By: Alex Passantino

Seyfarth Synopsis: On January 15, 2020, the Department of Labor’s Final Rule on regular and basic rates of pay will take effect. This series will explore the various issues implicated by the Department’s changes. Part I addresses the Department’s changes to Part 548 of the regulations, Authorization of Established Basic Rates for Computing Overtime Pay.

In December, the U.S. Department of Labor’s Wage & Hour Division announced its revisions to certain provisions of the FLSA regulations addressing regular and basic rates of pay. One of those changes increased the viability of the use of basic rates, by increasing the tolerance level related to additional overtime pay from $0.50 per week to 40% of the applicable minimum wage. Below we discuss basic rates and the impact of this revision.

What Are Authorized Basic Rates?

Ordinarily, under the FLSA, overtime pay must be paid at one-and-one-half times the employee’s “regular rate” of pay for the workweek in question. Regular rate requires that an employer total all remuneration (less authorized exclusions) and divide that total by the number of hours worked by the employee. The resulting number is the “regular rate,” and overtime pay is due at a rate that is one-half that rate (since the regular rate has already been paid for all hours).

Sometimes, the “extra” payments that must be included in the regular rate are small and have an even smaller impact on the overtime due. The FLSA nevertheless generally requires those payments to be included.

Enter basic rates …

In certain circumstances (detailed below), the FLSA permits overtime compensation to be computed pursuant to an agreement or understanding between employer and employee using rates that are “substantially equivalent” to the average hourly earnings of the employee. In other words, under certain circumstances — and pursuant to agreement — the small amounts that impact the regular rate in minimal ways can be effectively excluded from the week-to-week calculation of overtime pay.

What is Required to Use Basic Rates?

The FLSA regulations require satisfaction of all of the following elements in order to use basic rates:

  • Overtime compensation is paid pursuant to an agreement or understanding arrived at between the employer and the employee or as a result of collective bargaining before performance of the work;
  • The agreement establishes a rate as the “basic rate” to be used in computing overtime compensation;
  • The basic rate is a specified rate or derived from a specified method of calculation;
  • The basic rate is a bona fide rate and is not less than the applicable minimum wage;
  • The basic rate is authorized (as described below) as being substantially equivalent to the average hourly earnings of the employee, exclusive of overtime premiums, in the particular work over a representative period of time;
  • Overtime hours are paid at least one-and-one-half times the basic rate;
  • The employee is paid 1.5 times the basic rate only for those hours that qualify as “overtime hours” under the FLSA (e., over 8 in a day, over 40 in a week, Saturdays/Sundays/holidays/days of rest/sixth or seventh days; outside of normal workday);
  • The number of hours for which the employee is paid 1.5 times the basic rate is at least the number of hours worked in excess of 40;
  • The employee’s average hourly earnings for the workweek exceed the applicable minimum wage;
  • Extra overtime compensation is properly computed and paid on other forms of additional pay which have not been considered in arriving at the basic rate but which are required to be included in computing the regular rate.

How Are Basic Rates “Authorized”?

The FLSA regulations set forth a number of scenarios in which basic rates are authorized, assuming the rates meet the requirements set forth above:

  • A rate per hour which is obtained by dividing a monthly or semi-monthly salary by the number of regular working days in each monthly or semi-monthly period and then by the number or hours in the normal or regular workday.
  • A rate per hour which is obtained by averaging the earnings (less permitted exclusions) of the employee for all work performed during the workday or any other longer period not exceeding sixteen calendar days for which such average is regularly computed under the agreement or understanding.
  • A rate excluding the cost of meals where the employer customarily furnishes not more than a single meal per day.
  • A rate excluding additional payments in cash or in kind which, if included in the computation of overtime under the Act, would not increase the total compensation of the employee by more than 50 cents a week on the average for all overtime weeks in the period for which such additional payments are made. [As noted below, the 50 cents per week figure is increasing on January 15, 2020.]
  • A rate equal to the average hourly remuneration of the employee for employment during the annual period or the quarterly period immediately preceding the calendar or fiscal quarter year in which such workweek ends, subject to some significant limitations.

The above methods of determining a basic rate are inherently authorized under the FLSA; no additional approval from WHD is necessary.

In addition, employers may submit to WHD an application for authorization of basic rates determined by other methods, which the Administrator of WHD may or may not approve, in her discretion.

So What’s Changing on January 15, 2020?

The fourth bullet in the previous section addresses the exclusion from the computation of overtime “certain incidental payments which have a trivial effect on the overtime compensation due.” Since 1966, the triviality of those incidental payments has been governed by a standard that required no more than a 50 cents per week impact on the overtime rate. The 50 cents figure was based on 1966’s $1.25 minimum wage–it is 40% of that minimum wage.

In an effort to bring the provision in line with current minimum wages, the final rule references the minimum wage under either the FLSA or state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher.

What Does this Change Mean?

