By: Kyla Miller and Michael Afar

Last week, the financial world was upset by the seizure and shut down by regulators of two regional banks — Silicon Valley Bank and Signature Bank. With almost no warning, employers went from a position of high liquidity to one where their deposits were frozen. As depositors of those banks feared for the money in their accounts, the Federal Reserve, Treasury Department, and FDIC announced jointly that they would step in to guarantee deposits, including beyond the ordinary limits covered by the FDIC. As the week went on, regional bank stocks plunged, with First Republic Bank seeing its stock fall to an all-time low, prompting several large banks to jointly provide $30 billion in deposits to aid the failing institution. Some fear this volatility is just the beginning.

For employers that rely on regional financial institutions to fund payroll, this continued volatility could create major problems. Despite the bailouts, one thing is clear: employers should be prepared for immediate and unanticipated liquidity crisis as the financial industry remains in a state of uncertainty and the tech industry continues to take a downturn.

If the scramble feels familiar, that’s because it is. Another major, unanticipated crisis affected employers in recent years. On December 11, 2021, the Ultimate Kronos Group, a major HR technology provider, was hit with a ransomware attack that crippled thousands of employers across the country with an inability to access time and pay records. This emergency created chaos around attendance, scheduling and payroll, and ultimately spawned a wave of litigation against the companies that relied upon Kronos.

These crises are a sober reminder of the fragility of the systems and institutions that employers often rely upon to satisfy their wage and hour obligations to employees. When faced with these circumstances, employers may not have enough cash on hand and may consider skipping payroll obligations to conserve cash, or may be unable to access the records needed to process payroll, handle timekeeping, and complete other necessary HR functions.

But, even in crisis, employers across the United States are subject to wage and hour obligations, and many states have specific rules regarding timing of payment, method of payment, and penalties for failure to comply with those specific rules. Because of that, employers must endeavor to satisfy their legal obligations notwithstanding the disruption caused by a third-party, regardless of how unforeseen or chaotic it may seem.

In Part 1 of this blog series, we provide an overview of employer’s wage and hour law obligations in crisis, and issues to be aware of regarding short and long term solutions. Subsequent blogs will dive deeper into these topics.

Have An Emergency Plan

Sometimes you don’t realize you needed an emergency plan until it is far too late. Let recent events serve as an opportunity to review your policies and practices to determine how your company would react moving forward in the event of a crisis that would affect how you ordinarily handle timely payment of wages to your employees.

Method of Payment Concerns

Confirm you maintain up-to-date records for employees who have authorized direct deposits, and which financial institution they identified. In the event of a crisis with an institution authorized to accept direct deposit for any employee, be prepared to timely and accurately pay those employees by paper check until the employee can establish a new bank account.

Delayed Payment Concerns

Under federal law, primary liability lies with untimely payment of overtime wages for non-exempt employees. Although the FLSA does not contain an absolute requirement that overtime be paid as soon as it is earned, the Department of Labor regulations provide that employers must pay overtime as soon as it reasonably can when circumstances beyond its control make it impractical to pay overtime on the regular pay date. What is “reasonable” in a crisis is very much in dispute. We recommend being prepared to create an emergency response team to create a plan to respond to a payroll crisis in a timely manner. Key issues to consider include: increased staffing on your internal payroll teams; contracting with a back-up payroll vendor in the event there are issues with the primary vendor; and identifying alternative means of financing payroll in the event of financial institution failure. Emergency plans need to be employer-specific, and appropriately balance the risk with the cost of such plans.

In some states, the inability to timely pay all wages owed can result in potential liability for penalties.  For example, in California, a delayed payment may result in a violation of Labor Code §§ 204 and 210, which can lead to penalties of $100 or more per employee, per pay period where there is a late payment.

Inability to Pay — Furloughs & Layoffs

Employers that anticipate they may not be able to pay employees should consider immediate furloughs or other downsizing options.  It is very risky (including from an individual liability standpoint in California and some other states) to allow employees to continue working if they end up not being paid.

Furloughs

For exempt employees, if any work has been performed during the workweek, the employee needs to be paid for the whole workweek (unless they are terminated and it is a partial final workweek, in which case pay can be prorated).  In the event of a furlough, employees should be notified as soon as possible and told that they cannot work.  If the workweek has already begun, it may be lower risk to tell the employees to stop working even if it is mid-workweek.  Whether or not final pay is required at the time of furlough is a matter of state law, and is still in flux for many jurisdictions. For example, in California, the DLSE has taken the position – without direct approval from any state or federal appellate court – that any furlough without a specific return date within the pay period (and potentially within 10 days) requires cash out of final pay, although the issue is currently on appeal with the Ninth Circuit. In any event, employers must pay for all work performed prior to notice of the furlough.

