to employees who will use it to volunteer in relief services or for those otherwise affected by this terrible disaster.

For more information on this topic, please contact the authors, your Seyfarth Attorney, or any member of Seyfarth Shaw’s Wage and Hour Team.