By: Pamela L. Vartabedian and Eric M. Lloyd

Many independent contractors unable to work because of the COVID-19 pandemic could soon receive unprecedented relief from the U.S. Government as a result of the roughly $2 trillion coronavirus aid package that President Trump just signed into law.  The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) is a sweeping piece of legislation intended to provide emergency assistance to individuals, families and businesses affected by the COVID-19 outbreak.  It is not an understatement to say that the unprecedented circumstances gripping the economy prompted the government to venture into uncharted territory in order to help mitigate the impact of the pandemic on independent contractors.

For instance, unemployment benefits are now extended to independent contractors under the CARES Act.  Contractors unable to work due to COVID-19 may be eligible to collect these unemployment benefits, which are essentially federal disaster benefits, for up to 39 weeks or until December 31, 2020.  In addition to independent contractors, this benefit applies to self-employed workers, business owners, as well as employees who do not satisfy work history or other eligibility requirements for state unemployment, or those who have exhausted regular unemployment benefits.  The benefits are calculated the same way as a state’s unemployment insurance benefit, but consistent with federal disaster benefit calculations, have a higher minimum benefit or floor, which is one-half of the state’s average weekly employment insurance benefit.  Workers who receive this benefit will also receive an additional $600 payment, but only through July 31, 2020.

This is a major deviation from state laws concerning unemployment benefits, which exclude independent contractors from coverage.  It remains to be seen whether companies that engage independent contractors will now face increased scrutiny of their contractor classifications from state employment agencies as a result of the anticipated flood of unemployment claims. Companies that engage independent contractors should be mindful of this possibility.

In addition, independent contractors may be eligible to apply for small business and disaster relief loans under the CARES Act, loans which under usual circumstances are typically available only to certain types of businesses.  While this does not directly impact businesses that engage with independent contractors in the short term, the receipt of such loans could be construed as evidence that a contractor pursuing a misclassification claim is, in fact, an independent businessperson rather than an employee, as the funding is suggestive of the contractor’s efforts to maintain profitability.

We will continue monitoring these developments and report back on any updates.

By Kevin Young and Zheyao Li

Seyfarth Synopsis: What a difference a couple of weeks make. The COVID-19 outbreak has forced change upon all aspects of society, and the workplace is no exception. Many workers who escaped layoffs or furloughs are now adjusting to a new normal: working from home. In this post, we explore best practices for mitigating the risk that these so-called “WFH” arrangements present.

As we end a tumultuous March, many employees are settling into a novel work environment: their home. Though plenty of businesses were accustomed to work-from-home arrangements before the COVID-19 outbreak, many more are allowing WFH for the first time or extending WFH arrangements to segments of their workforce that never enjoyed them before.

Notwithstanding the flexibility they provide, WFH arrangements also present distinct wage-hour risks. The risks seem particularly great when WFH is rushed into action as a result of outside forces, with minimal notice or planning. Employers who fail to carefully monitor these arrangements risk facing costly claims years into the future for time that individuals thrust into WFH roles claim they worked without pay.

WFH arrangements are not “one size fits all”—the benchmark for appropriateness can vary by industry, company, and job function. There are, however, general best practices that employers can consider to help mitigate and manage WFH-related wage-hour risks. Here are ten that come to mind:

  1. Reiterate Timekeeping Policies. Remind non-exempt employees, in writing, that timekeeping policies apply with the same force as before. Managers should be crystal clear with their employees that they must record, and will be paid, for all hours worked, without exception.
  2. Set Schedules. Employees who abided by a set schedule before should be expected to do so at home, too. Where possible, involve employees in assessing whether their WFH schedule needs to change due to their new setting or circumstances. Once the schedule is set, hold them accountable. The circumstance to avoid is one in which an employee claims that the WFH setup meant that their workday became more nebulous and they were essentially working, or on-call, at all hours.
  3. Establish Boundaries. Closely related to setting and enforcing schedules, it’s important to have boundaries, particularly with non-exempt workers. Working from home can make it easier to fall into a habit of informally communicating with an employee, for instance through “this will only take a minute” calls or “feel free to respond whenever you have a minute” texts. These sorts of communications, if sent outside of an employee’s working hours, can fuel an off-the-clock claim.
  4. Identify and Address Any Gaps in Your Timekeeping System. Your timekeeping function must be configured to reasonably accommodate the WFH arrangement. If it’s not, work quickly to address any gaps, whether via software enhancements, new procedures/protocols for reporting time (e.g., sending an email to the supervisor each day confirming work time for the day before), or something else that makes sense for your business.
  5. Require Employees to Certify Their Time. While it’s an employer’s obligation to keep accurate time records, it’s sound business to make the employee part of that process. To that end, you should require WFH employees to record their time each day and to certify—whether on their timesheet, in the timekeeping system, or some other means—that their submission is accurate and reflects all hours worked. A verified or signed certification is a great exhibit in the event of a future lawsuit alleging off-the-clock work.
  6. Train Supervisors to Be Vigilant. Supervisors must be clear in their understanding of, and in their communications about, the company’s timekeeping expectations. Moreover, they must be vigilant in enforcing those expectations. A supervisor who regularly receives work-related communications at 10 pm from an employee’s whose schedule ends at 7 pm should be equipped to notice and address the potential issue.
  7. Remember Meal and Rest Requirements. California and various other states require employers to provide non-exempt employees with meal and rest breaks. Such laws apply equally in the WFH context. As a result, employers should instruct employees to abide by meal and rest period policies even while working from home.
  8. Avoid Salary Basis Issues. While the bulk of WFH concerns center around non-exempt employees, it’s also important to watch out for salary basis issues for exempt workers. If an exempt employee is on unpaid leave, the employer must communicate clearly to the employee that she should not be working, even at home. If she works during the week, she should be paid her full salary.
  9. Pay Attention to Expenses. If non-exempt employees incur costs as a result of the WFH arrangement—for example, having to buy a particular printer or add a phone line—it’s important to ensure that it does not reduce their pay below minimum wage or cut into any overtime compensation. This potential issue looms especially large for employees paid at, or very close to, the applicable minimum wage. The U.S. Department of Labor’s Wage & Hour Division reiterated the point in its recent FAQ addressing COVID-19 issues. Beyond potential minimum wage issues, note that some states (e.g., California, Illinois) require reimbursement of business expenses irrespective of classification or the impact on minimum wage.
  10. Listen. This is a difficult and uncertain time for employees and employers alike. Now more than ever, we advise inviting open communication with employees about work-related issues—including about any challenges that WFH presents—and being prepared to act quickly to address issues or assuage concerns.