Layoffs

In the event of layoffs, final pay is due. In California, waiting time penalties will begin to accrue at the final rate of pay for up to 30 days post-termination. Here, as with furloughed employees, employers must pay for all work performed prior to notice of the layoff.

Independent Contractor Payment Issues

If your workforce includes independent contractors, the law provides less protection to independent contractors than to employees, and generally, the terms of the contract between the company and the independent contractor will govern wage payments. In the event of crisis, we recommend working with these individuals in good faith to negotiate new pay dates or methods, if possible.

State-Specific Considerations

There are many state-specific considerations at play related to expectations for timing of payment, what payment is required in the event of furlough or layoffs, what penalties can be assessed, and against who (the employer or individuals as well), and more. For example, some states require final pay in the event of furlough, even though there is an expectation and understanding that those employees will return to the workforce at a later date. Some states charge hefty penalties for even the slightest delay in wage payment. California may even permit individual liability for directors, officers, managing agents and owners if they “cause” violations of any provision of the Labor Code or wage orders “regulating minimum wages or hours and days of work.”  There may also be attempts by impacted employees to “pierce the corporate veil” to recover unpaid wages or other damages for alleged wrongs. 

Indemnification Agreements for Depositors

In the event your company is affected by an inability to pay wages timely, or in an accurate manner, consider creating an indemnification agreement for your depositors.

While it may not be all doom and gloom in the short term, it’s always a good idea to prepare your team for a payroll crisis. We promise you’ll be glad you did.

By: John P. Phillips

Seyfarth Synopsis: Since the Supreme Court’s decision in Southwest Airlines Co. v. Saxon, many employers have seen an uptick in plaintiffs seeking to avoid arbitration by arguing that they are transportation workers and thus not subject to the Federal Arbitration Act. But as the subsequent history in the Saxon decision makes clear, employers can—and should—consider more than just the FAA when moving to compel arbitration. Employers should also consider applicable state law, many of which laws do not have a similar transportation worker exception.

The Federal Arbitration Act (“FAA”) provides that most arbitration agreements are valid and enforceable. Section 1 of the FAA, however, provides an exception for transportation workers. That section states that the statute does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Thus, if a worker is a transportation worker engaged in interstate commerce, an employer may not rely on the FAA to compel that worker to arbitration. Just last year, in Southwest Airlines Co. v. Saxon, the Supreme Court explained what it means to be a transportation worker for the purposes of Section 1 of the FAA.

The Saxon decision’s subsequent history is a helpful reminder to employers of the ability to rely on more than just the FAA when moving to enforce an arbitration agreement. Many states have their own arbitration statutes that permit the enforcement of arbitration agreements. And many of those statutes do not have similar exceptions for transportation workers. Accordingly, as the district court’s decision on remand in Saxon demonstrates, employers may still compel transportation workers to arbitration under applicable state law, even if they may not rely on the FAA.

The Supreme Court’s Saxon Decision

Last year, in Saxon, the Supreme Court provided additional guidance on when a worker is a transportation worker engaged in interstate commerce and thus exempt from the FAA. The Supreme Court applied a two-step inquiry, first determining the relevant “class of workers” to which the plaintiff belongs, and second, determining whether that class of workers is engaged in foreign or interstate commerce. The Court concluded that the plaintiff—a ramp supervisor for Southwest Airlines who physically loaded and unloaded cargo from airplanes traveling interstate—was a transportation worker engaged in interstate commerce and thus fell within the transportation worker exemption in Section 1 of the FAA.

As a result, Southwest Airlines was not able to rely on the FAA to enforce its arbitration agreement with the plaintiff.

The District Court’s Decision on Remand

On remand, Southwest Airlines moved to compel arbitration under Illinois law. Importantly, Illinois—like most states—does not contain a transportation worker exception to its arbitration law. Accordingly, transportation workers can be compelled to arbitration under Illinois state law.

