By Ethan Goemann and Noah Finkel

Employers have had to quickly pivot in numerous ways to keep their workplaces operating since the onset of the COVID-19 pandemic.  One such way the workplace changed is through the introduction of COVID-19 screening tests for employees before they enter their employer’s place of business.  Among other questions this spawned is whether such time is compensable under the FLSA and/or its state law equivalents.

While no court has ruled on whether such time would be compensable under any state law, some of which contain a broader definition of hours worked than does the FLSA, district courts have begun to issue decisions on the compensability of such time under the FLSA.  Thus far, the majority of those courts have held that pre-shift temperature checks or COVID screenings, at least outside the healthcare setting, are not compensable under the FLSA.

This question most recently was analyzed by the Western District of Michigan in Howard v. Post Foods, LLC.  In that case, the court dismissed the plaintiff’s claims for compensation for COVID-19 screening time because the plaintiff failed to provide evidence that such time was a principal activity in the defendant’s cereal manufacturing plant.  Notably, the Howard court rejected plaintiff’s argument that the screening was indispensable to their job because part of that job was to produce cereal in a sanitary plant.  “That argument … conflates the goal of [Defendant’s] operations with Plaintiffs’ specific duties, which Plaintiffs have not described. It requires a fact-finder to speculate whether the absence of COVID-19 symptoms is integral and indispensable to Plaintiffs’ productive work.”

The Southern District of California reached a similar holding in Pipich v. O’Reilly Auto Enterprises, LLC.  There, the court dismissed the claim of the plaintiff, a route driver, that pre-shift COVID-19 screening time was compensable because it found that COVID-19 screening was not a principal activity for the plaintiff under the FLSA.

The Howard and Pipich cases are the latest in a series of court opinions finding that pre-shift COVID-19 screening is not a principal activity for non-healthcare workers.  See, e.g., Adegbite v. United States (“Preventing the coronavirus from getting into and/or spreading within the Institution is not integral to” the principal activities of correctional officers).

On the other hand, under DOL guidance, pre-shift COVID temperature checks are likely compensable if the check is “necessary” to the job to be performed, such as for a hospital nurse whose principal job activities include “direct patient care services.” Despite these generally positive developments, employers should bear in mind that this area of the law is still evolving and some states’ overtime laws take a more expansive view of compensable time.

By: Robert S. Whitman and Kyle D. Winnick

Seyfarth Synopsis: Federal courts within the Second Circuit have held that merely alleging a pay frequency violation under New York Labor Law § 191 is insufficient for standing under Article III of the United States Constitution. Could this be the tool to end the current onslaught of late-pay claims?

Section 191(1)(a)(i) of the New York Labor Law (NYLL) requires employers to pay “manual workers” on a weekly basis.  For decades, courts held that employees could not sue their employers to redress violations of this provision.  Instead, only the New York Department of Labor could enforce the law, and it was limited to modest administrative penalties.

In 2019, a New York appellate court held that the statute provides a private right of action, opening the door for employees to sue directly, including in class action lawsuits.  The court also held that employees paid less than weekly could recover liquidated damages in the amount of 100% of the late-paid wages—so that even if employees had been paid in full, they could recover the full amount of wages that were not paid within a week of the work performed.

This decision triggered a tidal wave of class action litigation seeking liquidated damages for untimely wages. Few employers with significant numbers of “manual workers” have been spared.

A pair of recent federal court decisions may provide employers a new weapon to stem the tide.

In order to have standing to sue in federal court, a plaintiff has to show (among other things) that the defendant caused them a concrete injury.  Building off the United States Supreme Court’s decision in TransUnion LLC v. Ramirez, which held that a plaintiff does not automatically satisfy this requirement by merely alleging a statutory violation, courts within the Second Circuit have held that while “the late payment of wages can constitute a concrete harm sufficient to confer standing,” there must be allegations demonstrating “that the plaintiff forwent the opportunity to invest or otherwise use the money to which he was legally entitled.”

In other words, plaintiffs cannot merely plead a pay-frequency violation to establish standing; they have to plead how that violation actually injured them.  The rationale undergirding these decisions is that courts should not automatically assume that receiving wages one week late causes an injury, and that in many instances it does not.

These decisions have important implications beyond providing employers an opportunity to successfully move to dismiss threadbare NYLL § 191 allegations.  Because plaintiffs must demonstrate standing at all stages of a federal court litigation, they will not only have to allege that they suffered a concrete injury but prove it as well.  For many plaintiffs paid on a bi-weekly basis, that may be a difficult showing to make.

This is a welcome development for New York employers, who now have an additional shield against the barrage of NYLL § 191 lawsuits.

By: Noah FinkelCamille OlsonScott MalleryAndrew McKinley and Kevin Young

Seyfarth Synopsis:  Today the U.S. Department of Labor issued its draft new interpretive regulation (or NPRM) attempting to define employee versus independent contractor status under the Fair Labor Standards Act.  The NPRM jettisons an earlier attempt under the prior Administration to modernize and simplify how to determine who is an employee and who is a contractor.  The DOL proposes instead a return to a more ambiguous totality-of-the-circumstances approach that largely amalgamates existing judicial precedent, but that also clearly aims to place a thumb on the scale in favor of more workers being deemed employees under the FLSA.

