By: Kevin Young

Seyfarth Synopsis: On January 8, the U.S. DOL’s Wage & Hour Division issued an opinion letter confirming the exempt status of Account Managers at a life sciences manufacturing company under the FLSA’s administrative exemption. The letter offers useful guidance to employers assessing this notoriously murky exemption, as well as potential ammunition for those defending the exempt status of similar roles.

While job title alone does not determine exempt status under the FLSA, certain titles tend to carry preconceived notions with them. Sometimes, these notions are associated with a clear view of exempt status, for instance in the case of a CEO (exempt) or a Janitor (not so much). More often, however, the most ubiquitous titles across industries are associated with less certainty and a greater need for inspection. It’s hard to think of a better example than a title like “Account Manager.”

Account Manager roles are a common focus for employers, their advocates, and the plaintiffs’ attorneys circling the wage and hour waters. A leading reason for this is that the exempt status of these jobs typically turns on the applicability of the FLSA’s administrative exemption. The administrative exemption is the Act’s greyest exemption—it includes phrases like “the exercise of discretion and independent judgment with respect to matters of significance”—and is thus a magnet for litigation. In addition, these roles have been attacked by some who argue that Account Managers perform “inside sales” work, which is generally not regarded as exempt work..

On January 8, 2021, the U.S. Department of Labor’s Wage & Hour Division weighed in on the exempt status of Account Managers at a life sciences manufacturing company, finding the role was properly classified under the administrative exemption despite performing sales-related work. Though fact-intensive and not binding on federal courts, the opinion letter offers useful insight, and potential ammunition, for employers seeking to defend the exempt classification of similar roles.

So what were these Account Managers doing? In short, they performed a consultative function with potential clients, working to understand and assess their needs and identifying product solutions to meet those needs. The Account Managers worked to learn about the needs of potential clients, analyze what products would meet those needs, and communicate with the potential clients about how the company’s products can fulfill those needs. They were neither closely supervised nor scripted in carrying out their work—they had discretion in deciding how to engage with potential clients.

On these facts, WHD concluded that the Account Managers met the duties requirements of the FLSA’s administrative exemption. Those requirements include that the employee’s primary, or most important duty, must: (1) be non-manual or office work generally related to the management or general business operations of the employer or its clients; and (2) include the exercise of discretion and independent judgment with respect to important matters.

With respect to the first requirement, WHD referred to the so-called “administrative-production” dichotomy, finding that Account Managers fell on the management or administrative side of the business, which is suitable for exempt status, rather than the production side, which is not. The Account Managers developed relationships with target customers—typically high-level professionals—in order to facilitate the sales process and weighed in on which products were likely to satisfy their needs. They represented the company with respect to those prospects. Likening the role to those deemed exempt by various federal circuit courts in cases involving pharmaceutical sales representatives and hotel sales managers, WHD concluded that the Account Managers’ work “promoting sales through a sophisticated consultative marketing process … is not ‘production’ work, and is instead related to the management of [the company’s] operations.”

As for the other duties-based requirement—the exercise of discretion and independent judgment with respect to significant matters—WHD observed that the Account Managers were given wide latitude in deciding how to promote products to potential customers, as well as what products to market to which prospects. Though they received training on sales techniques, it was up to them to develop account plans and strategies with minimal supervision and to develop relationships with potential customers. The Account Managers’ independence in carrying out these types of tasks sufficed, according to the Division, to demonstrate the requisite judgment and discretion.

It’s important to note that opinion letters are provided in response to fact-specific circumstances and are generally regarded as persuasive, rather than binding, authority. Moreover, with a new administration en route to Washington, D.C., a withdrawal or revision of various DOL guidance, including WHD opinion letters, is certainly possible.

By: Ryan McCoy

Seyfarth Synopsis: Following the Federal Motor Carrier Safety Administration’s determination in December 2018 that federal law preempts California’s meal and rest break rules, observers questioned whether California courts would find that the preemption was valid.  Shortly after the determination was issued, the State of California and several other groups appealed directly to the Ninth Circuit, arguing the federal agency overstepped had its authority.  On January 15, 2021, a panel of the Ninth Circuit Court of Appeals published its decision, ruling that the FMCSA’s preemption determination, as applied to drivers of property-carrying commercial motor vehicles, was valid.  Employers should still proceed with caution, however, as this decision is still subject to further review and appeal, and regardless of what happens in the courts, the Biden Administration may seek to unravel the preemption determination.

The FMCSA’s Preemption Determination:

On December 21, 2018, the FMCSA concluded that the federal Motor Carrier Safety Act (the “Act”) preempts California’s meal and rest break rules when a driver is subject to federal hours-of-service requirements.  The FMCSA found that California’s rules “are incompatible with the federal hours of service regulations and that they cause an unreasonable burden on interstate commerce.”  Consequently, “California may no longer enforce the [state meal and rest break rules] with respect to drivers of property-carrying [commercial motor vehicles] subject to FMCSA’s [hours of service] rules.”  Given the ramifications of this preemption determination, observers question whether, and to what extent, California courts would defer to the federal agency’s determination in future meal and rest break cases brought by drivers.  Indeed, the determination is at some odds with the Ninth Circuit 2014 decision in Dilts v. Penske, which held that the Federal Aviation and Administration Authorization Act does not preempt California state law mandating meal and rest breaks for drivers.

Shortly after the FMCSA’s determination was issued, the State of California and several other groups filed petitions to challenge its authority to invalidate California’s rules.  While the appeal was pending before the Ninth Circuit, in 2019, California courts began applying the FMCSA’s preemption determination to dismiss drivers’ meal and rest period claims.  As these rulings came down, observers still waited for the Ninth Circuit to weigh in on the validity of the FMCSA’s preemption determination.

The Ninth Circuit Finds the FMCSA’s Preemption Determination Deserves Deference and is Reasonable and Neither Arbitrary nor Capricious.

The issues presented on appeal were whether federal law preempts California’s state meal and rest break claims, or whether the FMCSA exceeded its authority in issuing the preemption determination.

First, the Ninth Circuit’s decision finds the FMCSA has the authority, under the Act, to review for preemption any state laws and regulations “on commercial motor vehicle safety.”  Finding this phrase ambiguous, the Ninth Court ruled that the FMCSA’s interpretation of the Act was entitled to deference.  Still, because the same agency in 2008 had interpreted the same phrase differently (such that the meal and rest break rules were not preempted), the FMCSA had to explain why it changed its mind on the same preemption subject ten years later.