In changing the $0.50 limit to 40 percent of the higher of the applicable local, state, or federal minimum wage, WHD has increased the availability of the use of basic rates. For example, at the $0.50 limit, for an employee working 45 hours per week, the maximum additional payment would be around $9.00 per week. Under the revised provision, at the level of the current federal minimum wage, the tolerance would be $2.90 per week on average, which would be high enough to exclude (for example) a $500 bonus paid quarterly to an employee averaging 45 hours per week:

  • $500/13 weeks in quarter = $38.46/week
  • $38.46/45 hours = $0.85/hour
  • $0.85 * 0.5 (half-time) * 5 overtime hours = $2.13 per week impact

If you have any questions about the regulatory revisions, basic rate, or another wage and hour issue, please contact a member of Seyfarth’s Wage and Hour team.

By: Alex Passantino, Brett Bartlett, and Noah Finkel

Seyfarth Synopsis: On January 12, 2020, the U.S. Department of Labor announced its Final Rule clarifying the issue of joint employment under the Fair Labor Standards Act. The Final Rule adopts a four-factor balancing test and rejects various factors that have fueled recent litigation, e.g., a worker’s economic dependence on a potential joint employer, the potential employer’s business model, and its unexercised power over the worker.

Despite being the subject of intense debate and administrative focus, the DOL’s joint employment interpretation has not been subject to formal, substantive change in the 60 years since it was issued. In January 2016, however, then-WHD Administrator David Weil issued an Administrator’s Interpretation (“AI”) regarding joint employment under the FLSA. In the AI, Dr. Weil published a view that joint employment “should be defined expansively.” The AI focuses the inquiry, in part, on a worker’s economic dependence on the potential joint employer. This standard was intended to be “as broad as possible.” In June 2017, then-DOL Secretary Alexander Acosta withdrew the AI, which had grown to be seen by the business community as an over-expansion of the joint employment standard.

Four Factor Test

In the Final Rule, DOL specifies that, when an employee performs work for the employer that simultaneously benefits another person, that person will be considered a joint employer when that person is acting directly or indirectly in the interest of the employer in relation to the employee.

DOL adopts the four-factor test from its proposal. Thus, where an employee performs work for the employer that simultaneously benefits another individual or entity, the determination of whether the potential joint employer is directly or indirectly controlling the employee, looks to whether the potential joint employer:

  • hires or fires the employee;
  • supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  • determines the employee’s rate and method of payment; and
  • maintains the employee’s employment records.

Actual control is necessary to establish joint employment. Standard contractual language reserving a right to act, for example, is alone insufficient for demonstrating joint employer status.

The Final Rule also specifically notes that an employee’s “economic dependence” on a potential joint employer does not determine whether it is a joint employer under the FLSA. In addition, the Final Rule sets forth several factors that do not make joint employer status more or less likely under the FLSA, including:

  • operating as a franchisor or entering into a brand and supply agreement, or using a similar business model;
  • the potential joint employer’s contractual agreements with the employer requiring the employer to comply with its legal obligations or to meet certain standards to protect the health or safety of its employees or the public;
  • the potential joint employer’s contractual agreements with the employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation; and
  • the potential joint employer’s practice of providing the employer with a sample employee handbook, or other forms, allowing the employer to operate a business on its premises (including “store within a store” arrangements), offering an association health plan or association retirement plan to the employer or participating in such a plan with the employer, jointly participating in an apprenticeship program with the employer, or any other similar business practice.

As was the case with the proposal, the Final Rule provides several examples applying the Department’s guidance for determining FLSA joint employer status in a variety of different factual situations.

The Final Rule is expected to be effective on March 16, 2020.

Practical Pointers

When the Final Rule becomes effective, it will provide additional support to businesses claimed to be jointly and severally liable for unpaid wages alleged to be owed by workers who are not their own.  The Final Rule, however, should not be viewed as reason for businesses generally to be less cautious in the measures taken to avoid joint employer responsibility.  As a practical matter, for instance, the provision of handbooks, policies, and other materials to another employer’s employees will create less risk of imputing pay responsibilities beyond the direct employer; but additional safeguards such as disclaimers making clear that the provision of those materials does not create an employment relationship will remain prudent.

All of this said, the Final Rule creates an opportune moment for businesses to examine their relationships with the workers from whom they receive beneficial services but whom they do not employ directly.  The DOL’s new guidance provides a roadmap for further risk mitigating measures, though interpretations of joint employment under state wage and hour law need to be considered as well. Please contact Seyfarth Shaw’s Wage and Hour Litigation Practice Group for assistance.

By: Alex Passantino

Seyfarth Synopsis: The U.S. Department of Labor’s Wage & Hour Division recently issued two opinion letters providing clarity to employers in determining (1) the proper overtime rate of pay for non-discretionary, multi-week bonuses; and (2) whether certain per-project payments are sufficient to satisfy the salary basis test required for the FLSA’s white-collar exemption.