Background

Surprisingly to many, the FLSA itself does not define what constitutes an employee versus independent contractor.  Indeed, until early January 2021, the FLSA lacked even a regulatory definition of the term.  Because of that, guidance dictating which workers are employees subject to the FLSA’s minimum wage, overtime, and recordkeeping requirements, and which workers  may be classified as independent contractors, who are not subject to the FLSA, has come mainly through court decisions.  Those court decisions predominately coalesce around some form of an “economic realities test,” in which courts balance several factors to determine if a worker is so dependent on the business to which they render services that they must be deemed an employee. 

This set of multi-factor tests has been criticized on two principal grounds.  First, as summarized by Judge Easterbrook of the Court of Appeals for the Seventh Circuit, the economic realities test “is unsatisfactory both because it offers little guidance for future cases and because any balancing test begs questions about which aspects of ‘economic reality’ matter and why.”  Sec. of Labor v. Lauritzen, 835 F.2d 1529, 1539 (7th Cir. 1988) (Easterbrook, J. concurring).  Second, these tests — which date back to 1947 — do not adequately account for the growth of the gig economy, the increased desire among workers to control their work hours to ensure a work-life balance, and the evolution of the modern workplace to one in which workers rarely retain one full-time job throughout their working years, which cumulatively  have contributed to a greater demand for the flexibility that comes with and independent contractor relationships.

After issuing sub-regulatory guidance for a number of years, the DOL finally stepped in with its own interpretation in January 2021, that was scheduled to become effective in March 2021, on how to define an employee versus a contractor under the FLSA.  In doing so, the DOL proposed to simplify the multi-factor test by setting forth two core factors to consider:  (1) the nature and degree of the worker’s control of the work, and (2) the worker’s opportunity to earn a profit or loss.  The proposal further provided that, if both factors point toward the same classification, whether employee or contractor, then the worker is very likely to be classified as such..  If, however, those factors point in opposite directions, then three other factors should be considered: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the company, and (3) whether the work is part of an integrated unit of production.

Following the change in administration, however, the DOL delayed the effective date of that rule and then withdrew it in May 2021. 

The DOL’s New Interpretation

Nearly a year and a half later, the DOL has completely rescinded its prior guidance and has now set forth a new (but still kind of old) analysis for determining employee or contractor status under the FLSA.The proposed interpretation reinstates a multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA. The relevant factors under this test include:

(1) The worker’s opportunity for profit or loss depending on managerial skill.  This factor considers the managerial skill exercised by a worker, skills that will affect their success or failure in performing the work.  Additional considerations include whether the worker can set the rate of pay for the service provided, whether the worker accepts or declines jobs or the order in which they are completed, whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work, and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rents space, and finally, whether the worker has the opportunity to experience financial loss.  The DOL’s proposal notes that “the decision to work more hours or take more jobs generally do[es] not reflect the exercise of managerial skill indicating independent contractor status.”

(2) Investments made by the worker and the employer.  According to the DOL, an investment borne by the worker must be capital or entrepreneurial in nature to indicate independent contractor status.  Under that standard, the DOL notes, the use of a personal vehicle or vehicle leased by a worker to perform work will generally not be indicative of independent contractor status.  Concerningly, the DOL stress that “the worker’s investments should be considered on a relative basis with the employer’s investments in its overall business,” while at the same time acknowledging that the magnitude and scope of a worker’s investment will rarely be comparable to that of a putative employer.

(3) Degree of permanence of the work relationship.  The DOL’s proposed interpretation states that where workers provide services under a contract that is “routinely or automatically renewed,” that indicates a permanent or indefinite relationship indicative of employee status.  The NPRM also includes exclusivity as weighing against independent contractor status, while simultaneously providing that the ability to work for others does not necessarily weigh in favor of independent contractor status. The NPRM explicitly notes that exclusivity should be evaluated for both the permanence and control factors of the economic realities test. It further provides that “operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ” that result in a lack of permanence should not weigh in favor of contractor status.  Thus, the NPRM appears to be saying that the provision of sporadic services by a worker (such as seasonal or temporary work) does not make them a contractor.

(4) Nature and degree of the business’s control over the worker.  Under the proposal, this factor would consider the putative employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship.  Facts relevant to control would include whether the employer sets the worker’s schedule, supervises the performance of the work, sets the price or rate for service, or explicitly limits the worker’s ability to work for others.  In a clear break with prior proposed guidance, the DOL also states that “control implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer service standards may be indicative of control.”

(5) Extent to which the work performed is an integral part of the employer’s business. The DOL’s framing of this factor may be particularly problematic.  The DOL proposes that “this factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part” and that when the work a worker performs is “critical, necessary, or central to the employer’s principal business,” then this factor weighs in favor of employer status.  It begs the question of how to determine an employer’s “principal business” or what is “critical, necessary, or central to it,” though the DOL’s commentary to its proposal provides some possible guidance.