The district court found that Southwest Airlines did not waive its right to compel arbitration under Illinois law merely because Southwest Airlines had initially moved under the FAA, not state law. The court further found that Illinois law governed the arbitration agreement even though the arbitration agreement only referenced the FAA. The district court explained that “the fact that the Federal Arbitration Act doesn’t apply only means that its enforcement mechanisms aren’t available, not that the whole dispute can’t be arbitrated by enforcing the contract through another vehicle (like state law). . . . That’s true even when the contract says that the Federal Arbitration Act applies and mentions no other law.”

Accordingly, the district court compelled the plaintiff to individual arbitration and stayed the case, notwithstanding that she was a transportation worker to which the FAA does not apply.

Takeaways

Since the Supreme Court’s decision in Saxon, there has been an increase in plaintiffs arguing that they fall within the transportation worker exception to the FAA and, thus, that their arbitration agreements are not enforceable under the FAA. Employers should remember, however, that most states have their own arbitration statutes and many of those statutes do not have exceptions for transportation workers. Accordingly, even where an arbitration agreement is not enforceable under the FAA, it may still be enforceable under applicable state law. As such, employers should explore moving to compel arbitration under applicable state law in addition to—and in the alternative to—the FAA. Employers should do so early to avoid waiving the right to proceed under state law. And although an arbitration agreement may still be enforceable even where it does not reference state law, employers should review their agreements and expressly state in the agreements that arbitration may be compelled under both the FAA and applicable state law.

By: Christina Jaremus

Seyfarth Synopsis:  Illinois joined the exclusive club of now three states that require employers to offer paid leave for any reason when Governor J.B. Pritzker signed the Paid Leave for Workers Act last week.  The Act takes effect on January 1, 2024.  Illinois employees will be entitled to earn and use at least 40 hours of paid leave during a twelve-month period.  Leave must accrue at a rate of at least one hour for every 40 hours worked. 

Here’s what you need to know.

  1. Who’s Invited To The Paid Leave Party?

So how many employees does it take to get a day off? The Act requires employers with at least one employee to provide paid leave.  “Employee” in the Act has the same application and meaning as that provided in the Illinois Wage Payment and Collection Act and excludes independent contractors as well as certain railroad and student or other individuals employed less than full time or on a short-term basis for colleges and universities. Paid leave under this Act accrues at the rate of one hour of paid leave for every 40 hours worked up to a minimum of 40 hours of paid leave or such greater amount if the employer opts to provide more than 40 hours. 

  1. Reasonable Minimum Increments: “Sorry, Charlie, You Can’t Take 15 Minutes Off To Grab A Latte.  You Have To Take A Minimum Of 2 Hours.” 

Employees themselves determine how much paid leave they need to use at a time, but employers may set a reasonable minimum increment for the use of paid leave not to exceed two hours per day – unless an employee’s scheduled workday is less than 2 hours per day, then the employee’s scheduled workday shall be used to determine the amount of paid leave. 

  1. To Bank Or Not To Bank, That Is The Question

Employees are entitled to begin using paid leave 90 days following commencement of their employment or 90 days following the effective date of the Act (January 1, 2024), whichever is later.  Employers that provide the minimum number of hours of paid leave to an employee on the first day of employment or the first day of the 12-month period are not required to carryover paid leave and can require employees to use all paid leave prior to the end of the benefit period or forfeit the unused paid leave.

Paid leave may not be charged or credited to an employee’s paid time off bank or employee account unless the employer’s policy permits such a credit.  The Act itself does not require that any bank of paid leave be paid out to employees upon separation or at the end of the benefit year, although employers should ensure that their Handbooks and policies do not otherwise provide for such a payment upon separation if that is not the employer’s intention.  For example, if the paid leave under this Act is credited to an employee’s paid time off bank or employee vacation account then any unused paid leave shall be paid to the employee upon separation to the same extent as vacation time under existing Illinois law or otherwise.

  1. No Notice, No Reason, No Problem?  (For Employees, At Least…)

Employees can use their accrued paid leave “for any reason of the employee’s choosing” as long as the paid leave is taken in accordance with the provisions of this Act.  An employee is not required to provide an employer a reason for the leave and may not be required to provide documentation or certification as proof or in support of the leave.  Doing yoga with your dog counts.  Monday brunch counts.  Watching cat videos counts.  Anything counts.

Employees have to request leave orally or in writing in accordance with their employer’s reasonable paid leave policy notification requirements.  Requirements may include:

  • Seven calendar days’ notice before the date the leave will be given if the leave is foreseeable.
  • Notice as soon as is practicable if leave is not foreseeable, procedures for the same which must be outlined in a written policy.
  • Employers must provide employees with written notice of paid leave policy notification requirements within five calendar days of any change to the employer’s reasonable paid leave policy notification requirements.
  • Employers cannot require, as a condition of providing paid leave under this Act, that the employee search for or find a replacement worker to cover the hours during which the employee takes paid leave.

