Seyfarth Synopsis: The New York Court of Appeals holds that the state’s class action rules require notice of settlements to be sent to putative class members – even though no class has been certified.

In a decision sure to send shivers up the spines of wage and hour practitioners in New York, the State’s highest court has held that notice of a class action settlement must be distributed to all members of the putative class, even when the settlement comes before a class has been certified.  Together with Cheeks v. Freeport Pancake House, a Second Circuit ruling that pertains to FLSA settlements, the decision erects some very high hurdles for parties seeking early settlements in wage and hour cases in New York.

The case involved appeals in two separate wage and hour cases:  Desrosiers v. Perry Ellis Menswear, brought by an unpaid intern seeking wages, and Vasquez v. National Securities Corporation, in which a financial products salesperson alleged that his pay fell below minimum wage.  Both cases were brought in state court as putative class actions under the New York Labor Law.  Both were settled early – before class certification – but the plaintiffs filed motions seeking leave to send notice of the settlement to members of the putative classes.

In a 4-3 decision, the Court of Appeals (New York’s highest court) held that notice is required, even though the classes had not been certified in either case.

At issue was the language of CPLR 908, which states that a class action “shall not be dismissed, discontinued, or compromised without the approval of the court,” and that “[n]otice of the proposed dismissal, discontinuance, or compromise shall be given to all members of the class in such manner as the court directs.”  The defendants argued that the statute’s reference to a “class action” means a certified class action, while the plaintiffs contended “that an action is a ‘class action’ within the meaning of the statute from the moment the complaint containing class allegations is filed.”

Finding ambiguity in the statutory text, the majority looked to the legislative history and other interpretive guidance.  It placed particular weight on the State legislature’s failure to amend CPLR 908 in the decades since a 1982 decision from an intermediate appellate court holding that it does apply to pre-certification settlements.  The court held that this failure, in the face of the “sole appellate judicial interpretation of whether notice to putative class members before certification is required,” amounts to legislative acceptance of that decision’s construction of the rule.

The majority also drew a distinction between CPLR 908 and Federal Rule of Civil Procedure 23(e), on which it was modeled.  Rule 23 was amended in 2003 to provide that a district court is required to approve settlements only in cases where there is a “certified class” and that notice must be given only to class members “who would be bound” by the settlement.  In contrast, CPLR 908 has not be so amended, despite proposals by the New York City Bar Association and scholarly criticisms of the rule.

Thus persuaded that the text of the rule requires notice before certification, the court declined to consider the practical implications of its decision on the desirability of early settlements in class actions:

Any practical difficulties and policy concerns that may arise from [the court’s] interpretation of CPLR 908 are best addressed by the legislature, especially considering that there are also policy reasons in favor of applying CPLR 908 in the pre-certification context, such as ensuring that the settlement between the named plaintiff and the defendant is free from collusion and that absent putative class members will not be prejudiced. The balancing of these concerns is for the legislature, not this Court, to resolve.

In dissent, three judges took the majority to task for what they described as an unwarranted reading of the rule in light of the overall context of the class action provisions in CPLR Article 9.  In their view, the fact that the plaintiffs had never moved for, let alone received, a ruling granting class certification meant that the case was not a class action at all.  “In each of the actions here,” they said, “plaintiffs did not comply with the requirements under article 9 of the CPLR that are necessary to transform the purported class action into an actual class action, with members of a class bound by the disposition of the litigation.”

Responding in particular to the plaintiffs contention that a case becomes a “class action” from the moment it is filed putatively as such, the dissent said:

There is nothing talismanic about styling a complaint as a class action. Indeed, any plaintiff may merely allege that a claim is being brought “on behalf of all others similarly situated.” However, under article 9 of the CPLR, the court, not a would-be class representative, has the power to determine whether an action “brought as a class action” may be maintained as such, and may do so only upon a showing that the prerequisites set forth in CPLR 901 have been satisfied.