Addressing the charge of inconsistency, the FMCSA reasoned in 2018 that the phrase was one that “imposes requirements in an area of regulations that is already addressed by a regulation” under the Act, such as the federal hours-of-service regulations.

The fact that California regulated meal and rest breaks, regardless of industry, did not negate the FMCSA’s finding that the meal and rest break rules still were “on commercial motor vehicle safety.”  Indeed, many observers had suspected the Ninth Circuit may find difficulty in upholding the new preemption determination because of its recent case law holding that federal law did not preempt meal and rest break rules in light of the general application of those rules.  Here, the Ninth Circuit found the FMCSA permissibly determined that the meal and rest break rules were state regulations “on commercial motor vehicle safety,” and therefore within the agency’s authority to find preempted under the Act.  The Ninth Circuit distinguished its 2014 decision in Dilts v. Penske Logistics, LLC, which found no preemption arising from the FAAAA, an entirely different statute than the Motor Carrier Safety Act, and which prohibits state laws that are “related to” prices, routes, or services of commercial motor vehicles.  Dilts also involved short-haul drivers who were not covered by the federal hours-of-service regulations.

Finally, the Ninth Circuit’s decision held that the Act permits the FMCSA to find preemption where the state rules were “additional to or more stringent than” the federal regulations.  On this point, because California law requires more breaks, more often, and provides less timing flexibility than one sees under federal law, the FMCSA’s determination was reasonable and supported.  As a result, the Ninth Circuit dismissed the State of California’s arguments that the FMCSA acted arbitrarily or capriciously in finding that enforcement of the meal and rest break rules “would cause an unreasonable burden on interstate commerce.”

Employers Still Should Proceed With Caution Before Changing Their Current Meal and Rest Break Practices In California

While the Ninth Circuit’s decision is welcome news to employers of drivers subject to federal rules, employers still should, as always, proceed with caution in California.  The decision itself could be subject to a rehearing en banc by the full Ninth Circuit, where its fate would be uncertain.  Even if this decision stands at the Ninth Circuit, the Supreme Court could be asked to weigh in on the issues raised by the appeal, including whether the FMCSA’s determination is subject to Chevron deference.  (Justice Gorsuch is an avowed opponent of Chevron deference and may be influential in the next Supreme Court decision addressing it.)  Additionally, the Biden Administration, decidedly more favorable to the interests of employees and unions than the prior administration, may work to undo the preemption determination that was rolled out in December 2018.

As a result, the issue of whether drivers are subject to California’s meal and rest break rules remains in flux.  There also is the ever-present question of whether this preemption determination would have retroactive application, such that pre-December 2018 claims would be barred.  In any event, employers should continue to keep their eye on this developing area of law, especially given the ramifications that preemption (or no preemption) of California’s meal and rest break rules would have on many employers’ policies and practices, and given the consequences of not complying with these rules, when required.

By: Eric M. Lloyd & Pamela L. Vartabedian

Seyfarth Synopsis: In a unanimous decision, the California Supreme Court held that the worker friendly “ABC” test set forth by the Court in its 2018 landmark ruling, Dynamex Operations West, Inc. v. Superior Court, applies retroactively. The ABC test thus applies to all pending cases governed by the California Wage Orders in determining whether a worker is an independent contractor or an employee. Vazquez v. Jan-Pro Franchising Int’l, Inc.

The Facts

Jan-Pro Franchising, International, Inc. is a franchisor whose franchisees offer cleaning and janitorial services. In May 2017, the U.S. District Court for the Northern District of California granted Jan-Pro summary judgment in a case brought by independent contractor franchisees claiming they should have been treated as Jan-Pro employees. The plaintiffs then appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit.

While the appeal was pending, the California Supreme Court issued its decision in Dynamex. In Dynamex, the high court held that, for purposes of claims arising from the California Industrial Welfare Commission’s Wage Orders, the “ABC” test governs whether workers are properly classified as independent contractors rather than employees. To satisfy the ABC test, a hiring entity must prove: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. Dynamex represented a major shift in the law in the eyes of many businesses, practitioners, and courts, who presumed (incorrectly, as explained below) that the multi-factor common law test for employment articulated in a 1989 California Supreme Court case, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, governed the classification question where the Wage Orders were at issue.

On May 2, 2019, the Ninth Circuit vacated the summary judgment ruling for Jan-Pro entered prior to Dynamex, holding that Dynamex applied retroactively, and remanded the case for further proceedings. Then, on September 24, 2019, the Ninth Circuit asked the California Supreme Court to determine whether Dynamex applied retroactively.

The California Supreme Court’s Decision

On January 14, 2021, the California Supreme Court held that the Dynamex decision applies retroactively to its April 30, 2018, publication in all cases currently pending. The Supreme Court based its decision on two grounds.

First, the California Supreme Court emphasized that the misclassification test applicable to Wage Order claims was a question of first impression, rather than a settled rule. The Wage Orders define the term “employ,” in part, to mean “suffer or permit to work.” But the Wage Orders do not define the term “independent contractor,” nor do they address the distinction between workers entitled to the protections of the Wage Orders and independent contractors who are not. Dynamex represented the first time the Supreme Court explicitly ruled on the meaning of the “suffer or permit to work” language in the Wage Orders in the context of independent contractors. Because Dynamex did not overrule a prior Supreme Court decision nor disapprove any prior Court of Appeal decision, the Supreme Court held that Dynamex applied retroactively.

Second, the Supreme Court found no reason to depart from the general rule that judicial decisions apply retroactively. Jan-Pro, backed by numerous business groups, argued that in classifying workers as independent contractors it reasonably relied on the multi-factor common law test set forth in Borello, and businesses could not reasonably have anticipated that the ABC test would apply. The Supreme Court was not persuaded. The Supreme Court noted that Borello was not a Wage Order case and that the Supreme Court in two cases had expressly declined to rule on whether Borello applied to Wage Order claims. Moreover, the Supreme Court rejected the contention that litigants must have foresight of the exact rule that a court ultimately adopts in order for the rule to have retroactive effect. The Supreme Court then went on to state that because the ABC test drew on the factors set forth in Borello, its retroactive application was within the scope of what businesses reasonably could have expected. The Supreme Court also claimed that fairness and policy considerations justified retroactive application of Dynamex, as some workers would be denied the protections of the Wage Orders if Dynamex applied only prospectively.

