By Louisa Johnson

Seyfarth Synposis: As of March 16, 2020, Colorado’s daily overtime and meal and rest break requirements for non-exempt employees, as well as its different duties and salary level requirements for exempt employees, will apply to all employers who meet the definition of an “employer” under the federal Fair Labor Standards Act.

In the past, many employers have heard about some difficult wage-hour requirements under Colorado law, but most haven’t needed to follow them.  That is because Colorado’s Minimum Wage Order applied only to employers in four enumerated industries:  retail and service, commercial support service, food and beverage, and health and medical.  In fact, if you visit Colorado’s Department of Labor and Employment website today, you will find Minimum Wage Order Number 35, effective January 1, 2020, that is still limited in its application to these four industries.

Effective March 16, 2020, however, a new Colorado Overtime and Minimum Pay Standards Order (COMPS Order) #36 will apply to all employers in any industry who meet the definition of an “employer” under the federal Fair Labor Standards Act (FLSA).  Once the COMPS Order #36 takes effect in March, non-exempt employees in Colorado will be entitled to the following:

  • Overtime pay at time and one-half the regular rate of pay for worktime in excess of (i) 12 hours per workday, (ii) 12 consecutive hours (not counting bona fide meal breaks) without regard to how the employer defines the beginning and end of the workday, or (iii) 40 hours per workweek, whichever of these three provides the greatest payment of overtime wages to the employee;
  • Uninterrupted, duty-free meal breaks of at least 30 minutes in length for any shift exceeding 5 consecutive hours, with such meal breaks occurring, to the extent practical, at least one hour after the shift begins and at least one hour before the shift ends; and
  • Paid rest breaks of at least 10 minutes for each 4 hours of work, or major fraction of a 4-hour block of work. For example, employees will be owed 1 rest break for up to 6 hours of work, 2 rest breaks if they work more than 6 hours and up to 10 hours, and 3 rest breaks if they work more than 10 and up to 14 hours.

The new rest break rules also provide that a failure to authorize or permit one of these 10-minute paid rest breaks is a failure to pay 10 minutes of wages owed.

To ensure employees are aware of these new rules, COMPS Order #36 requires all employers to display the COMPS Order poster at each worksite, and every employer who publishes or distributes any handbook, manual, or written or posted policies must include in them a copy of the COMPS Order or the COMPS Order poster published by the Colorado Department of Labor and Employment’s Division of Labor Standards and Statistics.  In addition, the COMPS Order or poster must be provided to employees in other languages if they have limited English language abilities.

COMPS Order #36 also subjects employers to different rules for classifying their employees as exempt from minimum wage and overtime pay requirements.  Unlike under the FLSA, Colorado’s administrative exemption is limited to employees who directly serve an executive.  Colorado’s executive exemption is similar to the FLSA’s but more stringent in that it requires the employee to spend a minimum of 50% of the workweek supervising subordinates.  And the outside salesperson must devote 80% of worktime to activities directly related to his/her own outside sales.

In addition, COMPS Order #36 will soon set a salary threshold higher than the federal threshold to qualify an employee for the administrative, executive, or professional exemption.  As of July 1 of this year, Colorado’s salary threshold will be the same as the new federal level ($684 per week), but as of January 1, 2021, it will increase to $778.85 per week ($40,500 per year).  And every subsequent January 1, the minimum salary level for exempt status will increase another $5,000 or so, reaching $1,057.69 per week ($55,000 per year) by January 1, 2024.

Wage-hour lawsuits were already growing in prevalence in Colorado with a number of wage-hour plaintiffs’-side lawyers in other states setting up satellite operations in Colorado.  The above-described changes, particularly the expansion of the COMPS Order’s applicability to nearly all employers, are likely to lead to a further increase in wage-hour litigation in Colorado.  If your company has not previously been concerned with Colorado wage-hour law, now is the time to dust off and assess your company’s timekeeping and break policies, as well as the duties and salary levels of exempt-classified employees, to ensure compliance with Colorado wage-hour laws.

By: Victoria Vitarelli and Gena Usenheimer

Seyfarth Synopsis: In a clarification of the administrative/production dichotomy, the U.S. Circuit Court of Appeals for the Seventh Circuit has held that whether a duty is exempt under the FLSA’s administrative exemption may turn on the employee’s involvement in the enterprise’s “primary” or “central revenue generator.”

As our readers are aware, the United States Court of Appeals for the Seventh Circuit recently issued a highly-anticipated decision on when a plaintiff may be able to send a collective action notice to those who agreed to arbitrate their claims and to waive their ability to participate in a class or collective action. But the Seventh Circuit’s opinion was notable not just for its impact on arbitration agreements. It also has provided some clarity on how to interpret the FLSA’s administrative exemption.

In Bigger v. Facebook, Inc., a former Client Solutions Manager claimed that Facebook misclassified her, and those similarly-situated, as overtime-exempt in violation of the FLSA. In response to a motion for conditional certification, Facebook cross-moved for summary judgment, arguing that Bigger was exempt from the FLSA overtime-pay requirements under the FLSA’s administrative exemption. The district court denied Facebook’s motion for summary judgment.

