By: Christina Jaremus and Noah Finkel

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

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

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

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

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

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

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

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

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

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

By: Noah Finkel and Scott Hecker

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

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

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

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

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

 

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

Facts

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

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

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

The California Lower Court Decisions

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

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

The United States Supreme Court’s Decision

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

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

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

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

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

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

What Viking River Means for Employers

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

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

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

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

What’s Next

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

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

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

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

Background

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

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

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

What Did The Supreme Court Hold?

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

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

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

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

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

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

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

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

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

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

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

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

What About Other Classes of Workers?

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

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

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

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

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

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

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

Implications For Employers

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

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

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

By: Joseph Hadacek and Josh Rodine

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

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

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

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

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

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

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

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

By: Julia Keenan and Noah Finkel

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

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

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

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

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

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

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

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

By: Kyle Winnick & Andrew McKinley

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

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

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

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

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

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

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

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

 

 

By: A. Scott Hecker and Scott Mallery

Seyfarth Synopsis: On March 30, 2022, the Senate voted down a cloture motion to advance the nomination of Dr. David Weil to return as U.S. DOL Wage and Hour Division (“WHD”) Administrator. This public rebuke – made possible by the defection of Democratic Senators Manchin, Sinema, and Kelly – leaves WHD without a politically-appointed leader for the foreseeable future.  The Biden Administration will need to go back to the drawing board to identify an alternative nominee who is palatable to moderate Democrats, as the party faces down uncertain prospects in the upcoming November midterms.

While perhaps not so terrifying as the Eye of Sauron, the potential enforcement gaze of Dr. David Weil motivated employers to lobby against another round of his leadership at WHD.  Dr. Weil has been a consistently outspoken critic of the gig economy, and he believes most workers should be viewed as employees, rather than classified as independent contractors.

With the economy continuing to claw its way back from the pandemic-related downturn, employers engaged in significant efforts to keep Dr. Weil from returning to the office he occupied during the Obama Administration (which, incidentally, has a magnificent view of the Capitol).  These efforts were rewarded when Senators Manchin, Sinema, and Kelly crossed the aisle to stop Dr. Weil’s nomination in its tracks.  Days later, Dr. Weil formally withdrew from consideration.

Administrations prioritize avoiding such public failings when it comes to their nominees, so we can infer that these “no” votes came as something of a shock to President Biden; indeed, prior scuttled Biden nominees withdrew before landing on the Senate floor.  Of course, Senator Manchin expressed reservations about Dr. Weil previously, and Senator Sinema sits toward the conservative end of the Senate Democrat spectrum, so Senator Kelly’s lack of support was likely the most difficult to foresee.

The next step for President Biden is to lick his wounds and identify a new nominee to lead an agency at the forefront of numerous Administration priorities.  Beyond the gig economy and alleged worker misclassification, WHD is involved in significant rulemakings (e.g., Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees; and Modernizing the Davis-Bacon and Related Acts Regulations), and is working to staff up to execute its enforcement obligations.  Jessica Looman has not appeared hindered by her “Acting” title, but lacking the political heft of Senate confirmation at the top of the organizational chart tends to limit what a government agency can accomplish.  Dr. Weil’s many fans within DOL likely feel some level of demoralization resulting from this outcome as well.

Senate Democrats’ razor-thin majority may not survive midterms, so it could be that WHD remains without a confirmed Administrator for some time to come.  Employers should continue to monitor this leadership void because it will impact WHD’s policy-making and enforcement efforts under the Biden Administration.

For more information on this or any related topic please contact the authors, or your friendly, neighborhood Seyfarth attorney.

By: Emily J. Miller, Molly C. Mooney, Barry J. Miller, and Anthony S. Califano

We invite you to join us for a micro webinar where Seyfarth’s Boston Wage and Hour attorneys will discuss practical takeaways and considerations employers in Massachusetts should be aware of in light of this decision. Read more on the Massachusetts Supreme Judicial Court decision below.

