By Noah Finkel and Lennon Haas

Seyfarth Synopsis:  Plaintiffs asserting federal and state wage and hour claims in one action often pursue both class certification of state claims under Rule 23 and collective action certification under the FLSA.  In that hybrid environment, litigating FLSA collectives to judgment before addressing Rule 23 certification can saddle employers with the increased exposure of a class action without affording them the benefit of global peace upon resolution of the dispute.  Recognizing that unfairness, the Third Circuit admonished district courts to address class certification before trying FLSA claims.  In doing so, it may have provided employers with authority for an argument against class certification.

Plaintiffs claiming that their employers failed to properly compensate them usually have available both state and federal causes of action.  Asserting both types of claims in one action, and pursuing those claims on an aggregate basis, is not uncommon.  Because the FLSA contains its own unique aggregation mechanism, however, these “hybrid” cases proceed on two tracks—one for FLSA claims under that statute’s “collective action” provision, and another for state law claims under Rule 23.  The former includes only those who opt in to the case, but the latter, if certified, includes all those who don’t opt out of a case and thus an involve far greater exposure for an employer.

Those dual tracks normally follow a choreography where Plaintiffs move early for “conditional” certification of their proposed FLSA collective, discovery occurs, and then defense motions for collective action decertification and plaintiff motions for Rule 23 class certification are filed around the same time.  Sometimes, however, courts abandon that sequencing by focusing on FLSA claims first, often at the plaintiff’s urging.

Last week, the Third Circuit weighed in on how courts should order the affairs of hybrid actions, making clear that trying FLSA claims before deciding class certification may violate Rule 23.  In doing so, the court slowed plaintiffs’ pursuit of judgment and cast doubt on the superiority of the class device for litigating wage and hour cases.

Mortgage loan officers filed a complaint against their employer, a regional bank, that brought a collective action under the FLSA and parallel state law claims as a Rule 23 class action.  After the district court conditionally certified the FLSA collective, the plaintiffs moved for class certification of the state law claims and the employer moved to decertify the collective.  The court granted the former and denied the latter.  The employer appealed both decisions and succeeded in reversing class certification.

On remand, the district court refused to readdress certification and set the FLSA portion of the case for trial — even before considering class certification on the state law claim.  Out of alternative avenues for relief, the bank petitioned for mandamus, a stay pending a decision on its petition, and reassignment to a new district judge, arguing that it was improper to try the merits of the FLSA claim prior to class certification and an opportunity for class members to opt-out.  The Third Circuit granted the stay, but because the district judge joined the reassignment request it denied as moot the mandamus petition.

In doing so, however, it provided district courts guidance on the proper interaction between class certification under Rule 23 and merits decisions on FLSA collective actions.  A “trial-before-certification” approach, reasoned the court, ignores Rule 23’s mandate to decide certification “[a]t an early practicable time after a person sues.”  What’s more, that ordering invites proposed class members to wait for final judgment before deciding whether to opt-out, thus permitting them to “benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one.”

That “unfair upshot” is only “compounded when what is scheduled for trial [before certification] is a hybrid wage-and-hour case.”  Trial on the FLSA claims would have necessarily decided a merits issue for the class claims too and in doing so “may well have satisfied” Rule 23’s requirement that common questions predominate.  If the bank lost, then, members of the proposed class would have had no incentive to opt-out.  But if the bank won, the FLSA judgment would bind only the collective action participants, thus enabling the remaining putative class members to avoid the preclusive effect of an unfavorable decision.  In other words, trial-before-certification would expose employers to the full scope of class-wide liability but “would arbitrarily deprive [them] of the benefits of . . . the full preclusive effect of the class action judgment.”

For employers facing hybrid wage-and-hour actions, particularly those in the Third Circuit, this opinion provides support for a more deliberate and structured approach to sequencing the myriad decision points in these cases.  Fidelity to the court’s reasoning will mean that courts need to carefully coordinate FLSA collective action and Rule 23 proceedings to ensure that class certification receives attention before deciding FLSA merits issues that intertwine with state law claims and certification considerations.

The decision, in recognizing that an FLSA collective action trial likely disproves a class action’s superiority under Rule 23(b)(3), also provides possible ammunition for resisting class certification in a hybrid action.  If judgment on the merits of FLSA claims fatally undermines the class mechanism’s superiority, the mere availability of a collective action under the FLSA may as well.

By: Jeffrey A. Berman and Jennifer R. Nunez

Seyfarth Synopsis: An unpublished Ninth Circuit opinion has held that an employer need not pay employees for time spent undergoing government-required security checks en route to their worksite within the Los Angeles International Airport. Cazares v. Host International, Inc.