On interlocutory appeal (allowed because of the arbitration issue in the case), the Seventh Circuit examined Bigger’s exempt status under the highly compensated employee exemption, noting it was a “less rigorous” alternative to the administrative exemption. The FLSA’s highly compensated employee exemption provides that an employee with total annual compensation exceeding an amount specific by regulation (now $107,432) is exempt if the employee “customarily and regularly performs” any one or more of the exempt duties or responsibilities of the administrative or certain other exemptions. The parties agreed that Bigger was highly compensated, so, according to the Seventh Circuit, Facebook needed only to demonstrate that Bigger either customarily and regularly (1) performed “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers,” or (2) “exercise[d] of discretion and independent judgment with respect to matters of significance.”

Discussing the “directly related” criterion, the Seventh Circuit emphasized the importance of the enterprise’s core function, which it identified as “the central revenue generator,” and later, “primary revenue generator” and the employee’s involvement in that function, when determining whether a duty is exempt. The Seventh Circuit synthesized relevant “administrative/production dichotomy” precedent and instructed that, “while duties supporting an enterprise’s core function may qualify as an administratively exempt duty, actually engaging in that core function may not.” For example, if an employer’s core function or central revenue generator is the sale of products, employees who sell those products are engaged in production and may not satisfy the “directly related to management or general business operations” requirement. On the other hand, employees who are not actually engaged in that function—which could involve a broad swath of employees—likely would fall on the administrative side and may very well satisfy the “directly related” requirement.

The Seventh Circuit determined that Facebook’s core function or “primary revenue generator” is the sale of advertisements on its electronic platforms. Based on the evidence in the record, the Seventh Circuit was unable to determine as a matter of whether Bigger’s duties customarily and regularly supported Facebook’s general sales efforts (which would be exempt work) or constituted actual sales work (which, under the Court’s decision, would likely not be exempt work). The Court also held that it could not determine as a matter of law as to whether Bigger met the discretion and independent judgment prong based on the conflicting evidence in the record.

This is a helpful decision for employers and provides clarity as the meaning of the administrative exemption, including the emphasis on the employee’s involvement in the employer’s core function, which is its primary or central revenue generator.

By Robert Whitman

Seyfarth Synopsis: The Second Circuit held that attorneys’ fee awards in FLSA settlements are not limited by principles of “proportionality” between the fees and the amount of the settlement or subject to a 1/3 cap.

In the Second Circuit, settlements in FLSA lawsuits are subject to strict court scrutiny to ensure that the terms, including the amount of attorneys’ fees, are fair and reasonable. Many District Courts within the Circuit have applied a rule of “proportionality” and refused to approve fee amounts greater than one-third of the total settlement.

No more, according to the Circuit. In Fisher v. SD Protection Inc., it held that such a rule is at odds with the purpose of the FLSA and could discourage competent lawyers from taking on cases for low-wage workers.

The Fisher case arose from an otherwise-ordinary wage dispute brought by a $10/hour employee. He sued under the FLSA and New York Labor Law based on the employer’s alleged failure to pay required overtime and provide mandatory wage statements.

Although the case was pled as a putative class and collective action, the parties reached a settlement for the named plaintiff only. The total settlement amount was $25,000, inclusive of fees and costs. In papers submitted to the court for approval of the settlement, the parties disclosed that the plaintiff would be paid only $2,000 of that amount, with the remaining $23,000 going to his attorney. Stated differently, the attorney’s share of the settlement proceeds was 92%.

District Judge Richard Berman cried foul. While approving the total settlement amount as fair and reasonable, he sua sponte reduced the attorneys’ fee award to $8,250 – one-third of the total settlement amount – plus $1,695 in costs, leaving the plaintiff with $15,055. He reasoned that, as “a matter of policy, 33% of the total settlement amount – or less – is generally the maximum fee percentage which is typical and approved in FLSA cases.”

The plaintiff appealed to the Second Circuit. (In a procedural oddity, the defendant did not participate in the appeal since, according to the court, the appeal only “involves the split of the settlement funds between plaintiff and his counsel.”) In a detailed decision, the court reversed and remanded, emphatically disapproving of Judge Berman’s requirement of “proportionality” between the amount of the settlement and the size of the fee award.

Although noting that “district courts in FLSA actions in this Circuit routinely apply a proportionality limit on attorneys’ fees in FLSA actions,” the Second Circuit held that such a rule is not mandated by either the text or the purpose of the statute. While acknowledging that the proposed split of $23,000 to counsel and $2,000 to the plaintiff “understandably gave the district court pause,” the court rejected an “explicit percentage cap” on fee awards. In its view, requiring proportionality would “impede Congress’s goals by discouraging plaintiffs’ attorneys from taking on ‘run of the mill’ FLSA cases where the potential damages are low and the risk of protracted litigation high.”