As we have observed repeatedly in this blog, the Second Circuit’s holding in Cheeks, which requires court approval of FLSA settlements and tends to preclude various customary settlement provisions like confidentiality clauses, poses obstacles that may lessen the desirability of settlements in wage and hour cases.  And in Yu v. Hasaki Restaurant, the Second Circuit is now being asked to decide whether court approval is required even for a settlement achieved through an Offer of Judgment under FRCP 68.  Now, with Desrosiers on the books, the challenges for early settlements have been extended to wage hour settlements brought in state court under New York law.  (The case will presumably not apply to New York Labor Law claims brought in federal court, where Rule 23 rather than CPLR Article 9 would apply.)

The lesson for New York practitioners is as simple as it is daunting: if you want to settle a wage and hour case early, be prepared to jump through some significant procedural hoops.

Authored by Robert Whitman

Seyfarth Synopsis: The Second Circuit has upheld summary judgment against magazine interns seeking payment as “employees” under the FLSA.

In an end-of-semester decision that may represent the final grade for unpaid interns seeking minimum wage and overtime pay under the FLSA, the Second Circuit has firmly rejected claims by Hearst magazine interns challenging their unpaid status.

The interns served on an unpaid basis for various magazines published by Hearst Corporation, either during college or for a few months between college and graduate school. They sued, claiming they were employees because they provided work of value to Hearst and received little professional benefit in return.

Following discovery, District Judge J. Paul Oetken rejected the interns’ claim of employee status and granted summary judgment to Hearst. On appeal, the Second Circuit framed the question succinctly: “whether Hearst furnishes bona fide for‐credit internships or whether it exploits student‐interns to avoid hiring and compensating entry‐level employees.” If the former were true, the interns would be deemed trainees, who could permissibly be unpaid; if the latter were true, the interns would be entitled to minimum wage and overtime pay.

In support of their appeal, the interns argued that many of the tasks they performed were “menial and repetitive,” that they received “little formal training,” and that they “mastered their tasks within a couple weeks, but did the same work for the duration of the internship.” These points, they contended, outweighed their receipt of college credit and other indicia of an academic flavor to their experience.

The appeals court, in Wang v. Hearst Corp., appeared to have little trouble upholding the grant of summary judgment in favor of Hearst. Applying its test for assessing whether interns are employees or trainees, the court held that the factual record favored non-employee status on six of the seven pertinent factors, enough to sustain the judgment in the company’s favor.

Those seven factors, as loyal blog readers will recall from prior posts, first appeared in the court’s 2016 decision in Glatt v. Fox Searchlight, in which the court held that the “primary beneficiary” test governed whether interns were considered employees or trainees. The Glatt court rejected the Department of Labor’s multi-factor test and devised its own:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa;
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands‐on training provided by educational institutions;
  3. The extent to which the internship is tied to the internʹs formal education program by integrated coursework or the receipt of academic credit;
  4. The extent to which the internship accommodates the internʹs academic commitments by corresponding to the academic calendar;
  5. The extent to which the internshipʹs duration is limited to the period in which the internship provides the intern with beneficial learning;
  6. The extent to which the internʹs work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern;
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The factors are non-exhaustive, and as the Second Circuit reiterated in the current case, need not all point in the same direction to support a conclusion of non-employee status.

The “heart of the dispute on appeal” was factor two — whether the interns received “training that would be similar to that which would be given in an educational environment.” The plaintiffs argued that, in order for this factor to weigh in favor of non-employee status, the internships would have to provide “education that resembles university pedagogy to the exclusion of tasks that apply specific skills to the professional environment.”

The court was not convinced. It recognized that the Hearst internships varied in many respects from classroom learning. But as it had said earlier in Glatt, this was precisely the point. “The [plaintiffs’] tacit assumption is that professions, trades, and arts are or should be just like school; but many useful internships are designed to correct that impression…. [P]ractical skill may entail practice, and an intern gains familiarity with an industry by day to day professional experience.”

Perhaps the most significant part of the ruling comes at the end, where the court discusses the propriety of summary judgment. The interns, and various amici curiae (unions, advocacy groups, and professors) who advocated on their behalf, argued strenuously that various “mixed inferences” on the seven internship factors precluded a grant of summary judgment. While acknowledging that application of the factors required some weighing of evidence, the court nonetheless said this did not mean the case required a trial.