What Vazquez Means For Businesses

Dynamex was characterized as a sea change in the law by its proponents and its detractors alike. Vazquez, however, insists that it was not, as the California Supreme Court suggests that businesses reasonably could have foreseen that the ABC test applied to Wage Order claims all along. While reasonable minds will disagree with that suggestion, what is clear is that businesses must comply with an increasingly complex web of statutory and case law governing independent contractor relationships in California.

As a result of Vazquez, the ABC test applies to all independent contractor misclassification-related claims arising from the Wage Orders arising prior to 2020, while the Borello test applies to non-Wage Order misclassification-related claims arising during the same time period. And, as of January 1, 2020, when California’s infamous Assembly Bill No. 5 (“AB 5”) took effect, the ABC test applies to all independent contractor misclassification-related claims arising from the California Labor Code, as well as Wage Order claims—that is, unless a business can find comfort in one of the myriad occupation-based exemptions from the ABC test set forth in Assembly Bill No. 2257 (which recently repealed and replaced AB 5) applies. App-based transportation and delivery drivers may also be exempted from the ABC test with the passage of Proposition 22 in November 2020.

If you have questions regarding the Vazquez decision or would like further information, please contact Eric Lloyd (elloyd@seyfarth.com) or Pamela Vartabedian (pvartabedian@seyfarth.com).

By: Tim Watson, Brian Wadsworth, and John Phillips

Seyfarth Synopsis: In an important decision for employers, the Fifth Circuit Court of Appeals rejected the all-too lenient but commonly accepted Lusardi standard for conditional certification under the FLSA. In its place, the court adopted a more practical, common sense approach in deciding whether trial courts should send notice to past and current employees advising them that a lawsuit against their employer has been filed and that they have the right to join or “opt into” the lawsuit. Instead of Lusardi’s modest factual showing that other employees are “similarly situated” to the plaintiff, the court held that before allowing notice to be sent, a trial court should (1) decide what facts and legal questions are material to the “similarly situated” analysis; (2) authorize preliminary discovery on these issues; and (3) analyze all available evidence to determine whether the employees and the plaintiff are similarly situated, including “merits-based” evidence (which under Lusardi courts typically do not consider). This case marks an important win for employers and is a must read for anyone facing an FLSA collective action in the Fifth Circuit (or elsewhere).

On January 12, 2021, the Fifth Circuit issued a significant opinion in Swales v. KLLM Transport Services, L.L.C. that drastically alters the landscape of wage and hour litigation in the Fifth Circuit. The two-step Lusardi approach, which ignores the “merits” of the case at the conditional certification stage, no longer applies. Instead, courts must initially determine the facts and legal questions material to the “similarly situated” analysis early in the case and allow discovery directed towards these issues, including “merits-based” issues. The court may then analyze those “merits-based” issues in reaching a determination as to which potential opt-in plaintiffs are similarly situated to the plaintiff. This is significant because it counters the oft-used mantra from plaintiffs’ counsel that the “merits” of the case are irrelevant to conditional certification. In other words, the Swales decision gives employers the ammunition to fight back at the conditional certification stage.

Setting the Stage

The onslaught of collective actions against employers under the FLSA, which continues to grow, has been fueled in part by the relatively low standard for obtaining conditional certification under Lusardi. Unlike opt-out class actions under Rule 23 of the Federal Rules of Civil Procedure, plaintiffs’ counsel often are able to obtain conditional certification before any discovery takes place and without the need for expert witnesses. In fact, in 2020, the plaintiffs’ bar won 84% of conditional certification motions (231 out of 274), a higher percentage of successful conditional certification motions than in any of the past 15 years. Thus with the Lusardi standard, Plaintiffs’ counsel are able to pursue lucrative cases with little up-front investment.

Moreover, once certification is granted, there are real consequences for employers. Court-sanctioned notice of the case must be sent to past and current employees advising them of their right to join the case, which, given the relative size of the population to be notified, can be very disruptive in addition to creating significant exposure. As a result, employers face enormous pressure early in wage and hour cases to reach a settlement—before a case is conditionally certified and before notice goes out.

But nothing in the FLSA requires that conditional certification be so routine. In fact, nothing in the FLSA mentions conditional certification (or certification for matter) at all; the entire concept is a court-creation. Rather, the FLSA permits employees to sue for unpaid minimum wage and overtime compensation, and it states that the lawsuit may be brought “by any one or more employees for and in behalf of himself or themselves and other employees similarly situated.” It also requires that each plaintiff who joins the case file a written consent to join. There is no mention of conditional certification or mailing notice of the case to putative collective members.

The Lusardi Framework

So where did conditional certification come from? It was created by federal courts to manage wage and hour litigation. And because there are few appellate court decisions on the issue—and even fewer Supreme Court decisions—the result is a hodgepodge of district court decisions that rely on shifting standards with predictably diverse (and sometimes contradictory) outcomes.

A little history: in 1989, in the seminal Hoffmann-La Roche, Inc. v. Sperling decision, the U.S. Supreme Court held that courts have discretion (within limits) to send notice of a collective action to potential opt-in plaintiffs. But the Court also cautioned that a district court’s “intervention in the notice process” cannot devolve into “the solicitation of claims.” And the Court instructed district courts to “avoid even the appearance of judicial endorsement of the merits of the action.” Since Hoffmann-La Roche, the Supreme Court has not provided additional guidance on the issue.

Without guidance from the text of the FLSA or higher courts, district courts have searched for the right approach. They have largely settled on two general approaches: the Lusardi ad hoc approach (from the District of New Jersey’s 1987 decision in Lusardi v. Xerox Corporation) and the Shushan approach (from the District of Colorado’s Shushan v. University of Colorado decision). The overwhelming majority of courts—including most courts in the Fifth Circuit—have used some form of the Lusardi approach.

Under the Lusardi approach, courts apply a two-step “ad hoc” process to determine whether FLSA plaintiffs are “similarly situated” under the FLSA. At stage one, i.e., conditional certification, the court looks at whether the proposed collective members are similarly situated enough to receive notice. This stage is often based solely on the pleadings and some affidavits, and courts typically require nothing more than “substantial allegations that the putative [collective] members were together the victims of a single decision, policy, or plan.” Courts also take great pains not to delve into the merits and routinely credit plaintiffs’ assertions, even when those assertions are not based in evidence. As a result, conditional certification is often granted.

