By: Michael Afar

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

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

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

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

Case Background

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

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

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

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

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

The Ninth Circuit Affirms The Denial Of Class Certification

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

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

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

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

Implications For Employers In Defending Wage-Hour Class Actions

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

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

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

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

 

 

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

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

By: Brian A. Wadsworth and Andrew L. Scroggins

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

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

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

Breaks and Overtime

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

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

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

Wage Rates

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

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

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

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

Paystubs

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

Travel Time

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

Final Pay

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

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

By: Louisa J. Johnson and Noah A. Finkel

Seyfarth Synopsis: Much has been written in the past few weeks about a recent federal court decision that invalidated the U.S. Department of Labor’s (“DOL”) joint employment rule. While the immediate reaction of some may be to view this as a terrible decision for businesses that expands the potential for an entity that does not employ an individual to nonetheless be deemed that individual’s joint employer, this reaction may overstate the decision’s importance for putative joint employers.

The rule at issue is 29 C.F.R. § 791.2, which the DOL amended in January of this year, and which 18 states sought to enjoin through a lawsuit brought in the U.S. District Court for the Southern District of New York. The court invalidated the new rule with respect to “vertical joint employment,” which refers to situations in which the employee has an employment relationship with one employer but a separate company also benefits simultaneously from the work of the employee, often through a contract with the direct-employing entity. The court reasoned that the DOL’s new rule for vertical joint employment was essentially the same as the common law control test for joint employment. This purported similarity, the court said, was proof that the DOL’s new test was impermissibly narrow because Congress intended the scope of employment under the FLSA to be very broad.

The court also found that the DOL had departed from its earlier non-binding interpretations of vertical joint employment issued by the DOL during President Obama’s administration without sufficient explanation of why those interpretations were wrong in conflating the “economic realities” case law on joint employment with “economic dependence.” In the court’s opinion, the focus of the joint employer test should be on economic dependence, with all factors that were designed for the independent contractor test incorporated into the joint employer test. While the court’s view may have academic appeal by simplifying the “economic realities” test and combining the independent-contractor and joint employment tests into one, it is not a pragmatic or fair approach. Too many factors under the independent contractor test would point to a joint employment finding in virtually every contractual relationship through which one company benefits from work performed by the workers of another company. By way of example only, whether an individual works permanently or indefinitely for a single company or instead performs project-based work for multiple different companies and whether that individual has the opportunity for profit and loss in the performance of the work have been deemed relevant factors in determining whether the individual should be classified as an employee or an independent contractor. These same factors would always, and often wrongly, point to joint employment status if they played a key role in the joint employer entity. Naturally, an individual who is employed fulltime by his employer on an hourly basis without the opportunity for profit or loss is economically dependent on his employer; that does not mean he is jointly employed by another entity that benefits from his long-term, hourly-based relationship with his employer.

Perhaps more perplexing still is the court’s ultimate determination that Congress’s intended meaning of a joint employer for purposes of the FLSA is clear from the language of the Act itself and that the DOL’s interpretive rule is clearly at odds with that intent. Before reaching this conclusion, the court summarized eighty years’ worth of differing interpretations of the joint employer standard, suggesting that it is not at all clear to most courts how Congress intended to define a joint employer.

Irrespective of whether the court’s decision is right about what the joint employment standard is or should be, the ultimate question for putative joint employers is what impact it will have on their contractual relationships with the actual employers of workers and the threat of future litigation over those relationships. As the court’s decision acknowledges, the 2020 amendments to 29 C.F.R. Part 791 offered nothing more than a clarification of the DOL’s interpretation of the joint employer standard; the rule was merely the DOL’s guidance to employers and employees, not a regulation establishing new law, and thus is entitled Skidmore deference. This means that even if the court had not taken the rare step of enjoining the DOL’s new joint employer rule, each subsequent court with a joint employer case before it could have decided for itself whether to deem the rule persuasive because the DOL’s rule was not a controlling regulation with the force of law. It remains to be seen whether the DOL will appeal the Court’s decision to the Second Circuit.

Thus, despite the court’s decision to “vacate” much of 29 C.F.R. § 791.2, putative joint employers are in essentially the same position in which they found themselves before this decision: without a DOL regulation that carries the force of law and with federal court decisions on the joint employer standard that vary by jurisdiction, to say nothing of the various state wage-hour law standards for joint employer that may call upon different factors than the federal test under the applicable federal circuit’s common law.

Of course, businesses concerned about the possibility of being deemed joint employers would be wise to exercise particular caution in the 18 states that brought the lawsuit against the DOL to enjoin its amendments to the joint employer rule. The states who sued did so on the ground that it would cause them to issue new guidance at a state level to explain their different view of joint employment and ensure they have more than one pocket from which to seek taxes in the event that the actual employer fails to properly classify its workers as employees and properly pay them.