“Status as an ‘employee’ for the purposes of the FLSA is a matter of law,” the court said, “and under our summary judgment standard, a district court can strike a balance on the totality of the circumstances to rule for one side or the other.” It continued: “Many of our FLSA tests that are fact‐sensitive and require the judge to assign weight are routinely disposed of on summary judgment [citing cases]. The amici contend that summary judgment is inapposite in all unpaid intern cases that turn on competing factors. Such a rule would foreclose weighing of undisputed facts in this commonplace fashion.”

In many ways, the Wang decision may be the epilogue to a textbook that has already been written. After the Glatt decision in 2016, the number of lawsuits filed by interns seeking unpaid compensation dropped precipitously. That may have been due to Glatt’s highly-employer-friendly resolution, both as to the merits of the employee-or-intern question and its pronouncements on the high threshold for collective/class certification on the question. Or perhaps it was due to the decisions by employers, reacting to the onslaught of intern lawsuits seeking pay under the FLSA and state law, to curtail or limit their internship programs or to pay interns compensation at or above minimum wage. Whatever the reason, the Wang decision cannot be heartening for plaintiffs’ lawyers, and the days of widespread lawsuits by interns are likely over.

Still, companies who remain interested in sponsoring unpaid interns should not get complacent. Paying minimum wage, of course, remains a fail proof antidote to the possibility of FLSA claims by these individuals. But if that is not an option, companies should take care to ensure that their programs have primarily educational aims and coordinate wherever possible with the interns’ educational institutions to ensure they meet the factors articulated by the court. Otherwise, the interns may be the ones teaching them a lesson.

By: Noah A. Finkel and Andrew L. Scroggins

Seyfarth SynopsisPending bi-partisan legislation aimed at preventing employers from enforcing arbitration agreements of sexual harassment claims might make employers unable to enforce arbitration agreements, and class waivers included in them, as to any employment claim.

High profile stories of sexual harassment (and much worse) in the workplace and beyond have dominated headlines in recent months.  Yesterday Time magazine recognized The Silence Breakers – women who have gone public with allegations of sexual harassment and sexual assault – as the 2017 “Person of the Year,” thus becoming the latest to criticize companies and other employers who keep sexual harassment allegations and settlements secret through arbitration agreements with their employees.

Congress is now stepping in with a bill titled the “Ending Forced Arbitration of Sexual Harassment Act” that would amend the Federal Arbitration Act (FAA) by making the FAA inapplicable to claims of sex discrimination.  Without the FAA available to enforce an arbitration agreement, an employer likely would be unable to compel a claim of sex discrimination into arbitration and thus would have to litigate sex discrimination claims publicly in federal or state court.

The bill already has attracted bipartisan support.  At a press conference to announce the bill, former Fox News anchor Gretchen Carlson shared the stage with Democrats and Republicans from both houses of Congress.  In the House, its early co-sponsors include two Republicans.  In the Senate, the six original co-sponsors include two Republicans, Lisa Murkowski of Alaska and Lindsey Graham of South Carolina, the latter of whom said at the press conference that his goal is to create a better business environment where women are “able to go to work without having to put up with a bunch of crap.”

That is a goal that any employer can support, but the bill would do far more than that.  Under the version pending in the House (the version in the Senate has not yet been posted), there exists a so-called “technical and conforming amendment” that is anything but that.

Currently, Section 1 of the FAA contains an exclusion from its mandate to enforce arbitration agreements for employees involved in transportation.  The bill, however, would strike certain limiting language from Section 1 of the FAA so that Section 1 simply would read as follows:  “nothing herein contained shall apply to contracts of employment.”

This language likely would mean that employers would not be able to enforce arbitration agreements with their employees.  It would not matter whether the agreement is optional or a condition of employment.  It would not matter whether the arbitration program contained a waiver of the ability to bring a class or collective action.  Under this bill, the FAA arguably no longer could be used as the vehicle to enforce any arbitration agreement in the employment context.  And while there may be other vehicles through which to enforce an arbitration agreement (for, example state arbitration acts), the FAA has provided the foundation for recent jurisprudence allowing for enforcement of arbitration agreements, most notably class and collective action waivers, including the ones currently at issue before the U.S. Supreme Court.