It followed from the court’s analysis that a strict one-third rule was not permissible. “In most FLSA cases, it does not make sense to limit fees to 33% of the total settlement. FLSA cases often involve ordinary, everyday workers who are paid hourly wages and favorable outcomes frequently result in limited recoveries.” The facts of the plaintiff’s potential claim illustrated the conundrum: he was apparently entitled, at most, to $585 in unpaid overtime, $585 in liquidated damages, $5,000 for wage notice violations, and $5,000 for wage statement violations, for a total of $11,170. Yet under the District Court’s order, he received more than $15,000.

Finally, the Second Circuit took Judge Berman to task for rewriting the settlement agreement rather than sending it back to the parties to correct the terms of which he disapproved. “If a district court concludes … that a proposed settlement is unreasonable in whole or in part, the court cannot simply rewrite the agreement – it must reject the agreement or give the parties an opportunity to revise it,” the court said. But a court “exceeds its authority when it simply rewrites the agreement by imposing terms on the parties to which they did not agree.”

It would be easy for employers to conclude, like the defendant in Fisher that chose not to participate in the appeal, that this ruling only concerns matters between plaintiffs and their lawyers and has nothing to do with defendants. But the practical effect may be greater than that. Any employer that has engaged in settlement negotiations with employees and their counsel in FLSA matters quickly comes to understand that the plaintiffs’ attorneys’ fees are a significant driver of the bargaining, sometimes to the point of taking over the negotiations entirely. To the extent that Fisher frees plaintiffs’ lawyers from fears that they will be held to a one-third share of the settlement fund and not receive a sufficient payday for themselves, it may loosen some of the constraints on negotiating, and thereby foster settlements overall, perhaps at lower gross numbers. Hope springs eternal.

By Patrick Bannon and Michael Steinberg

Seyfarth Synopsis: An appellate court has ruled that a district court should not authorize notice of an FLSA suit to employees who are ineligible to join the suit because they agreed to resolve disputes exclusively through arbitration. And, the court recognized that sending FLSA notice too broadly can pose “dangers” of unfair harm to employers.

In FLSA collective actions, plaintiffs usually request, early in the litigation, that courts authorize written notice to potential plaintiffs of the opportunity to join the suit. Courts often grant such requests, believing that there is no downside to doing so.

On January 24, 2020 the Seventh Circuit became the second federal appeals court to consider whether notice may be sent even to employees who are ineligible to join an FLSA suit because they have executed valid arbitration agreements. A unanimous appellate panel answered the question “no” and, along the way, showed a refreshing recognition of the potential for abuse of the FLSA notice process.

In Bigger v. Facebook, Inc., a former Client Solutions Manager claimed that Facebook misclassified her as overtime-exempt in violation of the FLSA. Bigger asked the district court to conditionally certify the case as a collective action and to authorize notice to a national collective of Facebook Client Solutions Managers. In opposing the request for notice, Facebook asserted that most of the employees Bigger proposed to notify had entered into arbitration agreements. Therefore, Facebook argued, they were not potential plaintiffs and should not receive notice. The district court considered it too soon to determine whether potential opt-ins had valid arbitration agreements because the opt-ins weren’t (yet) parties and because the court believed it should not make merits determinations at the conditional certification stage of an FLSA collective action. The district court therefore authorized notice to the entire group plaintiff proposed — arbitration agreements or not.

On appeal, the Seventh Circuit concluded that the district court should have allowed Facebook to prove that many of the employees had agreed to arbitration. In reaching that result, the court recognized a crucial, often-overlooked point about FLSA litigation: sending court-authorized notice to potential opt-ins can unfairly harm employers. “[P]laintiffs may wield the collective action format for settlement leverage,” the court noted, and “notice giving, in certain circumstances, may become indistinguishable from the solicitation of claims . . . .” Given those “dangers,” the Seventh Circuit concluded, district courts must give employers a chance to show that potential notice recipients have valid arbitration agreements. If the plaintiff does not contest or the employer proves that certain employees have valid arbitration agreements, notices may not be sent to those employees.

The Bigger decision, and a similar Fifth Circuit ruling last year in JPMorgan, are especially important given the growing phenomenon of mass arbitration, in which plaintiffs’ counsel file or threaten to file hundreds, thousands, or even tens of thousands of simultaneous individual arbitration demands — often for small amounts. For an employer that has agreed to bear the costs of arbitration, the up-front arbitration filing fees alone can create enormous Day 1 settlement pressure. While the overall mass arbitration problem remains, Bigger and JPMorgan make it harder for plaintiffs’ counsel to use the FLSA notice process to identify and connect with individuals who could then pursue individual arbitration claims.

By Barry J. Miller and Hillary J. Massey

Seyfarth Synopsis: The Second Circuit has affirmed summary judgment for the employer, Aetna, in an exempt misclassification overtime claim brought by a nurse reviewer. Agreeing that the plaintiff was properly classified as a “professional” employee and thus exempt from the FLSA, the Second Circuit explained that clinicians who do not directly provide medical care qualify for the exemption if they make the final decision to approve payment for medical services.

Background

Plaintiff Isett worked as an appeals nurse, reviewing claims for coverage of medical services for which Aetna had denied coverage, in order to determine whether to override the denial and approve payment for the services. Working remotely from home without much oversight, Isett reviewed patients’ medical files to determine whether the requested services were medically necessary, as defined in the insurance plans and clinical guidelines. If so, she approved payment without further review, thus binding Aetna to pay for the services.

