By: John Yslas and Carolina Nunez

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

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

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

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

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

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

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

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

By: Alexander Passantino

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

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

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

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

By: Kerry Friedrichs and Elizabeth MacGregor

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

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

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

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

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

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

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

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

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

By: Alex Passantino

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

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

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

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

The comment period runs through December 9, 2019.

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

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

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

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

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

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

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

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

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

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

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

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

By: Jinouth D. Vasquez Santos

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

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

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

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

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

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

Why is this important?

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

By: Alex Passantino

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

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

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

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

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

The final rule does not:

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

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

By: Vanessa Rogers, John Phillips, and Steve Shardonofsky

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

Summary of the Case

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

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

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

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

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

Case Highlights and Takeaways

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

By: Kevin M. Young, Kerry M. Friedrichs, and Ryan McCoy

Seyfarth Synopsis: On Tuesday, the Third Circuit issued a decision rejecting the U.S. DOL’s general position that incentive bonuses paid to employees by a third-party must be factored into overtime pay. While the decision merely endorses a more tempered “it depends” view, it provides welcome news and guidance for employers that provide labor to third-parties.

Imagine you’re an employer that staffs non-exempt employees to work on a project at a client site. Because you’re an avid reader of this blog, you are the Michael Jordan of wage-hour compliance, taking near-perfect steps to ensure employees record and are paid for each minute of work on the project, including overtime. Each week, you pay the employees their hourly rate for every hour worked, including time and a half for overtime hours.

Your employees finish the project, and the client is thrilled with their work. The client is so pleased, in fact, that it includes your employees on production and safety bonuses that it issues to its own staff, remitting the payments through you, their employer. And that leads to a question: must you, a compliance-minded employer, now dig deeper into your own pocket to pay overtime on those bonuses, just as you would for a non-discretionary bonus that you establish and pay yourself?

While some courts and the U.S. DOL have answered this question in the affirmative, the Third Circuit rejected that position in a decision issued earlier this week. Instead, the court ruled, the question turns on the agreement between the employer and the employee.

The case was brought by the Secretary of the U.S. DOL against Bristol Excavating Inc., a small excavation contractor, and Talisman Energy, Inc., a natural gas production company. Bristol entered into an agreement with Talisman to provide equipment, labor, and other services at Talisman drilling sites. As part of the agreement, Bristol employees worked at Talisman’s sites.

After working on Talisman Energy projects, some Bristol employees learned that Talisman had a practice of paying its own employees bonuses for safety, efficiency, and completion of work. That led them to ask Talisman if they could get in on the action. After clearing it with Bristol, the employees’ employer, Talisman said yes. It paid the bonuses through Bristol.

Eventually the DOL conducted a routine audit of Bristol’s offices. After learning about the Talisman bonuses, the Department determined that Bristol’s failure to include them in its employees’ “regular rate” resulted in underpayment of overtime. For background, the “regular rate” is defined to include “all remuneration for employment,” and it’s well established that this encompasses non-discretionary bonuses. (As an example of a bonus that should be included, the Third Circuit cited National Lampoon’s Christmas Vacation, where Clark Griswold, upon receiving a jelly-of-the-month club membership in lieu of a bonus he’d received seventeen years in a row, decries, “You don’t want to give bonuses, fine. But when people count on them as part of their salary, well…”)

Here, the DOL took the position that the rule requiring inclusion of non-discretionary bonuses in the regular rate of pay applies irrespective of who pays the bonuses. Bristol disagreed. Ultimately the dispute landed in litigation, with the DOL filing suit against Bristol and Talisman for underpayment of overtime compensation in violation of the FLSA. After a magistrate judge sided with the DOL, the case wound its way to the Third Circuit’s docket.

On Tuesday, a three-judge panel sided with the employers on two of the three bonuses at issue. In a harsh rebuke, the Court opined that the DOL’s “recently discovered” reading of an “80-year-old statute“—a reading that requires all remuneration employees receive for their work from any source to be included in the regular rate—goes too far. To be clear, however, the Court did not go so far as to say that third-party bonuses will always steer clear of the regular rate. Instead, the answer is a classic, “it depends.”

Specifically, the Third Circuit ruled, whether a third-party payment qualifies as remuneration for employment that must be included in the regular rate depends on whether “the employer and employee have effectively agreed it will.” Simply allowing employees to participate in a third-party bonus program does not establish an implicit agreement. Instead, relevant factors to consider include:

  • Regular payment of the bonus. As a threshold matter, a bonus needs to be “regularly and actually received by the employee” for it to be potentially included in the regular rate.
  • Employer’s use of the bonus to drive behavior. Further, the Court explained, it would be “significant” to a finding that a bonus must be included in the regular rate if “an employer regularly and predictably relies on [the] bonus to induce certain behavior…”
  • Employer’s involvement in the bonus program. The Court also noted that “the deeper an employer gets into the creation, management, and payment of an incentive bonus program, the more those bonus payments begin to look like part of the regular pay structure to which the employer has agreed…”

While the Third Circuit’s decision is binding only on federal courts in Delaware, New Jersey, and Pennsylvania, it provides welcome guidance for employers grappling with potential unintended consequences of third-party bonus programs. Employers should continue to think carefully, and with an eye toward the law of their jurisdiction, about whether to allow employees to participate in such programs. If they do allow it, employers should consider taking a “hands off” approach to the program. Alternatively, another option might be to require that the third-party calculate bonuses, if any, as a percentage of total earnings (including overtime pay), which would avoid the need to calculate and pay additional overtime. (Of course, that alternative should be carefully weighed in light of the joint employment concerns it might raise.)