(6) Whether the worker uses specialized skills in performing the work.  Under the proposal, if a worker “uses specialized skills and … those skills contribute to business-like initiative,” then the worker is more likely a contractor.  In its commentary, however, the DOL proposes to define those skills rather narrowly.  The DOL commentary also proposes that, even when a worker actually possesses specialized skills, that fact is irrelevant unless the work actually requires those skills.

Under the proposed rule, no one factor would be dispositive or entitled to predetermined weight. While on the one hand this may lead to greater flexibility, it can also blur lines and, under some circumstances, fuel litigation.

What’s Next and What Will It Mean

The proposal is just that: a proposal, and it may change in unforeseen ways before a final interpretation is implemented.  The DOL will be accepting comments from the public to assist in the rulemaking process through November 28, 2022.  

And even when the proposal is finalized, it is not clear what effect it will have.  Significantly, the DOL’s action, though termed a “rulemaking,” is not the promulgation of a rule in the classic sense.  Unlike exempt status regulations, for example, this DOL regulation is an interpretive one that does not necessarily constitute the law and courts are not bound to follow it.  Each federal circuit has its own body of judicial precedent defining employee vs. contractor, and courts will remain bound to follow that precedent.  The extent to which they find the DOL’s interpretation persuasive, and thus a standard to apply, remains to be seen.

Further, remember that this is just one statute in which employment classification matters.  Many states have their own minimum wage and overtime laws, and several of those laws contain different definitions of who is an employee and who is a contractor.  The DOL’s proposal does not affect that.  It also does not affect the definition of employee vs. independent contractor under all the other federal or state employment statutes, such as the National Labor Relations Act.

While the proposal is just a proposal, it is clear that the guidance is designed to decrease the number of workers employers classify as independent contractors and increase the number of workers classified as employees.  This goal is apparent simply by looking to the commentary added to the various factors to consider, almost all of which attempt to narrow the circumstances in which an employee can be considered an independent contractor under the FLSA. For example, the DOL unnecessarily notes that” “the decision to work more hours or take more jobs generally do[es] not reflect the exercise of managerial skill indicating independent contractor status.”

If you are interested in making your voice heard in the comment process, please don’t hesitate to reach out to the authors listed above, or another Seyfarth attorney to hear more about the process.

By: Christina Jaremus and Noah Finkel

Seyfarth Synopsis:  FLSA practitioners long have been aware that most courts hold that purely private releases of FLSA claims are void, and that a release of an FLSA claim is valid only if approved by the Department of Labor or a court.  A few courts have gone a step further and prohibited parties from voluntarily dismissing an FLSA claim without approval from a court.  But a federal judge in the Eastern District of Pennsylvania last week persuasively explained why those courts have gone too far.

Following a familiar script, two plaintiffs in Byron Alcantara v. Duran Landscaping, Inc., sued their employer alleging that they were not paid for all overtime hours they worked.  A few months later, and before any conditional certification motion was filed, the parties settled the case.  They informed the court and, because the case included an FLSA claim, asked District Court Judge Joshua D. Wolson of the Eastern District of Pennsylvania to approve the settlement in a telephonic hearing.  But rather than provide oral approval, Judge Wolson told the parties that they do not necessarily need it.

Judge Wolson advised the parties that they could take one of two paths.  They could seek and brief court approval of their settlement, which would ensure that the waiver of FLSA claims would be valid against any future claims, or they could opt to voluntarily dismiss the case under Federal Rule of Civil Procedure 41(a)(1)(A), without having to explain to the court why the settlement is fair and reasonable and, critically, without having to publicly file their settlement terms.

Judge Wolson reasoned that he and other judges do not necessarily know what is best for the parties and therefore judges do not need to approve settlements in order for FLSA cases to be resolved.  In a display of judicial modesty, Judge Wolson explained that the purpose of court-approval for FLSA settlements is to ensure that settlements are fair and reasonable.  But “in reality,” the Court stated,

those plaintiff-employees, represented by able counsel, are equipped to make that decision for themselves.  And the “help” that we courts offer—a settlement approval process—drives up litigation costs in small-value cases, makes settlement more difficult, and delays the disbursement of unpaid wages to FLSA plaintiffs.  Nor is it clear that the help that courts offer is worth all that much.  Most of the time, courts have very little to add to the settlements that parties present.  Sometimes we nibble around the edges, modifying confidentiality provisions or making other minor changes.  But rarely does this procedural burden yield anything of value to the parties trying to settle.

The Court relied on the plain language of Fed. R. Civ. P. 41(a)(1)(A) to nix the court-approval requirement.  That rule, the Court stated, allows the parties “to dismiss their claims at any time, and without court action” and “gives effect to the bedrock principle of American courts that public policy favors private settlements of civil litigation.”  Specially, Rule 41(a)(1)(A) permits a plaintiff to dismiss a case voluntarily, without a court order, with the exception of cases that are “[s]ubject to Rule 23(e), 23.1(c), 23.2, and 66 and any applicable federal statute.”  These rules do not apply to individual FLSA actions, so parties to those cases can dismiss their claims voluntarily, without a court order, unless the FLSA is an “applicable federal statute.”  The Court found, based on the plain language of the FLSA, that it is not.  The FLSA includes a private right of action against any “employer who violates” the statute.  The FLSA also permits the DOL to file an FLSA case and administer a settlement.  Neither provision, according to the Court, requires a court to approve a settlement between an individual plaintiff and an employer.