Stage two of Lusardi approach typically takes place after discovery has been completed. At that point, the defendant may move to “decertify” the collective, and the court applies a stricter test to determine whether the named plaintiff and opt-in plaintiffs are sufficiently similarly situated to proceed together as a collective at trial. If the court decides the plaintiffs are not similarly situated, it dismisses the opt-in plaintiffs leaving only the original named plaintiff’s claims.

The second test (the Shushan test) borrows concepts from class actions under Rule 23 and looks at numerosity, commonality, typically, and adequacy of representation when deciding whether to certify the collective. As mentioned above, the majority of district courts across the country have adopted some version of the Lusardi approach (rather than the Shushan test); although the actual application differs from court-to-court and even judge-to-judge.

The Fifth Circuit’s Decision

Over the years the Fifth Circuit has taken great pains not to endorse (or reject) the Lusardi framework. This changed with the Fifth Circuit’s recent decision in Swales v. KLLM Transport Services, L.L.C. In a lively and engaging opinion, the Court went through the history of conditional certification, examined the text of the FLSA, and analyzed the Supreme Court’s Hoffmann-La Roche decision. After doing so, the Court rejected the Lusardi approach (and the Shushan approach) and set out a new test.

First, the Court explained that “Lusardi frustrates, rather than facilitates, the notice process.” And the Court pointed out that “[t]he use of ‘Lusardi’ or even collective-action ‘certification’ has no universally understood meaning.” Accordingly, the approach provides district courts with little guidance.

Second, the Court concluded that Lusardi does not comport with the text of the FLSA. The FLSA says nothing about “conditional certification,” and the Fifth Circuit refused to read the Lusardi approach into the FLSA. The Court explained:

Two-stage certification of § 216(b) collective actions may be common practice. But practice is not necessarily precedent. And nothing in the FLSA, nor in Supreme Court precedent interpreting it, requires or recommends (or even authorizes) any “certification” process. The law instead says that the district court’s job is ensuring that notice goes out to those who are “similarly situated,” in a way that scrupulously avoids endorsing the merits of the case. A district court abuses its discretion, then, when the semantics of “certification” trump the substance of “similarly situated.”

The Court explained that the refusal to look at the “merits” under the Lusardi approach ignores the requirement under the FLSA that plaintiffs be similarly situated and leads courts to certify collective actions of putative collective members that are not similarly situated.  The Court stated:

Considering, early in the case, whether merits questions can be answered collectively has nothing to do with endorsing the merits. Rather, addressing these issues from the outset aids the district court in deciding whether notice is necessary. And it ensures that any notice sent is proper in scope—that is, sent only to potential plaintiffs. When a district court ignores that it can decide merits issues when considering the scope of a collective, it ignores the “similarly situated” analysis and is likely to send notice to employees who are not potential plaintiffs. In that circumstance, the district court risks crossing the line from using notice as a case-management tool to using notice as a claims-solicitation tool. Hoffmann-La Roche flatly forbids such line crossing.

Accordingly, the Court rejected the Lusardi approach and set out a completely different test for conditional certification:

[A] district court should identify, at the outset of the case, what facts and legal considerations will be material to determining whether a group of “employees” is “similarly situated.” And then it should authorize preliminary discovery accordingly. The amount of discovery necessary to make that determination will vary case by case, but the initial determination must be made, and as early as possible.

And the Court made clear that a district court should consider all of the evidence available when deciding whether and to whom notice should be issued. In short, the Fifth Circuit set out the following framework: (1) courts should decide what facts and legal questions will be material to the “similarly situated” analysis early in the case; (2) courts should authorize preliminary discovery directed toward these issues; and (3) the court should then analyze all of the evidence available to determine whether the putative collective is similarly situated. If the proposed group is “too diverse” to be similarly situated, the court may decide the case cannot proceed on a collective basis.

Takeaways

The new test represents a sea change in the conditional certification framework, and the case is a welcome decision for employers. The decision should curtail some of the success the plaintiffs’ bar has enjoyed of obtaining conditional certification early in FLSA cases on little more than allegations alone. Although it may result in increased discovery costs early in the case, it promises to provide an avenue for employers to meaningfully oppose conditional certification; especially in misclassification, joint employment, “off-the-clock,” and similar-type FLSA cases where plaintiffs have had success in pushing back “merits” arguments at stage one of the Lusardi test.  In short, this decision is required reading for all employers facing wage and hour litigation in the Fifth Circuit (Louisiana, Mississippi, and Texas), and even employers outside of those jurisdictions.

Moreover, employers who are currently in pending FLSA litigation may want to ask the court to reconsider a prior ruling on a motion for conditional certification that is inconsistent with Swales. To the extent the case has not reached the conditional certification stage, or if the conditional certification briefing is pending, employers should immediately apprise the court of this significant decision.

By: Camille A. Olson, Richard B. Lapp, Louisa J. Johnson, and Andrew M. McKinley

With the growth of the gig economy, the increased desire of some workers to control their own work hours to ensure a work-life balance, and the evolution of the modern workplace to one in which workers rarely retain one full-time job throughout their working years, the demand by workers and companies alike for independent contractor relationships has grown. The line between employee and independent contractor status, however, has remained frustratingly unclear. In more than 80 years since the FLSA’s enactment, neither the FLSA’s text nor formal rulemaking have provided businesses or courts a broadly-applicable rule regarding where to draw that line. That is, until now. Tomorrow, the DOL’s final rule on “Employee or Independent Contractor Classification” will be published in the Federal Register, with an effective date of March 8, 2021.  An unofficial, advance copy of the final rule is available here.

The Notice of Proposed Rulemaking and Request for Comments (“NPRM”) was announced in September 2020, and we summarized it here. The final rule largely adheres to the rule proposed by the NPRM. In the final rule, the DOL has attempted to harmonize decades of its own employer- and industry-specific opinion letters and court decisions that have considered slightly different factors and interpreted similar factors in different manners. It has done so by articulating five non-overlapping factors to be considered in the determination of whether an individual qualifies as an employee or an independent contractor under the FLSA.