If she determined that the services were not medically necessary, Isett was required to forward the appeal to a licensed physician for a final decision; Isett did not have authority to deny any claims without such further review. While not stated in the court’s opinion, it appears that Isett did not communicate with any medical provider to make her decisions. She reviewed only the paper medical files.

Court’s Analysis

The Court of Appeals concluded that Isett was properly classified as an exempt professional employee. The court emphasized at the outset that the exemption must be given a fair, as opposed to narrow, reading, relying on the Supreme Court’s 2018 opinion in Encino Motorcars, LLC v. Navarro.

Because the plaintiff conceded that her work satisfied the second prong of the professional exemption (work in a field of science or learning), the opinion focused on the first and third prongs.

First Prong: Work Requiring Advanced Knowledge

The Court of Appeals noted that the exemption’s first prong requires work that includes the consistent exercise of “discretion and judgment,” but distinguished that standard from the requirement of the administrative exemption, quoting the applicable regulation: “the discretion and judgment standard for the professional exemption is ‘less stringent’ than the discretion and independent judgment standard of the administrative exemption.” The court noted that 1) the burden to satisfy the discretion standard is “not particularly stringent” and 2) the court reviews the discretion and judgment characteristic of the learned profession at issue, as opposed to the freedom of the particular plaintiff to deviate from an employer’s practices. The court relied heavily on its 2014 decision in Pippins v. KPMG LLP, in which a panel held that junior audit associates who performed entry-level accounting tasks under close supervision were properly classified as exempt professional employees.

The court concluded that Aetna satisfied prong one due to the ability of registered nurses in general to act independently, and of Isett in particular to act independently in reviewing clinical information and making a final approval decision or deciding to forward the file to a doctor. The court noted that Isett’s approval decisions were not reviewed, meaning that her work directly and finally affected the sums that Aetna was required to pay. The fact that Isett had a supervisor who would provide advice, if needed, did not sway the court from concluding that she acted independently.

The greatest battleground in the case may have been Isett’s argument that she did not exercise discretion and judgment because her work was governed by “step by step instructions” and guidelines. The court was not moved by this argument and noted that the application of those clinical guidelines required Isett to act independently based on the clinical data and her trained intellect to determine whether a proposed plan of care was appropriate.

Third Prong: Knowledge customarily acquired by a prolonged course of specialized instruction

In concluding that Aetna also satisfied the third prong, the court rejected Isett’s argument that her work could be performed by licensed practical nurses (“LPNs”) who were paid hourly. The court explained that its focus was on Isett’s actual job duties and not the minimum academic qualifications for the role. Noting that the third prong is satisfied if the employee’s primary duty “calls on advanced knowledge that is typically required through a prolonged course of study,” the court concluded that Isett’s job required making a “final decision” based on specialized instruction and clinical experience, as opposed to on the job training in utilization review. The court rejected Isett’s argument that specialized knowledge was required only to decide whether the clinical criteria are satisfied — a duty even the LPNs had — as opposed to making the final approval decision. The court explained that Isett could not break down her work into separate parts “described in the most banal way possible” to support that argument.

Notably, beyond observing that Isett was a registered nurse and relied on that body of knowledge and experience in performing her work, the court did not premise its conclusions on any specific facts pertaining to her prior training or other licensure or work experience, including whether she had ever performed direct clinical care.

Takeaway for Employers

This opinion is a decisive win for employers who classify their utilization review clinicians as professional employees. The Court of Appeals not only distinguished out-of-circuit cases involving similar positions as “mistaken” and “unpersuasive,” its opinion did not waiver or leave any room for doubt. Employers, at least in the Second Circuit, may take comfort that a “fair” reading of the professional exemption supports classification of utilization review clinicians as exempt.

By: Ryan McCoy and David Kadue

Seyfarth Synopsis: A federal court has granted a preliminary injunction blocking the State of California from enforcing AB 5 against motor carriers. The court provided a fulsome analysis demonstrating that the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) preempts enforcement of Prong B of AB 5’s ABC Test. The injunction, unless modified, will block California from enforcing AB 5 against motor carriers until the case is resolved.

The District Court’s Decision

On January 16, 2020, a federal judge in the Southern District of California, following up on a temporary restraining order issued on December 31, 2019, granted the California Trucking Association’s request for a preliminary injunction blocking enforcement of AB 5 against motor carriers. Two owner-operators joined the Association’s request, both claiming that they want to remain independent contractors and not be forced into the employment relationship that AB 5 would require.

In its 23-page order, the court first noted that “for decades, the trucking industry has used an owner-operator model to provide the transportation of property in interstate commerce.” The Association argued that Prong B of AB 5’s ABC test destroys this historical owner-operator model, in direct contravention of the FAAAA, a 1994 de-regulation measure that forbids any state law “related to a price, route, or service of any motor carrier … with respect to the transportation of property.”

The court rejected California’s argument that the Association lacks standing to challenge AB 5. The court found that the Association and its members face “imminent injury” if AB 5 is enforced because they must either implement “significant, costly compliance measures” or “risk[] criminal and civil prosecution.”