The Court rejected the argument that Section 216(c) of the FLSA and the Portal-to-Portal Act render the FLSA an applicable federal statute under Rule 41.  First, it found that, while Section 216(c) gives the DOL the power to file FLSA actions and then to supervise the payment of unpaid wages under the statute, Congress did not include any similar provision in Section 216(b), which authorizes private lawsuits under the FLSA.  The Court therefore would not assume that Congress also meant to require judicial approval of private settlements.  Second, the Court found that the Portal-to-Portal Act structure or language does not suggest that Congress intended to place the FLSA within the scope of an “applicable federal statute” under Rule 41 or otherwise to restrict the compromise of individual FLSA actions.

Judge Wolson acknowledged the Second Circuit’s contrary authority in Cheeks v. Freeport Pancake House, Inc., which held that the FLSA is an “applicable statute” under Rule 41 and that, therefore, judicial approval of a settlement is required to obtain dismissal of an FLSA case.  But Judge Wolson politely criticized Cheeks for failing to base its decision on the text of Rule 41 and instead resting on “unique policy considerations underlying the FLSA,” including “highly restrictive confidentiality provisions,” overbroad releases of FLSA claims, and too-high attorney’s fees in their settlements.  He also highlighted strong policy considerations which weigh against requiring courts to approve FLSA settlements:

  • court approval slows the resolution of FLSA settlements and, by extension, the payment of wages to plaintiffs;
  • it requires lawyers to expend more time and to seek higher fees to resolve small cases;
  • court approval forces federal courts to do work that Congress did not require of them, delaying resolution of other cases; and
  • a risk-averse employer may demand employees file suit before settling, rather than settling pre-suit, thus clogging court dockets.

So the question remains, should employers seek approval of individual settlements?  It depends.  On certain facts, in which seeking judicial approval may provide public information that will encourage litigation, it may make sense not to.  See To Seek Or Not To Seek (Court Approval)?  THAT Is The Question.  It also depends on the jurisdiction; as the opinion noted, some courts require approval. Ultimately, if an employer settles an FLSA case without DOL or court approval, it runs the risk that a judge might later hold some or all of the release invalid because it is not a fair, reasonable, and involved a bona fide dispute.  But there is nothing that prevents a court from approving a settlement if the parties request it.

By: Noah Finkel and Scott Hecker

Seyfarth Synopsis:  On June 21, 2022, the Biden Administration announced the release of its Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions. In connection with the Administration’s new regulatory agenda, the U.S. Department of Labor’s Wage and Hour Division targeted October 2022 for the release of a Notice of Proposed Rulemaking on its regulations governing the white-collar exemptions.

As our readers are well aware, the DOL has made clear that, during the Biden Administration, it will attempt to increase the minimum salary that employers must pay to most of their exempt employees.  DOL has conducted several listening sessions with various groups, including employer representatives, over the past few months to gather information and opinions on whether, when, and to what amount the DOL should increase the minimum salary which employers must pay to exempt employees to maintain their status as exempt from the FLSA’s overtime requirements under the executive, administrative, professional, and computer employee exemptions.

Employers should be aware that the regulatory agenda, indicates the DOL is targeting October 2022 for release of a Notice of Proposed Rulemaking (“NPRM”) on “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.” While this is not necessarily a firm date — indeed the Fall 2021 regulatory agenda listed April 2022 as a goal to issue the NPRM — this means the DOL could publish this fall its proposal for what should be done with the rule on the minimum salary for exempt status — currently $684 per week, which annualizes to $35,568.

The amount of the new minimum salary, which may constitute a significant increase, remains to be seen.  Whatever it is, it will substantially impact all employers.  The NPRM will propose a new minimum salary and will provide 60-90 days for the public to comment on the proposal (though the DOL could propose changes to other aspects of its exempt status regulations, that does not appear likely).  After that, the DOL will take several months to review the comments and then create a final rule, which likely would be effective a few months after it is promulgated.  There may be a legal challenge to the new minimum salary, though that might depend on the new amount.  Though this is somewhat speculative and could be delayed for several reasons, a new minimum exempt status salary level — whatever it is — could be in effect in the back half of 2023 or very early in 2024.

Be on the lookout this October for the DOL’s proposal.

 

Seyfarth Synopsis: On June 15, 2022, in Viking River Cruises v. Moriana, the United States Supreme Court ruled that individual claims under the California Private Attorneys General Act (“PAGA”) can be compelled to arbitration under the Federal Arbitration Act, partially preempting the California Supreme Court’s longstanding and contrary Iskanian decision.

Facts

Angie Moriana was hired by Viking River as a sales representative.  She executed an agreement to arbitrate any dispute arising out of her employment.  The agreement contained a “Class Action Waiver” providing that in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action.