It is unlikely that this is Congress’ intent, at least within the Republican majority.  And while the bill as a whole has received media attention today, none of that has focused on or even mentioned the broader limit the bill would place on arbitration agreement.

Given recent media coverage about sexual harassment, prominent stories about efforts to use private agreements to thwart complaints about harassment, and early Republican support for this bill, this bill appears it has a real chance of becoming law.  Congress should remove the amendment to Section 1 of the FAA before passing it.  Otherwise, it threatens to greatly limit the ability of companies and their employees to agree to arbitrate employment disputes on an individual basis.

Co-authored by Noah Finkel and Cheryl Luce

Seyfarth Synopsis: On Monday, the DOL issued a Notice of Proposed Rulemaking announcing rescission of a rule that regulates tip pooling by employers who do not take the tip credit.

The DOL has issued a Notice of Proposed Rulemaking regarding the tip pooling regulations of the Fair Labor Standards Act. The FLSA allows employers to take a tip credit toward their minimum wage obligations, and employee tips may be pooled together, but pooling of tips is allowed only “among employees who customarily and regularly receive tips.” 29 U.S.C. § 203(m). The DOL took the tip pooling law a step further in 2011 when it promulgated a regulation that prohibits employers from operating tip pools even when they do not take the tip credit. The regulation states: “Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.” 29 C.F.R. § 531.52.

The DOL’s tip pooling rule has been unpopular with courts—and for good reason, as we have previously noted. Indeed, several federal courts have found that it is overbroad and invalid, excluding the Ninth Circuit. In the Notice of Proposed Rulemaking, the DOL agrees with the holdings of most courts and, while not outright stamping the rule as “overbroad” or beyond the DOL’s authority, states that the DOL is concerned “about the scope of its current tip regulations” and “is also seriously concerned that it incorrectly construed the statute in promulgating the tip regulations that apply to” employers who do not take the tip credit. The DOL’s about-face is also motivated by policy concerns. The Notice explains that removing the rule “provides such employers and employees greater flexibility in determining the pay policies for tipped and non-tipped workers [and] allows them to reduce wage disparities among employees who all contribute to the customers’ experience and to incentivize all employees to improve that experience regardless of their position.” Finally, the DOL notes that the increase in state laws prohibiting tip credits and the volume of litigation over this issue contributed to its decision to put the rule on the chopping block.

The end of the rule does not come as a surprise as both the DOL and courts have sounded the death knell this year. On July 20, 2017, the DOL issued a nonenforcement policy to not enforce the rule with respect to employees who are paid at least minimum wage. Additionally, the National Restaurant Association filed a petition for certiorari with the Supreme Court asking for review of the Ninth Circuit’s decision, which is still pending.

The DOL announced that if the rule is finalized as proposed, the rule would qualify as an “EO 13771 deregulatory action” under the Trump administration’s “two-for-one” executive order that requires federal agencies to cut two existing regulations for every new regulation they implement. Once the proposal is published in the Federal Register, interested parties will have the opportunity to provide comments regarding the Department’s proposal within 30 days. Only after these steps is the rule made final.

Authored by Cheryl Luce

Seyfarth Synopsis: Tipped workers who didn’t receive notice of the tip credit get a win under New York state minimum wage law in a case that echoes technical traps we have seen in FLSA decisions.

Throughout the year, we have been covering cases that show how the FLSA has been construed by courts as “remedial and humanitarian” in purpose, but that its technical traps do not always serve such a purpose and do not necessarily serve to ensure a living wage for working Americans. A recent decision from a New York federal court applying New York law shows how state minimum wage laws can also provide traps for the unwary and result in big payouts to employees who were paid at least minimum wage but in a way that violates the law’s technical requirements.