WHD has been issuing a steady stream of opinion letters on a wide variety of issues–by its own count, 53 letters since the start of the Trump Administration. The most recent two FLSA letters were issued just this week and address some outstanding issues regarding overtime rates of pay and salary basis.

Calculating Overtime Due on Multi-Week Bonus

The first letter, FLSA2020-1, addresses the calculation of overtime pay for a non-discretionary lump sum bonus paid at the end of a multi-week training period. The $3,000 bonus is an inducement for the employee to successfully complete a 10-week training program (and agree to, but not necessarily complete, an additional eight weeks of training). There was no dispute that such a bonus should be included in the regular rate of pay; the employer’s question focused on *how* the bonus should be included in the regular rate.

Section 778.209(b) of the regulations provides two methods of allocating a multi-workweek bonus that cannot be allocated among the workweeks proportionally to the amount of bonus earned each workweek. The first is to divide the bonus equally across each of the workweeks in the period in which it is earned. If, however, there are facts that would make it “inappropriate” to assume equal bonuses each week, it may be reasonable and equitable to assume the employee earned an equal amount of bonus each hour of the pay period. In either case, the resulting rate is used to determine overtime pay, with one-half the rate paid for each overtime hour.

In the opinion letter, the employee worked 40 hours in 8 of the 10 weeks, 47 hours in one week, and 48 hours in another. WHD found that it was appropriate to allocate the amount equally across the 10 workweeks — missing any week would result in loss of the bonus, regardless of whether there was overtime worked. WHD also stated that equal weekly allocation of bonuses is the appropriate method for any bonus earnings that cannot be identified with particular workweeks.

In the example from the opinion letter, the $3,000 would be divided into each of the 10 weeks, for a weekly bonus of $300. For the two overtime workweeks, the $300 would be divided by hours worked, and the half-time rare would be paid for the overtime hours.

  • $300/47 = $6.38; $6.38 * 0.5 * 7 = $22.34 in additional overtime due in 47 hour week
  • $300/48 = $6.25; $6.25 * 0.5 * 8 = $25.00 in additional overtime due in 48 hour week
  • $47.34 in additional overtime due.

The letter did not address those circumstances in which it would be “inappropriate” to use the weekly allocation. In those circumstances, however, an hourly allocation would be required, which would result in $54.22 in additional overtime due ($3,000/415 = $7.23; $7.23 * 0.5 * 15 =  $54.22).

WHD’s conclusion should come as no surprise — it is its long-used method for determining the overtime due on multi-week bonuses. Nevertheless, it is welcome clarity on a regular rate issue at a time when such issues are likely to come into focus as employers adjust to WHD’s final rule on regular rate of pay, effective January 15, 2020.

Per Project Payments and Salary Basis

The second letter, FLSA2020-2, addresses the salary basis test for the FLSA’s white collar exemption. Effective January 1, 2020, executive, administrative, and professional employees must (with limited exceptions) be paid at least $684 per week on a salary or fee basis in order to qualify for an exemption from the FLSA. The letter relates to per-project payments and whether they satisfy the salary basis test.

The first proposed element of payment would be made to an educational consultant who would work on a project for a school district for 40 weeks. The hours would be irregular and would vary between 0 and 80. The consultant would be paid $80,000 for the project in 20 biweekly installments of $4,000.

The second proposed element of payment would be made to the same educational consultant. The consultant would be assigned to a second project lasting 8 weeks, and would be paid an additional $6,000 in four $1,500 biweekly payments.

As a result, the total weekly compensation of the consultant would vary depending on the number of projects to which the consultant was assigned. In the example provided, the consultant would earn $4,000 per pay period when not assigned to the second project, but $5,500 for the pay periods when performing work on the second project.

WHD first found that the first scenario met the salary basis of payment: the consultant was paid a “predetermined amount constituting all or part of the employee’s compensation” paid biweekly and without reduction because of variations in the quality or quantity of work performed. WHD then determined that the second element of payment constituted “extra” compensation under the regulations. Because an employer may provide an exempt employee with additional compensation without losing the exemption, WHD determined that the pay structure complied with the salary basis requirements. In addition, because the consultant’s pay was not computed in an hourly, daily, or shift basis, the reasonable relationship requirement would not apply.

Finally, WHD addressed the “unusual” scenario in which the consultant’s pay might increase or decrease due to prospective changes in the project(s) negotiated between the employer and its customer. WHD restated its long-held position that prospective reductions in salary do not defeat the salary basis test absent revisions that are so frequent that the compensation is rarely the same from pay period to pay period.

Unfortunately, although the employer requested guidance on the ever-elusive “fee basis” component of the salary test, WHD declined to provide it, citing its conclusion that the method of pay satisfied the salary basis test. Hopefully, WHD has another opinion letter in the hopper in which it will provide additional explanation of the manner and method in which fee basis can be used.