The court then ruled that the Association was likely to ultimately succeed on the merits of its argument that the FAAA preempts AB 5. The court, applying Ninth Circuit precedent, concluded that the FAAAA “likely preempts ‘an all or nothing’ state law like AB 5 that categorically prevents motor carriers from exercising their freedom to choose between using independent contractors or employees.” Owner-operators necessarily perform work within “the usual course of the [motor carriers] hiring entity’s business,” meaning drivers can “never” be considered independent contractors under Prong B. By effectively prohibiting motor carriers from using drivers as independent contractors, AB 5’s ABC test has a “significant, impermissible effect on motor carrier’ ‘prices, routes, and services” and thus is preempted by the FAAAA. In support of this conclusion, the court cited the Los Angeles Superior Court’s January 8 order likewise finding that the FAAAA preempts AB 5.

The court also rejected California’s argument that the ABC test is a state law of general applicability that “cannot be preempted.” Even if the ABC test were such a law, the court ruled, the FAAAA would still preempt the “all or nothing” ABC test because it impermissibly compels a motor carrier to use employees instead of independent contractors for certain services.

Finally, the court found that the Association and its members would likely suffer irreparable harm in the absence of an injunction because motor carriers would have to “significantly restructure their business model” or face criminal and civil penalties. While California has legitimate concerns about preventing misclassification of independent contractors, Congress has decided to deregulate the motor carrier industry and the FAAAA is “supreme” to AB 5:

[T]he State of California has encroached on Congress’ territory by eliminating motor carriers’ choice to use independent contractor drivers, a choice at the very heart of interstate trucking. In so doing, California disregards Congress’ intent to deregulate interstate trucking, instead adopting a law that produces the patchwork of state regulations Congress sought to prevent. With AB-5, California runs off the road and into the preemption ditch of the FAAAA.

What the Injunction Means for Employers

This preliminary injunction will remain in effect while the Association’s case continues or until the Court modifies or vacates the injunction. Like the earlier TRO, the injunction is against the State of California and does not necessarily prevent private enforcement.

The State of California and Teamsters have each filed motions to dismiss the Association’s lawsuit. The hearing is set for February 3, 2020.

By: Alex Passantino

Seyfarth Synopsis: On January 15, 2020, the Department of Labor’s Final Rule on regular and basic rates of pay will take effect. This series will explore the various issues implicated by the Department’s changes. Part I addresses the Department’s changes to Part 548 of the regulations, Authorization of Established Basic Rates for Computing Overtime Pay.

In December, the U.S. Department of Labor’s Wage & Hour Division announced its revisions to certain provisions of the FLSA regulations addressing regular and basic rates of pay. One of those changes increased the viability of the use of basic rates, by increasing the tolerance level related to additional overtime pay from $0.50 per week to 40% of the applicable minimum wage. Below we discuss basic rates and the impact of this revision.

What Are Authorized Basic Rates?

Ordinarily, under the FLSA, overtime pay must be paid at one-and-one-half times the employee’s “regular rate” of pay for the workweek in question. Regular rate requires that an employer total all remuneration (less authorized exclusions) and divide that total by the number of hours worked by the employee. The resulting number is the “regular rate,” and overtime pay is due at a rate that is one-half that rate (since the regular rate has already been paid for all hours).

Sometimes, the “extra” payments that must be included in the regular rate are small and have an even smaller impact on the overtime due. The FLSA nevertheless generally requires those payments to be included.

Enter basic rates …

In certain circumstances (detailed below), the FLSA permits overtime compensation to be computed pursuant to an agreement or understanding between employer and employee using rates that are “substantially equivalent” to the average hourly earnings of the employee. In other words, under certain circumstances — and pursuant to agreement — the small amounts that impact the regular rate in minimal ways can be effectively excluded from the week-to-week calculation of overtime pay.

What is Required to Use Basic Rates?

The FLSA regulations require satisfaction of all of the following elements in order to use basic rates:

  • Overtime compensation is paid pursuant to an agreement or understanding arrived at between the employer and the employee or as a result of collective bargaining before performance of the work;
  • The agreement establishes a rate as the “basic rate” to be used in computing overtime compensation;
  • The basic rate is a specified rate or derived from a specified method of calculation;
  • The basic rate is a bona fide rate and is not less than the applicable minimum wage;
  • The basic rate is authorized (as described below) as being substantially equivalent to the average hourly earnings of the employee, exclusive of overtime premiums, in the particular work over a representative period of time;
  • Overtime hours are paid at least one-and-one-half times the basic rate;
  • The employee is paid 1.5 times the basic rate only for those hours that qualify as “overtime hours” under the FLSA (e., over 8 in a day, over 40 in a week, Saturdays/Sundays/holidays/days of rest/sixth or seventh days; outside of normal workday);
  • The number of hours for which the employee is paid 1.5 times the basic rate is at least the number of hours worked in excess of 40;
  • The employee’s average hourly earnings for the workweek exceed the applicable minimum wage;
  • Extra overtime compensation is properly computed and paid on other forms of additional pay which have not been considered in arriving at the basic rate but which are required to be included in computing the regular rate.