Specific topics covered will include:

  • How employers should revamp payroll systems to operate in a zero-margin-for-error environment
  • How to deal with the settlement of disputed wages claims in the face of automatic multiple damages
  • The potential retroactive effect of the ruling to create liability based on payments that have already been made

Friday, April 8, 202212:30 p.m. to 1:00 p.m. Eastern11:30 a.m. to 12:00 p.m. Central10:30 a.m. to 11:00 a.m. Mountain
9:30 a.m. to 10:00 a.m. Pacific

Speakers
Barry J. Miller, Partner, Seyfarth Shaw LLPMolly C. Mooney, Partner, Seyfarth Shaw LLP

Register Here

 

On April 4, 2022, the Massachusetts Supreme Judicial Court adopted an even more employee-friendly approach to damages for Wage Act violations in the Bay State.  In Reuter v. City of Methuen, No. SJC-13121 (Mass. April 4, 2022), the SJC held that all Wage Act violations trigger treble damages, regardless of whether the employer remedies the violation prior to the employee filing suit.  This decision contradicts longstanding lower court precedent holding to the contrary.  Under the SJC’s holding in Reuter, any employee paid late – for whatever reason and even if remedied – is entitled to three times the total amount of the wages in question.  In short:  honest payroll errors and good faith disputes over what an employee may be owed just got much more expensive.

The Wage Act (M.G.L. ch. 149, § 150) provides that prevailing plaintiffs “shall be awarded treble damages, as liquidated damages, for any lost wages and other benefits and shall also be awarded the costs of the litigation and reasonable attorneys’ fees.”  It also provides that, “[t]he defendant shall not set up as a defen[s]e a payment of wages after the bringing of the complaint.”  Nearly two decades ago, in the first case to address this issue, Dobin v. CIOview Corp., then Superior Court Justice Gants interpreted this provision of the Wage Act to mean that when wages are paid late but before a complaint is filed, the only damages are interest on the delayed payment, trebled.  Since then, Justice Gants’ reasoning has been followed in a number of Superior Court and federal court decisions interpreting this provision of the Wage Act.

But yesterday, the SJC upended that precedent.  In Reuter, the City of Methuen terminated the plaintiff’s employment after she was convicted of larceny.  Three weeks after it terminated plaintiff’s employment, the City paid the plaintiff for her accrued, unused vacation time (totaling roughly $9,000).  Approximately a year later, having lost her bid to challenge her termination in front of the Civil Service Commission, Plaintiff sent the City a demand letter seeking treble damages for the late-paid vacation – plus attorney’s fees.  When the City sent her a check for the trebled interest instead (consistent with the holding of Dobin), the plaintiff filed the instant action.

The SJC determined that because the City of Methuen paid the plaintiff’s final wages late, it was strictly liable and therefore owed treble damages on the delayed wages.  In doing so, the Court rejected the holding in Dobin, and reasoned that “allowing a defense for late payments made before litigation is commenced would essentially authorize, and even encourage, late payments right up to the filing of a complaint.”  The SJC held that the statute imposes strict liability and that “employers rather than employees should bear the cost of such delay and mistakes, honest or not.”  Under the holding of Reuter, employers now have a substantially reduced financial incentive to attempt to settle wage disputes before they are filed in the courts.

This decision carries harsh penalties for inadvertent and potentially unavoidable payroll mistakes.  Under this standard, payroll errors beyond an employer’s control will automatically result in liability for three times the amount of the wages actually owed.  For systemic payroll errors or system outages affecting a large number of employees, this will mean potentially catastrophic liability for payments that are even one day late.  The SJC was unmoved by the draconian nature of these penalties for employers, and instead singularly focused on the impact on employees whose wages may be detained upon termination.

In some respects, these harsh remedies imposed by the Reuter decision are arguably not well calibrated to the mischief that the Court sought to remedy.  First, while the Court repeatedly emphasized consequences that might befall employees from the abrupt interruption of their usual wages, the amount at issue in the case pertained exclusively to vacation pay, and not all employees will have accrued vacation to use as an economic cushion when terminated.  Further, the SJC even identified a means by which employers can avoid immediate payments to an employee who is subject to termination, noting that employers in that situation may need to suspend an employee to buy time to determine their final wages before actually terminating them.  Most employees lawfully can be suspended without pay, leaving an employee in exactly the situation from which the Court sought to protect the plaintiff in Reuter – having her stream of income interrupted.  An employee might be left in that limbo status for an extended period of time before the termination was formalized and final wages paid, and such a circumstance seems no better for the employee than the harm that troubled the Court.