This case was filed five years ago against a restaurant company operating franchises in New York. The plaintiffs moved for partial summary judgment on whether they were properly advised in writing about tip credits when they started at the company and whether their wage statements met New York state law requirements. The moving plaintiffs were paid $5.00 per hour in regular pay and $7.50 per hour in overtime in addition to tips that (at least for the purposes of summary judgment) the plaintiffs did not dispute brought their pay above New York’s minimum wage requirements, nor did they contend that they did not understand that they were paid pursuant to the tip credit. Nonetheless, because of the company’s technical tip credit notice and wage statement violations, the court concluded that the company was liable to 15,000 workers for the liability period of 2011 to present for the difference between their hourly rate and the New York minimum wage (which increased to $9.70 per hour on December 31, 2016).

According to reporting by Law360, the plaintiffs’ attorney estimates that the damages could lead to more than $100 million in payments to the workers. It is not hard to imagine that such a massive judgment could put a major strain on the company’s operations or even threaten their ability to continue doing business. All the while, the plaintiffs did not dispute that, accounting for their tips, they were actually paid at least the New York minimum wage. In the event that the court orders defendants to pay them difference in the hourly rate they were paid and the New York minimum wage, they will have received the benefit of not just tips, but also damages resulting from what can only be described as a technicality.

Although this is a state law case and thus does not make up the fabric of inconsistent and illogical rhetoric we find in FLSA decisions that we have examined earlier, we find it appropriate to draw similar conclusions here. What is remedial and humanitarian about this court’s construction of New York’s minimum wage requirements? What protection of the right to earn a living wage is afforded low wage workers in this case? And if the answer is none, then perhaps courts ought to acknowledge that they do not always construe wage-hour laws in a way that achieves their core purpose of ensuring a living wage for working Americans, but rather in a way that has no apparent connection to such a purpose.

Co-authored by Kara Goodwin and Noah Finkel

Seyfarth Synopsis: The Ninth Circuit recently joined the Second, Fourth, Eighth, and D.C. Circuits in holding that the relevant unit for determining minimum-wage compliance under the FLSA is the workweek as a whole, rather than each individual hour within the workweek.

Yes, Virginia, contrary to the contentions of some plaintiffs’ counsel, the FLSA does allow for flexibility in how employers compensate their employees. In the recent case of Douglas v. Xerox Business Services, the Ninth Circuit rejected the argument that the FLSA measures minimum-wage compliance on an hour-by-hour basis; instead, the Ninth Circuit copied the other circuits that have addressed the issue and concluded that minimum-wage compliance is measured by weekly per-hour averages.

The plaintiffs—customer service representatives at call centers run by Xerox—were paid under what the court described as a “convoluted” and “mind-numbingly complex payment plan” where employees earned different rates depending on the task and the time spent on that task. In reality, the pay arrangement was not terribly difficult to discern. For certain defined activities like trainings and meetings, employees received a flat rate per hour; for time spent managing inbound calls, employees were paid a variable rate calculated based on a matrix of qualitative and efficiency controls; all remaining tasks had no specific designated rate.

At the end of each workweek, Xerox totaled all amounts earned (for defined activities and for activities paid at the variable rate) and divided that total by the number of hours worked that week. If the resulting average hourly wage equaled or exceeded minimum wage, Xerox did not pay the employee anything more. But if the average hourly wage fell below minimum wage, Xerox gave the employee subsidy pay to bump the average hourly wage up to minimum wage.

In the plaintiffs’ view, because Xerox averaged across a workweek, it compensated above minimum wage for some hours and below minimum wage for others, thereby violating the FLSA. Plaintiffs sought back pay for each hour they worked at sub-minimum wage because, they claimed, the FLSA bars an employer from paying below minimum wage for a single hour.

The Ninth Circuit disagreed and concluded that the relevant unit for determining minimum-wage compliance under the FLSA is the workweek as a whole and, as such, Xerox properly compensated employees for all hours worked by using a workweek average to arrive at the appropriate wage.

Although the FLSA’s “text, structure, and purpose” provided “few answers” to the per-hour versus per-workweek question, the Department of Labor’s longstanding per-workweek construction and decisions by sister circuits shaped the Ninth Circuit’s holding. The Department of Labor adopted the per-workweek measure just over a year and a half after the FLSA was passed in 1938 and has never deviated from this understanding: “[T]he workweek [is] the standard period of time over which wages may be averaged to determine whether the employer has paid the equivalent of [the minimum wage].”