Overall, the letter is good for both employer and employee. The employer wants to pay more; the employee presumably wants to earn more. The letter allows that to happen. Although the pay was described a project-based, the first element of pay appeared to be a salary method of pay in everything but name — the same pay each workweek regardless of the amount of work performed. WHD’s treatment of the second element of pay — which, again, is more of an “extra salary” for a short duration than a payment for a specific project — should provide employers with comfort in designing pay plans that reward exempt employees with additional pay for tackling additional projects.

By Alex Passantino

 

 

 

 

 

 

 

‘Twas the week before Christmas, in a year for the ages.

So here’s our latest recap of hours and wages.

The letters and laws. The regulations and cases.

A year’s worth of matters that impacted workplaces.

 

We begin up at One First, where SCOTUS debated

A trio of cases we’d call “wage-hour-related.”

A split decision came down–with the usual camps–

And the FAA’s light was shining with the brightest of Lamps.

Plus an unambiguous holding, a simple conclusion:

Class arbitration is toast if there’s any confusion.

But lest you think arbitration only gets protected,

Where trucking’s involved, SCOTUS declared it rejected.

As to delegated gateway questions like “Shouldn’t we be in a court?”…

“Arbitrators rule first,” was the dissent-less retort.

 

Over at DOL, this year has been merry.

There’s a confirmed Administrator and a new Secretary.

And a regulatory agenda so full and ambitious.

Will they make it in time? Initial signs are propitious!

The first rule is final, updating Part 541.

Now we just hope that this multi-year journey is done.

“Obama’s salary was too high!”; “Bush’s is too little!”

The solution? They literally went right down the middle.

Regular rate is done, too. Excluding some perks and some bennies.

And some overtime payments that amounted to pennies.

Joint employment’s up next–the new test is factual,

Requiring control of the worker, and that control must be actual.

Their proposals on fluctuation and tips will be plenty

To keep Wage & Hour busy through most of 2020.

Then throw in some new letters that express opinions with grace,

Like one on independent contractors in an e-marketplace.

In D.C., they’re working hard to make compliance seem easy,

But there’s another locale that makes employers feel … queasy.

 

California. Eureka! We’ve found the location.

The eternal source of employer consternation.

Just as marketplace businesses are starting to thrive,

California steps in and says “Here’s AB5.”

The federal fight on arbitration? It’s all but said and done.

Well, there goes California again with AB51.

Between the state and its cities, so many minimum wages,

And computing regular rate requires consultation with sages.

But California is not the sole source driving employer fear,

For New York and New Jersey shout “Dude, hold my beer.”

 

And the rest of the country has been busy as well,

With new wage-theft laws or fluctuating workweek’s death knell.

So many decisions, sometimes it’s hard to keep track.

The 80/20 rule gets killed, but a court brings it back.

Class claims need more rigor and can’t be based in fiction.

Certification requires personal jurisdiction.

An arbitration agreement may block your class notice.

And you just might owe OT on some other guy’s bonus.

We’ve seen that on demand pay can be tricky, indeed.

And it turns out you have to pay folks who grow weed.

A day rate is a salary, is what the Fifth Circuit has proffered.

Settlement approval’s not needed if a judgment is offered.

 

Though the law keeps on changing, our team will keep you updated.

Some developments hurt, others will make you elated.

And as the wage-hour world keeps spinning at this decade’s end

Happy New Year to you, our wage-hour friends!!!

 

THANKS TO ALL OF OUR READERS. BEST WISHES FOR A HAPPY, HEALTHY, AND PROSPEROUS NEW YEAR!

Seyfarth Synopsis: In the December 16, 2019, Federal Register, the U.S. Department of Labor’s Wage & Hour Division (WHD) published its final rule clarifying and updating the regulations governing the regular rate requirements under the Fair Labor Standards Act (FLSA).

Generally, the FLSA requires overtime to be paid at a rate that is at least one and one-half times the “regular rate of pay.” Despite the significance of the regular rate to ensuring compliance with the FLSA, the regulatory provisions governing this critical issue have not been meaningfully updated in more than 50 years. In the final rule — which will take effect on January 15, 2020 — WHD seeks to address several of the issues that have confounded employers, as well as provide clarity on the proper treatment of several new and evolving methods of compensation. In addition, WHD revises the little-used “basic rate” of pay provisions, in a manner that it hopes will make those provisions more relevant (and more useful) in today’s economy.