As if treble damages for inadvertent payroll errors is not harsh enough, in his concurrence, Justice Georges also highlighted the Wage Act’s provision authorizing those aggrieved to recover “any damages incurred, and for any lost wages.”  Under Justice Georges’ reading of the Wage Act, plaintiffs are entitled to consequential damages in addition to treble their late-paid wages.  He suggests plaintiffs who “face catastrophe due to an employer’s withholding of wages” should be able to recover for those damages, citing hypothetical instances in which employees may miss mortgage or tuition payments and seek to hold their employers responsible for such consequences.  The majority did not take a position on this issue, as it was not properly before the Court in Reuter.

It remains to be seen whether the holding will be applied retroactively, but if so, it will impact ongoing litigation and past disputes.  For purposes of avoiding future liability, employers in the Commonwealth should take all available steps to minimize the potential for payroll errors or delays, including creating contingency plans for unavoidable and unexpected payroll issues.

By: John R. Skelton, Anthony Califano, Keval D. Kapadia

Introduction

On March 24, 2022, the Massachusetts Supreme Judicial Court (“SJC”) issued a much-anticipated decision in Patel, et al. v. 7-Eleven, Inc., et al. answering a certified question from the United States Court of Appeals for the First Circuit concerning the application of the Massachusetts independent contractor law (“ICL”) to franchise relationships.  The SJC found there is no conflict (and thus no preemption) between the “freedom from control” requirement under Prong A of the ICL and the Federal Trade Commission (“FTC”) Franchise Rule (the “FTC Franchise Rule”) which includes franchisor control as a potential element of a franchise relationship.

While some may see the SJC’s ruling as a boon for potential franchise misclassification claims, the SJC was careful to limit the scope of the ruling and actually offers useful guidance for franchisors.  First, the SJC confirmed the importance and protection of legitimate franchise relationships. Second, and significantly, it made clear that before any consideration of the ICL’s three prongs, there is a threshold question: a franchisee claiming to be a misclassified employee must first establish that the franchisee is an “individual performing any service” for the franchisor.  Patel v. 7-Eleven, Inc., No. SJC-13166, 2022 WL 869486, at *1 (Mass. Mar. 24, 2022). This is significant because franchisors don’t pay franchisees for services. Rather, franchisees pay franchisors, commonly through an upfront fee and ongoing royalties, for a license to use the franchisor’s trademarks and business format to operate an independent business associated with the franchisor’s brand.  Indeed, as defined under both the FTC Franchise Rule and various state franchise relationship laws, a “franchise” (and thus a franchise relationship) is an ongoing commercial relationship where a franchisee operates an independent “business” associated with the franchisor’s trademark.  Thus, this threshold providing services question should mean that for franchisors with true franchise relationships where franchisees operate independent businesses (as opposed to those designed to evade wage and hour laws) the ICL’s three–prong test simply will not apply.

Case Background and Decision

The Massachusetts ICL establishes a three-pronged “ABC” test to determine whether someone is an employee or an independent contractor. If an individual performs services for the putative employer, the ICL presumes employment status, which the putative employer can overcome by establishing:

  1. the individual is free from control and direction in performing services;
  2. the service performed is outside of the putative employer’s usual course of business; and
  3. the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