Courts—including every circuit that has addressed the issue—have overwhelmingly followed the Department of Labor’s guidance. The Second Circuit first embraced the per-workweek construction in 1960 in United States v. Klinghoffer Brothers Realty Corp., explaining that “the [c]ongressional purpose is accomplished so long as the total weekly wage paid by an employer meets the minimum weekly requirements of the statute.” The Fourth (Blankenship v. Thurston Motor Lines, Inc.), Eighth (Hensley v. MacMillan Bloedel Containers, Inc.), D.C. (Dove v. Coupe), and now Ninth Circuits have also agreed that minimum wage compliance is measured by the workweek as a whole. No circuit has taken a contrary position.

As is often the case, plaintiffs relied heavily on the fact that the “FLSA is remedial legislation” that “must be construed broadly in favor of employees” (if you are a frequent reader of this blog you are aware of our feelings on this language as described in detail here) and argued that a per-hour approach is necessary to ensure workers are protected from wage and hour abuses. But, as the Ninth Circuit pointed out, there is no empirical evidence that broad application of the workweek standard disadvantages employees in any way. As this case makes clear, even if employees (or their attorneys) are unhappy with an employer’s pay plan, there is no violation of the FLSA’s minimum wage provision so long as an employee’s total compensation for the week divided by total hours worked results in a rate that is at or above the minimum wage.

Co-authored by: Steve Shardonofsky and John P. Phillips

Seyfarth Synopsis: On November 7, 2017, the U.S. House of Representatives passed the Save Local Businesses Act. If passed by the Senate, the bill would overturn Obama-era decisions and agency guidance broadly defining and holding separate, unrelated companies liable as “joint employers” under federal wage & hour and labor law. Perhaps more importantly, the bill signifies a broader trend to provide more clear guidance and roll-back various Obama-era rules on wage & hour issues.

The Broad Approach to “Joint Employment” Under the Obama Administration

Under the prior Administration, and particularly during the later years, employers who had traditionally relied on contract labor, temporary workers, staffing agencies, subcontractors, and franchise arrangements found themselves in the crosshairs of federal agencies and regulators. Traditionally, joint employer status was found where separate, unrelated entities shared responsibility and exercised direct control over the employment relationship, including decisions affecting the terms and conditions of employment. In that case, both entities could be held jointly liable for violations of wage & hour and other employment laws. The Obama Administration upended this traditional test, however.

In August 2015, the NLRB issued its much-discussed Browning-Ferris decision (addressed here), where the Board adopted an expansive definition of joint employment focusing on the right to control the terms and conditions of employment and the indirect exercise of those rights. (Seyfarth Shaw LLP is leading the appeal of Browning-Ferris to the D.C. Circuit Court of Appeals.) In 2015 and 2016, then-WHD Administrator Dr. David Weil issued two separate Administrator’s Interpretations (“AIs”) concerning independent contractors and joint employment. In 2015, in an effort to reduce the classification of workers as independent contractors and increase the number of workers subject to the FLSA’s minimum wage and overtime requirements, Dr. Weil issued guidance espousing a broad interpretation of who qualifies as an “employee” under the FLSA and highlighting the DOL’s position that almost all workers are employees. In 2016, Dr. Weil followed-up with guidance emphasizing the DOL’s position that joint employment must be determined based on the economic realities instead of (in their view) artificial corporate or contractual arrangements, including situations involving “horizontal” and “vertical” joint employment (discussed here). This guidance focused on the economic realities of a business’s relationship with a given worker, especially noting that indirect control (e.g., control excised solely through a staffing company) can be sufficient for a finding of joint employment. While the AIs were not entitled to judicial deference, we anticipated that some judges would treat Dr. Weil’s words as gospel.

As we previously reported, the broader tests espoused by the NLRB and the WHD exposed employers to a myriad of new wage and hour liabilities, investigations, and enforcement actions, and were especially relevant to companies that outsource work, utilize staffing agencies and contractors, or employ a franchisor/franchisee business model. If recent activity by Trump’s DOL and Congress is any indication, a shift in regulatory enforcement and focus is well underway.