The bulk of the final rule is spent clarifying whether certain kinds of benefits or “perks” must be included in the regular rate. Specifically, WHD explains that employers may exclude the following types of benefits/perks/payments from an employee’s regular rate of pay:

  • the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
  • payments for unused paid leave, including paid sick leave or paid time off;
  • payments of certain penalties required under state and local scheduling laws;
  • reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit; WHD also clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
  • certain sign-on bonuses and certain longevity bonuses;
  • the cost of office coffee and snacks to employees as gifts;
  • discretionary bonuses, by clarifying that the label given a bonus does not determine whether it is discretionary and providing additional examples; and
  • contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

WHD also provides examples to illustrate the types of bonuses that are discretionary and may be excluded from an employee’s regular rate, such as bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, referral bonuses for employees not primarily engaged in recruiting activities, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation.

WHD further eliminates the restriction that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee’s regular rate, while maintaining that such payments must not be so regular that they are essentially prearranged.

Finally, WHD updates its “basic rate” regulations. “Basic rate” is authorized under the FLSA as an alternative to the regular rate under specific circumstances. The current regulations contain a fairly unhelpful limitation, which all but eliminates its viability as an alternative: employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than $0.50 a week on average for overtime workweeks in the period for which the employer makes the payment. The final rule updates this regulation to change the $0.50 limit to 40 percent of the higher of the applicable local, state, or federal minimum wage. At the current federal level, this would be $2.90 per week on average, which would be high enough to exclude (for example) a $500 bonus paid quarterly to an employee averaging 45 hours per week.

As noted above, these provisions take effect on January 15, 2020.

By Jacob Oslick

Seyfarth Synopsis: Does Pennsylvania law permit the fluctuating workweek (“FWW”) method of paying overtime? The Pennsylvania Supreme Court has answered that question with a resounding “No, but…”

In Chevalier v. Gen. Nutrition Centers, Inc., the Supreme Court finally tackled whether the Pennsylvania Minimum Wage Act (“PMWA”) aligns with the federal Fair Labor Standards Act, and permits paying overtime to salaried non-exempt workers on a “half-time” basis (i.e., paying 50% of an employee’s regular rate for overtime, instead of paying 150%). The Supreme Court concluded that it did not. In so doing, the Supreme Court adopted the view enunciated both by Pennsylvania’s Superior Court (an intermediate appellate court) and by several federal district court opinions. But the Supreme Court’s opinion comes with certain qualifiers, of which employers should take note.

To begin with, the Supreme Court did not disturb the Superior Court’s finding that the “regular rate” for salaried workers is not based on a 40 hour workweek, but instead fluctuates with the actual number of hours worked. For example, if an employee earns a $1,200 a week salary and, in one week, works 50 hours, the “regular rate” for that week would be $24 an hour ($1,200 divided by 50) — entitling the employee to an overtime rate of $36 an hour for the 10 overtime hours that week. If, the next week, the employee works 60 hours, the “regular rate” would only be $20 an hour ($1,200 divided by 60) — entitling the employee to an overtime rate of only $30 an hour for the 20 overtime hours that week. This fluctuation of the regular rate makes paying overtime significantly more affordable for employers. So, although the “half-time” method is now verboten under Pennsylvania law, Pennsylvania employers may still reap some of benefits associated with the FWW, if they pay salaries to non-exempt workers who work varying hours.

To be clear, the Pennsylvania Supreme Court didn’t quite bless calculating overtime rates based upon actual hours worked. It just didn’t address this question, because the Chevalier plaintiffs conceded the issue on appeal. And, as Justice Sallie Mundy noted in her concurrence, “a future case may present the issue, and this Court may reach a contrary result.” But, for the foreseeable future, the Superior Court’s affirmed decision in Chevalier, which recognized the permissibility of using the “actual hours worked” method, will bind Pennsylvania trial courts. That should provide comfort to employers who use this method.

Additionally, the Supreme Court’s opinion may offer an escape hatch to certain employers who want to pay overtime on a “half-time” basis. But it is a risky one. The Supreme Court recognized, per the PMWA’s regulations, that employees paid on a “day or job rate basis” can be paid overtime using a “0.5 Multiplier.” To qualify for this payment method, such an employee must be “paid a flat sum for a day’s work or for doing a particular job without regard to the number of hours worked in the day or at the job” and must “receive[] no other form of compensation for services.” There is virtually no case law interpreting the PMWA’s “day’s work” provision. Arguably, the regulation covers all employees whose salaries are quoted on a daily basis. If so, then it is not difficult for an employer to frame an employee’s wages as “$200 a day” instead of “$1000 a week.” But the restriction that such employees “receive[] no other form of compensation for services” should give employers pause. Read literally, it could exclude any employee who receives health care, retirement, other fringe benefits, or periodic bonuses. Without any clarity on this issue from Pennsylvania courts, employers should think twice before trying to get around Chevalier’s holding by paying daily salaries.