But perhaps most important of all for putative joint employers to remember is that the arguments the DOL made in its interpretive rule for considering some factors and not others to be part of the joint employer standard were largely based on existing case law and thus remain available to businesses in defending against joint employer litigation, separate and apart from the DOL’s vacated rule. And these arguments may still be deemed persuasive by other judges.

By: Noah A. Finkel, Camille A. Olson, Louisa J. Johnson, and John R. Skelton

For decades, companies have wrestled with whether certain workers must be treated as employees subject to various employment laws and company rules or whether they are appropriately classified as independent contractors with different terms of engagement, work, and pay and tax consequences. Amid a changing economy and evolving business models, companies continue to consider the application of an alphabet soup of federal employment statutes plus the laws of the states in which they do business, many of which contain different definitions of “employee” and conversely “independent contractor,” few of which provide clear guidance on how to meet the definition of independent contractor status.

The FLSA has been a leading source of this uncertainty. Because the FLSA’s text does not provide a clear definition, it largely has been up to the courts to define “employee” under the FLSA, and thus determine which workers are subject to the FLSA’s minimum wage and overtime provisions and which are not. All courts have used an elastic, multi-factor test, but unsurprisingly, the circuits have diverged on what those factors are, what those factors mean, and how those factors should be applied. Meanwhile, the Wage-Hour Division of the U.S. Department of Labor, which is charged with enforcing and interpreting the FLSA, has been relatively silent, issuing only individual worker specific opinion letters, a fact sheet, a since-withdrawn Administrator Interpretation, and regulations applicable only to logging and sharecropping.

Today, however, the DOL issued for the first time proposed interpretations, to be codified as a rule, defining employee versus independent contractor under the FLSA. The interpretations, if finalized in or close to their proposed form, would provide clearer guidance for companies and, in many cases, could minimize the chances that courts apply the FLSA definition of employee to workers who seemingly should be allowed to be treated as contractors. As discussed below, however, DOL interpretations are not controlling law and do not give license to companies to classify all workers as contractors. There remain several hurdles to the DOL’s proposal becoming a final rule, the DOL’s proposal still would result in a good number of workers having to be classified as employees, and other federal and especially state laws may nevertheless cause a company to classify a worker as an employee for other purposes.

What the DOL’s Proposal Does

Those hoping for a bright-line rule on who is an employee and who isn’t will be disappointed by the DOL’s proposal, because it still involves a several factor test.  Those hoping for the common law right to control test (which is used by the IRS) also will be disappointed, because the DOL didn’t adopt it either.  The DOL believes Supreme Court precedence requires it to continue to adhere to the “economic realities” test. That said, the DOL’s proposal would clarify how to apply the factors under the economic realities test in a more clear and modern way to determine whether a worker is economically dependent on, and thus an employee of, a putative employer.

The DOL’s proposal — which would be codified at 29 C.F.R. §§ 795.100 through .195 —  first would elevate two “core factors” from the economic realities test above all others:

  • The nature and degree of an individual’s control over the work; and
  • The individual’s opportunity for profit or loss.

If both factors point toward the same classification, whether employee or independent contractor, “there is substantial likelihood that is the individual’s accurate classification.” If they point in opposite directions, then the three “other factors” likely will tip the balance. These are:

  • The amount of skill required for the work;
  • The degree of permanence of the working relationship between the individual and the potential employer; and
  • Whether the work is part of an integrated unit of production.

The proposal contains certain specific guidance to assist companies in determining whether they can engage in certain workplace practices to enhance the safety of all employees and invitees while holding workers to certain final results in requirements in terms of quality and timeliness of provided services. It makes clear that “[r]equiring an individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses” does not render a worker more or less likely to be an employee. Such guidance likely will help franchisors in particular, who maintain that some level of control is inherent in a true franchise relationship and actually is required under the Federal Trade Commission’s Franchise Rule, 16 C.F.R. § 436.1, et seq. and Federal Trademark Law, 15 U.S.C. § 1127. It also provides that the opportunity for profit or loss isn’t limited to a worker’s capital investment and can include the exercise of initiative, such as managerial skill or business acumen or judgment, another hallmark of a business-format franchise relationship. It dispels the notion that a “long-term” worker is more likely to be an employee by stating that such a factor weighs in favor of employee status “to the extent the work relationship is instead by design indefinite in duration or continuous.”