How Are Basic Rates “Authorized”?

The FLSA regulations set forth a number of scenarios in which basic rates are authorized, assuming the rates meet the requirements set forth above:

  • A rate per hour which is obtained by dividing a monthly or semi-monthly salary by the number of regular working days in each monthly or semi-monthly period and then by the number or hours in the normal or regular workday.
  • A rate per hour which is obtained by averaging the earnings (less permitted exclusions) of the employee for all work performed during the workday or any other longer period not exceeding sixteen calendar days for which such average is regularly computed under the agreement or understanding.
  • A rate excluding the cost of meals where the employer customarily furnishes not more than a single meal per day.
  • A rate excluding additional payments in cash or in kind which, if included in the computation of overtime under the Act, would not increase the total compensation of the employee by more than 50 cents a week on the average for all overtime weeks in the period for which such additional payments are made. [As noted below, the 50 cents per week figure is increasing on January 15, 2020.]
  • A rate equal to the average hourly remuneration of the employee for employment during the annual period or the quarterly period immediately preceding the calendar or fiscal quarter year in which such workweek ends, subject to some significant limitations.

The above methods of determining a basic rate are inherently authorized under the FLSA; no additional approval from WHD is necessary.

In addition, employers may submit to WHD an application for authorization of basic rates determined by other methods, which the Administrator of WHD may or may not approve, in her discretion.

So What’s Changing on January 15, 2020?

The fourth bullet in the previous section addresses the exclusion from the computation of overtime “certain incidental payments which have a trivial effect on the overtime compensation due.” Since 1966, the triviality of those incidental payments has been governed by a standard that required no more than a 50 cents per week impact on the overtime rate. The 50 cents figure was based on 1966’s $1.25 minimum wage–it is 40% of that minimum wage.

In an effort to bring the provision in line with current minimum wages, the final rule references the minimum wage under either the FLSA or state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher.

What Does this Change Mean?

In changing the $0.50 limit to 40 percent of the higher of the applicable local, state, or federal minimum wage, WHD has increased the availability of the use of basic rates. For example, at the $0.50 limit, for an employee working 45 hours per week, the maximum additional payment would be around $9.00 per week. Under the revised provision, at the level of the current federal minimum wage, the tolerance would be $2.90 per week on average, which would be high enough to exclude (for example) a $500 bonus paid quarterly to an employee averaging 45 hours per week:

  • $500/13 weeks in quarter = $38.46/week
  • $38.46/45 hours = $0.85/hour
  • $0.85 * 0.5 (half-time) * 5 overtime hours = $2.13 per week impact

If you have any questions about the regulatory revisions, basic rate, or another wage and hour issue, please contact a member of Seyfarth’s Wage and Hour team.

By: Alex Passantino, Brett Bartlett, and Noah Finkel

Seyfarth Synopsis: On January 12, 2020, the U.S. Department of Labor announced its Final Rule clarifying the issue of joint employment under the Fair Labor Standards Act. The Final Rule adopts a four-factor balancing test and rejects various factors that have fueled recent litigation, e.g., a worker’s economic dependence on a potential joint employer, the potential employer’s business model, and its unexercised power over the worker.

Despite being the subject of intense debate and administrative focus, the DOL’s joint employment interpretation has not been subject to formal, substantive change in the 60 years since it was issued. In January 2016, however, then-WHD Administrator David Weil issued an Administrator’s Interpretation (“AI”) regarding joint employment under the FLSA. In the AI, Dr. Weil published a view that joint employment “should be defined expansively.” The AI focuses the inquiry, in part, on a worker’s economic dependence on the potential joint employer. This standard was intended to be “as broad as possible.” In June 2017, then-DOL Secretary Alexander Acosta withdrew the AI, which had grown to be seen by the business community as an over-expansion of the joint employment standard.

Four Factor Test

In the Final Rule, DOL specifies that, when an employee performs work for the employer that simultaneously benefits another person, that person will be considered a joint employer when that person is acting directly or indirectly in the interest of the employer in relation to the employee.

DOL adopts the four-factor test from its proposal. Thus, where an employee performs work for the employer that simultaneously benefits another individual or entity, the determination of whether the potential joint employer is directly or indirectly controlling the employee, looks to whether the potential joint employer:

  • hires or fires the employee;
  • supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  • determines the employee’s rate and method of payment; and
  • maintains the employee’s employment records.

Actual control is necessary to establish joint employment. Standard contractual language reserving a right to act, for example, is alone insufficient for demonstrating joint employer status.

The Final Rule also specifically notes that an employee’s “economic dependence” on a potential joint employer does not determine whether it is a joint employer under the FLSA. In addition, the Final Rule sets forth several factors that do not make joint employer status more or less likely under the FLSA, including:

  • operating as a franchisor or entering into a brand and supply agreement, or using a similar business model;
  • the potential joint employer’s contractual agreements with the employer requiring the employer to comply with its legal obligations or to meet certain standards to protect the health or safety of its employees or the public;
  • the potential joint employer’s contractual agreements with the employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation; and
  • the potential joint employer’s practice of providing the employer with a sample employee handbook, or other forms, allowing the employer to operate a business on its premises (including “store within a store” arrangements), offering an association health plan or association retirement plan to the employer or participating in such a plan with the employer, jointly participating in an apprenticeship program with the employer, or any other similar business practice.