The Facts

Jesus Cazares, an attendant in the Admirals Club lounge at the Los Angeles International Airport (“LAX”), sued his employer, Host International, Inc., for unpaid wages, failure to provide meal and rest breaks, and failure to provide accurate wage statements. The main claim was that Host failed to pay for time spent going through TSA security procedures to enter LAX. Cazares also claimed that Host failed to provide meal breaks in that the security process left him no time to leave the airport on meal breaks. Cazares also alleged that Host failed to provide him full 10-minute rest breaks because he had to spend time walking through the terminal to reach designated rest areas.

The Trial Court Decision

In July 2020, the district court dismissed Cazares’s lawsuit for failure to state a claim on which relief can be granted. Cazares appealed the court’s order to the Ninth Circuit.

The Appellate Court Decision

On August 18, 2021, a Ninth Circuit panel affirmed the order dismissing Cazares’s case.

The claim for unpaid work. The Ninth Circuit held that the time spent passing through federally-mandated airport security checks en route to work was not compensable because Cazares did not allege enough facts to show that Host had subjected him to any control during the security checks.

The claim for unprovided meal breaks. The Ninth Circuit held that Cazares had failed to allege facts to show that Host had discouraged him from taking meal breaks as he was not required to undergo a security check in order to leave his worksite (the Admirals Club) during meal breaks.  Host did not have to also ensure that Cazares could leave the secured area of the airport in order to satisfy its meal break obligation.

The claim for unprovided rest breaks. The Ninth Circuit rejected Cazares’s contention that his rest breaks were shortened by a walking requirement, as he failed to allege facts to show that Host made him take his rest breaks at a particular designated area several minutes away from his Admirals Club worksite.

The claim for inaccurate wage statements. Because the wage and break claims failed, the Ninth Circuit concluded that the derivative wage-statement claim also failed.

Seyfarth filed an amicus brief on behalf of a large employer association in support of Host.

What Cazares Means For Employers

The Ninth Circuit’s ruling, though unpublished, is nonetheless citable. It is a useful reminder that it is the level of the employer’s control over employees—not the mere fact that the work requires an activity—that determines whether an activity is compensable under California wage and hour law. The ruling also represents a common sense approach to California’s meal and rest period rules.

By Lennon Haas and Noah Finkel

Seyfarth Synopsis:  Since the Supreme Court’s 2017 decision in Bristol-Myers Squibb Co. v. Superior Court, federal district courts around the country have wrestled with whether they may exercise personal jurisdiction over employers as to FLSA claims brought by people who worked and were paid outside of the forum state.  On August 17 and 18, the Sixth and Eighth Circuits said no.  The result is that, at least within those circuits, an employer cannot be subject to a multi-state FLSA collective action unless it is brought in a court in the employer’s home state.

The FLSA allows individuals to bring claims for minimum wage or overtime violations “for and in behalf of” themselves and other “similarly situated” employees.  These “collective actions” often involve relatively few resident plaintiffs and a multitude of out-of-state employees.  Where their claims may be brought became an open question after the Supreme Court’s 2017 decision in Bristol-Myers.

That case involved 678 individual product liability claims joined together in a California state court based mass action.  Nearly 600 of those claims belonged to nonresidents.  To establish personal jurisdiction, the nonresidents relied on the similarity of their claims to those of the California plaintiffs.

The Supreme Court rejected that conception, holding that resident/nonresident claim similarity “is an insufficient basis for jurisdiction.”  Despite having incurred the “same injuries” as the California plaintiffs in the same manner and from the same cause, the nonresidents, reasoned the Court, had failed to show “a connection between the forum and the[ir] specific claims.”  That essential element of due process lacking, the Supreme Court held that no specific jurisdiction existed over Bristol-Myers as to the claims of out-of-state plaintiffs when those claims did not arise from the company’s California contacts.

Recognizing the similarity between mass actions and FLSA collective actions, employers have argued ever since that Bristol-Myers required all FLSA plaintiffs—both resident and nonresident named and opt-in plaintiffs—to establish specific personal jurisdiction.  Almost 50 district courts weighed in, with plaintiffs and defendants each prevailing about half the time.

On August 17, 2021, the Sixth Circuit became the first court of appeals to decide the issue, holding in Canaday v. The Anthem Companies, Inc. that courts may not exercise specific jurisdiction over FLSA claims “unrelated to the defendant’s conduct in the forum state.”  The very next day the Eighth Circuit reached the same conclusion in largely the same way in Vallone v. CJS Solutions Group, LLC.

Both courts began by determining the proper analytical framework under which to proceed.  And both, although considering federal questions in federal court, concluded that due process limits on state court authority constrained their power.

Service of process, they observed, is a prerequisite for obtaining authority over a defendant and must be congressionally authorized.  A statute can authorize nationwide service, and many do.  But not the FLSA.

More often, and as is the case for FLSA litigation, Federal Rule of Civil Procedure 4(k) constrains effective service within the limits prescribed by a forum state’s long-arm statute and by extension the Fourteenth Amendment’s Due Process Clause.