Be forewarned that it remains to be seen whether president-elect Joe Biden’s administration will permit the final rule to take effect, whether it could be rejected under the Congressional Review Act, particularly if the Senate majority changes, and whether certain state attorneys general might seek an injunction against the rule the way they did with respect to the DOL’s recent interpretation of the joint employer standard under the FLSA. Further, the independent contractor standard under other federal laws and some state laws also need to be considered for compliance. Nonetheless, the DOL’s new rule provides clearer guidance for companies on independent contractor classification under the FLSA.

What Does the DOL’s Final Rule Provide?

The DOL’s final rule adheres to the earliest Supreme Court decisions and long-standing DOL guidance by continuing to focus the inquiry on whether, as a matter of economic reality, the worker is dependent upon the company for work or is instead in business for him- or herself. The new rule, however, offers previously missing guidance on what factors should be used to assess a worker’s economic-dependence or independence and how much weight should be given to each factor. And while the rule falls short of providing absolute clarity—indeed, it expressly declines to set forth an exhaustive list of considerations—it provides a balanced approach to analyzing independent contractor status under the economic realities test, and sets forth five factors, with two of the factors being “core factors” on which greater weight should be placed.

These two core factors are (1) the nature and degree of the worker’s versus the potential employer’s control over the work; and (2) the worker’s opportunity to earn profits or incur loss based on either the worker’s exercise of initiative or the management of investments in or expenses for items such as helpers, equipment, or material to further the work.

With respect to the first core factor, examples of a worker’s control include setting one’s own schedule, selecting one’s own projects, and having the ability to work for other entities. More critically, the rule provides that a number of issues some courts have previously afforded weight—such as requiring compliance with laws and regulations, health and safety standards, contractual deadlines, and quality control standards—should not impact the analysis. On the other hand, a company’s vigilant enforcement of a non-compete clause or its punishment of a worker for turning down available work may demonstrate control by the company over the worker that is indicative of an employment relationship.

With respect to the second core factor, the worker need not have an opportunity for profit or loss based on both initiative and management of investments or expenses. The ability for a contractor to satisfy this factor through initiative without also needing to show investment, or vice versa, was a point of dissatisfaction for some commenters but, as the DOL noted, makes sense in the modern economy in which many contractors are in knowledge-based jobs that require little investment in materials or equipment. In addition, the DOL states in its preamble to the final rule that it agrees with comments submitted by Seyfarth Shaw that the worker’s use of initiative to impact profit or loss is intended to cover acumen that can be present in a wide variety of contractor jobs, such as acumen in sales, management, customer service, marketing, distribution, communications, and other learned and technical skills, and can exist independent of the skill set needed to perform the work, as in the case of the exercise of general business acumen that impacts a contractor’s ability to profitably run their own business.

If these two core factors point clearly toward either independent contractor or employee classification, they are substantially likely to yield the correct classification. If, however, these core factors do not point toward the same classification or if the considerations under one or both core factors point to different classifications or cause the factors overall to be in equipoise, then the three remaining factors gain importance in determining the correct classification.

The three remaining factors are (1) the amount of skill required for the work, (2) the degree of permanence of the working relationship between the worker and the company, and (3) whether the work is part of an integrated unit of production.

Significantly, the rule places the focus for all five factors primarily on the actual circumstances of the working relationship rather than what is merely contractually or theoretically possible in the relationship. And notably, with respect to the last factor, the rule declines to place import on whether an individual’s work is “integral” to the potential employer’s business, focusing instead on whether the individual’s work can be segregated from the potential employer’s production process.

What Happens Next?

The DOL’s final rule provides much-needed guidance for businesses and workers alike, particularly as technological, social, and business developments have highlighted a need for clarity and uniformity in the economic realities test. However, for now, businesses are well-advised to treat the new rule as precisely that: guidance.

While the final rule is slated to go into effect on March 8, 2021, it remains to be seen how the new administration will deal with the rule. Nevertheless, the rule provides necessary guidance that can be used to assist companies in understanding the impact of various modern workplace and business practices for independent workers and the businesses with which they contract.  A question remains as to the impact of the balanced approach provided by the DOL with respect to interpretation of various relevant factors that are present in the economic realities test under the FLSA and are also relevant to determination under other federal and state tests used for determining independent contractor status. The DOL has noted specifically in the rule that the various versions of the ABC test used in certain state laws have defined employment more broadly for certain purposes.

If you would like to discuss the impact of the DOL’s final rule, or the various state laws that are unaffected by the rule, please feel free to contact the authors or your typical Seyfarth contact.

By Ariel Fenster and Kevin Young

Seyfarth Synopsis. In the final hours of 2020, the U.S. DOL’s Wage & Hour Division issued an opinion letter containing guidance on the compensability of time commuting to the office, or tending to personal matters, for employees primarily working from home. While fact-specific, the letter offers a glimpse into WHD’s current thinking on increasingly common issues in a changed workplace.

The pandemic has changed the way we work. For many employees across numerous industries, the most basic aspects of work—where we work, when we work, how we work—have evolved dramatically since the spring of 2020. In turn, many employers have been forced to confront circumstances and issues that evaded the radar just one year ago.

Continuing its efforts to clear muddy waters, the Wage & Hour Division (“WHD”) of the U.S. Department of Labor (“DOL”) closed 2020 by issuing two new opinion letters, one concerning the compensability of normal commute time and other personal time for employees who work from home (“WFH”), and another more nuanced letter relating to whether certain pre-calculated premium payments may be excluded from overtime pay calculations, specifically in the context of live-in or 24-hour-shift workers. Given its broader reach and implications, we focus here on the former letter.

In Opinion Letter 2020-19, WHD offers clarity on its interpretation of the so-called “continuous work day rule.” That rule generally provides that, other than a bona fide meal period, all time between the first and last principal work activities of the workday is compensable. A strict interpretation of the rule could lead to harsh consequences in the WFH setting, where employees may tend to personal, non-work matters between their first and last principal work activities, such as helping to facilitate a child’s remote learning or choosing to change work locations.

As we reported, earlier in 2020, the DOL issued guidance relaxing the continuous workday rule through the end of 2020 for employees teleworking due to “COVID-19 related reasons.” Though a welcome development, this led many employers and their advocates to wonder: what will the continuous workday rule mean (i) for employees working from home other than for “COVID-19 related reasons,” or (ii) after 2020?