Perhaps most significantly, and in contrast to interpretations of the ABC test under California and some other state’s wage-hour laws, the proposal substantially would reduce reliance on the extent to which a worker’s services are “integral” to, or an essential part of, the putative employer’s business. In a section helpful to companies that provide a platform or marketplace for customers to be matched with workers who desire to provide services, the DOL persuasively explains in the preamble to its proposal why such a formulation is inappropriate in determining whether a worker is economically dependent on, and thus an employee of, a company. In its place, the DOL proposes to inquire whether a worker’s activities are “a component of the potential employer’s integrated production process for a good or service,” further explaining that a worker is more likely to be a contractor when the work is “segregable from the potential employer’s production process.” Indeed, in the preamble explaining the proposal, the DOL noted that, under this test, “discrete, segregable services for individual customers is not part of an integrated unit of production” and provided an example of workers who provide services to a virtual marketplace company’s individual customers. The proposal further stresses that this factor should not be confused with “the concept of the importance or centrality of the individual’s work to the potential employer’s business.”

Finally, in a subsection that may assist employers in defeating or limiting collective action certification, the DOL’s proposal stresses that “the actual practice of the parties involved is more important than what may be contractually or theoretically possible.” Thus, a worker’s theoretical ability to negotiate prices or work for a competing business doesn’t move the needle much toward contractor status if those don’t happen. On the other hand, the mere contractual authority to supervise or discipline a worker is of little relevance in deeming a worker an employee if that authority isn’t exercised.

The Limits of the DOL’s Proposal

The DOL’s proposal is far from a cure all for companies seeking absolute clarity on a worker’s status under the FLSA. Under the proopsal, the definition of employee becomes more clear, but it remains fairly broad and will continue to be applied based on the particular facts of any case.  And there are some instances where a company may have more difficulty in classifying a worker as a contractor where that worker does not have an opportunity for profit or loss.

If finalized, the proposal must be kept in perspective. Unlike some other recent DOL rules, such as on the minimum salary for the white-collar exemptions, this DOL rule is an interpretive guidance. Courts have the final say on who is an employee and who is an contractor, and they must give a DOL interpretation such as this one Skidmore deference, which is based on how persuasive each judge finds this guidance.

Further, to the extent that this proposal is applied by courts, it is applicable only under the FLSA. Differing definitions of “employee” will continue to exist under other federal employment statutes. More significantly, several state overtime and other wage-hour laws, some of which use the ABC test to determine employee vs. contractor status, are unaffected by the DOL’s proposal.

What Happens Next

Whether the rule becomes finalized and effective remains to be seen. The DOL announced a 30-day comment period that will commence upon formal publication of the proposal, which likely occur on Friday. Once comments are submitted, the DOL must consider them and then prepare a final rule. It is not clear whether that can be accomplished before Inauguration Day and whether a different administration would continue to pursue this proposal. It also is possible that the rule could be subject to rejection under the Congressional Review Act, a possibility if the Senate majority changes parties and the administration changes. It also is possible that a coalition of state attorneys general will seek an injunction against the rule, similar to the one recently granted by a federal district judge against a recent DOL interpretation on the definition of joint employer.

By: Gerald L. Maatman, Jr. and Alex S. Oxyer

Seyfarth Synopsis: Incentive awards for class representatives are impermissible, according to a ground-breaking decision last week by the U.S. Court of Appeals for the Eleventh Circuit.  Though not an employment case, the decision is a must-read for class action practitioners handling all varieties of workplace class and collective action litigation, such as wage & hour and employment discrimination lawsuits.  The decision may diminish the ability of plaintiff’s lawyers to recruit class representatives and may change how practitioners settle class and collective actions.

On September 17, 2020, the Eleventh Circuit reversed in part and vacated in part the approval of a class settlement in a Telephone Consumer Protection Act (“TCPA”) case, determining that “in approving the settlement here, the district court repeated several errors that, while clear to us, have become commonplace in everyday class-action practice.” The errors found by the Eleventh Circuit included, among others, the award of an incentive payment to the named plaintiff. In holding that incentive awards compensating class representatives for their time and rewarding them for bringing a lawsuit are unlawful, the Eleventh Circuit has eliminated a significant incentive for plaintiffs to bring claims as class actions instead of individual suits. The case is Johnson v. NPAS Sols., LLC, No. 18-12344, 2020 WL 5553312 (11th Cir. Sept. 17, 2020).

Case Background

This case began when the named plaintiff sued NPAS Solutions, LLC in the U.S. District Court for the Southern District of Florida, alleging violations of the TCPA. In his suit, the plaintiff claimed that NPAS, a company that collects medical debts, had used an automatic dialing system to call his cell phone without his consent. Specifically, the plaintiff alleged that NPAS had a practice of calling phone numbers that had originally belonged to consenting debtors but had been reassigned to non-consenting individuals.