The Winds of “Joint Employment” Are Shifting

As we reported here and here, this summer the DOL withdrew its AIs on joint employment and independent contractors. More recently, on November 7, 2017, the U.S. House of Representatives passed the Save Local Businesses Act by a vote of 242-181, including yes votes from eight Democrats. The bill clarifies the standard for “joint employer” status under the FLSA and the NLRA, and returns to a traditional test that requires “direct, actual, immediate,” and “significant” control over the essential terms and conditions of employment, such as hiring, discharging employees, determining rates of pay and benefits, day-to-day supervision, and administering employee discipline.

Implications for Employers

The DOL’s decision to withdraw its AIs and the passage of the Save Local Businesses Act are welcome changes for employers who faced significant liability and uncertainty under the Obama-era rules. Although the bill itself still faces a tough road in the Senate—where it will require Democratic support to reach 60 votes and avoid a filibuster—it would represent a significant shift in the federal government’s focus. Even if the bill stalls, it nevertheless solidifies a broader regulatory and enforcement trend that may prompt federal courts to return to the traditional and more predictable joint employer test under the FLSA.

Full passage of the Save Local Businesses Act in Congress and signature by the President, however, will not be a panacea for these thorny joint-employer issues. Many states, such as California, still have broad joint-employer tests under their respective wage-hour laws. Courts will also continue to grapple with the proper application and interpretation of these rules, as evidenced by a recent decision from the Fourth Circuit Court of Appeals purporting to define joint employment even more broadly than the Obama Administration. Furthermore, the plaintiffs’ bar will continue to push the outer contours of the law in their search to apply joint employer principles more broadly and thereby reach the “deep pockets” of franchisors and other principals. Regardless of what happens to the Save Local Businesses Act, we foresee continued potential exposure and litigation in this arena. Employers—and particularly those in industries that make heavy use of franchises, subcontractors, and staffing agencies—should remain engaged and focused on these issues, and continue to scrutinize their independent contractor relationships, staffing arrangements with third parties, and related contracts.

Co-authored by Robert S. Whitman and Needhy Shah

Seyfarth Synopsis: A judge in the Southern District of New York held that FLSA off-the-clock claims could not proceed collectively because the employer’s policy enforcement and approval of overtime compensation varied by supervisor.

In Lynch v. City of New York, Judge Katherine Forrest rejected an attempt to prosecute a single collective action for off-the-clock claims of employees in different units reporting to different supervisors. Ordering the case decertified, she held that the plaintiffs’ own testimony showed “critical differences in what supervisors told their employees about overtime.”

A group of five representative plaintiffs–current and former administrative assistants–asserted FLSA claims against the New York City Department of Homeless Services. The group had been granted conditional certification of a FLSA collective action, which requires only a modest showing that the employees were similarly situated with respect to alleged FLSA violations. A total of 30 opt-ins remained at the final certification stage.

Following discovery and motion practice, the court granted the City’s motion for decertification of the FLSA collective, determining that the plaintiffs were not similarly situated under the more stringent standard applicable after discovery is complete.

To determine whether plaintiffs could proceed collectively, the court analyzed whether the employees worked in disparate settings, whether the City would have individualized defenses to the employees’ claims, and the impact of fairness and procedural considerations. The court sided with the City on all of these factors due to the highly individualized nature of plaintiffs’ experiences with overtime compensation.

The core issues were whether the City had knowledge of plaintiffs’ uncompensated work outside regular hours and whether supervisors had uniform practices. Plaintiffs’ depositions revealed variations by supervisor on what employees were told about overtime and whether overtime compensation requests were approved. Employees were responsible for recording their hours in an electronic timekeeping system and submitting requests to be compensated for overtime hours. Plaintiffs claimed they did not always request to be compensated for overtime work, even though requests were routinely granted—98.5% of requests since July 2013 were approved.

These individualized factual issues and proof, the court said, meant there were few procedural benefits and little judicial efficiency to be gained through collective action. However, Judge Forrest left open the possibility of collective treatment of appropriate subclasses by supervisor or unit.

