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.

By: Alex Passantino

Seyfarth Synopsis: The Department of Labor’s Wage & Hour Division announced its long-awaited proposed rule related to the FLSA’s tip provisions. The rule would implement statutory changes passed in March 2018; it also would elevate certain WHD policy guidance into regulation.

The legislative changes come from the Tip Income Protection Act, which was passed as part of the Consolidated Appropriations Act of 2018. As we have discussed previously, that provision prohibits employers from “keep[ing]” employees’ tips. The proposed rule would allow employers who do not take a tip credit to establish a tip pool to be shared between workers who receive tips and are paid the full minimum wage and employees that do not traditionally receive tips, such as dishwashers and cooks. According to WHD, its proposal would not impact regulations related to employers who *do* take a tip credit: that tip poll may only include traditionally tipped employees.

The proposed rule also would codify WHD’s opinion letter that an employer may take a tip credit for any amount of time an employee in a tipped occupation performs related non-tipped duties with tipped duties. For the employer to use the tip credit, the employee must perform non-tipped duties contemporaneous with, or within a reasonable time immediately before or after, performing the tipped duties. The proposed regulation also addresses which non-tipped duties are related to a tip-producing occupation, referring to O*NET (an occupational database created under DOL sponsorship), and stating that tasks listed for an occupation in O*NET will be considered as “related” tasks for the purposes of the tip credit.

WHD also proposes to explicitly prohibit employers, managers, and supervisors from keeping tips received by employees and incorporate new civil money penalties that may be imposed when employers unlawfully keep tips.

The comment period runs through December 9, 2019.

Seyfarth Synopsis:  Furthering a recent trend, a judge in the District of Massachusetts denied a motion for conditional certification because there was no personal jurisdiction over non-Massachusetts entities with respect to the claims of employees who worked outside the state.

As we have discussed previously, several courts have held that plaintiffs in nationwide FLSA collective actions must either sue in the state in which general jurisdiction exists over the defendant corporation (where it is incorporated or has its principal place of business) or limit the case to employees who worked in the state in which the case is brought.

In Chavira v. OS Restaurant Services, LLC et al., Judge Allison Burroughs in the District of Massachusetts continued that trend.

The named plaintiff in Chavira worked for Outback Steakhouse in four Massachusetts locations as a Front of House Manager.  The other plaintiffs who joined the case (before the court ruled on conditional certification) worked in other states.  Each of the defendants is incorporated and has its principal place of business outside Massachusetts.

The defendants took a three-pronged attack:  they asserted a defense of lack of personal jurisdiction in their answer, moved to strike the consent forms filed by the out-of-state opt-ins, and opposed the plaintiff’s motion for conditional certification based on the court’s lack of personal jurisdiction over out-of-state employees and the lack of evidence concerning in-state employees.

The court granted the motion to strike and denied the motion for conditional certification.  Noting that the First Circuit has not addressed the question, the court described two divergent approaches taken by district courts around the country on the personal jurisdiction issue:  some courts, with which the Chavira court agreed, have ruled that the Supreme Court’s decision in Bristol-Myers Squibb Co. v. Superior Court of California, San Francisco Cty., et al., 137 S. Ct. 1773 (2017) divests courts of personal jurisdiction over out-of-state plaintiffs because there is no connection between the forum state and those plaintiffs’ claims.  Other courts have held that the plain language of the FLSA does not limit its application to in-state plaintiffs’ claims and that the original plaintiff’s work location dictates the court’s jurisdiction.

The Chavira court pointed to decisions by another District of Massachusetts judge and by judges in the Northern District of Ohio that have reached the same conclusion.  And, while not cited by the court, a recent decision in the Middle District of Tennessee similarly concluded that the court lacked personal jurisdiction over non-Tennessee potential plaintiffs where the employer was based in Georgia, and denied a motion for conditional certification.

As to cases coming out the other way and determining that Bristol-Meyers does not divest courts of personal jurisdiction over out-of-state employees, the Chavira court cited decisions from a number of District Courts but did not find them persuasive.

Given the proliferation of nationwide FLSA collective actions in the past decade, the jurisdictional argument addressed in Chavira provides reason for employers to be optimistic about limiting the scope of such actions.  When an employer faces a putative collective action in a state in which it is not incorporated and does not have its principal place of business, it should take the following key steps to seek to narrow the size of the collective as much as possible:

  • include a lack of personal jurisdiction defense in its answer;
  • consider whether to move to strike any pre-conditional certification opt-in forms filed by out-of-state employees; and
  • consider whether to oppose the motion for conditional certification as to out-of-state employees, with the full understanding that the court’s denial as to out-of-state employees will not have preclusive effect.