If you would like to discuss any issues addressed in this blog, please do not hesitate to reach out to your favorite Seyfarth Shaw attorney.

By: Howard M. Wexler and Lisa L. Savadjian

Seyfarth Synopsis: On August 6, 2019, Acting New Jersey Governor Sheila Oliver signed into law A-2903/S-1790, described as an Act “concerning enforcement, penalties, and procedures for law regarding failure to pay wages.”  The Act makes a number of critical changes to several New Jersey civil and criminal laws, adding a variety of increased employee protections and harsher penalties.  These additions make New Jersey’s anti-wage theft law one of the strongest anti-wage theft protection laws in the country. 

The primary and immediate impact of the Act’s amendments to various wage-payment laws is the institution of increased penalties for failure to pay wages, up to and including criminal punishments.  Below is a summary of the Act’s key provisions:

Liquidated Damages for Violation of Wage Payment Law

Among other changes, the Act primarily amends key provisions to the Wage Payment Law, the Equal Pay Act, and the Wage and Hour Law.  With amendments to each of these laws, the Act provides that if an employer is found to owe wages to an employee that is due unpaid wages or wages lost due to the retaliatory action, the employee is allowed to recover the wages owed plus liquidated damages in an additional amount equal to 200 percent of the unpaid wages, plus reasonable costs of the action and attorney’s fees to the employee.

The Act does provide for a good faith defense.  The payment of liquidated damages is not required for a first violation by an employer who demonstrates that the employer’s action was taken in good faith with reasonable grounds for believing that the action was not a violation, and the employer admits the violation and pays the amount owed within 30 days.

Increased Statute of Limitations

The Statute of Limitations for commencing an action to recover wages is significantly extended from two to six years.

Expansion of “Employer” to Include Successor Entity

The Act also expands the definition of “employer” to encompass any successor entity or successor firm of the employer, meaning that a successor entity can also now be liable for the purported wage violations of its predecessor.

Furthermore, with regard to a failure to pay employees pursuant to a contract, a client employer and a labor contractor providing workers to the client employer shall now be subject to joint and several liability and shall share civil legal responsibility for any violations of the provisions of the wage and hour laws, including provisions regarding retaliatory actions against employees for exercising their rights under the laws.

Penalties and Criminal Punishments

The Act also amends the violations provision of the Wage Payment Law.  A violation will be found if the employer knowingly fails to pay the full amount of wages to an employee agreed to or required by law; OR the employer takes a retaliatory action against an employee by discharging or in any other manner discriminating against the employee, because the employee either:

  • made a complaint to his/her employer, to the commissioner, or to an authorized representative, that the employer has not paid the employee the full amount of wages due, OR
  • testified or is about to testify in any proceeding relating to the wage-payment laws, OR
  • because the employee has informed any employee of the employer about rights under State laws regarding wages and hours worked.

Fines and punishments will be imposed as follows:

For First Violation: the employer shall be guilty of a disorderly persons offense and shall be punished by a fine of $500 to $1,000, or by imprisonment for 10-90 days, or by both the fine and imprisonment.

For Second Violation: the employer shall be guilty of a disorderly persons offense and shall be punished by a fine of $1,000 to $2,000, or by imprisonment of 10 to 100 days, or by both the fine and imprisonment.

For Third or subsequent Violation: the employer shall be guilty of a crime of the fourth degree, and be punished by a fine of $2,000 to $10,000 or by imprisonment of up to 18 months, or by both the fine and imprisonment.

Each week in which an violation of the Wage Payment Act occurs shall constitute a separate and distinct offense.

Anti-Retaliation Provisions

The Act also carves out an additional remedy in the case of an adverse action such as discharge or other discriminatory action taken against an employee in violation of the Wage Payment Law, the Wage and Hour Law, or a contract to pay employees.  Employers shall be required to offer reinstatement to the discharged employee and take other actions as needed to correct the retaliatory action.  In addition, an employer taking an adverse action against an employee within ninety days of the employee filing a complaint with the Department of Labor and Workforce Development, or a claim or action being brought for a violation of the wage payment laws, shall raise a rebuttable presumption that the employer’s action was taken in retaliation against the employee.  The presumption may be rebutted only by clear and convincing evidence that the action was taken for other, permissible, reasons.

Crime of Violation Of Contract to Pay Employees

The Act further amends the New Jersey Code of Criminal Justice to provide that it will constitute a disorderly persons offense if an employer agreed with an employee to pay wages, compensation or benefits and fails to pay wages when due or fails to pay compensation as required by law within thirty days due.  The Act further imposes a fine of $500, plus a penalty equal to 20% of the wages owed for the first offense.  Penalties for subsequent violations will be assessed at $1,000 plus a penalty of 20 percent of wages owed.  Employers who have been convicted of violating the law on two or more occasions are guilty of the crime of “pattern of wage nonpayment” which is a crime in the third degree.

Effective Date

The majority of the Law’s provisions take place immediately, except for the addition of the crime of pattern of non-payment of wages, which will take effect on the first day of the third month following enactment, which is November 1, 2019.

Conclusion

These are drastic changes to New Jersey wage and hour law, to which all employers with operations in New Jersey should be mindful of going forward.  Given the increased penalties, when coupled with the largely expanded statute of limitations period for wage and hour violations, a spike in wage and hour lawsuits in New Jersey may very well be forthcoming.  As such, a renewed review of pay, timekeeping, and classification practices and policies for employers with operations in New Jersey is well advised.