This opinion is another example of why employers should not get discouraged after an early pre-discovery grant of conditional certification. Even though courts regularly invoke the “lenient standard” at that stage, and sometimes decline to review the defendant’s evidence, all bets are off by the time the factual record is complete and the time for final certification arrives.

Co-authored by Cheryl Luce, Kyla Miller, and Noah Finkel

Seyfarth Synopsis: A recent decision highlights why the FLSA is not always the remedial statute created to protect low-income workers by holding that four commission-based sales representatives, each earning six figures, were not exempt from the overtime requirements because they were not paid on a salary basis.

Our readers are well aware that under the FLSA, employers are required to pay employees overtime equal to time and one-half the regular rate for all hours worked over 40 hours in a workweek unless an exemption applies. When making exempt classification decisions, the focus tends to be on whether employees are doing the kind of work that would satisfy the applicable duties test and whether employees are making enough to satisfy the income thresholds. But the FLSA exemptions don’t concern only how much employees are paid, but also how they are paid. Though sometimes overlooked, technical requirements about how employees are paid can carry the day in a misclassification lawsuit, leaving a trail of decisions that often seem contrary to the purpose set out by the creators of the FLSA. This was one such decision.

This decision illustrates how the FLSA often is applied in a way that is a far cry from what it was originally intended to be: an Act passed during the Great Depression to ensure a living wage for working Americans. In this case, the U.S. District Court for the Eastern District of Tennessee denied the defendants’ motion for summary judgment, finding that four highly compensated sales representatives, who were paid on a commission basis, were not exempt from FLSA’s overtime provisions despite the fact that the plaintiffs each earned well over $100,000 per year. In fact, one sales representative topped out at over $900,000 per year. Across the relevant period, the plaintiffs’ compensation averaged about $470,00 per year.

The defendants argued that the plaintiffs were exempt from overtime wages under the highly compensated employee exception. Under this exemption, the employee must perform office or non-manual work and be paid a total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) and must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee. The defendants argued that even though the plaintiffs were paid by commissions on sales, the highly compensated employee exemption applies because the commissions are “fees,” so they were paid on a fee basis. The plaintiffs argued that the highly compensated employee exemption applies only when employees are paid on a salary basis and that the commissions they received were not “fees.” The court agreed with the plaintiffs, holding that the plaintiffs’ compensation did not meet the highly compensated employee exemption’s salary basis test.

We previously have discussed courts’ construction of the FLSA as “remedial and humanitarian in purpose and must not be interpreted or applied in a narrow, grudging manner.” We have argued that courts apply this construction inconsistently and often illogically. And this case serves as one more challenge to the unsupported dicta that we find in many cases stating that, because the FLSA is “remedial and humanitarian,” its exemptions must be “narrowly construed.” Here, we have employees who are very high earners, with two employees making close to one million dollars in a single year, and whose employer is now forced to pay them additional compensation and liquidated damages (and a fee petition for their lawyers is sure to come next). The court construed the FLSA exemptions against these employees narrowly, and we can discern no remedial or humanitarian purpose that the FLSA is serving here. Rather, this decision reflects the FLSA as a statue riddled with technical traps and rigid rules that do not necessarily serve to ensure a living wage for working Americans.

Authored By Alex Passantino

As we’ve reported previously, among the items the Department of Labor identified earlier this year in its Regulatory Agenda was a Notice of Proposed Rulemaking (NPRM) seeking to rescind portions of a 2011 rule that restricted tip pooling for employers who do not use the tip credit to satisfy their minimum wage obligations. On October 24, 2017, that NPRM was sent to the White House Office of Information and Regulatory Affairs (OIRA) for review and approval. One of the cases challenging the validity of the 2011 rulemaking may be on its way to the Supreme Court, with the Administration’s response to a cert petition due on November 7. With that deadline looming, it’s possible that the Administration is seeking to moot the issue before the Supreme Court has the chance to address some of the issues related to agency deference.

After OIRA clears the NPRM, it will be sent to the Federal Register for the public to provide comments in response to the Department’s proposal. At that time, we’ll know the specifics of the proposal and will be able to provide more guidance on what this means for employers. Stay tuned.