As was the case with the proposal, the Final Rule provides several examples applying the Department’s guidance for determining FLSA joint employer status in a variety of different factual situations.

The Final Rule is expected to be effective on March 16, 2020.

Practical Pointers

When the Final Rule becomes effective, it will provide additional support to businesses claimed to be jointly and severally liable for unpaid wages alleged to be owed by workers who are not their own.  The Final Rule, however, should not be viewed as reason for businesses generally to be less cautious in the measures taken to avoid joint employer responsibility.  As a practical matter, for instance, the provision of handbooks, policies, and other materials to another employer’s employees will create less risk of imputing pay responsibilities beyond the direct employer; but additional safeguards such as disclaimers making clear that the provision of those materials does not create an employment relationship will remain prudent.

All of this said, the Final Rule creates an opportune moment for businesses to examine their relationships with the workers from whom they receive beneficial services but whom they do not employ directly.  The DOL’s new guidance provides a roadmap for further risk mitigating measures, though interpretations of joint employment under state wage and hour law need to be considered as well. Please contact Seyfarth Shaw’s Wage and Hour Litigation Practice Group for assistance.

By: Alex Passantino

Seyfarth Synopsis: The U.S. Department of Labor’s Wage & Hour Division recently issued two opinion letters providing clarity to employers in determining (1) the proper overtime rate of pay for non-discretionary, multi-week bonuses; and (2) whether certain per-project payments are sufficient to satisfy the salary basis test required for the FLSA’s white-collar exemption.

WHD has been issuing a steady stream of opinion letters on a wide variety of issues–by its own count, 53 letters since the start of the Trump Administration. The most recent two FLSA letters were issued just this week and address some outstanding issues regarding overtime rates of pay and salary basis.

Calculating Overtime Due on Multi-Week Bonus

The first letter, FLSA2020-1, addresses the calculation of overtime pay for a non-discretionary lump sum bonus paid at the end of a multi-week training period. The $3,000 bonus is an inducement for the employee to successfully complete a 10-week training program (and agree to, but not necessarily complete, an additional eight weeks of training). There was no dispute that such a bonus should be included in the regular rate of pay; the employer’s question focused on *how* the bonus should be included in the regular rate.

Section 778.209(b) of the regulations provides two methods of allocating a multi-workweek bonus that cannot be allocated among the workweeks proportionally to the amount of bonus earned each workweek. The first is to divide the bonus equally across each of the workweeks in the period in which it is earned. If, however, there are facts that would make it “inappropriate” to assume equal bonuses each week, it may be reasonable and equitable to assume the employee earned an equal amount of bonus each hour of the pay period. In either case, the resulting rate is used to determine overtime pay, with one-half the rate paid for each overtime hour.

In the opinion letter, the employee worked 40 hours in 8 of the 10 weeks, 47 hours in one week, and 48 hours in another. WHD found that it was appropriate to allocate the amount equally across the 10 workweeks — missing any week would result in loss of the bonus, regardless of whether there was overtime worked. WHD also stated that equal weekly allocation of bonuses is the appropriate method for any bonus earnings that cannot be identified with particular workweeks.

In the example from the opinion letter, the $3,000 would be divided into each of the 10 weeks, for a weekly bonus of $300. For the two overtime workweeks, the $300 would be divided by hours worked, and the half-time rare would be paid for the overtime hours.

  • $300/47 = $6.38; $6.38 * 0.5 * 7 = $22.34 in additional overtime due in 47 hour week
  • $300/48 = $6.25; $6.25 * 0.5 * 8 = $25.00 in additional overtime due in 48 hour week
  • $47.34 in additional overtime due.

The letter did not address those circumstances in which it would be “inappropriate” to use the weekly allocation. In those circumstances, however, an hourly allocation would be required, which would result in $54.22 in additional overtime due ($3,000/415 = $7.23; $7.23 * 0.5 * 15 =  $54.22).

WHD’s conclusion should come as no surprise — it is its long-used method for determining the overtime due on multi-week bonuses. Nevertheless, it is welcome clarity on a regular rate issue at a time when such issues are likely to come into focus as employers adjust to WHD’s final rule on regular rate of pay, effective January 15, 2020.

Per Project Payments and Salary Basis

The second letter, FLSA2020-2, addresses the salary basis test for the FLSA’s white collar exemption. Effective January 1, 2020, executive, administrative, and professional employees must (with limited exceptions) be paid at least $684 per week on a salary or fee basis in order to qualify for an exemption from the FLSA. The letter relates to per-project payments and whether they satisfy the salary basis test.

The first proposed element of payment would be made to an educational consultant who would work on a project for a school district for 40 weeks. The hours would be irregular and would vary between 0 and 80. The consultant would be paid $80,000 for the project in 20 biweekly installments of $4,000.