In Patel, several 7-Eleven franchisees allege they are actually employees misclassified as independent contractors.  See Patel v. 7-Eleven, Inc., 8 F.4th 26, 28 (1st Cir. 2021). On cross motions for summary judgment, citing Monell v. Boston Pads, LLC, 471 Mass. 566 (2015), the Federal District Court found that the ICL did not apply to a franchisor / franchisee relationship because “there is an ‘inherent conflict” between Prong A which requires the “worker” be “free from control in connection with the performance of the service” and the FTC Franchise Rule which contemplates a franchisor will “exert or [have] authority to exert a significant degree of control over the franchisee’s method of operation . . . .” Patel v. 7-Eleven, Inc., 485 F. Supp. 3d 299, 309 (D. Mass. 2020).  Plaintiffs appealed.  Focusing on that conflict, the First Circuit certified the following question:  “[w]hether the three-prong test for independent contractor status set forth in [G. L. c. 149, § 148B,] applies to the relationship between a franchisor and its franchisee, where the franchisor must also comply with the FTC Franchise Rule [16 C.F.R. § 436.1, et seq.].”  Patel, 8 F.4th at 29.  The Court of Appeals recognized the broader policy implications at stake, noting, in its certified question: there are “unique policy interests at stake,” the resolution of which impacts “untold sectors of workers and business owners across the Commonwealth.” Id. The SJC also saw the significant policy implications and took the opportunity to offer additional guidance which actually offers significant protections for franchisors. Patel, 2022 WL 869486 at *9.

On the conflict question, the SJC noted the importance of proper classification and how the ICL reflects “the Legislature’s broad, remedial intent ‘to protect workers by classifying them as employees, and thereby grant them the benefits and rights of employment, where the circumstances indicate that they are, in fact, employees.’”  Id. at *3 (quoting Depianti v. Jan-Pro Franchising Int’l, Inc., 465 Mass. 607, 620 (2013)).  Excluding franchise relationships from the ICL could potentially “permit employers to evade obligations under the wage statutes merely by labeling what is actually an employment relationship as a “franchise” relationship.” Patel, 2022 WL 869486 at *9.

The SJC ultimately found no conflict because the FTC Franchise Rule “is a pre-sale disclosure rule” that “does not regulate the substantive terms of the franchisor-franchisee relationship.” Id. at *6.  Given the FTC definition of a franchise, the SJC found that “control” is not necessarily the defining element because a franchisor can either exert “a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation”.  It could be just “significant assistance” to the franchisee.

Even where the franchisor chooses to exercise control over the franchisee’s method of operation, however, the SJC found that the FTC Rule disclosure obligations “do not run counter to proper classification of employees and, importantly, does not necessary make the franchisee an employee under Prong A.”  Id. at *6-7.  “Indeed, ‘significant control’ over a franchisee’s ‘method of operation’ and ‘control and direction’ of an individual’s ‘performance of services’ are not necessarily coextensive,” the SJC reasoned.  Id. at *7 (quoting Goro v. Flowers Foods, Inc., No. 17-CV-2580 TWR (JLB), 2021 WL 4295294 (S.D. Cal. Sept. 21, 2021)).  Similarly, the SJC noted that the “controls required under the Lanham Act, 15 U.S.C. § 1064(5)(A),” also do not preclude compliance with the first prong of the ABC test.  Patel, 2022 WL 869486, at *7 n.16.

Finally, the SJC dismissed both the franchise industry’s concern that a literal application of the ICL prongs would render virtually all franchisees employees and any thought of the “apocalyptic end of franchise arrangements.” Id. at *8.  Signaling an opportunity for franchisors to defend the legitimacy of their business models and the resulting franchise relationship, especially through the now clearly applicable threshold providing services question, the SJC noted that “any analysis of whether the ABC test is met must be done on a case-by-case basis”, citing numerous cases where franchise relationships were found to satisfy the three prongs of the ICL.  Id. *8 n.17.

Patel provides a roadmap for franchisors defending misclassification claims.

The SJC made clear that application of the ICL to franchise relationships would not “result in every franchisee being classified as an employee of the franchisor”. Id. at *9.  This was obviously important given the recognition by the First Circuit that there are “unique policy interests at stake” which impacts “untold sectors of workers and business owners across the Commonwealth.”  Patel, 8 F.4th 29. The SJC’s decision, especially the additional guidance, provides a roadmap for franchisors facing misclassification claims.

Patel recognizes and protects legitimate franchise relationships.