Given the fact that employers cannot require employees to provide a reason for their leave, it remains to be seen how effectively employers will be able to enforce the seven calendar day notice requirement if an employee simply calls in to work at the eleventh hour saying they need to be off for a reason that was not foreseeable or some other self-defined “emergency.”

  1. Documenting The Downtime

And wait, there’s more!  Employers must provide written notice of their employees’ right to paid leave under the law.  The notice should include the amount of leave that the employee is entitled to, the terms and conditions of the leave, and the employee’s right to file a complaint if their employer does not comply with the law.  Employers must also maintain record documenting their compliance with the Act, including the amount of paid leave provided to each employee, the purposes for which leave was taken, and any notices provided to employees.  These records must be kept for at least three years.

  1. Retaliation Roulette: The Risks Employers Take by Ignoring Paid Leave Rights

The Act prohibits retaliation against employees who exercise (or even “attempt” to exercise) their rights under the Act, opposing a practice an employee believes violates the Act, or even supporting another employee in exercising their rights under the Act.

Penalties and fines for violations are significant, including damages in the form of the actual underpayment, compensatory damages, a penalty of up to $1,000 (but not less than $500), reasonable attorney’s fees, reasonable expert witness fees, and other costs of the action.  Employers who violate the Act shall also be subject to a civil penalty of $2,500 for each separate offense.

  1. Take A Break And Don’t Get Left Behind (Legally, That Is)

If your Company already offers a comparable amount of paid leave to employees that meets the Act’s requirement, it likely does not need to provide additional paid leave.  But the Act implicates policies regarding leave accrual and usage, employee requests for leave, record keeping to support employee’s use of paid leave, notice, the applicable rate of pay for paid leave, and pay for accrued leave at the time of separation.  So, employers may want to give those a fresh look.  And if your Company does not offer paid leave, it will likely need to do so and prepare a policy on the same.

By: Andrew McKinley, Kyle Winnick & Alex Simon

Seyfarth Synopsis: This first part of a multi-part series explores the implications of the Department of Labor’s proposed independent contractor rule under the Fair Labor Standards Act. Specifically, it focuses on proposed changes to the control factor concerning legal, safety, contractual, and other similar requirements.

As we detailed here, on October 11, 2022, the Department of Labor (DOL) issued a notice of proposed rulemaking (“NPRM”) defining employee versus independent contractor status under the Fair Labor Standards Act.  If promulgated, the NPRM would rescind and replace an interpretive regulation promulgated by the DOL in 2021 under the Trump Administration (the “2021 Rule”), which attempted to revamp and modernize the standard for determining employee status under the FLSA, as discussed here.    

Courts have long held that the ultimate inquiry when determining employee versus independent contractor status under the FLSA is whether the worker is economically dependent on the putative employer.[1] One factor considered under this inquiry is the nature and degree of the worker’s versus the putative employer’s control over the work performed.  In this first part of a multi-part series on the NPRM, we take a closer look at how the NPRM re-defines employer control, for purposes of determining employee status.

Not all control or oversight is voluntary.  As any company in the airline, energy, financial services, healthcare, insurance, or logistics industry knows, regulatory compliance often requires businesses to exercise a certain amount of oversight and control over workers, irrespective of whether the individual is an employee or independent contractor. Such control is not dictated by the whims of the company to cabin a worker’s judgment, but instead a reflection of restrictions imposed by federal and state laws and agencies. Aligning with a long line of cases,[2] and other regulatory guidance,[3] the 2021 Rule opined that control stemming from compliance with legal requirements is not indicative of employee status, because laws apply to both workers and employees alike and because compliance with such laws—which are often designed to protect workers and consumers—should be encouraged.  Indeed, even under the so-called ABC test employed in some states, which presumes a worker is an employee, courts have found that compliance with regulatory requirements does not evidence control for purposes of employment.[4]       

Relatedly, prior to the NPRM, a long line of cases found that contractual warranties of quality and time of delivery had no bearing on the employment inquiry.[5]  This makes good sense: businesses want contractual assurances that they will receive contracted-for products in a timely manner and in good quality.  In fact, some businesses need goods delivered at a specific time, such as businesses dealing with perishable goods or customer commitments.  Such contractual warranties have nothing to do with one business wanting to control the workers of another business. They merely ensure that a company receives the end result for which it has contracted, and leave the business free to determine how it will achieve that result. In short, such contractual assurances are standard—and, indeed, expected—aspects of most functional business-to-business relationships.