As Canaday and Vallone recognized, the power to exercise jurisdiction under that amendment is finite.  Courts may assert general, or “all purpose,” jurisdiction over a defendant in its home state (for a corporation, where it is incorporated and headquartered).  Or, they may assert specific or “case-based,” jurisdiction if a claim “arises out of or relates” to the defendant’s forum conduct.  Because neither Canaday nor Vallone chose to litigate in their employer’s homes, only specific jurisdiction could provide the authority needed.

Both plaintiffs contended that even so, the FLSA’s collective mechanism negated the need for individual nonresident plaintiffs to show a connection between the forum and their specific claims.  The circuits disagreed.  “The principles animating Bristol-Myers,” they concluded, dictated that even collective action opt-ins individually establish that their claims connected to the defendant’s forum conduct.  That was so because collective actions are “more accurately described as a kind of mass action,” with “each opt-in plaintiff . . . a real party in interest[] who must meet her burden for obtaining relief,” including by establishing that personal jurisdiction exists.

The question became, then, whether nonresident FLSA plaintiffs could show a connection between their claims and the defendants’ in-forum conduct.  Both Vallone and Canaday held that they cannot.  Nonresident plaintiffs were not employed in the forum.  They were not paid in the forum.  And they were not “shortchanged” overtime compensation in the forum.  “Taken together,” said Canaday, nonresident FLSA opt-in claims “look just like the claims in Bristol-Myers.”

That similarity led Canaday and Vallone to conclude that where “nonresident plaintiffs opt in to a putative collective action under the FLSA, a court may not exercise specific personal jurisdiction over claims unrelated to the defendant’s conduct in the forum state.”

For employers with multi-state operations, the decisions in Vallone and Canaday offer an important avenue for potentially limiting the size and reach of individual collective actions.  A pending decision in Waters v. Day & Zimmerman, No. 20-1997 (1st Cir.), will further clarify this important personal jurisdiction issue.  Should that case split from Canaday and Vallone, the applicability of Bristol-Myers to collective actions may well command attention from the Supreme Court.

Tuesday, August 24, 2021

1:00 p.m. to 2:00 p.m. Eastern
12:00 p.m. to 1:00 p.m. Central
11:00 a.m. to 12:00 p.m. Mountain
10:00 a.m. to 11:00 a.m. Pacific

On July 21, 2021, the US Department of Labor announced a Notice of Proposed Rulemaking (NPRM) to establish standards and procedures to implement and enforce Executive Order 14026, “Increasing the Minimum Wage for Federal Contractors.” The Executive Order and its enacting regulations will increase the minimum wage for workers performing work on or in connection with covered federal contracts to $15 per hour beginning January 30, 2022; continue to index the federal contract minimum wage in future years to an inflation measure; eliminate the tipped minimum wage for federal contract workers by January 1, 2024; ensure a $15 minimum wage for workers with disabilities performing work on or in connection with covered contracts; and restore minimum wage protections to outfitters and guides operating on federal lands.

In this webinar, attorneys from Seyfarth’s Government Contracts, Government Relations and Policy, and Wage and Hour Litigation Practice Groups will provide an overview of the NPRM including its substance, reasoning, timeline and potential impacts on employers.

REGISTER HERE

 

Speakers

Brett C. Bartlett, Moderator, Partner, Seyfarth Shaw LLP
Adam K. Lasky, Partner, Seyfarth Shaw LLP
A. Scott Hecker, Senior Counsel, Seyfarth Shaw LLP
Stephanie B. Magnell, Counsel, Seyfarth Shaw LLP

*This webinar is accredited for CLE in CA, IL, NJ, and NY. Credit will be applied for as requested for TX, GA, WA, NC, FL and VA.  The following jurisdictions accept reciprocal credit with these accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, CT, ME, NH.  The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD.  For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used in other jurisdictions for self-application. If you have questions about jurisdictions, please email CLE@seyfarth.com.

By: Ryan McCoy

Seyfarth Synopsis: The Federal Arbitration Act (“FAA”) exempts workers engaged in interstate commerce from enforcement of mandatory arbitration agreements. Uber drivers (and other drivers working in the gig economy) have frequently argued that they fit under this “interstate transportation” exemption in order to avoid arbitration of their claim that they have been misclassified as independent contractors. A growing number of courts across the country have rejected those arguments, however, finding that Uber drivers are not interstate workers because Uber’s service is primarily local and intrastate in nature. Last week, the Ninth Circuit Court of Appeals joined those courts, affirming a ruling from the Northern District of California that sent the Uber drivers’ classification claims to arbitration.