Several months after the complaint was filed, the parties reached a class-wide settlement of the claims and moved to certify the class for settlement purposes and obtain approval of the settlement from the district court. The district court preliminarily approved the settlement and certified the class. The district court also appointed the named plaintiff as the class representative and his lawyers as class counsel, and its order stated that the plaintiff could “petition the Court to receive an amount not to exceed $6,000 as acknowledgment of his role in prosecuting this case on behalf of the class members.” Id. at *2. The district court then set a deadline for class members to opt out of the settlement and to file objections to the settlement. It set a date 18 days after the opt-out/objection deadline as the date by which the parties had to submit their motion for final approval of the settlement and their responses to objections, and by which class counsel had to submit their petition for attorneys’ fees and costs.

The class members were then notified about the settlement and, after the expiration of the objection deadline, no class members opted out and only one objected to the settlement. The objector noted several bases for her objection, including, among others, the district court’s decision to set the objection deadline before the deadline for class counsel to file their attorneys’-fee petition; the amount of the settlement; and the class representative’s incentive award. The district court granted final approval of the settlement over the objections, and the objector appealed the approval to the Eleventh Circuit.

The Eleventh Circuit’s Opinion

On appeal, the Eleventh Circuit considered three separate arguments raised by the objector regarding the approval of the class settlement by the district court, including: (1) that the district court erred when it required class members to file objections to the settlement before the class counsel had filed their fee petition; (2) that the district court’s approval of the $6,000 incentive award was in contravention of U.S. Supreme Court precedent; and (3) that the district court failed to provide sufficient explanation of the settlement approval to allow for meaningful appellate review.

The Eleventh Circuit’s opinion first addressed whether the district court was in error when it required objections to be filed before class counsel was required to file their fee petition. The Eleventh Circuit concluded that Rule 23(h) clearly requires a district court to sequence filings so that class counsel must file and serve their motion for attorneys’ fees before any objection pertaining to fees is due and, accordingly, the district court erred in requiring that objections be filed prior to the fee petition. However, the Eleventh Circuit ultimately found that the error was harmless, as the objector had already lodged a detailed objection to the attorneys’-fee award before class counsel had filed their petition. Accordingly, the potential harm that could have occurred by requiring objections to be filed prior to the fee petition was not present in this case.

The Eleventh Circuit then considered the argument relative to the incentive award granted to the class representative. In the most notable part of the opinion, the Eleventh Circuit overturned the incentive award in light of the Supreme Court holdings in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). The Eleventh Circuit interpreted these more than 135 year old holdings to stand for the proposition that “[a] plaintiff suing on behalf of a class can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he cannot be paid a salary or be reimbursed for his personal expenses.” Johnson, 2020 WL 5553312 at *9 (emphasis added). The Eleventh Circuit then opined that “we think that modern-day incentive awards present even more pronounced risks than the salary and expense reimbursements disapproved [by the Supreme Court]. Incentive awards are intended not only to compensate class representatives for their time (i.e., as a salary), but also to promote litigation by providing a prize to be won (i.e., as a bounty).” Id. The Eleventh Circuit found that the incentive award at issue in the case was a combination of “salary” and “bounty” and, accordingly, was not permissible.

Finally, the Eleventh Circuit examined the district court’s order giving final approval of the settlement. Despite the Rule 23 requirement that when awarding “reasonable attorney’s fees and nontaxable costs,” the court “must find the facts and state its legal conclusions under Rule 52(a),” the Eleventh Circuit determined that the district court had failed to articulate its reasoning for approving the attorneys’ fees, incentive award, or litigation costs accorded in the settlement. Id. at *13. In light of this deficiency, the Eleventh Circuit remanded the case back to the district court for additional analysis of the awards.

Implications

The Eleventh Circuit’s ruling in Johnson has dealt a significant blow to the plaintiffs’ bar in their efforts to recruit individuals to act as class representatives for class claims. By eliminating the availability of incentive awards to compensate plaintiffs for their time and efforts, the appeal to plaintiffs for bringing claims as a class action instead of a single plaintiff case is diminished. The Eleventh Circuit’s ruling currently cuts against the holdings of the other U.S. federal courts of appeals; however, time will tell whether other circuits will begin adopting the Eleventh Circuit’s interpretation of early Supreme Court precedent that modern-day incentive awards are generally impermissible. Another open issue is whether this concept will take hold in collective actions brought under the Equal Pay Act and Fair Labor Standards Act. While the logic of the Eleventh Circuit’s ruling suggests that the result would be the same, such a development would stand the practicalities of settling class and collective actions on their head. However, practitioners might consider settling class and collective action lawsuits by providing the class representative, or collective action lead plaintiff, with a reasonable supplemental payment in exchange for a release that is broader than the one to which the class or collective agrees in an effort to eliminate the issues raised by the Eleventh Circuit.

By: Eric Lloyd, Scott Mallery, and Kerry Friedrichs

Seyfarth Synopsis: Businesses operating in California have had all of eight months to adapt since Assembly Bill 5 (“AB 5”), a landmark piece of legislation governing their relationships with independent contractors, took effect on January 1, 2020.  Now, with the passage, executive signature, and immediate enactment of Assembly Bill 2257 (“AB 2257”), businesses must once again adapt to another drastic shift in the employee classification calculus.