Yet, departing from these well-established principles, the NPRM proposes a different interpretation: “[c]ontrol implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer services standards may be indicative of control.”  The NPRM does not disclaim that there may be many instances in which such compliance efforts would not be evidence of control, but despite the DOL’s stated goal of providing clarity, it also provides precious little in the way of guidelines as to when it would be evidence of control. And the examples it does provide of situations probative of control—e.g., mandating a specific time and location for safety briefings—focus more on external factors attendant to the requirement (e.g., mandating attendance at a meeting) than on the ultimate legal, contractual, or other requirement being communicated. Nevertheless, the ambiguous use of “may” could open the door for courts and the DOL to find that the control factor favors employee status for workers long considered independent contractors working in highly-regulated industries based on little more than the ambiguity introduced by the NPRM.  This, in turn, could risk large segments of workers in these industries being found to be employees because, as some courts have recognized, the control prong can often be the most significant.

This standard would likewise open the door to finding that contractual warranties of quality and timeliness is indicative of employer control, despite being standard elements of business relationships.  The implications are broad: any business that has a service contract with an independent third party risks being found the employer of the third party (or his/her workers) simply by agreeing, for example, on when a project will be completed.  Moreover, because the NPRM—again departing from the 2021 IC Rule—would find that contractually reserved control is just as indicative of employee status as actual control, this risk remains even when a company does not strictly hold the third-party to its contractual commitments.  Thus, if a business contractually reserves the right to cancel a contract if legal requirements are not adhered to, the quality of the deliverables is poor (or done in a way that undermines the purpose of the contract or deliverables altogether), or other commitments are not met, a court following the NPRM may find this to be evidence of employee status.  The upshot is that the control prong of the NPRM, if enacted, would tilt the scales in favor of employee status, while simultaneously failing to account for the everyday realities of most business-to-business arrangements.  Accordingly, were a court to accept this departure from the 2021 Rule and prior caselaw, it would potentially make classifying workers as independent contractors more difficult, especially for those businesses operating in heavily-regulated industries.

[1] See U.S. v. Silk, 331 U.S. 704, 716 (1947). 

[2] See, e.g., Parrish v. Premier Directional Drilling, L.P., 917 F.3d 369, 387 (5th Cir. 2019); Iontchev v. AAA Cab Serv., Inc., 685 F. App’x 548, 550 (9th Cir. 2017); Chao v. Mid-Atl. Installation, 16 F. App’x 104, 106 (4th Cir. 2001). 

[3] For example, the Internal Revenue Service (IRS) has long considered control stemming from compliance with laws, rules, and regulations as not indicative of employee status. See IRS, Training Materials: Independent Contractor or Employee?, available at https://www.irs.gov/pub/irs-utl/emporind.pdf , at 2-11 (Oct. 30, 1996).

[4] See, e.g., L. Off. of Gerard C. Vince, LLC v. Bd. of Rev., 2019 WL 4165066, at *3 (N.J. Super. Ct. App. Div. Sept. 3, 2019).

[5] See, e.g., Zheng v. Liberty Apparel Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003).

By: Annette Idalski, Kyle Winnick, A. Scott Hecker, and Ethan Goemann

Seyfarth Synopsis: The Supreme Court held that highly-compensated employees paid solely on a day rate must meet the so-called “reasonable relationship test” to satisfy the salary basis requirement.

In Helix Energy Solutions Group, Inc. v. Hewitt, the Supreme Court considered whether a day-rate employee earning at least $963 per day and over $200,000 annually was paid on a “salary basis” under the highly-compensated employee (“HCE”) exemption to the overtime requirements of the Fair Labor Standards Act (“FLSA”).  In a 6-3 opinion, the Court held that he was not.

The HCE rule in effect at the time of the plaintiff’s employment required employees to receive at least $455 per week on a salary basis and at least $100,000 in total annual compensation.  (Currently, those figures are $684 and $107,432, respectively.)  Two regulations were at issue: 29 C.F.R. §§ 541.602(a) and 541.604(b). 

Section 541.602(a) states that “[a]n employee will be considered to be paid on a ‘salary basis’ . . . if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation.” 