The District Court’s Decision

In September 2019, plaintiffs filed a putative class action in the District Court for the District of Massachusetts, seeking to represent a class of Uber drivers who worked in Massachusetts. The lawsuit sought an order against Uber that would prohibit Uber from continuing to classify its drivers as independent contractors and force Uber to reclassify drivers as employees “and comply with Massachusetts wage laws.” In response, Uber sought to transfer the lawsuit from Massachusetts to the Northern District of California, and further sought to compel arbitration of the drivers’ claims based on the mandatory arbitration agreement the drivers signed, which included a class action waiver. Plaintiffs resisted Uber’s efforts to send their claims to arbitration, arguing Uber drivers are exempt from mandatory arbitration under Section 1 of the FAA because, in plaintiffs’ view, such drivers are a class of workers engaged in interstate commerce. In support of their arguments, drivers pointed to data in Massachusetts showing the relative frequency drivers crossed state lines or picked up and dropped off at airports. But the district court rejected those arguments because the nationwide data showed Uber drivers spent the vast majority of their time in a single state; unchallenged facts that did not support such a broad interpretation of the interstate commerce exemption. Plaintiffs then appealed to the Ninth Circuit after the district court compelled individual plaintiffs’ claims to mandatory arbitration.

The Ninth Circuit “Joins The Growing Majority Of Courts” Holding Uber Drivers Are Not Engaged In Interstate Commerce.

The ultimate question on appeal was whether Uber drivers are engaged in interstate commerce within the meaning of the FAA; if the drivers are engaged in interstate commerce, then they are exempt from the FAA and their claims are not subject to mandatory arbitration and they could bring their classification claims in federal court. Citing authorities from across the country, however, the Ninth Circuit panel agreed Uber drivers were not engaged in interstate commerce and thus their claims were subject to mandatory arbitration under the FAA. First, the panel found Uber drivers’ services were “primarily local and instrastate in nature.” This conclusion remains true even if the drivers sometimes (in this case, just 2.5% of all rides in the United States from 2015-2019) crossed state lines or started and ended their serve in different states. Thus, “[o]verall, interstate trips, even when combined with trips to the airport, represent a very small percentage of Uber rides, and only occasionally implicate interstate commerce.”

The panel also found that assessing the nationwide data for purpose of the exemption, rather than cherry-picking data from a limited geographic region (such as Massachusetts), was important to further the “very purpose of the FAA, by which Congress sought to create a national policy favoring arbitration.” Indeed, “[a]ny alternative approach would potentially produce absurd results whereby the FAA would apply differently to neighboring states, or even neighboring cities in the same state.” The panel thus rejected as “unpersuasive” the minority of courts’ view that a de minimis amount of time spent engaged in interstate commerce could be enough to satisfy the FAA’s exemption and avoid arbitration, finding such a view was inconsistent with the public policy encouraging arbitration.

In addition to affirming the district court’s order compelling arbitration of the Uber drivers’ claims, the Ninth Circuit agreed that the district court should address Uber’s motion to compel arbitration before addressing the drivers’ motion for relief.

What the Ruling Means for Employers

This ruling affirms a common-sense interpretation of the FAA’s interstate commerce exemption, finding that Uber drivers who spend the vast majority of their time engaged in intrastate commerce cannot avoid arbitration of their claims. This ruling is consistent with the public policy underlying the FAA, and avoids setting an unworkable precedent that even a “de minimis” amount of time spent engaged in interstate commerce is sufficient to meet the FAA’s exemption. The panel’s decision could be subject to a rehearing en banc by the full Ninth Circuit, and eventually one might expect that the Supreme Court will be asked to weigh in on the issues raised by the appeal.

 

By: Andrew McKinley and Eric Lloyd

Seyfarth Synopsis: Today, the U.S. Department of Labor rescinded the final rule entitled “Joint Employment Status Under the Fair Labor Standards Act,” more commonly known as the Joint Employer Rule. This alert provides an overview of the DOL’s action and its impact on employers.

With the growth of the gig economy and in light of the varying standards that have developed among the courts in the over-80-years since the passage of the Fair Labor Standards Act, the U.S. Department of Labor in January 2020 issued its first formal rule delineating the standard that should be applied to determine whether an entity qualifies as a joint employer. The rule’s discussion of horizontal joint employment – which assesses when multiple putative employers are sufficiently associated that hours worked for each must be aggregated to determine liability – substantively tracked prior DOL guidance. However, with respect to vertical joint employment, which assesses situations in which work for an employer simultaneously benefits another entity, the new rule adopted a four-factor test that focused primarily on whether the potential joint employer (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records.

Today, sixteen months after that rule went in effect, it is effectively dead.

The Joint Employer Rule

The DOL’s joint employer rule had been under assault almost from its announcement. In February 2020, before the rule went into effect, a group of state attorneys general filed a complaint in the Southern District of New York, seeking to invalidate the rule. The court ultimately agreed to vacate the rule, at least with respect to vertical joint employment, reasoning, among other things, that the DOL’s test reflected an impermissibly narrow interpretation of the FLSA, that the rule departed from the DOL’s prior interpretations without adequate explanation, and that the DOL had failed to consider the rule’s costs to workers.