The arbitration agreement also contained a “severability clause” specifying that if the class action waiver was found invalid, any class, collective, representative, or PAGA action presumptively would be litigated in court.  But, under that severability clause, if any “portion” of the waiver remained valid, it would be “enforced in arbitration.”

After her employment ended, Moriana filed a PAGA action against her former employer, alleging individual PAGA claims, as well as “representative” PAGA claims on behalf of other aggrieved employees.

The California Lower Court Decisions

Viking River moved to compel arbitration of Moriana’s individual claims and to dismiss her representative claims, based on the terms of the arbitration agreement, including the waiver of representative PAGA actions.

The trial court denied Viking River’s motion to compel arbitration, holding that categorical waivers of PAGA standing are contrary to public policy and that PAGA claims cannot be split into arbitrable individual claims and non-arbitrable representative claims.  This decision was based on the decision of the California Supreme Court in Iskanian v. CLS Transp. Los Angeles.  The California Court of Appeal affirmed the trial court’s decision denying the motion to compel, and Viking River petitioned the United States Supreme Court for a writ of certiorari.

The United States Supreme Court’s Decision

The Supreme Court reversed the lower court decision and held that the FAA preempts Iskanian’s rule that PAGA claims cannot be divided into individual and non-individual actions through an arbitration agreement.  Because individual PAGA claims can be split from separate, “representative” PAGA claims, the Court held that Viking River was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim.

Given that Moriana’s individual PAGA claims were required to be enforced in arbitration, the Court then concluded that Moriana lacked statutory standing to continue to maintain her representative PAGA claims in court, and the correct course was to dismiss her remaining claims.  The rationale for this holding is that “PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding” (i.e., arbitration).

Under PAGA’s standing requirement, plaintiffs can maintain representative PAGA claims “only by virtue of also maintaining an individual claim in that action.”  So, “if an employee’s own individual dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.”

The Court, however, held that a waiver of “representative” PAGA claims was still invalid under Iskanian if construed as a “wholesale waiver” of such PAGA claims, and that this aspect of Iskanian was not preempted by the FAA.

In concurrence, Justice Sotomayor highlighted the uncertainty and questions that still linger for how representative PAGA claims can proceed.  Justice Sotomayor noted the majority opinion’s holding that the FAA poses no bar to the adjudication of “non-individual” PAGA claims and that Moriana lacks “statutory standing” under PAGA to litigate her “non-individual” claims separately in state court.

However, Justice Sotomayor warned that the Court’s “understanding of state law” on this issue may be wrong, and that “California courts, in an appropriate case, will have the last word.”  Alternatively, Justice Sotomayor hinted that if the lack of standing was correct, then the “California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”

What Viking River Means for Employers

The decision is a nuanced one, and it is important to carefully evaluate whether any changes need to be made to existing arbitration agreements.  While employees can waive the ability to pursue a representative PAGA claim on behalf of other employees, an arbitration agreement that waives the employee’s ability to bring an individual PAGA claim would still be unenforceable under Iskanian.  If an arbitration agreement includes a waiver of individual PAGA claims, then the outcome may depend on whether the arbitration agreement includes a severability clause like the one at issue in Viking River.

Important to the Supreme Court’s decision was that Viking River’s severability clause provided that if the PAGA waiver was invalid, then any portion of the waiver that remains valid must be enforced in arbitration.

As individual PAGA claims can now be compelled to arbitration at the same time as representative PAGA claims can be excluded from the arbitration proceeding, employers should evaluate the scope of their PAGA waivers.

Going forward, PAGA waivers in arbitration agreements should be clear that there is no waiver of the right to bring a PAGA claim for violations allegedly suffered individually by the employee, but that there is a waiver of the right to bring a PAGA claim involving violations allegedly suffered by other employees.

What’s Next

The California Legislature may accept Justice Sotomayor’s invitation to amend PAGA to expand who can bring a PAGA claim.  Currently, only “aggrieved employees” can bring a PAGA claim, but the Legislature may attempt to permit anyone in the public to bring a PAGA claim, like what existed with the Unfair Competition Law prior to Proposition 64.  If the Legislature took such action, it likely would be met with legal challenges based on existing FAA jurisprudence.

California employers utilizing arbitration agreements should be on the lookout for whether the 9th Circuit will grant en banc review of its decision in Chamber of Commerce v. Bonta, involving whether the FAA preempts AB 51, which prohibits employers from requiring certain arbitration agreements as a condition of employment.

By: Jennifer A. Riley, Andrew Scroggins, and Tyler Zmick

Seyfarth Synopsis: As we previously reported, employers generally have found success when the United States Supreme Court takes up questions about the arbitrability of workplace disputes. The unanimous decision in Southwest Airlines Co. v. Saxon bucks that trend, holding that those who load cargo onto airplanes engaged in interstate travel are exempt from the Federal Arbitration Act (FAA). The Court’s fact-specific decision, however, rejects any bright-line test. As such, it leaves room for employers looking to enforce their arbitration agreements under federal law and opens the door to future litigation regarding whether workers are actually “engaged in interstate commerce” when they do not cross borders to perform their work.