Section 541.604(b) provides an alternative path to satisfying the salary basis test.  This section states that an employee’s earnings may be computed on an hourly, daily, or shift basis, without violating the salary basis requirement, if the employee receives a guarantee of $455 per week (now $684) and there is a “reasonable relationship” between “the guaranteed amount and the amount actually earned.”  The Department of Labor (“DOL”) has construed the “reasonable relationship” requirement to mean that the guaranteed portion constitutes at least two-thirds of total compensation.  

Notably, the HCE does not expressly incorporate Section 541.604(b).  And as we discussed here, courts have held that this omission was intentional: the DOL meant to exclude from the reasonable relationship requirement employees otherwise meeting the HCE.  Nonetheless, the Supreme Court held that Section 541.604(b) applied on the facts before it—namely, an employee paid purely on the basis of a daily rate.

The plaintiff was paid from $963 to $1,341 per day for any day worked (regardless of hours worked).  Justice Kagan, writing for the majority, found that the plaintiff’s pay structure did not satisfy Section 541.602, because the “predetermined amount” an employee receives must be computed with respect to the week as a unit of time.  Because the plaintiff’s predetermined amount—his day rate—was calculated with respect to a daily unit of time, his pay did not satisfy Section 541.602(a).  Thus, the Court held that to satisfy the salary basis requirement, the plaintiff’s pay had to meet the reasonable relationship test, which was not met.  

The case therefore turned on the fact that the employee was only paid a day-rate.  The Court suggested in several footnotes that the outcome may have been different if the plaintiff was paid a base salary in addition to a daily rate.  The Court explained that Section 541.602(a)’s reference to “all or part” means that a worker “can be paid on a salary basis even if he additionally gets non-salary compensation,” and that if a highly-compensated worker’s pay satisfies Section 541.602(a), the employer “does not also have to meet § 604(b) to make a worker exempt.” 

Justice Kavanaugh, joined by Justice Alito, dissented[1] and opined that the underlying regulatory framework may not survive if subject to a direct statutory challenge.  As Justice Kavanaugh explained, the FLSA’s white-collar exemptions (as set forth in the statute itself) focus on job duties, not salary.  “So it is questionable whether the Department’s regulations—which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act.”  Thus, time will tell if the salary-basis requirements of the HCE, and related exemptions, survive judicial review.  

In light of Hewitt, employers who pay their exempt workers on a daily basis should consider assessing their pay practices with the support of competent counsel to ensure continued compliance.  Please feel free to reach out to your Seyfarth attorney for questions regarding this decision and its implications.

[1] Justice Gorsuch also authored a dissent, indicating he “would dismiss this case as improvidently granted because “[w]ith the benefit of briefing and argument, it has become clear that the ‘critical question here’ is not how §541.601 and §541.604 interact. Instead, the critical question is an antecedent one—whether Helix Energy paid Michael Hewitt . . . ‘on a salary basis’ under §541.602. (internal citation omitted).

By: Scott Hecker and Scott Mallery

On this episode of the Policy Matters Podcast, Seyfarth Senior Counsel Scott Hecker and Counsel Scott Mallery discuss the Senate HELP Committee’s recent inability to advance U.S. DOL Wage and Hour Administrator nominee Jessica Looman out of committee, this time due to a procedural hiccup that will likely be remedied. The Scotts discuss what this means for Looman’s nomination specifically, as well as the general implications for Article I and Article III nominations during this Congressional term. Listen to the podcast here.

By: Sage Fishelman and Josh Rodine

Seyfarth Synopsis: A divided Ninth Circuit Court of Appeals panel has ruled that the Federal Arbitration Act (FAA) preempts California Assembly Bill 51 (AB 51), which purports to prohibit employers from requiring job applicants and workers from signing arbitration pacts. The panel further concluded that AB 51’s criminal penalties are preempted by the FAA. Chamber of Commerce of the U.S. v. Bonta.

Facts

AB 51 subjects employers to criminal misdemeanor charges and civil sanctions for mandating arbitration agreements of certain claims as a condition of employment. The law exclusively focuses on pre-arbitration agreement behavior, but does not bar enforcement of improperly-entered into arbitration agreements.

On December 9, 2019, a collection of trade associations and business groups (collectively, “Chamber of Commerce”) filed a complaint for declaratory and injunctive relief against various California officials (collectively, “California”). The Chamber of Commerce sought a declaration finding that AB 51 is preempted by the FAA, a permanent injunction prohibiting California officials from enforcing AB 51, and a temporary restraining order.