On September 4, 2020, AB 2257, which substantially revises and clarifies California’s independent contractor laws, went into effect immediately upon receiving California Governor Gavin Newsom’s signature.  AB 5, as businesses are all too aware, installed the “ABC Test” as the default standard for determining whether independent contractors should be treated as employees of a hiring entity, and also set forth a labyrinthine list of exemptions from its purview.  From its inception, AB 5 has stirred an inordinate amount of controversy—not only have we written extensively on the measure, we also have our own tag dedicated exclusively to the issue.  Our prior analysis of AB 5 can be accessed here.  AB 2257, which preserves the ABC Test for independent contractor classification, expands the universe of available exemptions from this test.  The new law will no doubt delight some businesses, frustrate others and confound anyone responsible for keeping track of the exemptions.

Background On AB 5

AB 5, which took effect on January 1, 2020, codified the ABC Test for employee status adopted in the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court.  In Dynamex, the California Supreme Court held that in order to defeat claims arising under California’s Wage Orders premised on independent contractor misclassification, a defendant must prove that: (A) the worker is free from control and direction of the hiring entity in connection with performing the work, both under contract and in fact; (B) the worker performs work outside the usual course of the hiring entity’s business; and (C) the worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

AB 5 expanded the reach of Dynamex by making the ABC Test the default test for all Labor Code, Unemployment Insurance Code and Wage Order claims.  As a result, application of the ABC Test was extended to a host of additional causes of action to which it previously did not apply, such as, for instance, claims for failure to reimburse necessary business expenses and failure to provide accurate wage statements.

In addition to expanding the applicability of the ABC Test, AB 5 also provided for broad governmental enforcement powers.  It enabled the Attorney General and certain city attorneys to pursue injunctions against businesses suspected of misclassifying independent contractors.

AB 5 also contained numerous statutory exemptions from the ABC Test.  Provided certain criteria were met, the employment status of independent contractors in an occupation covered by one of these exemptions was determined by the common law test for employment (commonly known as the Borello test), a considerably more flexible standard than the ABC Test. The fact that some industries were expressly exempted while others were not, led to controversy, confusion, and requests from hiring entities and workers in dozens of industries for additional and clarifying legislation.  As of February of this year, the Legislature introduced 34 stand-alone bills exempting certain industries. As those measures wound through the legislative process, they were, for the most part, distilled into AB 2257.

What’s New In AB 2257?

AB 2257 maintains the essential framework of AB 5.  The ABC Test remains the default standard for independent contractor misclassification.  However, as a result of swift and concerted lobbying efforts, a plethora of new statutory exemptions from the ABC Test, which apply retroactively where applicable, are now available.  In addition, some of the existing exemptions have been altered in potentially significant ways.