In its year-end guidance, WHD confirmed its continued reasonable interpretation of the continuous workday rule. In the opinion letter, the Division addressed the continuous workday rule as applied to an employee who works from home in the morning and then commutes to the office. Specifically, the DOL was asked to opine on whether time the employee spent commuting to the office on her own volition, or traveling to a personal appointment and then to the office—neither of which are compensable as a general matter—would be compensable under the continuous workday rule if preceded by performing some work at home.

WHD concluded that this time was not compensable. At a broad level, WHD explained that the continuous workday rule has several exceptions, one of which provides that when an employee is completely relieved of job duties, such that she can use time effectively for her own purposes, the time is non-compensable. Also, the Division pointed out that normal home-to-work and work-to-home commute time is expressly deemed non-compensable under the FLSA regulations. The Division distinguished this sort of travel time from worksite-to-worksite travel during the workday, which is compensable, on the grounds that the employer did not require the travel as part of the employee’s work, but rather the travel was of the employee’s own volition during off-duty time.

In reaching this conclusion, WHD was mindful of the changed work environment for so many employees across the country. The Division noted that employees may now be dividing their days into blocks with some time working at home, other time at the office, and some time in between to handle personal matters. Cognizant of these realities, the Division provided ammunition for employers to push courts to adopt a reasonable interpretation of the continuous workday rule—one pursuant to which employees, rather than being paid “punch to punch” but for a meal break, need not be paid for blocks of off-duty time that they can effectively use for their own purposes.

It’s important to note that opinion letters are provided in response to fact-specific circumstances and are generally regarded as persuasive, rather than binding, authority. Moreover, with a new Administration coming to Washington, D.C., a withdrawal or revision of various DOL guidance, including WHD opinion letters, is possible.

If you would like to discuss the impact of the guidance detailed in this post, please feel free to contact the authors or your favorite Seyfarth Shaw attorney.

By: Noah A. Finkel and Christina Jaremus

Seyfarth Synopsis:  Just before the holidays, the Department of Labor’s Wage-Hour Division issued its final pay regulations governing tipped employees.  The final regulations, which were published December 22, 2020 and will be effective March 1, 2021, provide a ray of hope in what was an otherwise miserable 2020 for hospitality employers.  The regulations codify the abolition of the 80/20 tip credit rule and guide the circumstances in which “back-of-the-house” employees can be included in tip pools.  The regulations explicitly exclude managers and supervisors from taking a share of employee’s tips.  In 2021, hospitality employers will have to watch how the courts interpret these regulations.

The End Of The 80/20 Rule?

The main course in the DOL’s regulations, and one for which hospitality employers have grown hungry, is the end of the 80/20 rule – at least from the DOL.  The 80/20 rule has had a somewhat complicated recipe.  As those familiar with the tip credit know, an employer can pay certain employees who receive tips from customers a wage below the minimum wage.  This practice is permitted on the theory that the tips employees receive from customers will more than make up the difference.  But doing so requires an employer to meet some technicalities, including that this tip credit can be taken only for the hours the employee spends working in a tipped occupation.  So, for example, a server at a hotel’s restaurant can be paid the tip credit for the hours they spend as a server, but not for the hours they spend at the hotel as a maintenance employee.  More difficult questions emerge, however, when the server spends part of their time on duties related to server duties, but that do not produce tips, such as cleaning or setting tables.  Under DOL regulations, tipped employees are allowed to perform “related duties” “occasionally,” but the DOL’s regulations have never defined those two terms.

To fill the plate, the DOL issued some opinion letters and then in 1988 the DOL’s Field Operations Handbook – an operations manual made available to investigators – ultimately determined that a tipped employee could spend no more than 20% of their time on “related duties” (which remained undefined) and remain eligible to be paid under the tip credit.  In other words, an employee would have to spend 80% of their time performing tipped job duties.  The 80/20 dual jobs rule remained a little-known side dish until more than a dozen years ago, just after wage-hour collective and class litigation began its boom.  As can be imagined, tip credit litigation blew up as well, with many cases generating seven-figure settlements centering on whether restaurant servers’ side work is a “related duty” and what percentage of time servers spend performing those duties.

In November 2018, the DOL sought to abolish the 80/20 rule through an opinion letter and a field assistance bulletin.  In its place, the DOL explained that an employer may take a tip credit for time when an employee in a tipped occupation performs related non-tipped duties either contemporaneously with or for a reasonable time immediately before or after performing tipped duties.  Under this rule, the DOL explained, when a tipped employee engages in a substantial amount of separate, non-tipped-related duties, such that they have effectively ceased to be engaged in a tipped occupation, the tip credit is no longer available.  Further, the DOL defined related duties by stating that a non-tipped duty is presumed to be related to a tip-producing occupation if it is listed as a task of the tip-producing occupation in the Occupational Information Network O*NET.

Beginning in early 2019, however, as Seyfarth previously reported, district courts largely have refused to give it deference and have clung to the 80/20 rule.  Several of them reasoned that the opinion letter and field assistance bulletin did not provide persuasive reasons for an abrupt change in position after decades of the 80/20 rule.  Strangely, these district courts instead have chosen to defer to the no-longer-effective 80/20 rule, or have imposed it as a matter of judicial fiat.

Therefore, in the late 2019, the DOL issued a proposed regulation and then, last week, published final regulations that hopefully will be the death blow to the 80/20 rule.  In doing so, the DOL largely restated, with some minor tweaks, the guidance from its November 2018 opinion letter and field assistance bulletin.  Perhaps responding to some of the criticism of district courts, the DOL in these regulations sought to explain why it was abandoning the 80/20 rule.  For example, among other reasons, it stated:

An employer of an employee who has significant non-tipped related duties which are inextricably intertwined with their tipped duties should not be forced to account for the time that employee spends doing those intertwined duties. Rather, such duties are generally properly considered a part of the employee’s tipped occupation, as is consistent with the statute.

It remains to be seen if district courts will defer to this guidance now that the DOL has officially codified the rule.  They should, as this guidance is reasonable and went through lengthy notice-and-comment rulemaking.  Further, employers must be mindful that some states (e.g, Connecticut, New Jersey) have enacted their own versions of the 80/20 rule, in which employers in those states will need to follow regardless of the DOL’s new rule.