The Pennsylvania Supreme Court’s decision in Chevalier stands in contrast to the Trump Administration’s efforts to promote the FWW method. The Trump Administration issued a proposed rule clarifying that employees can qualify for the FWW method even if they receive bonuses and other premium payments in addition to their salaries. But Pennsylvania is not alone in its hostility to the FWW method. While most states follow the federal model, a few others, including California and New Mexico, have prohibited it. For this reason, employers who wish to pay under the FWW method should consult competent counsel both to ensure the legality of this method in the jurisdictions in which they operate, and to confirm that their employment arrangements satisfy the procedural requirements for using the FWW method (such as a clear agreement that a salary covers all hours worked).

By Robert S. Whitman, Howard M. Wexler, and Thomas F. Howley

Seyfarth Synopsis: The Second Circuit held that FLSA settlements pursuant to Rule 68 Offers of Judgment do not require judicial approval.  The Court distinguished such settlements from Rule 41 stipulated dismissals, which still require approval under Cheeks v. Freeport Pancake House.

Wage and hour practitioners have long understood that settlements of FLSA claims require formal approval from a court or the Department of Labor.  The Second Circuit has been especially firm in applying this rule, holding in Cheeks v. Freeport Pancake House that the statute imposes a host of significant restrictions on otherwise-standard settlement provisions like general releases and confidentiality clauses.

In a decision issued on December 6, 2019, however, a divided Second Circuit panel approved a potentially important carve-out.  It held that FLSA settlements pursuant to a Rule 68 Offer of Judgment do not require court approval.  Instead, based on the language of the rule, the court said that when a Rule 68 offer is accepted, the case must be dismissed with prejudice, with no role for the court other than the ministerial act of entering the dismissal and closing the case.

As soon as the appeal in the case was filed, it promised to delight wage and hour geeks, and the decision does not disappoint.  It was a battle of statutory interpretation between the panel’s two-judge majority, which held that the text of Rule 68 requires dismissal when an offer is accepted, with no court review of the settlement terms, and the “emphatically” dissenting judge, who wrote that the rule does not overcome the FLSA’s longstanding requirement of judicial oversight of settlements to ensure fairness and procedural regularity.

The decision, Yu v. Hasaki, involved a claim by a sushi chef for unpaid overtime under the FLSA.  Soon after the complaint was filed, the restaurant sent a Rule 68 Offer of Judgment for $20,000 plus attorneys’ fees.  Yu accepted the offer, and the parties filed a notice with court.  But before the Clerk could enter judgment, the District Judge ordered the parties to submit the settlement agreement to the court for a fairness review and judicial approval, which he believed to be required by Cheeks.

Both parties disputed the District Court’s interpretation of the FLSA, Rule 68, and Cheeks, and filed an interlocutory appeal.  The Second Circuit accepted the case to address what it described as a “straightforward” question: “whether acceptance of a Rule 68(a) offer of judgment that disposes of an FLSA claim in litigation needs to be reviewed by a district court or the DOL for fairness before the clerk of the court can enter the judgment.”

The Second Circuit majority relied primarily on language in Rule 68 that, when an offer is accepted, the clerk “must” enter the parties’ stipulated judgment, and held that the FLSA does not contain a “clear expression of congressional intent” to exempt the FLSA from the rule’s coverage.  Putting a fine point on its conclusions, the judges emphasized that the term “must” is an explicit textual command in Rule 68 to enter judgment without discretion, while the language of the FLSA fails to provide “a scintilla of textual support” that Congress intended the statute to create an exception.

Judge Guido Calabresi was equally pointed in dissent.  He castigated the majority for a holding that he said “has no basis in the text, history, design, or purpose of the FLSA, nor indeed in common sense.”  And he tantalized the wage-and-hour-verse with this bold prediction:  “I do not believe the majority’s holding can–or will–withstand Supreme Court scrutiny.”

Before making its way to SCOTUS, however, the case may first draw the attention of the full Second Circuit in a possible en banc rehearing.  While such rehearings are rare in that court, a split panel decision increases the odds.  And if en banc review happens, then it may open the door to a full reconsideration of the merits of the Cheeks rule entirely.  While that issue was not before the panel in Yu, the majority opinion includes statements suggesting that the judges are not entirely comfortable with the strictures of mandatory review of FLSA settlements even outside the Rule 68 context.  For example:

[T]he fact that a judicial approval requirement might further the broad, remedial policy goals of the FLSA does not necessarily mean that Congress would have enacted such a requirement if it had considered the question, for it is quite mistaken to assume … that whatever might appear to further the statute’s primary objective must be the law.  Were that the case, we would be a short step away from requiring judicial approval of a variety of settlements that involve vulnerable citizens, such as discrimination suits under Title VII of the Civil Rights Act and § 1983 claims of serious police misconduct.

That is an argument that many opponents of the requirement of court review of FLSA settlements have been making for a long time.  Does this passage means it is gaining traction?  Stay tuned.

In the meantime, from a practical perspective, the takeaway of Yu is simple: parties within the Second Circuit can use Rule 68 offers of judgment to settle FLSA claims without having to go through the process of court review.  That is a welcome new tool for resolving FLSA cases without the costs, public disclosures and delays of the judicial approval process.