The DOL appealed that decision to the Second Circuit, and submitted briefing in January 2021 supporting the challenged rule. Only two months after announcing that support, the DOL published a notice of proposed rulemaking, in which it proposed to rescind the joint employer rule, largely based on arguments contrary to its appeal. And today, while the appeal remains pending, the DOL issued its final rule of rescission, largely agreeing with the issues raised by the decision from the Southern District of New York. The DOL also went a step further than that decision and rescinded the rule’s horizontal joint employment analysis, concluding that the rule’s discussion of vertical and horizontal joint employment were intertwined, and that leaving the latter in place would engender confusion.

Impact on Employers

With the joint employer rule now rescinded, companies must look to the pre-rule patchwork of federal court decisions that vary across (and even within) jurisdictions to assess whether they may qualify as joint employers of third parties’ personnel under the FLSA. At the same time, employers need to continue to evaluate how different joint employer standards under state wage laws may create additional opportunities for exposure. Finally, employers should prepare for the possibility that the Biden Administration will use legislation, rulemaking, or non-binding guidance to expand the situations in which a company may be found to be a joint employer, particularly as the need for a uniform joint employment standard remains unaddressed.

If you would like to discuss any of these developments further, please feel free to contact the authors or your favorite Seyfarth attorney.

By: Daniel I. Small, Robert T. Szyba, Howard M. Wexler, and Glenn J. Smith

Seyfarth Synopsis: New Jersey Governor Phil Murphy signed a legislative package into law on July 8, 2021 that increases enforcement mechanisms for state agencies to impose a variety of penalties against employers who misclassify workers as independent contractors and creates a new office specifically designed to enforce such violations.  Most portions of the legislation are effective immediately.

Continuing his commitment to combat perceived worker misclassification in the Garden State, Governor Murphy signed additional legislation regarding independent contractor misclassification.  We discussed the 2020 legislative efforts by the Murphy administration to address misclassification concerns here.  Now, Governor Murphy has taken the following additional steps, in his administration’s words, to ensure that “New Jersey is the best state in which to be a worker in the entire country”:

  • Court Injunction. Bill A-5890/S3920 empowers the Commissioner of the Department of Labor and Workforce Development (“DOL”) to seek a superior court injunction to prevent ongoing violations of state wage, benefit, and tax laws stemming from employee misclassification, for which the Commissioner would be entitled to collect attorneys’ fees and litigation costs should it prevail.  The law does not provide any standards or factors the Commissioner must consider in determining whether to pursue an enforcement action and instead leaves such an analysis to the Commissioner’s “sole discretion.”  This provision takes effect immediately.
  • Stop-Work Orders. While the Commissioner was already able to issue a stop-work order for the “specific place of business” where a misclassification violation occurred, Bill A-5890/S3920 goes further and empowers the Commissioner to issue a stop-work order for one or more worksites, or across all an employer’s worksites, when the employer commits a single violation of a state wage, benefit, or tax law.  These stop-work orders can remain in effect until the Commissioner finds that the employer has come into compliance and has paid any penalties assessed and are not stayed by an employer’s request for a hearing.  Moreover, the stop-work order will become a final order after 72 hours should an employer not request an appeal in writing of the Commissioner’s decision to issue the order.  Additionally, workers affected by such a stop-work order are entitled to be paid by the employer for the first 10 days of work lost because of the stop-work order.  The Commissioner may bring any legal action necessary to collect any unpaid wages for the first 10 day of a stop-work order.  Finally, the Commissioner may assess a civil penalty of $5,000 per day against an employer for each day that it conducts business operations that are in violation of the stop-work order.  This provision takes effect immediately.
  • Creation of the Office of Strategic Enforcement and Compliance. Bill A-5891/S3921 creates a new office within the DOL — the Office of Strategic Enforcement and Compliance (“OSEC”) — to oversee and coordinate across the divisions of the DOL, and between the DOL and other state agencies and entities, for the strategic enforcement of state wage, benefit, and tax laws.  The law provides that, as a condition for receiving an award of direct business assistance from the DOL, or for the DOL to provide a report to another state agency or entity that a business is in good standing, the DOL will first determine whether the person or business has any outstanding liability to the DOL, including for unpaid contributions to the unemployment compensation fund or the state disability benefits fund, unless the business has entered into an agreement with the DOL to immediately and fully comply with the statutes and rules enforced by DOL and to resolve all delinquencies or deficiencies within a time period specified by the Commissioner.  The bill appropriates $1 million to the DOL to support and expand OSEC to effectuate the purposes of the bill.  This law is effective immediately.
  • Insurance Fraud. A-5892/S3922 makes misclassifying employees for the purpose of evading payment of insurance premiums a violation of the New Jersey Insurance Fraud Prevention Act and provides penalties for fraud involving misclassification — $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation.  Moreover, this bill permits the Bureau of Fraud Deterrence and the insurance fraud prosecutor to consult with the DOL to assist with the investigation of the failure to properly classify employees “for the purpose of wrongfully obtaining the benefits or of evading the full payment of the insurance benefits or insurance premiums.”  This law is effective either January 1, 2022 or February 1, 2022.[1]