The second proposed element of payment would be made to the same educational consultant. The consultant would be assigned to a second project lasting 8 weeks, and would be paid an additional $6,000 in four $1,500 biweekly payments.

As a result, the total weekly compensation of the consultant would vary depending on the number of projects to which the consultant was assigned. In the example provided, the consultant would earn $4,000 per pay period when not assigned to the second project, but $5,500 for the pay periods when performing work on the second project.

WHD first found that the first scenario met the salary basis of payment: the consultant was paid a “predetermined amount constituting all or part of the employee’s compensation” paid biweekly and without reduction because of variations in the quality or quantity of work performed. WHD then determined that the second element of payment constituted “extra” compensation under the regulations. Because an employer may provide an exempt employee with additional compensation without losing the exemption, WHD determined that the pay structure complied with the salary basis requirements. In addition, because the consultant’s pay was not computed in an hourly, daily, or shift basis, the reasonable relationship requirement would not apply.

Finally, WHD addressed the “unusual” scenario in which the consultant’s pay might increase or decrease due to prospective changes in the project(s) negotiated between the employer and its customer. WHD restated its long-held position that prospective reductions in salary do not defeat the salary basis test absent revisions that are so frequent that the compensation is rarely the same from pay period to pay period.

Unfortunately, although the employer requested guidance on the ever-elusive “fee basis” component of the salary test, WHD declined to provide it, citing its conclusion that the method of pay satisfied the salary basis test. Hopefully, WHD has another opinion letter in the hopper in which it will provide additional explanation of the manner and method in which fee basis can be used.

Overall, the letter is good for both employer and employee. The employer wants to pay more; the employee presumably wants to earn more. The letter allows that to happen. Although the pay was described a project-based, the first element of pay appeared to be a salary method of pay in everything but name — the same pay each workweek regardless of the amount of work performed. WHD’s treatment of the second element of pay — which, again, is more of an “extra salary” for a short duration than a payment for a specific project — should provide employers with comfort in designing pay plans that reward exempt employees with additional pay for tackling additional projects.

By Alex Passantino

 

 

 

 

 

 

 

‘Twas the week before Christmas, in a year for the ages.

So here’s our latest recap of hours and wages.

The letters and laws. The regulations and cases.

A year’s worth of matters that impacted workplaces.

 

We begin up at One First, where SCOTUS debated

A trio of cases we’d call “wage-hour-related.”

A split decision came down–with the usual camps–

And the FAA’s light was shining with the brightest of Lamps.

Plus an unambiguous holding, a simple conclusion:

Class arbitration is toast if there’s any confusion.

But lest you think arbitration only gets protected,

Where trucking’s involved, SCOTUS declared it rejected.

As to delegated gateway questions like “Shouldn’t we be in a court?”…

“Arbitrators rule first,” was the dissent-less retort.

 

Over at DOL, this year has been merry.

There’s a confirmed Administrator and a new Secretary.

And a regulatory agenda so full and ambitious.

Will they make it in time? Initial signs are propitious!

The first rule is final, updating Part 541.

Now we just hope that this multi-year journey is done.

“Obama’s salary was too high!”; “Bush’s is too little!”

The solution? They literally went right down the middle.

Regular rate is done, too. Excluding some perks and some bennies.

And some overtime payments that amounted to pennies.

Joint employment’s up next–the new test is factual,

Requiring control of the worker, and that control must be actual.

Their proposals on fluctuation and tips will be plenty

To keep Wage & Hour busy through most of 2020.

Then throw in some new letters that express opinions with grace,

Like one on independent contractors in an e-marketplace.

In D.C., they’re working hard to make compliance seem easy,

But there’s another locale that makes employers feel … queasy.

 

California. Eureka! We’ve found the location.

The eternal source of employer consternation.

Just as marketplace businesses are starting to thrive,

California steps in and says “Here’s AB5.”

The federal fight on arbitration? It’s all but said and done.

Well, there goes California again with AB51.

Between the state and its cities, so many minimum wages,

And computing regular rate requires consultation with sages.

But California is not the sole source driving employer fear,

For New York and New Jersey shout “Dude, hold my beer.”

 

And the rest of the country has been busy as well,

With new wage-theft laws or fluctuating workweek’s death knell.

So many decisions, sometimes it’s hard to keep track.

The 80/20 rule gets killed, but a court brings it back.

Class claims need more rigor and can’t be based in fiction.

Certification requires personal jurisdiction.

An arbitration agreement may block your class notice.

And you just might owe OT on some other guy’s bonus.

We’ve seen that on demand pay can be tricky, indeed.

And it turns out you have to pay folks who grow weed.

A day rate is a salary, is what the Fifth Circuit has proffered.

Settlement approval’s not needed if a judgment is offered.

 

Though the law keeps on changing, our team will keep you updated.

Some developments hurt, others will make you elated.

And as the wage-hour world keeps spinning at this decade’s end

Happy New Year to you, our wage-hour friends!!!

 

THANKS TO ALL OF OUR READERS. BEST WISHES FOR A HAPPY, HEALTHY, AND PROSPEROUS NEW YEAR!