Background

Latrice Saxon worked at Midway International Airport in Chicago as a ramp supervisor for Southwest Airlines. She filed suit against the company in federal court, alleging that Southwest Airlines failed to pay overtime wages to Saxon and others. Saxon, however, previously had agreed to submit any disputes over wages to an arbitrator who would decide them in arbitration on an individual basis. Accordingly, the company moved to dismiss the lawsuit and to compel arbitration under the FAA.

Saxon resisted the motion to compel, arguing that her work placed her outside the scope of the FAA. More specifically, she cited Section 1 of the FAA, which provides that the statute does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The district court sided with Southwest Airlines, reasoning that ramp agents and supervisors are responsible for the handling of goods but not responsible for the transportation of those goods across state lines. The Seventh Circuit reversed that decision, holding that “[t]he act of loading cargo onto a vehicle to be transported interstate is itself commerce” as the term was understood when the FAA was enacted. The Seventh Circuit’s decision put it in conflict with an earlier decision by the Fifth Circuit, and the Supreme Court took the case to resolve the split.

What Did The Supreme Court Hold?

In a unanimous 8-0 decision (Justice Barrett recused), the Supreme Court agreed with the Seventh Circuit’s holding that ramp agents and supervisors who physically loaded cargo onto airplanes traveling across state lines are subject to the FAA’s transportation worker exemption.

The Court reached its conclusion through a two-step analysis. First, the Court defined “the relevant ‘class of workers’ to which Saxon belongs.” Next, the Court “determine[d] whether that class of workers is ‘engaged in foreign or interstate commerce.’”

Defining the Relevant Class of Workers As “Airplane Cargo Loaders”

Saxon urged the Court to take an expansive view of this issue and to decide it based on her employer’s industry – air transportation. The Court expressly rejected this sweeping approach, noting that the FAA refers to “workers,” not “employees” or “servants,” which suggests that the meaning of who is covered turns on the performance of work.

The Court held that this inquiry is not directed at the nature of the employer’s business but directed at the actual work that the members of the class typically carry out. In other words, “Saxon is … a member of a ‘class of workers’ based on what she does at Southwest, not what Southwest does generally.”

The Court concluded from the record before it that Saxon and other ramp supervisors physically loaded and unloaded cargo on and off airplanes on a frequent basis.

Defining Whether “Airplane Cargo Loaders” Are Engaged in Interstate Commerce

The Court next considered whether the class of airplane cargo loaders to which Saxon belonged was “engaged in foreign or interstate commerce” and found its answer in a decision issued nearly a century ago:

We have said that it is “too plain to require discussion that the loading or unloading of an interstate shipment by the employees of a carrier is so closely related to interstate transportation as to be practically a part of it.” Baltimore & Ohio Southwestern R. Co. v. Burtch, 263 U. S. 540, 544 (1924). We think it equally plain that airline employees who physically load and unload cargo on and off planes traveling in interstate commerce are, as a practical matter, part of the interstate transportation of goods. They form “a class of workers engaged in foreign or interstate commerce.”

Applying that decision here, the Court concluded that “one who loads cargo on a plane bound for interstate transit is intimately involved with the commerce (e.g., transportation) of that cargo.”

Having concluded that “Saxon frequently loads and unloads cargo on and off airplanes that travel in interstate commerce,” the Court held that she satisfied the transportation worker exemption in Section 1 of the FAA.

The ruling does not disturb mandatory arbitration of certain types of disputes arising under collective bargaining agreements pursuant to the Railway Labor Act.

What About Other Classes of Workers?

While the Court agreed that “airplane cargo loaders” are engaged in interstate commerce, it acknowledged that the distinction may not always be clear:

We recognize that the answer [whether the class of workers are engaged in foreign or interstate commerce] will not always be so plain when the class of workers carries out duties further removed from the channels of interstate commerce or the actual crossing of borders.

While the Court did not offer a bright-line test to help draw such distinctions in the future, it provided a few guideposts.

First, the Court noted that, although the FAA does not define “transportation worker,” any such worker must at least be “actively engaged” in the “free flow of goods across borders” via the “channels of foreign or interstate commerce.”

Applying these criteria, the Court noted that cargo loaders exhibit these central features of a transportation worker because they “load[] cargo on a plane bound for interstate transit” and, when they engage in such activity, “there [can] be no doubt that [interstate] transportation [is] still in progress.”

Second, the Court offered some examples of work that would not satisfy the exemption. It noted that workers who make intrastate sales of asphalt are not engaged in interstate commerce merely because the product is later used to build interstate highways. Similarly, the Court stated that workers who supply localized janitorial services to a corporation engaged in interstate commerce do not satisfy the exemption because they do not perform activities “within the flow” of interstate commerce.

In a footnote, the Court acknowledged that two Circuits recently issued decisions involving workers who carried out duties “further removed from the channels of interstate commerce or the actual crossing of borders.” It referred to the Ninth Circuit’s decision finding “last leg” delivery drivers within Section 1’s exemption and the Seventh Circuit’s decision finding food delivery drivers outside Section 1’s exemption. Although its opinion appeared to signal agreement with the holdings in those cases, the Court stated only that it “need not address those questions to resolve this case.”