First, Patel confirms that nothing in the ICL prohibits legitimate franchise relationships that have not been created to evade obligations under the wage statutes.  Patel, 2022 WL 869486 at *9.  The SJC quotes a Massachusetts Attorney General Advisory Opinion which expressly states “there are legitimate independent contractors and business-to-business relationships in the Commonwealth [which] . . . are important to the economic wellbeing of the Commonwealth and, provided that they are legitimate and fulfill their legal requirements, they will not be adversely impacted by enforcement of the [ICL].”  Id. (citing Advisory 2008/1 at 5) (emphasis added).  While the Court did not want a blanket exemption leading to putative employers seeking to avoid the ICL simply by labeling relationships as a franchise, the underlying message of the decision is that legitimate franchise relationships are valid and are to be protected.

The SJC’s endorsement of legitimate franchise relationships is important because franchising is a “ubiquitous, lucrative, and thriving business model” which has “existed in this country in one form or another for over 150 years.” Patterson v. Domino’s Pizza, LLC, 333 P.3d 723, 725, 733 (Cal. 2014).  Maybe the most common form of franchising is business-format franchising (e.g., restaurants, hotels, gyms, and convenience stores) where the franchisee buys the right to use the franchisor’s trademarks, service marks, trade names, logos, proprietary business format, and methods to establish and operate their own independent business.  See id. at 733 (“Under the business format model, the franchisee pays royalties and fees for the right to sell products or services under the franchisor’s name and trademark.”).  As noted, the FTC Franchise Rule embodies the notion that franchisees are not “workers” but rather individuals who want to own and operate their own independent businesses. See 16 C.F.R. § 436.1(h)(1) (franchise is a “continuing commercial relationship or arrangement” where the franchisee obtains “the right to operate a business that is identified or associated with the Franchisor’s trademark”) (emphasis added).  Indeed, a franchisee is “an entrepreneurial individual who is willing to invest his time and money, and to assume the risk of loss, in order to own and profit from his own business.”  Patterson, 60 Cal. 4th at 490 (emphasis added).  Instead of opening a non-branded convenience store, restaurant, hotel, or other retail business, franchisees see the benefit of using the franchisor’s “brand” and business format because it provides the franchised business instant credibility, a customer base, and the “good will” associated with the franchisor’s brand.  The SJC recognizes franchising as a legitimate business model that is to be protected.

Franchisees must prove they are an “individual providing any service” to the Franchisor and not operating an independent business.

Second, and most significantly, the SJC confirmed that before any consideration of the individual ICL prongs, there is a threshold question that should render the ICL inapplicable to legitimate franchise relationships.  As the Court held, “distinguishing between legitimate arrangements and misclassification requires examination of the facts of each case, which begins with a threshold determination whether the putative employee ‘perform[s] any service’ for the alleged employer.” Patel, 2022 WL 869486 at *9 (citing G. L. c. 149, § 148B) (emphasis added).  In the franchisor -/- franchisee context, this threshold determination should turn on whether the franchisee is actually operating an independent business, or the franchise relationship is a subterfuge to outsource workers by classifying them as independent contractors instead of employees. Id. (citing Sebago v. Boston Cab Dispatch, 471 Mass. 321, 329-331 (2015)).

Significantly, the putative employee challenging the nature of the franchise relationship carries the burden of proof on this threshold question.  Also, per the SJC, the franchisee cannot meet that burden merely by showing there is a mutual economic benefit between the franchisor and franchisee which, of course, is the case.  Patel, 2022 WL 869486 at *9.  Similarly, mere compliance with relevant regulatory obligations by the franchisor is also not dispositive of the “performs any service” question.  Id.