  • Business-To-Business Exemption: AB 2257 maintains the exemption for “bona fide business-to-business contracting relationships” where a contractor “acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership or corporation contracts to provide services to another such business.”  The exemption now also applies where a “public agency or quasi-public corporation” has retained a contractor.  However, in addition to broadening the availability of the exemption, AB 2257 also extends the application of the ABC Test to individual workers retained by a contractor, with respect to their relationships with both the contractor and the hiring entity.  In other words, the ABC Test will determine whether an individual worker retained by a contractor, and not directly by the hiring entity, is an employee of the hiring entity.  While case law holds that the ABC Test does not apply where a worker has been classified as an employee, the unclear phrasing of the new business-to-business exemption could lead to litigation on this subject.
  • “Single-Engagement” Business-To-Business Exemption: AB 2257 creates an exemption from the ABC Test for individual businesspersons who contract with one another “for purposes of providing services at the location of a single-engagement event.”  Provided certain criteria are met (including a lack of control over the work, a written contract specifying payment amounts, and each individual’s maintenance of his or her own business location), the ABC Test will not apply where one individual contracts with another to perform services at “a stand-alone non-recurring event in a single location, or a series of events in the same location no more than once a week.”
  • Referral Agency Exemption: AB 2257 also includes clarifications of the referral agency exemption, which may exempt from the ABC Test the relationship between an individual operating as a sole proprietor or a business entity and a business that refers that individual’s services to clients. For starters, AB 2257 expands the referral agency exemption significantly, expressly applying the exemption to a non-exclusive list of additional services, including consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors and interpreting services.  Indeed, according to the Senate Committee on Labor and Employment analysis, the referral agency expansion was one of the most significant changes in AB 2257.  In addition to expanding the scope of the exemption, AB 2257 expressly provides that the ABC Test governs “the determination of whether an individual worker is an employee” of the contractor referred to provide services, or an employee of the client to which the contractor was referred.  As with the analogous clarification of the business-to-business exemption, this is a potentially significant addition in that it may lead to litigation over whether the ABC Test applies to workers who have been classified as employees.
  • Professional Services Exemption: AB 2257 expands the already lengthy list of occupations that may qualify for an exemption from the ABC Test under the professional services exemption.  The following occupations, in addition to those originally identified in AB 5, may be subject to the common law test for employment as a result of AB 2257: content contributors, advisors, producers, narrators or cartographers for certain publications (provided they do not displace existing employees); specialized performers hired to teach a class for no more than a week; appraisers; registered professional foresters; and home inspectors.  AB 2257 also eliminates restrictions in AB 5 that threatened to upend the journalism industry.  Whereas AB 5 limited the number of “submissions” independent contractors of various types, including still photographers and photojournalists, videographers, photo editors, freelance writers, translators, editors/copy editors and illustrators/newspaper cartoonists, could publish in a single forum without sacrificing their contractor status, AB 2257 removes the submission cap and instead requires that businesses refrain from displacing existing employees in order to utilize one of these types of contractors.
  • Music Industry & Performer Exemptions: AB 2257 creates several exemptions for the entertainment industry, primarily in the music industry.  First, the following occupations involved in creating, marketing, promoting or distributing sound recordings or musical compositions are exempt from the ABC Test: recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers and mixers, musicians, vocalists, photographers, independent radio promoters and certain types of publicists.  Notably, however, musicians and vocalists who do not receive royalties from a sound recording or musical composition must be paid the applicable minimum and overtime wages, as though they were employees.  Second, musicians and musical groups engaged for a single-engagement live performance event (i.e., a concert) are exempt from the ABC Test unless: (a) they perform as a symphony orchestra, or in a musical theater production, or at a theme park or amusement park; (b) are an event headliner in a venue with more than 1,500 attendees; or (c) perform at a festival that sells more than 18,000 tickets per day.  Finally, individual performance artists including comedians, improvisers, magicians and illusionists, mimes, spoken word performers, storytellers and puppeteers who perform original work they created will qualify for an exemption so long as they are free from the hirer’s control, retain the intellectual property rights related to their performance, set their terms of work and negotiate their rates.
  • Miscellaneous Exemptions: Subject to certain requirements, AB 2257 adds exemptions for the following occupations: manufactured housing salespersons; certain individuals engaged by international exchange visitor programs; and competition judges (including amateur umpires and referees).
  • Broader Governmental Enforcement Powers: AB 2257 provides district attorneys the ability to file an injunctive relief action against businesses suspected of misclassifying independent contractors.  Previously, only the Attorney General and certain city attorneys possessed this power.

Which Industries Were Excluded From AB 2257?

AB 2257 does not include exemptions for a number of industries that have engaged in extensive lobbying efforts that pre-date even the passage of AB 5.  Such industries include, among others, gig economy companies, franchising, trucking and the motion picture and television industries. The 2021-22 legislative session will undoubtedly see these, and other, industries lobbying for additional exemptions; the most immediate task for many in the business community, however, is understanding how AB 2257’s amendments affect their business relationships.

What Will Happen Next?

AB 2257 took effect immediately upon its passage, and is, accordingly, the law of the State of California.  It is a given that some industries which did not secure an exemption will continue lobbying legislators.  Others may choose to follow the lead of transportation platform companies, which are funding a ballot initiative (Proposition 22) to create a new class of workers applicable to drivers, if their efforts prove successful.  Lawsuits currently pending and yet to be filed, including one previously filed by a trucking industry interest group, may yet impact the scope of AB 2257’s application.  Finally, it remains to be seen whether governmental officials will avail themselves of the enforcement powers bestowed upon them, as the flood of such lawsuits predicted by many following the passage of AB 5 has not occurred.

By: Andrew McKinley and Louisa Johnson

Seyfarth Synopsis: The U.S. DOL has confirmed that there is no per se violation of the FLSA’s minimum wage requirement when low-wage employees are reimbursed for their use of a personal vehicle at a reasonable rate that is less than the IRS standard mileage rate and clarified that, in many cases, not all vehicle-related expenses need to be reimbursed.

While employers often view the requirement to pay employees at least the minimum wage rate for each hour worked to be straight-forward, lawsuits under the Fair Labor Standards Act’s minimum wage requirement remain common even among certain hourly-paid employees who make more than the minimum wage rate. Why? Because if employees who are paid at a relatively low hourly rate use personal tools or equipment to do their job, they may contend that the cost they personally bear for such items is great enough to cause their net take-home pay to be less than the minimum wage rate. One of the most common situations in which this claim arises is when an employee uses a personal vehicle for work-related activities. In most such cases, the employees earn above the minimum wage rate and the employer has in fact reimbursed the employee using a method that it believes fairly compensates the employee for the business use of a vehicle that the employee also uses for personal reasons. Thus, these lawsuits tend to turn on the question of how reimbursements must be calculated and what car expenses (such as depreciation, fuel, oil, repairs, insurance, license fees, and registration fees) must be reimbursed. On August 31, 2020, the U.S. Department of Labor, Wage & Hour Division issued an Opinion Letter (FLSA2020-12) to provide guidance on these two questions, and in doing so, provided helpful clarifications for employers.