By: John Yslas and Carolina Nunez

Seyfarth Synopsis: In acquiring a company, there is often a tendency to think an asset purchase (as opposed to a stock purchase) guarantees the purchaser will not inherit any liability (so-called “successor liability”).  This is not necessarily so with wage and hour liability, particularly if the purchaser merely continues to operate virtually the same business that was acquired. 

Under the FLSA, several courts have weighed the following factors in assessing successor liability: 1) the successor’s actual notice of the pending lawsuit, 2) the predecessor’s ability to provide the relief before the sale, 3) the predecessor’s ability to provide relief after the sale, 4) the successor’s capacity to produce the relief, and 5) whether there is a continuity between the operations of the predecessor and the successor.

Under state law, there is similar potential successor liability.  For instance, under New Jersey state law courts have tended to look at these factors in establishing continuity: continuity of ownership; continuity of management; continuity of personnel; continuity of physical location, assets and general business operations; cessation of the prior business shortly after the new entity is formed; and extent to which the successor intended to incorporate the predecessor into its system with as much the same structure and operation as possible.

And then, in August 2019, New Jersey passed an anti-wage theft law that is arguably even stricter, A-2903/S-1790, described as an Act “concerning enforcement, penalties, and procedures for law regarding failure to pay wages.”  The Act expands the definition of “employer” where the successor entity can be liable for the purported wage violations of and penalties imposed on its predecessor. Under the law, a rebuttable presumption that an employer has established a successor entity shall arise if the two share at least two of the following capacities or characteristics: (1) perform similar work within the same geographical area; (2) occupy the same premises; (3) have the same telephone or fax number; (4) have the same email address or Internet website; (5) employ substantially the same work force, administrative employees, or both; (6) utilize the same tools, facilities, or equipment; (7) employ or engage the services of any person or persons involved in the direction or control of the other; or (8) list substantially the same work experience.

Moreover, California law protects employees seeking recovery for nonpayment of wages, and seeking to enforce their judgments.  An employer cannot withhold wages willfully and strategically evade wage final judgments by creating a new business. California also enacted Labor Code sections 238 and 1434 in 2016 and 2017 respectively.  While the plain text of Labor Code 238 appears to only apply to final judgments, the factors to be considered mirror those of the FLSA, specifically, whether (1) the employees of the successor employer are engaged in substantially the same work in substantially the same working conditions under substantially the same supervisors or (2) whether the new entity has substantially the same production process or operations, produces substantially the same products or offers substantially the same services, and has substantially the same body of customers.

Additionally, California Labor Code 1434, with some exceptions, expressly states that a janitorial services provider is liable for wages and penalties when it meets “any” of the following criteria: (a) uses substantially the same workforce to offer substantially the same services as the predecessor employer; (b) shares in the ownership, management, control of the labor relations, or interrelations of business operations with the predecessor employer; (c) employs in a managerial capacity any person who directly or indirectly controlled the wages, hours, or working conditions of the affected employees of the predecessor employer; or (d) is an immediate family member of any owner, partner, officer, or director of the predecessor employer of any person who had a financial interest in the predecessor employer.  While section 1434 only applies to janitorial employers, it appears to be part of a trend that could expand to other entities.

So what to do? First, the purchaser should be aware of all pay practices that could result in liability, as well as all pending and threatened lawsuits.  Second, the purchaser should consider including in the asset purchase agreement:

  • Provisions accurately portraying the transaction as strictly an asset purchase, and making clear any facts that support arguing the post-acquisition business is not merely continuing (e.g., under new management, new email addresses, new location etc.);
  • Indemnification provisions that make clear the target will indemnify the purchaser for any wage and hour (and perhaps other forms of) liability that precedes the closing of the sale of the business;
  • Escrowing significant monies in a separate account for such indemnification. That way, the purchaser does not find itself in the unenviable position of chasing the seller for money.  Typically such provisions call for return of the monies to the seller in phases with the applicable statutes of limitation in mind (e.g., in California, four years for wage-and-hour claims); and
  • Including robust representations and warranties around wage-and-hour matters such that the purchaser can make a clear claim against the representations and warranties and recover against the escrow or indemnity.

By: Alexander Passantino

Seyfarth Synopsis: The U.S. Department of Labor’s Wage & Hour Division issued a proposed rule on the fluctuating workweek method of pay. The proposal continues a regulatory saga started in 2008, and clarifies that payments in addition to the fixed salary are compatible with the fluctuating workweek method of compensation, and, in most cases, must be included in the regular rate of pay.

Specifically, the proposed regulation would clarify that bonus payments, premium payments, and additional pay are consistent with using fluctuating workweek. The extra payments, unless they are excluded under FLSA section 7(e)(1)-(8), must be included in the calculation of the regular rate. This is similar to a Bush Administration proposal issued in 2008, which was not implemented when the rule was finalized by the Obama Administration in 2011.