The District Court Decision

The District Court granted a preliminary injunction in favor of the Chamber of Commerce explaining that AB 51 criminalizes only contract formation, but the law does not make the arbitration agreement unenforceable. The authors of AB 51 adopted this approach in an attempt to avoid conflict with Supreme Court precedent, which holds that a state rule that discriminates against arbitration is preempted by the FAA.

In essence, in what turned out to be an unsuccessful attempt to avoid FAA preemption, the California Legislature included a provision in AB 51 that an arbitration agreement would be enforceable even if the employer violated the law by making arbitration mandatory. This resulted in the oddity that an employer could be subject to criminal prosecution and civil penalties for requiring an employee to enter into an arbitration agreement, but the agreement would be enforceable once executed.

Consequently, the District Court granted the motion for a temporary restraining order, and after a hearing, issued a minute order granting the motion for a preliminary injunction. The District Court ruled that the Chamber of Commerce was likely to succeed on the merits of its preemption claim because AB 51 “treats arbitration agreements differently from other contracts,” and “conflicts with the purposes and objectives of the FAA.”

The Ninth Circuit Court of Appeals Decision

The issue on appeal was whether the FAA preempts a state rule that discriminates against the formation of an arbitration agreement, even if that agreement is ultimately enforceable. The panel held that such a rule is preempted by the FAA.

In reaching its decision, the panel applied the principles articulated in U.S. Supreme Court cases Doctor’s Assocs., Inc. v. Casaraotto and Kindred Nursing Ctrs. Ltd. P’ship v. Clark. These cases led the panel to conclude that AB 51’s penalty-based scheme to inhibit arbitration agreements before they are formed violates the “equal-treatment principle” inherent in the FAA, and is the type of device evincing hostility towards arbitration that the FAA was enacted to overcome. In short, AB 51 is preempted by the FAA because one of the FAA’s touchstones is to encourage arbitration, and AB 51 is contrary to this purpose.

In an attempt to save AB 51, California argued that the court could rely on AB 51’s severability clause to eliminate AB 51’s penalties, and then uphold the surviving portions of AB 51. However, the panel rejected this argument, concluding that all provisions of AB 51 work together to burden formation of arbitration agreements.

The sole dissenting judge (sitting by designation from the Tenth Circuit Court of Appeals), argued that the majority nullified a California law codifying what the enactors of the FAA and the U.S. Supreme Court took as a given: arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual. In support of this position, the judge distinguished AB 51 from state rules previously preempted by the FAA.

What Bonta Means for Employers

Not only does the decision reinforce the strong federal policy favoring arbitration, but the decision suggests that California will ultimately be required to respect the right of private enterprises to require employees to waive their right to go to court over most disputes arising out of employment.

While this is a positive decision for employers, they should bear in mind that the matter will now return to the District Court for a determination on the merits of the Chamber of Commerce’s claims. And, California may seek en banc review of the decision, or request review by the U.S. Supreme Court.

By: Noah Finkel and Kyle Petersen

Seyfarth Synopsis:  The DOL has issued guidance to its staff – that might be relied upon by courts – that any break less than 20 minutes while working from home is compensable time, regardless of the reason for the break.

Especially because this post is being released on a Friday, chances are that you are reading it while working from home.  Before doing so, you might have fired up your home computer in the wee hours of the morning, and then grabbed your coffee from the kitchen.  You logged in, checked for urgent emails, and then took a few minutes for breakfast.  You got in some work, and then ensured your child was up and getting ready for school.  You went back to work again, but then had to take the dog out for a walk around the block.  After that, you resumed working, then took a full 30-minute lunch break, worked again for a few hours, and then met your child at the school bus stop.  You got back to work, only to be interrupted a few times by that same child asking for help with some homework assignments.  Upon resuming work for an hour or so, you remembered to move your laundry from the washer to the dryer, and then you finished your day’s work.

As a reader of this blog, you probably are exempt from the FLSA’s overtime requirement and you do not track your time worked.  But what about this work pattern for your non-exempt teleworking colleagues?  To what extent does an employer have to pay that non-exempt employee for all those short breaks that are endemic to working from home and that, when accumulated over the course of a week, add up to a considerable amount of time and thus pay?  And bear in mind that employees who work on an employer’s worksite typically work just as many hours as the teleworkers and do not enjoy the flexibility to take short breaks to the same extent.