Implications For Employers

Employers avoided the worst case scenario that some had feared — a holding that the transportation worker exemption applies to all employees who work for employers engaged in the transportation industry. Instead, the Court issued a fact-specific decision that focused on application of the transportation worker exemption to a worker directly engaged in loading cargo for transport across borders.

Companies should anticipate that other workers who are less directly involved in the flow of interstate commerce will attempt to invoke the exemption claiming that they, too, are exempt from the FAA. The burden of demonstrating that the “transportation worker” exemption applies falls to the worker, and the decision in Saxon provides employers ammunition for curtailing these arguments based the work “actually performed” as well as the connection of that work to the flow of goods across borders.

Further, the Court’s decision heightens the importance of state law, potentially through uniform arbitration acts in effect in many states that do not contain a transportation worker exemption, in enforcing arbitration agreements of workers most connected to interstate transportation. For those workers, the choice of state law will take on renewed emphasis.

By: Joseph Hadacek and Josh Rodine

Seyfarth Synopsis: The California Supreme Court recently determined that meal and rest period premium payments are subject to the final pay timing requirements of Labor Code section 203 and the wage statement reporting requirements of Labor Code section 226(e). Additionally, the prejudgment interest rate for violating these sections is seven percent. Naranjo v. Spectrum Security Services, Inc.

Can an employee recover wages without pursuing a claim for nonpayment of wages?  Yes, held the California Supreme Court in Tuesday’s decision in Naranjo v. Spectrum Security Services, Inc.   Navigating through a paradox created by its prior decisions, the Court answered in the affirmative, finding that meal and rest premium payments prescribed by the California Labor Code are “wages” subject to California’s wage statement and final pay requirements.  Reversing the Court of Appeal, the Supreme Court held that while a claim for meal and rest premium pay is not an “action for nonpayment of wages,” the actual premium pay is a “wage” because it serves a dual purpose of compensating employees for the hardship of a missed break as well as the work performed during the missed break. While the plaintiffs’ bar won the top prize, the Court gave employers small consolation by confirming the Court of Appeal’s finding that the appropriate rate of prejudgment interest on a meal and rest premium claim was the default rate of seven percent rather than ten percent applicable to wage claims.

So why did the Supreme Court need to make the distinction between the character of a Labor Code section 226.7 claim for meal and rest premiums and its remedy of premium pay?  Because the Supreme Court had previously held, in Murphy and Kirby respectively, that meal and rest premiums were “wages” for statute of limitations purposes—three years, per Code of Civil Procedure section 338—but a claim for those same premiums was not an “action for nonpayment of wages” subject to an award of attorneys’ fees under Labor Code section 218.5.  Former security guard Gustavo Naranjo provided the Court with a vehicle to reconcile Murphy and Kirby—and the split state and federal decisions that followed—presenting the issue of whether a meal and rest period violation can form the basis for derivative claims under Labor Code section 203, for waiting time penalties, or Labor Code section 226(e), for inaccurate wage statements.

In 2007, Naranjo filed a putative class action alleging that his former employer, Spectrum Security Services, failed to pay him meal and rest premium pay, and that Spectrum’s failure to do so created derivative liability for wage statement and waiting time penalties.  Following certification and trial, the trial court found Spectrum liable for failure to pay meal period premiums, and agreed that Spectrum could be subject to derivative wage statement and waiting time penalties.  Spectrum was able to convince the trial court that waiting time penalties were inappropriate because its non-payment of premiums was not willful, but the trial court still imposed derivative wage statement penalties and awarded prejudgment interest at a rate of ten percent.

The Court of Appeal disagreed, however, and reversed the trial court’s determination that meal premium violations could support derivative claims under the wage statement and timely payment statutes. Following Kirby and Ling, the Court of Appeal concluded that section 226.7 premium pay was a statutory remedy and not a “wage,” and neither section 203, which penalizes an employer that willfully fails “to pay … any wages,” nor section 226(e), which entitles an employee to a penalty when the employee’s wage statement omits gross or net “wages earned,” were implicated by a section 226.7 violation.  Following the same reasoning, the Court of Appeal found that section 218.6’s provision for a prejudgment interest rate of ten percent for wage claims was inappropriate and the default rate of seven percent would apply.

The Supreme Court found a different path through the labyrinth. Reversing the Court of Appeal in major part, the Court found that meal and rest premiums served two functions: first, to remedy the hardship that an employee endured by working through a break (and to incentivize employer compliance), and second, to compensate the employee with “wages” owed for work performed during the break period. The Court rejected the argument that the Legislature’s use of the term “pay” in section 226.7 in lieu of the term “wages” was determinative, as the Court had previously found that the term “pay” is synonymous with “wages” and “compensation.”

But employees who miss breaks are already compensated for their work because they are still on the clock, right?  Not quite.  Comparing meal and rest premiums to overtime premium pay, the Court explained that the Legislature intended to provide additional compensation for work performed during a missed break.  And while it is true that overtime premiums are paid on a pro rata basis, other lump sum payments such as reporting time pay and split shift pay are considered “wages.”  With meal and rest premiums now “wages,” at least in part, the final pay and wage statement requirements were well within reach of section 226.7.  Not wanting to undo the holding in Kirby, however, the Supreme Court affirmed that the a ten percent rate of interest would not apply to section 226.7 claims because it was not an “action for nonpayment of wages.”