Given the still-developing law on this issue, which has not yet been decided by any Court of Appeals, none of these strategies will guarantee success in limiting the scope of the case.  And there may be strong countervailing strategic reasons not to pursue the personal jurisdiction argument:  the plaintiffs might try to move the case to the state with general jurisdiction over the employer or file a separate collective action.

But for now, cases like Chavira give employers a powerful tool, and may help improve their odds of defeating FLSA certification

By: Jinouth D. Vasquez Santos

Seyfarth Synopsis: the 10th Circuit has held that the FLSA applies to workers in the marijuana industry.

Looks like at least some arguments seeking to dismiss FLSA wage claims under the guise that “cannabis is illegal under federal law” have gone up in smoke. The 10th Circuit created a buzz last week in Robert Kenney v. Helix TCS, Inc., by holding that cannabis industry workers can claim overtime under the Federal Labor Standards Act (“FLSA”).

The FLSA requires employers to pay employees overtime if employees work more than 40 hours in a workweek.

In Helix, Kenney, a security worker in the cannabis industry, brought an action against his employer claiming that he was misclassified as exempt and sought overtime wages under the FLSA. Kenney argued that he and other co-workers routinely worked more than 40 hours per week but were not compensated any overtime in violation of the FLSA.

Helix moved to dismiss the action and argued that the FLSA did not apply because the marijuana industry is considered illicit under the Controlled Substances Act (“CSA”). Helix argued that allowing cannabis employees to receive protections under the FLSA would “create a clear repugnancy” between the FLSA and CSA and “impermissibly render the two laws mutually inconsistent.” The district court denied the motion to dismiss, and the appellate court affirmed.

The 10th Circuit reasoned that “‘case law is clear that employers are not excused from complying with federal laws’ because of their other federal violations.” The court noted that a finding that pot workers are covered by the FLSA is in line with “both the plain reading and the overall purpose of the statute, and doing so does not require disavowal of the CSA” because Congress has amended the CSA many times since the enactment of the CSA “without excluding employees working in the marijuana industry.” The court also held that both statutes seek to discourage companies from seeking an unfair advantage over legitimate employers and, thus, cannabis workers “are not categorically excluded from FLSA protections.”

Why is this important?

Cannabis employers governed by the FLSA either will need to schedule workers so that they do not work more than 40 hours in a workweek or pay workers overtime unless employers want to be subjected to a lawsuit. Moreover, cannabis employers in California must take other precautions because of California’s more stringent overtime requirements.

By: Alex Passantino

Seyfarth Synopsis: The U.S. Department of Labor announced its final rule updating and revising the regulations issued under the Fair Labor Standards Act (FLSA) regarding the earnings thresholds necessary to exempt executive, administrative or professional employees from the FLSA’s minimum wage and overtime pay requirements.  The Department simultaneously announced its formal rescission of the 2016 final rule.

The final rule updates the salary and compensation levels needed for workers to be exempt:

  • The standard salary level has been increased from the currently-enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker). The Department is updating the standard salary level set in 2004 by applying to current data the same method used to set that level in 2004—i.e., by looking at the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (then and now the South), and/or in the retail sector nationwide.
  • The total annual compensation level required for highly compensated employees has been increased from the currently-enforced level of $100,000 to $107,432 per year. This compensation level equals the earnings of the 80th percentile of full-time salaried workers nationally.
  • Employers are permitted to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level. If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52-week period) to retain his or her exempt status, the Department permits the employer to make a “catch-up” payment within one pay period of the end of the 52-week period.

The effective date for the changes is January 1, 2020.  The Department rejected calls to automatically update the salary levels, instead expressing its intention to update the standard salary and highly compensate employee total annual compensation levels more regularly in the future through notice-and-comment rulemaking.

In addition, the final rule updates the special salary levels for employees in Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands ($455 per week), as well as the special base rate for employees in the motion picture producing industry ($1,043 per week).

The final rule does not:

  • change the regulatory text for primary duty;
  • revise the tests for the duties required of executive, administrative, or professional employees;
  • amend the salary basis test;
  • apply any new compensation standards to doctors, lawyers, teachers, or outside sales employees; or
  • make any changes to the computer employee exemption (other than the salary increase, as may be applicable).

Employers will need to meet the new levels by the effective date and should begin making preparations to do so.  In the meantime, various groups–including workers’ advocates and others purporting to represent public interests–previously have threatened to pursue litigation to enjoin the final rule from going into effect.

By: Vanessa Rogers, John Phillips, and Steve Shardonofsky

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

Summary of the Case

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

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

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

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

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

Case Highlights and Takeaways

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