Back-of-House Staff May Collect Tips In Mandatory “Nontraditional” Tip Pools

In addition, the DOL’s regulations also address amendments to the FLSA made in the Consolidated Appropriations Act of 2018.  The new regulations do not change longstanding regulations that apply to employers that take a tip credit under the FLSA.  Employers that claim a tip credit must ensure that a mandatory “traditional” tip pool includes only workers who customarily and regularly receive tips.  Under the new regulations, however, employers that do not claim a tip credit may now implement mandatory, “nontraditional” tip pools.  In this scenario, tip pools may include employee who do not customarily and regularly receive tips, including “back-of-house” employees that may not be customer-facing, such as cooks and dishwashers.

Managers and Supervisors: Keep Your Hands Off Employees’ Tips!

The new regulations also explicitly prohibit managers and supervisors from keeping employees’ tips for any purpose—even in a nontraditional tip pool situation during which the employer does not take a tip credit and back-of-house employees are permitted to take a share of tips.  In order to prevent employers from “keep[ing]” tips, the new regulations require employers who collect tips and redistribute them through a mandatory tip pool to redistribute the tips no less often than when it pays wages to avoid penalties.  The regulations also require employers who collect tips and redistribute them through a mandatory tip pool to keep records of the same even if the employer does not take a tip credit.

If you have questions about how to navigate pay regulations under federal and state law, contact your Seyfarth wage-hour attorney.

By: Michael Afar

Seyfarth Synopsis:  Calculating the correct “regular rate of pay” for overtime hours under California law, in order to properly factor in certain types of bonuses, can give nightmares to even the most diligent employers.  The Ninth Circuit, however, recently held that a potentially wrong formula for calculating overtime is not, by itself, enough to justify class certification—rather, there must be proof that employees have actually been harmed.  The decision will impact the ability of plaintiffs’ lawyers to simply rely on a common unlawful policy or practice, and instead be forced to show that class members have, in fact, suffered an injury.

The Ninth Circuit last week affirmed a district court’s denial of class certification of claims involving an alleged failure to properly calculate and pay overtime wages in violation of California law.

The Ninth Circuit held that the plaintiff had established the “commonality” and “typicality” requirements under Rule 23, because the question of whether a bank’s policy of calculating overtime wages is lawful was common to the putative class and employees were subject to these policies.

The plaintiff could not establish “predominance” because the challenged company policy either did not apply to or did not cause an injury to many employees.  This inability to prove liability for a large number of putative class members was the fatal flaw that precluded class certification.

Case Background

The plaintiff, Cindy Castillo, worked as an hourly employee at the bank’s call center.  She filed a lawsuit alleging various wage-hour violations under California law, with the main issue concerning the bank’s policies and practices for calculating overtime wages.

While the plaintiff was an employee, she and other employees could receive a flat-sum, nondiscretionary incentive bonus ranging from $350 to $2,100 per month.  If employees worked overtime and received a bonus during the same period, the bank would apply the bonus to the employee’s straight pay to calculate the employee’s regular rate of pay for purposes of overtime premiums.

The bank factored the bonus into the overtime pay calculations in two different ways, over two periods of time.  During one period of time, the bank “divided the incentive pay amount by the number of total hours worked in the previous two pay periods, even if those two pay periods did not coincide with the month for which the incentive pay compensated, then multiplied that amount by the overtime hours worked in those pay periods.”

During a later period of time, the bank used another method.  First, it “divide[d] the month’s incentive pay by weekdays in the month regardless of how many days an employee actually worked that month.”  Second, it “multiplie[d] that number by five, representing the days worked in a week, regardless of how many days an employee actually worked.”  Third, the bank then divided “that number by total hours worked instead of only non-overtime hours worked.” Finally, it would then divide “that number by two to get the new overtime ‘half rate,’ which it multiplied by the overtime hours worked to retroactively pay the underpaid overtime amount.”

The plaintiff alleged that both of these methods were unlawful, based on the California Supreme Court’s ruling in Alvarado v. Dart Container Corp. of Cal., and sought class certification.  The district court denied class certification, holding that the plaintiff did not meet the predominance requirement of Rule 23(b)(3).

The Ninth Circuit Affirms The Denial Of Class Certification

The Ninth Circuit held that “it is not sufficient to establish predominance where a large portion of the proposed class either (1) did not work overtime or did not receive a bonus in the same period, and thus could not have been exposed to [the bank’s] overtime formulas in the first place; or (2) if they were exposed to a formula, they were not underpaid and thus were not injured.” Instead, “determining liability for all class members would require complicated individualized inquiries. Although [the bank’s] method of calculation [for overtime pay] has been deemed improper, the use of the method to calculate overtime wages is not evidence of harm in every instance to all employees, for those who did not work overtime or receive a bonus in the same period, as well as those who were overpaid for it have no actual injury and hence have no claim.”

The Court agreed with the bank that “the question of whether the putative class members were ever ‘subject to [the] overtime calculation policy and ever underpaid as a result goes to liability rather than damages.’”  The Court explained that there was “no common proof of liability, because a large portion of the proposed class was never exposed to the challenged formulas or was not underpaid, and thus could not have been injured by those formulas in the first place.”  As the Court aptly noted, “[t]he issue is not that Castillo is unable to prove the extent of the damages suffered by each individual plaintiff at this stage.  Instead, it is that Castillo has been unable to provide a common method of proving the fact of injury and any liability.”

Put simply, the predominance prong failed “because many of [the putative class] members were never exposed to the challenged formulas or, if they were, were never injured by them. Some of the putative class members were (1) not exposed to one or both overtime policies, (2) paid adequately by one or both overtime polices, or even (3) overpaid by one or both of the overtime policies.”

This was particularly true because an expert estimated that “roughly 35.2% of putative class members … either never received an incentive payment, or never worked overtime during a period for which they received a bonus,” and a sample of data showed that 41.7% of employees “never received a bonus or never worked overtime during a period for which they received a bonus.”

Implications For Employers In Defending Wage-Hour Class Actions

This is an important and refreshing case coming out from the Ninth Circuit, because it reinforces the importance of the “predominance” prong of Rule 23.

All too often, courts are quick to simply grant class certification at the sight of a potentially unlawful policy or practice that applies, in theory, to all putative class members—especially one involving overtime claims for improper regular rate of pay calculations.  But this case provides a roadmap for defending a purportedly indefensible policy or practice, by showing that some putative class members were either not exposed to or not harmed by the policy or practice.