How May Expense Reimbursements Be Calculated?

In answering how to calculate expenses, the DOL explained that an employer may pay a reasonable approximation of expenses instead of attempting to calculate actual, difficult-to-quantify vehicle-related expenses, such as depreciation and fuel. Importantly, contrary to the argument employees often make, the DOL also confirmed its regulation, 29 C.F.R. § 778.217, “explicitly allows employers to approximate expenses at a rate lower than the IRS standard [mileage] rate.” Thus, its regulations “cannot be read to require employers to use the IRS standard rate” simply because the employer chose to approximate expenses rather than track and pay for actual expenses. Rather, alternative approximation methods may also be reasonable.

Unfortunately, the DOL declined to opine on the reasonableness of alternative approximation methods suggested by the employer who requested the opinion letter. It instead stated that what would be reasonable will depend upon the circumstances in each case. Nonetheless, the fact that a rate as high as the IRS standard mileage rate (currently, $0.575 per mile) need not be used is significant for employers because employees often must argue for application of the IRS standard rate in order to show that their net hourly rate fell below the minimum wage rate.

What Expenses Must Be Reimbursed?

In answering what expenses must be reimbursed, the DOL divided the types of vehicle expenses into two categories: fixed and variable. It described fixed costs as those “that do not vary with the way or amount that an asset is used,” such as insurance, sales and use taxes, vehicle registration and license fees, and driver’s license fees. Variable costs, on the other hand, vary with the amount of use or mileage driven, such as fuel, periodic maintenance (like oil changes and tire rotations), and depreciation of the vehicle.

The DOL explained that fixed costs need only be reimbursed when the expense is incurred primarily for the employer’s benefit. And a vehicle that is driven for both personal and business purposes is not likely to be primarily for the employer’s benefit unless a specific vehicle is mandated by the employer. The analogy the DOL drew was to an employer’s uniform requirements. Where the employer requires that a certain style of dress be worn by an employee at work but does not mandate a specific outfit that would be uncomfortable or inappropriate for everyday use, it is not a “tool of the trade” that the employer must pay for as primarily for its own benefit. Similarly, where an employee readily uses a vehicle for personal reasons as well, it is not a tool of the trade, and the employer need not reimburse the employer for any fixed costs because the fixed costs are primarily for the employee’s convenience.

In addition, while the employer will usually be responsible for the employee’s variable vehicle expenses, the employer is only responsible for the business portion of the variable expenses. For example, if the employee drives 1,000 miles in one month and only 250 of those miles were driven for business-related reasons, the employer would only be responsible for that portion of the variable costs (such as fuel, maintenance, and depreciation) that are attributable to the 250 miles that the employee drove for the employer’s benefit.

Conclusion

The DOL’s opinion letter offers employers a powerful tool in combatting employees’ efforts to use the maximum IRS reimbursement rate to approximate expenses when actual expenses are not tracked. Through its limitations on the types of expenses that may be subject to reimbursement and its confirmation that only the business portion of expenses need be reimbursed, it also provides employers with a defense to employees’ efforts to have the employer effectively pay the full cost of owning their personal vehicle. Please note, however, that employers should remain mindful of state reimbursement laws, which may deviate from the FLSA’s standards.

As always, please feel free to reach out to us or your favorite Seyfarth attorney if you would like to discuss this important topic.

Authored by Kevin Young and Christina Meddin

Seyfarth Synopsis: Some states are known for setting high legislative bars with respect to employment rights and protections (looking at you, California). The State of Georgia isn’t one of them. Earlier this month, however, the Peach State broke its mold by enacting one of the most stringent lactation break laws in the country.

Since 2010, the federal Fair Labor Standards Act has required covered employers to provide reasonable, unpaid break time to hourly employees to express breastmilk for a nursing child up to one year after the child’s birth. The law also requires that employers provide employees a private place that is not a bathroom for these breaks. The FLSA’s lactation break requirement does not apply to salaried workers.

While Georgia previously had a law in place addressing lactation breaks in the workplace, the law did not impose requirements beyond what the FLSA required. The state’s law provided that an employer “may, but is not required to” provide a lactation break to an employee who “needs” to express breastmilk “for her infant child.” The law additionally provided that an employer “may, but is not obligated to, make reasonable efforts” to provide a location in close proximity to the work area, other than a toilet stall, to pump breast milk.