This threshold independent business -/- providing services question actually has been central to many cases.  See, e.g., Athol Daily News v. Bd. Of Rev. Of Div. Of Emp. And Training, 439 Mass. 171, 181, 786 N.E.2d 365 (2003) (Court needs to determine “whether the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.”); Boston Bicycle Couriers, Inc. v. Deputy Director of the Div. of Employment & Training, 56 Mass.App.Ct. 473, 480, 778 N.E.2d 964 (2002).  See also Sebago, 28 N.E.3d at 1149 (holding that the trial court erred in failing to award summary judgment to defendant taxi garages where the record showed plaintiffs received service from, and did not provide services to, garages); Gallagher v. Cerebral Palsy of Massachusetts, Inc., 86 N.E.3d 496, 501 (Mass. App. Ct. 2017) (“Gallagher did not provide services to CPM and cannot be deemed its employee for the purpose of the Wage Act or the overtime statute.”).  Further, while decided in the context of the ABC prongs, Awuah v. Coverall N.A., Inc., 707 F. Supp. 2d 80 (D. Mass. 2010) and Coverall N.A. Inc. v. Comm’r of Div. of Unemployment Assistance, 447 Mass. 852, 857 N.E.2d 1083 (2006) also turned on this threshold question.  In each case, the courts concluded, based on the actual relationship and business structure, that the franchisees were not operating independent businesses but instead providing cleaning services for their franchisors.  Because Coverall provided the initial equipment and supplies; solicited and contracted directly with customers; set prices; invoiced customers and collected payments; and paid the putative franchisees after deducting fees, the Awuah and Coverall courts concluded those franchisees were not operating true independent businesses but rather were simply being paid for the cleaning services they were providing. Awuah, 707 F. Supp. 2d at 84; Coverall N.A. Inc., 447 Mass. at 859.

Even though the franchisee has the burden of proof on this threshold question, franchisors should be prepared to demonstrate how and why their franchisees are operating independent businesses. Franchisors should take the opportunity to review their presale disclosures, franchise agreements, and operations manuals and policies, to make sure that nothing reflects that franchisees are providing services and instead confirm that the franchisee is operating an independent business.  Franchisors should have a robust presale disclosure and acknowledgment concerning the nature of the relationship, including that the franchisee, by executing the franchise agreement is agreeing to establish and operate an independent business, the success of which depends on, among other things, the franchisee’s individual entrepreneurial ability. The specific terms of the franchise agreement will also be important, especially the franchisee’s authority and responsibility to manage and control customer relationships, pricing, profits, etc. All should demonstrate that when franchisees execute the franchise agreement they are not applying for a job, but rather entering into a commercial relationship pursuant to which they will establish and operate their own business.

Patel also offers useful guidance beyond the franchisor-franchisee relationship.

The threshold question of whether the individual claimant is performing services for the putative employer is not unique and certainly not limited to franchisor-franchisee relationships.  Patel reflects that various business arrangements involving legitimate independent contract relationships may indeed satisfy the ICL.

Also, while the ICL is intended to protect Massachusetts workers and provides a presumption of employment status once applicability is determined, Patel confirms that the considerations under the ABC prongs are more nuanced than many suggest.  Indeed, because the ABC test involves intricate, fact-specific inquiries, Patel recognizes that businesses establishing proper independent contractor arrangements can prevail under each prong of the ICL’s ABC test.

As an example, the SJC acknowledges that the specific nature of the control being exerted matters, and not all control precludes a finding of an independent contractor relationship.  While “control and direction in connection with the performance of the service” may reflect an employment relationship, the Patel decision confirms such control is distinct from control over a worker’s “method of operation.”  Patel, 2022 WL 869486 at *7.  According to the SJC, these two types of control “are not necessarily coextensive.”  Id.  Patel indicates that a business can exert control over the method of operation, and perhaps in other areas, and still satisfy prong A. Id.

Patel also reflects that neither prong B nor C is an insurmountable obstacle to a finding of a valid independent contractor relationship.  In a lengthy footnote, the SJC acknowledges, without criticism, numerous decisions where franchisors were held to have satisfied prongs B and C. Id. at *8. While those cases involved franchise arrangements, the Court’s rationale and observations should apply to other independent contractor business relationships.  Because “distinguishing between legitimate arrangements and misclassification requires examination of the facts of each case,” id. at *9, Patel reflects that businesses in Massachusetts—even those involving certain elements of control, synergy, and reliance—can establish legitimate independent contractor relationships.

John Skelton is co-chair of Seyfarth’s Franchise and Distribution Practice Group, Anthony  Califano is a partner in the firm’s Labor and Employment department and routinely represents clients concerning employee classification. Keval Kapadia, is an associate and a member of the Franchise Practice Group.