Given these developments, the existing use of the ABC test in New Jersey, and a wage theft law that provides workers with a six-year statute of limitations and three times liquidated damages, employers with operations in New Jersey must consider how these new laws impact their business models, particularly those that rely on independent contractors in support of their business operations.  With New Jersey moving to the forefront of independent contractor compliance, employers are advised to conduct a review of their pay, timekeeping, and classification practices and policies in light of these developments.  Please feel free to consult with any of the authors regarding these and other New Jersey-specific updates.

 

[1] The legislation states “This bill shall take effect on the first day of the sixth month next following the date of enactment.”

By Lennon B. Haas, Kyle Petersen, and Kevin M. Young

Seyfarth Synopsis: Though it may sound esoteric, the question of whether “last mile” drivers fall within the Federal Arbitration Act’s transportation worker exemption bears tremendous consequence. If they are exempt, they can’t be compelled to arbitrate under the FAA. If they are not exempt, the answer reverses. In a recent decision, the Eleventh Circuit wedged open the door for employers to establish that these drivers steer clear of the exemption.

As a general matter, the Federal Arbitration Act requires courts to enforce arbitration agreements. The FAA does not apply, however, to employment contracts with “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Workers who fit this so-called transportation exemption cannot be required to arbitrate their claims under the FAA.

In recent years, last-mile delivery drivers have questioned whether last-mile driving qualifies for this exemption, such that they cannot be made to arbitrate under the FAA. Usually, the question turns on the determination of whether these drivers are engaged in interstate commerce. Courts have divided on whether it’s enough for last-mile drivers to deliver goods that have crossed state lines, even if the drivers never do.

On June 22, 2021, the Eleventh Circuit became the latest appellate court to enter the thickening fray, making clear that delivering goods that originate out of state is not enough to trigger the exemption. In doing so, the appellate court propped open the door for last-mile employers to argue that their drivers are not exempt from the FAA and may be mandated to arbitrate under the Act.

The employer in this case, Partsfleet, helps to bridge the last-mile gap. To do so, it contracts with drivers like Curtis Hamrick, a last-mile delivery driver, who pick up goods from local warehouses and deliver them to their final destination. Those contracts require that disputes between Partsfleet and its drivers must proceed in arbitration.

Hamrick sued Partsfleet for alleged unpaid overtime under the FLSA. Partsfleet moved to compel the matter to arbitration. Resisting, Hamrick argued that he and other last-mile drivers fell within the transportation worker exemption, such that they could not be required to arbitrate under the FAA. The district court agreed, reasoning that (i) the drivers transported goods that traveled in interstate commerce, and (ii) that transport was the core function of their job.

Hamrick’s victory was short-lived. In its recent opinion, the Eleventh Circuit ruled that the district court’s analysis departed from the proper test for the exemption. To unlock the exemption, a worker must be employed in the transportation industry. But that alone isn’t sufficient—the worker must also, “in the main,” engage in the transportation of goods across state lines.

Relying on cases interpreting “interstate commerce” related language in different statutory contexts—namely, the FLSA and Motor Carrier Act—Hamrick had urged that drivers performing intrastate trips qualified for the FAA’s exemption so long as “they transport items which had been previously transported interstate.” Not so, ruled the Eleventh Circuit, observing that the FAA presented a distinct statutory scheme in which exemptions receive narrow construction.

The appellate court also took issue with Hamrick’s focus on goods instead of workers. The transportation worker exemption is just that, the court reasoned: an exemption “directed at what the class of workers is engaged in, not what it is carrying.” A test that requires workers to actually engage in the transport of goods between states honors the exemption’s text by: (i) maintaining the link between “workers” and “engaged in interstate commerce”; and (ii) defining that “residual phrase…consistently with the other transportation workers mentioned in the exemption.”

Because the district court did not apply the proper test, the Eleventh Circuit remanded for fact finding on whether Hamrick, in his work as a last-mile delivery driver, was employed in a transportation industry that actually engages in interstate commerce.

For last-mile businesses with operations in the Eleventh Circuit (which embraces Alabama, Florida, and Georgia), this decision is critically important. If last-mile drivers cannot establish they are employed in a transportation industry that actually engages in interstate commerce (i.e., transporting goods across state lines), then their promises to arbitrate their claims can be enforced under the FAA. The FAA’s transportation worker exemption will not apply.