These arguments are not limited just to claims for overtime wages or “regular rate of pay” calculations and bonuses—they can be broadly applied to all wage-hour claims based on a purportedly unlawful policy, such as off-the-clock work, meal periods, or rest periods.

An unlawful policy or practice may certainly be a “common” issue, but Rule 23 requires more—predominance of those issues over individualized inquiries.  And, as the Ninth Circuit has explained (and now reaffirmed), “[i]f the plaintiffs cannot prove that damages resulted from the defendant’s conduct, then the plaintiffs cannot establish predominance.”

 

 

Seyfarth Shaw does it again with the 20th Edition of its annual publication Litigating California Wage & Hour Class And PAGA Actions. This latest iteration continues to be a valuable resource for employers who are navigating the nuances of wage and hour class and PAGA actions in California. As in past editions, the 20th edition covers top legal developments and wage and hour trends in the Golden State, including updates devoted to strategies for defeating class certification, defending against PAGA representative actions, issues affecting classification of workers as independent contractors and much, much more.

To request your eBook copy of the 20th Edition, click here.

By: Brian A. Wadsworth and Andrew L. Scroggins

As COVID-19 cases surge again in the United States, state and local governments continue to recommend or require remote work arrangements, and some employers have already announced plans to permit remote work to continue well into 2021 and even beyond.

Remote work is not new, and many of its challenges such as providing remote work tools, maintaining productivity, staying connected with coworkers, and managing effectively from a distance are well known to employers. (Our colleagues have written about those issues here.) However, the remote work spurred by driven by government mandates and public health concerns in response to COVID-19 has introduced new wrinkles. Employers permitted remote work for roles that had not been granted such flexibility in the past. In addition, public health concerns frequently prompted people not to work from their primary “home” residences, but to relocate to other areas to be with family or friends, or where the perceived risk of infection was lower, or just somewhere more comfortable. As the pandemic has continued, some workers have remained at these secondary locations, or made plans for where they might want to reside now that it seems a strong internet connection is more important than a regular office presence. Because the change was sudden, there was less time to plan for and track the choices made by individual workers.

As remote work has become the new normal for more companies, there may be long-term consequences to these “temporary” moves, as companies become subject (perhaps unwittingly) to the complexities of multi-state employment. Wage and hour statutes alone present a host of issues.

Breaks and Overtime

Take for instance overtime and meal breaks. Many states, including California (of course) assert authority over work performed anywhere within the jurisdiction.

Multiple states have their own overtime laws that do not mirror the Fair Labor Standards Act. For instance, in Colorado an employer is required to pay overtime to an employee who exceeds twelve hours of work in a work day or twelve consecutively worked hours. Thus, a remote worker’s relocation to Colorado could create new overtime requirements of which the employer was not previously aware.

Likewise, an unwitting employer could inadvertently fail to provide or keep records of specific meal and rest breaks required by the statute in effect where the employee has undertaken remote work.  For example, in Illinois an employer is required to provide an unpaid meal break of at least 20 minutes for any employee who works a shift of 7.5 hours or more, with the break occurring within the first 5 hours of the shift.

Wage Rates

The same analysis extends to wage rates. Generally speaking, a non-exempt employee is entitled to the minimum wage of the jurisdiction where the work is performed, and some states and municipalities require a higher minimum wage than is due under federal law. Some jurisdictions can provide for significantly higher rates, which many employers may not recognize as a “minimum” wage.

In the past, this was rarely a concern. The jobs for which remote work was permitted often paid above minimum wage, and the location from which the work would be performed was known at the time the arrangement was made. If work needed to be performed from a different location with a higher wage requirement, an arrangement could be made to change the pay rate for that time.

While most remote workers will still receive much more than the minimum wage, there are some jurisdictions where the minimum wage is so high that it may creep into a higher wage category and catch an employer unaware. Moreover, the expansion of roles permitted to work remotely coupled with worker movement in response to COVID-19 increases the potential for paying the wrong wage rate. Consider this example: Phoenix, Arizona has one of the highest concentrations of call center work, which was generally performed in a busy office environment before the pandemic. Now, however, more of this work is permitted to be performed remotely. A worker earning the minimum wage in Arizona ($12 per hour) who moved to be with family in California is likely entitled to the higher minimum wage rate ($13 per hour) set by that state. If the worker moved to one of the California municipalities with a higher rate, like Los Angeles County ($15 per hour), it is possible that amount would be due under the California Supreme Court’s Sullivan v. Oracle Corp. decision.

This issue is not limited to non-exempt employees either. Just as states may set minimum wage rates that are higher than those imposed by the FLSA, they may also set minimum salary levels for exempt employees. By way of example, in 2020 the minimum annual salary level under the FLSA is $35,568, but under New York law it ranges from $46,020 to $58,000, depending on where the employee works. Salaries do not need to be adjusted for periodic work performed in a different locale. After a sufficiently long relocation, however, an exempt employee may become subject to the law of state where the work has been performed. There is no bright line rule when that threshold is reached.

Paystubs

Some states have specific paystub rules that employers must comply with that outline all of the information that an employer must include in a paystub. In some states, such as California, violations of these rules can lead to draconian fines and present significant liability for unwary employers. A recent California Supreme Court decision, Ward v. United Airlines, held that these strict paystub rules do not apply just because an individual performed a week of work in the state but left open the possibility that the state might have an interest in applying its rules to one who had been performed work there for some longer period of time.

Travel Time

Employers sometimes request that remote workers periodically return to the office for business reasons. The employer may be obligated to reimburse travel time and expenses if the worker has relocated somewhere more distant. Employers should ensure that their policies are clear on whether this travel time is reimbursable.

Final Pay

The law regarding when an employer has to provide separated employees with final pay varies from state-to-state and can carry fines for any potential violations. Thus, employers must ensure that they follow these rules for any remote workers whom they separate.

Employers should be cognizant of these issues and take steps to address them before they become significant problems. To do so, employers should formulate a formal remote work policy to address specific concerns that may arise from remote work relocation or revise existing remote work policies to address these concerns. (More practical reminders from our colleagues can be found here.) Seyfarth Shaw will continue to publish content about some of the unusual employment-related issues arising from responses to COVID-19 to assist employers in formulating and revising these policies and will provide a more in-depth analysis of some of the issues raised by this checklist. In the meantime, if you have inquiries on these topics please reach out to the authors.