So what does Spectrum mean for employers?  In short, employers should ensure that all meal and rest premiums are separately listed on employees’ wage statements and are timely paid, and should consider implementing meal and rest attestations at the end of each shift to blunt employees’ claims that they are owed premium pay.  Spectrum is silent on retroactivity, but the Supreme Court’s recent decision in Ferra (regarding the appropriate rate of pay for meal and rest premiums) suggests that a good faith reliance on prior decisions such as Ling and Kirby may not be sufficient to avoid liability for non-compliance prior to Tuesday.  Nor is it clear how the decision will impact courts’ approach to wage statement liability or whether other unpaid wages are now subject to reporting on wage statements.  But employers should still be able to defend against wage statement claims by showing that they were not knowing or intentional, and final pay claims by showing that any non-compliance was not willful.  For now, at least.

By: Julia Keenan and Noah Finkel

Seyfarth Synopsis: The Supreme Court held that no showing of prejudice is necessary to establish a waiver of the right to arbitrate. The validity and enforceability of arbitration agreements themselves is not affected by this ruling.

Followers of this blog, and of wage and hour litigation generally, have seen an unbroken string of victories at the U.S. Supreme Court for employers who have sought to compel threatened class and/collective actions into individual arbitration. So when a fast-food worker brought a purported nationwide FLSA collective action against her employer in federal district court in Iowa, and the employer ultimately moved to compel arbitration, one might assume that a grant of cert from Supreme Court meant that this collective action is destined to be heard by an arbitrator in individual arbitration. Not so fast.

This time, in Morgan v. Sundance, Inc., the Supreme Court ruled against the employer and held that the employer could not compel this matter to arbitration, at least not yet. How did this happen?  Is the Supreme Court now backing off of its pro-arbitration stance?  Hardly. Despite some characterizing this week’s arbitration decision as a “win for workers,” the Supreme Court’s ruling is a limited one that applies to a narrow class of cases: those where a party, for whatever reason, did not assert its right to arbitrate at the outset of litigation.

What happened here is that, after the plaintiff filed her putative collective action, the employer filed a motion to dismiss in federal court and then engaged in mediation, neither of which resulted in ending the case. Then, eight months after the complaint was filed, the employer moved to compel arbitration. The plaintiff-employee contended that the employer waited too long and thus waived its contractual right to compel arbitration, but on appeal, the Eighth Circuit held that the delay didn’t equate to a waiver because it didn’t prejudice the employee.

That’s when the Supreme Court stepped in to decide whether courts should consider the impact of the waiver on the plaintiff in deciding whether a defendant waived its right to arbitrate. The Supreme Court held that they should not.

In its holding, the Supreme Court noted that arbitration agreements are like any other contract, and when a court decides if a party waived a right in any other context, the court should consider only: (1) whether the party knew of its contractual right and (2) whether the party intentionally relinquished or abandoned that right. In contracts generally, courts do not consider how the waiver of a right affects the other party. The analysis is focused only on the action of the waiving party. Here, the Supreme Court held that the same analysis applies to the waiver of arbitration agreements. In other words, arbitration agreements are just like any other contract and should be treated as such. The Supreme Court reached this decision despite its oft-cited command that the Federal Arbitration Act constitutes a “congressional declaration of a liberal federal policy favoring arbitration agreements,” explaining that this policy means that the FAA acts to even the playing field between arbitration agreements and other contracts and does not permit courts to take an extra step to privilege arbitration agreements above contracts concerning other subjects.

The Supreme Court therefore remanded the case for a determination of whether the employer waived or forfeited its right to arbitrate, but without consideration of prejudice to the opposing party.  It is entirely possible that, under whatever standard is used, the employer still will be able to compel arbitration despite its delay.

What does this mean for employers? Are the validity of arbitration agreements now undermined? No! Nothing in the Supreme Court’s ruling affects the right of employers to mandate that employees agree to arbitrate certain disputes, including wage-hour claims, in arbitration, and on an individual basis only, and nothing in the ruling detracts from an employer’s ability to enforce such an agreement if it timely does so. This ruling is simply a procedural matter. In the vast majority of cases, defendants assert the right to arbitrate immediately, as there is usually no reason to wait. In those cases where employers and their counsel decide that waiting to compel arbitration is in the employer’s best interest, this Supreme Court ruling simply says that courts will no longer consider whether the waiting period injured the plaintiff. Thus, it will be easier for a plaintiff-employee to demonstrate that the employer waived its right to compel arbitration because the additional requirement of prejudice is now removed. So while some have framed this Supreme Court ruling as a win for employees and a detriment to employers on the validity and enforceability of arbitration agreements, including class waivers contained within them, they are just as enforceable as ever. That said, waiting to enforce such agreements just became a bit more risky.

By: Kyle Winnick & Andrew McKinley

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

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

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

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

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

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

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

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