The decision matters outside the Eleventh Circuit as well. While not binding outside the circuit, the ruling can be cited as persuasive authority in analogous cases. Moreover, the decision—which aligns with Wallace v. Grubhub Holding, Inc., 970 F.3d 798 (7th Cir. 2020), but breaks with decisions issued by the First and Ninth Circuits—inches this important issue closer to the type of circuit split that might command attention from the U.S. Supreme Court.

By: Ariel Fenster and Noah Finkel

Seyfarth Synopsis:  If the gist of a proposed regulation is made final, the 80/20 rule will be back, and with a vengeance.  Employers who take a tip credit for their tipped employees will have to ensure that those employees spend no more than 20 percent of their time in a workweek, and no more than 30 minutes of uninterrupted time, on side work that does not itself generate tips.

Tip credit regulations always have been a murky stew for employers.  Congress enacted the tip credit provisions to the FLSA to alleviate some of the financial burdens on industries that employ tipped workers.  At the time, the goal was simple: count a portion of customers’ gratuities for service employees toward the minimum wage. Yet, over the years, whether a tipped employee is eligible for tip credit has been a hotly contested issue both in the courts and in various presidential administrations’ rulemakings.  Just last week, the United States Department of Labor issued a Notice of Proposed Rule Making (NPRM) which creates greater limits on an employer’s ability to take a tip credit under the FLSA.

What is Currently on the Tip Credit Menu?

Currently, the maximum tip credit an employer can take for “tipped employees” is $5.12 per hour.  With a federal minimum wage of $7.25 per hour, this means that an employer may pay its employees an hourly wage of $2.13 per hour, on the basis that tips that customers provide will more than make up for the $5.12 per hour difference between that wage and the minimum wage.

But what exactly constitutes a tipped employee, and what happens when a tipped employee isn’t always engaging in activities that earn tips?  Since the tip credit was introduced, the DOL has explained that an employee may be employed in two occupations, one tipped and one not, but the employee may be paid the sub-minimum wage amount only for time in a tipped occupation.  For example, an employee may be employed by a hotel as a both a maintenance employee and restaurant server, but can be paid under the tip credit only for time spent as a restaurant server.

That, however, can be a difficult line to draw, particularly when a tipped employee spends part of their time on duties that relate to tipped work, but don’t produce tips themselves. For example, how should a restaurant pay a server who rolls or polishes silverware, bussers who may spend time brewing coffee, or bartenders who clean bar glasses (think Sam Malone in Cheers with his ever-present white towel drying beer mugs)?

Restaurateurs have long struggled to make sense of when they can and can’t use the tip credit. For decades, the DOL explained what are and what aren’t tip-producing duties, what duties are and are not related to tipped duties, and how much tolerance exists for a tipped employee to perform duties that aren’t tip producing duties only through opinion letters and its Field Operations Manual.  In doing so, the DOL never definitely set forth what is and isn’t tipped, but it did determine that a tipped employee couldn’t spend more than 20% of their time on “related duties.”  Unsurprisingly, this lack of clarity and the 80/20 rule led to a smorgasbord of litigation and, consequently, large settlements.

In 2018, however, the DOL took the 80/20 rule off the menu.  In an employer win, the DOL issued new sub-regulatory guidance removing the rigidness of a specific time split, and codified its guidance in a regulation.  That regulation, which was published in December 2020 and was scheduled to go into effect on March 1, 2021, eliminated the focus on a specific percentage of time spent on non-tipped duties and instead stated that an employer may take the tip credit for the time an employee performs related, non-tipped duties, as long as those duties are performed contemporaneously with, or for a reasonable time immediately before or after, tipped duties.  And to make things clearer, the DOL defined related duties by stating that a non-tipped duty is presumed to be related to a tip-producing occupation if it is listed as a task of the occupation in the Occupational Information Network O*NET.

No longer, it appeared, were hospitality employers required to calculate how much time tipped employees spent task by task.  No longer, it seemed, were such employers left to wonder what is and what isn’t a tipped or tipped-related task.

This period of relative calm lasted as long as it takes to eat an amuse bouche, unfortunately, as several courts refused to defer to the DOL’s new sub-regulatory guidance and continued to adhere to the 80/20 rule.  Further, once the administration changed, the DOL delayed the effective date of the regulation.

The Old/New Recipe for the Tip Credit

Last week, the DOL published a NPRM replacing that 2020 rule. The new proposed rule largely repackages the old 80/20 rule, and also places even greater limits on employers’ ability to take the tip credit under the FLSA.  What is work within a tipped occupation is no longer guided by the duties listed in O*NET.  Rather, under the new proposed rule, work within a tipped occupation includes (a) work that “produces tips” or (b) work that “directly supports” tip-producing work, provided it is “not performed for a substantial amount of time.”