At a time when employers have so many serious concerns to balance and triage, the wage-and-hour risks presented by WFH arrangements may not seem the most critical. If left unaddressed, however, these risks may be among the most long-lived legal risks from this time period, coming back to roost years after this crisis has unfolded. If you have questions or concerns, please contact the authors of this post or the Seyfarth attorney with whom you regularly work.

By Andrew Scroggins and Kerry Friedrichs

Seyfarth Synopsis: Employers around the globe are feeling the impact of coronavirus (COVID-19). Before reducing hours or pay to address health or economic concerns, employers should take heed of federal and state wage-hour laws.

As coronavirus continues to spread around the globe, its economic effects have grown more far-reaching. Some companies are confronting a surge in demand for their goods and services. For others, supply chain disruptions have raised concerns whether they will be able to procure the raw materials they need to build their products. Employees are being asked to work from home or avoid non-essential travel. Conventions and large public events have been cancelled or scaled back.

In order to prevent the spread of the coronavirus among their workforce, or as a cost-saving measure taken in response to negative economic impacts, some employers may need to consider temporary furloughs, reductions in hours, or reduced pay. Other employers may find their products and services in greater demand, only to confront staffing challenges that increase hours worked. These changes have potential wage and hour law implications that employers should bear in mind.

Non-Exempt Employees

Reductions in Hours and Hourly Rate

Non-exempt employees need only be paid for time when they are working. Employers can reduce scheduled hours or hourly pay without implicating wage and hour laws. Any changes to pay rates must be prospective.

Federal and state minimum wage requirements must still be satisfied, of course. If you’ve decided to reduce pay due to the economic impact of the coronavirus, it is important to check state law requirements regarding notification of pay rate changes.. It is also important to continue paying workers on time.

Exempt Employees

Exempt employees are subject to the salary basis test; generally, they must be paid the same minimum weekly salary regardless of how many or few hours they work each week. (To qualify under federal law, an employee must earn a minimum salary of $35,568 per year, which works out to a weekly salary of $684.) Failure to pay an employee’s full weekly salary could jeopardize the employee’s exempt status and make them eligible for overtime pay.

Full-Week Reductions in Hours and Salary

An employer can impose a full-workweek furlough (or require an employee to take a full workweek off) and not pay the weekly salary, but with an important caveat: the exempt employees can perform no work during the week. Employers that choose this route must ensure that furloughed employees completely unplug from the workplace and abstain from responding to email, taking phone calls, or otherwise working until their return.

Exempt employees who perform any work at all generally must be paid for the full week, and it can be very difficult to completely prohibit all work by an exempt employee during a workweek. However, employers can meet the salary requirement through payment of vacation time for time that the employee does not work during the workweek. Accordingly, employers can mitigate risk by mandating that furloughed employees use accrued vacation time for non-worked time during the workweek (and paying regular salary for time actually worked), rather than treating the furlough as unpaid.

Partial-Week Reductions in Hours and Salary

As a general rule, partial-week reductions in salary are not permitted because they violate the salary basis test. For example, employers generally cannot pay exempt employees 80% of their salary for working four-day workweeks instead of five at the employer’s request.

There is a narrow exception to this rule. Employers may implement a fixed reduction in future salaries and base hours due to a bona fide reduction in the amount of work. The FLSA and federal regulations do not specifically address furloughs, but Department of Labor opinion letters and courts have (almost) unanimously concluded that employers may make prospective decreases in salary that correspond to reduced workweeks, so long as the practice is occasional and due to long-term business needs or economic slowdown. What counts as “occasional”? The question is not settled, but federal courts have held that salary reductions twice per year are infrequent enough to be bona fide.

Once the economic impacts of the coronavirus subside and employees return to work, caution is still warranted in returning furloughed employees to work. As always, when dealing with these issues, be sure to contact your wage and hour counsel.

By Louisa Johnson

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

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

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

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

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

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

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

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

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

By: Victoria Vitarelli and Gena Usenheimer

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

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

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

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

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

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

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

By Robert Whitman

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

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

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

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

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

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

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

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

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

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

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

By Patrick Bannon and Michael Steinberg

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

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

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

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

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

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

By Barry J. Miller and Hillary J. Massey

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

Background

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

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

Court’s Analysis

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

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

First Prong: Work Requiring Advanced Knowledge

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

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

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

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

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

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

Takeaway for Employers

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

By: Ryan McCoy and David Kadue

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

The District Court’s Decision

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

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

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

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

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

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

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

What the Injunction Means for Employers

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

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

By: Alex Passantino

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

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

What Are Authorized Basic Rates?

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

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

Enter basic rates …

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

What is Required to Use Basic Rates?

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

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

How Are Basic Rates “Authorized”?

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

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

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

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

So What’s Changing on January 15, 2020?

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

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

What Does this Change Mean?

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

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

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