WHD rejects a distinction that has been developing in the courts: whether the additional pay is “productivity-based” or “hours-based.” Under the proposal, additional pay of any kind on top of the fixed salary would be compatible with the fluctuating workweek method.

The proposal will appear in the November 5, 2019, Federal Register. Interested parties will have 30 days to comment.

By: Kerry Friedrichs and Elizabeth MacGregor

Seyfarth Synopsis:  The Ninth Circuit’s recent decision in Salazar v. McDonald’s Corporation is welcome news for entities facing concerns about joint employment status under California law, and in particular, for franchisors. In Salazar, the Ninth Circuit held that the plaintiffs, who were employed by a McDonald’s franchisee, were not also employed by McDonald’s under California law. In an opinion that acknowledged the business realities of the franchisor-franchisee relationship, the court recognized that franchisors must retain some control over quality and brand standards, even where that control indirectly impacts a franchisee’s employees. This type and degree of control, the court concluded, was not enough to create a joint employer relationship.

The plaintiffs in Salazar v. McDonald’s Corporation worked for Haynes Family Limited Partnership (“Haynes”), a McDonald’s franchisee. Haynes selected, interviewed, and hired employees for its franchise restaurants.  It also trained new employees, supervised, disciplined, and fired employees. Haynes set employee schedules, monitored their time entries, and set and paid their wages. McDonald’s did not perform any of these functions.

Under the franchise agreement, Haynes was required to meet certain quality standards and serve McDonald’s products. Haynes managers were also trained by McDonald’s on topics such as meal and rest break policies. Haynes management voluntarily used McDonald’s computer system for scheduling, timekeeping, and determining regular and overtime pay.  Haynes employees also wore McDonald’s uniforms.

The Salazar plaintiffs filed a class action alleging various wage and hour violations against both Haynes and McDonald’s on a joint employment theory. After settling with Haynes, the plaintiffs continued litigating against McDonald’s. The district court then granted McDonald’s motion for summary judgment on the ground that McDonald’s did not employ the plaintiffs, and the plaintiffs appealed. In examining the question of joint employment status, the Ninth Circuit considered the three definitions for employment that the California Supreme Court applied to joint employment claims in Martinez v. Combs: (1) exercising control over wages, hours, and working conditions; (2) suffering or permitting work; or (3) engaging, thereby creating a common law relationship.

The Ninth Circuit first examined the extent of McDonald’s control over the franchisee’s employees. The court found that, although McDonald’s retained quality control over the franchise, it did not control the day-to-day aspects of the employees’ work, nor did it have control over their wages, hours, or working conditions. The court also found that there was no common law employment relationship, as McDonald’s exercised control only over quality and brand standards, not over the “manner and means” by which the franchisee employees performed their work.

The Ninth Circuit further found that McDonald’s did not “suffer or permit” the franchisee’s employees to work, as it did not have authority to hire or fire Haynes employees, nor did it have the power to prevent those employees from working. Plaintiffs’ argument that McDonald’s had the power to prevent the alleged wage and hour violations was not sufficient to find that it had “suffered or permitted” Haynes employees to work. The court also dismissed plaintiffs’ argument that Dynamex Operations West, Inc. v. Superior Court supported their position, noting that Dynamex applies in the independent contractor classification context and not to claims of joint employment.

The plaintiffs also attempted to argue that McDonald’s was liable for the alleged wage and hour violations under an ostensible agency theory. The court rejected this argument, as an “agent” applies only to an entity that actually employs the worker or exercises control over their wages, hours, or working conditions. As the court had already determined, McDonald’s did none of these things.

Salazar v. McDonald’s is welcome news for franchisors and other employers, as it affirms the principle that direct control, rather than reserved or indirect control, is the relevant factor. Although Salazar addressed the question of joint employment under California law, the decision nevertheless substantially aligns with Department of Labor’s proposed rule for joint employment status, released for comment earlier this year. That test would consider four factors, including whether the potential joint employer actually exercises the power to: (1) hire or fire the employee; (2) supervise and control the employee’s work schedules or conditions of employment; (3) determine the employee’s rate and method of payment; and (4) maintain the employee’s employment records.

The Ninth Circuit’s common-sense approach to evaluating joint employment in Salazar is very significant for franchisors and other entities that engage with other businesses that employ workers. It supports that these entities may apply quality and similar standards on the other business, even where such standards may indirectly affect the other business’s employees. It also affirms that franchisors may offer franchisees optional tools to assist franchisees with running their businesses, even where such tools may impact the franchisee’s employees’ wages, hours and working conditions. This decision thus recognizes the business realities of the franchisor-franchisee context, and also more broadly recognizes the principle that employment status is based on actual, direct control — not on actions that may indirectly impact another entity’s employees.