Tip-producing work is defined circularly as “any work for which tipped employees receive tips.”  The DOL provides precious few examples in the regulation of that for a few job categories, noting that “a server’s tip producing work includes waiting tables” and that “a bartender’s tip-producing work includes making and serving drinks.”  The commentary to the proposed regulation provides a few other examples, but, because tip-producing work is defined only through examples, the proposal ultimately leaves it up to individual DOL investigators and judges to decide what they each think produces tips and what doesn’t.

So too with the definition of work that “directly supports tip-producing work.”  It is defined as “work that assists a tipped employee to perform the work for which the employee receives tips.”  Again, the proposed regulation provides only a few examples.  For servers, it includes “preparing items for tables so that the servers can more easily access them when serving customers or cleaning the tables to prepare for the next customers” and for, bartenders, it includes “slicing and pitting fruit for drinks so that the garnishes are more readily available to bartenders as they mix and prepare drinks for customers.”  The commentary to the DOL’s proposal lists a few other examples, but again leaves restaurateurs and bar owners wondering which tasks are tip-producing, which merely support tip-producing work, and which are completely outside the tipped occupation.

As noted, the proposed rule provides that work that directly supports tip-producing work is work within a tipped occupation only to the extent it not performed for a “substantial amount of time.”  The proposed rule provides that work is performed for a substantial amount of time if it (1) exceeds, in the aggregate, 20 percent of the employee’s hours worked during the workweek or also if (2) it is performed for a continuous period of time exceeding 30 minutes.  In other words, the 80/20 rule has returned, is being codified, and now is accompanied by a limit on how much side work can be performed under the tip credit at any one given time, which many employers may view as particularly troubling.  Indeed, under the DOL’s proposal, if server Jane were to work a 40-hour week under the tip credit, earn several hundred dollars in tips, spend a total of seven hours cleaning tables along the way, and then spend one 30-minute stint rolling silver while the restaurant is slow, no FLSA violation is committed.  But if server Joe were to work that same 40-hour workweek for double the amount of tips that Jane received, spend no time cleaning tables, but then spend a single 31-minute stint rolling silver, his employer would face FLSA liability for paying Joe under the tip credit.

For the next two months, the public has the opportunity to submit comments to the proposed rule.  We suspect that many employers of tipped employees will be challenging the DOL to reconsider several aspects of its proposed rule, including:

  • The circular nature of the definitions of “tip-producing work” and work that “directly supports” it;
  • The small number of examples of those terms;
  • The fact that employers likely would have to track tipped employees’ job duties by the minute and with multiple job or pay codes, and/or create and enforce highly-regimented work schedules designating when employees may help with side work;
  • Whether the additional 30-consecutive minute rule is necessary on top of the 80/20 rule;
  • If an employee makes a large amount of tips from which their take-home pay is exponentially greater than the minimum wage, whether there is a need to apply these stringent regulations at all; and
  • The effect of the new rule on employees who support servers and bartenders, viewed traditionally as tipped employees, performing duties like pitting olives, clearing dishes, and rolling silverware.

The DOL’s comment period is open until August 23, 2021.  Concerned employers should make their views known, but brace themselves for a set of tip credit rules that will be difficult to administer and likely would lead to large serving of litigation.

 

Tuesday, May 25, 2021
1:00 p.m. to 2:00 p.m. Eastern
12:00 p.m. to 1:00 p.m. Central
11:00 a.m. to 12:00 p.m. Mountain
10:00 a.m. to 11:00 a.m. Pacific

Classifying workers properly to comply with wage-hour and fair employment laws is an important aspect that many businesses are already aware of, but misclassifying workers may have unintended effects to other legal interests, including non-competes and other restrictive covenants. In this third installment of our 2021 Trade Secrets Webinar Series, our team outlines the connections between wage and hour law and restrictive covenant law.

The panel will discuss:

  • State restrictive covenant laws that expressly or by inference incorporate federal or state wage and hour laws
  • State restrictive covenant laws that impose compensation thresholds for enforcement of non-compete agreements
  • Tips for drafting restrictive covenants in independent contractor agreements to avoid misclassification claims
  • Pros and cons of mandatory arbitration clauses in employment agreements in wage and hour and restrictive covenant litigation

REGISTER HERE

Speakers
Daniel Hart, Partner, Seyfarth Shaw LLP
Kevin Young, Partner, Seyfarth Shaw LLP
Cary Burke, Associate, Seyfarth Shaw LLP

If you have any questions, please contact Colleen Vest at cvest@seyfarth.com and reference this event.

This webinar is accredited for CLE in CA, IL, NJ, and NY. Credit will be applied for as requested for TX, GA, WA, NC, FL and VA.  The following jurisdictions accept reciprocal credit with these accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, CT, ME, NH.  The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD.  For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used in other jurisdictions for self-application. To request CLE credit, fill out the recorded attendance form linked above and return it to CLE@seyfarth.com. If you have questions about jurisdictions, please email CLE@seyfarth.com. CLE credit for this recording expires on May 24, 2022.