In a move that commands attention from employers throughout the state, Georgia ended its permissive approach to lactation breaks with the August 5, 2020 passage of HB 1090, also referred to as “Charlotte’s Law” (named for a teacher whose supervisor would not allow her to pump during a break). The amended law, which is codified under Georgia Code Section 34-1-6, makes several critical changes:

  1. Providing the opportunity for lactation breaks is mandatory, not optional;
  2. Providing a private location other than a restroom to express breast milk in privacy is mandatory, not optional;
  3. Break time provided under the statute must be paid;
  4. The age of the child is not referenced; and
  5. The right to lactation breaks extends to salaried employees.

The law applies to employees who desire to express breast milk at the worksite, and during work hours. Employers are not required to provide this paid break time to employees who are working away from the worksite. Further, the law prohibits employers from discriminating or retaliating against an employee for expressing or requesting to express breast milk, or for reporting any violations of the law.

The new law includes an undue hardship exemption for businesses with fewer than 50 employees. The exemption is available only if compliance would cause “significant difficulty or expense when considered in relation to the size, financial resources, nature, or structure of the employer’s business.”

In addition to following the new law (which is effective immediately), we advise businesses with employees in Georgia to review their break or nursing mother policies to ensure they’re configured to promote compliance. Please don’t hesitate to reach out to us, or your favorite Seyfarth attorney, if you need help.

By: Molly Gabel and Samuel Rubinstein

Seyfarth Synopsis: Over a year since it was introduced, the New York State Senate and Assembly recently passed the Healthy Terminals Act.  The Act, among other things, gives the government the authority to set prevailing wages and overtime rates for covered airport workers.  At this time, it is unclear whether Governor Cuomo will sign the Act.

Introduction

On July 22, 2020, after a year of sitting in committee, Senate Bill S6266D (also known as the Healthy Terminals Act) passed in both the New York State Senate and Assembly.  The purported impetus behind the Act was the number of airport workers who were uninsured.  The Act is heading to the Governor’s desk for his signature.  If it is signed, the Act will take effect on January 1, 2021.

Prevailing Wage

A key priority for worker groups lobbying for the legislation was to have a prevailing wage for covered airport workers.  If the Governor signs the bill, the “fiscal officer,” usually the Comptroller of a city, will determine the prevailing wage every September 1st beginning in 2021 “for the various classes of covered airport workers in the locality.”  “Wage” includes the “basic hourly cash rate of pay” and a supplemental benefits rate for fringe benefits, including “medical or hospital care, pensions or retirement or death compensation for injuries or illness resulting from occupational activity, unemployment benefits, life insurance, disability and sickness insurance, accident insurance, and other bona fide fringe benefits not otherwise required by federal, state, or local law to be provided by [the] covered airport employer.”  The obligation to pay prevailing supplements may be discharged by furnishing any equivalent combinations of fringe benefits or by making equivalent or differential payments in cash under the fiscal officer’s rules and regulations.

Overtime

The bill amends the existing Prevailing Wage for Building Service Employees law to include “covered airport employers” and “covered airport workers.”  Pursuant to this amendment, covered airport workers will be entitled to overtime at a rate not less than one-and-one-half times the prevailing basic cash hourly rate for work of more than eight hours in any one day or more than forty hours in any workweek.  N.Y. Labor Law § 232.

Covered Airport Employers, Employees, and Locations

The Act applies to “covered airport employers,” which is defined broadly to cover any entity employing any covered airport worker in an occupation, industry, trade, business, or service.  However, it does not apply to a public agency.  Notably, and although exclusions may come in through the regulatory rulemaking process if the bill is signed into law, the bill itself appears to cover air carriers and their employees.  The bill itself also appears to cover private-sector employers covered by collective bargaining agreements and does not explicitly allow for a waiver in collective bargaining agreements.

Covered airport workers include “any person employed by a covered airport employer to perform work at a covered airport location provided at least one-half of the employee’s time during any workweek is performed at a covered airport location.”  It does not include any person employed in an executive, administrative, or professional capacity as defined under the United States Fair Labor Standards Act.  Furthermore, it does not include any employees covered under the Public Work and Grade Crossing Elimination Work Articles of the New York Labor Law.

Finally, a “covered airport location” are the airports within the state operating under the jurisdiction of the Port Authority of New York and New Jersey.  This currently includes John F. Kennedy, LaGuardia, and New York Stewart International Airport.

Other Requirements

The bill contains extensive recordkeeping requirements associated with the calculation of the prevailing wage.  It also includes various contracting-related language requirements.

Employer Takeaways

Assuming that Governor Cuomo signs the bill, it is imperative for employers with air terminal operations to consider how this Act will impact them.  Employers should carefully consider whether they can avail themselves of various federal and state constitutional and preemption or other defenses.