Yesterday the DOL’s Wage-Hour Division provided its view on this question in the form of a Field Assistance Bulletin (“FAB”) to its staff that also is made available to the public. 

Unfortunately, the guidance – which does not have the force of law but may be relied upon by courts that find it persuasive – does not help employers.  Rather, it sets forth the view that any break that is 20 minutes or less must be treated as compensable time, no matter its location or its true purpose.

The DOL’s reasoning largely stems from its own interpretive regulations – which themselves do not have the force of law, but are used by courts to the extent they find them persuasive – on determining compensable hours.  Under those interpretations, all time in an employee’s workday, from when they commence their first principal activity until they cease their last principal activity, is presumptively compensable, an interpretation that some have dubbed the “continuous workday rule.”  The common exception to the continuous workday rule is the bona fide meal period, which generally is 30 minutes or more and can be considered unpaid time.  In contrast, the DOL’s interpretations provide that rest periods of 20 minutes or less are counted as hours worked because “they are common in industry” and “promote the efficiency of the employee.”

Applying those principles to teleworkers, the DOL’s FAB states that “Employees commonly take short breaks during the workday.  Breaks of twenty minutes or less must be counted as hours worked” (emphasis added).  “Whether teleworking at home or working at the employer’s facility, employees often take short breaks to go to the bathroom, get a cup of coffee, stretch their legs, and other similar activities.  By their very nature, such short breaks primarily benefit the employer by reducing fatigue and helping employees maintain focus and be more productive.”  Query how short breaks for childcare, pet care, or home care duties accomplish those goals.  The DOL’s FAB nevertheless concludes that “When employees take short breaks of 20 minutes or less, the employer must treat such breaks as compensable hours worked regardless of whether the employee works from home, the employer’s worksite, or some other location that is not controlled by the employer.” 

The DOL’s view does not go so far as to say that any break that isn’t a meal break is compensable.  Unsurprisingly, the DOL does admit that long breaks can be unpaid.  As examples, the DOL’s FAB states that a one-hour break to get children ready for school and a three-hour break to make dinner and do laundry are non-compensable.  But it is with the shorter and frankly, more common, breaks on which the DOL’s view provides a disincentive for employers to allow non-exempt employees to work remotely. 

The extent to which the DOL’s view becomes law in the age of teleworking remains to be seen. Hopefully, courts instead will determine the compensability of teleworking breaks by focusing more on the nature of the breaks than merely mechanically measuring their length.

As the FLSA landscape continues to evolve, Seyfarth’s national Wage and Hour Litigation practice group is pleased to share our observations and analysis of the 2022 FLSA litigation trends as well as our forward-looking predictions for 2023. Given FLSA litigation trends over the past decade or so, we anticipate that the volume, locations, and substance of filings in 2023 will resemble those that we can now observe retrospectively in 2022.

Worth noting, too, is the likelihood that the US Department of Labor’s promise—even if delayed—to create growth in the number of employees eligible for overtime pay by revising the executive, administrative, and professional exemptions from FLSA requirements will ignite increased litigation activity, as media and other sources of market awareness focus more attention on overtime pay rights under federal and state laws. This, coupled with plaintiffs’ lawyers’ innovations and creativity in the cases they file, are sure to make 2023 exciting for those in the wage and hour world. Businesses’ operators and in-house lawyers are right to consider the evolving, seemingly ever-present risk of employee-pay litigation to be among the most significant challenges facing them in the next year.

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We hope our analysis is of assistance to you and/or your colleagues. Should you have any questions or comments, please reach out to your Seyfarth attorney.

Brett Bartlett and Noah Finkel, co-chairs of Seyfarth’s Wage & Hour Litigation Practice Group.

By: A. Scott Hecker and Noah A. Finkel

Seyfarth Synopsis: On January 4, 2023, the Biden Administration announced the release of its Fall 2022 Unified Agenda of Regulatory and Deregulatory Actions. In connection with the Administration’s new regulatory agenda, the U.S. Department of Labor’s Wage and Hour Division has a number of ambitious rulemakings on the horizon, including a target of May for a proposed revision to the standard for the FLSA’s white-collar exemptions.

With Winter 2023 upon us, the Biden Administration has issued its Fall 2022 regulatory agenda, and from the looks of it, executive agencies will be busy this year. Here, we focus on the Wage and Hour Division’s (“WHD”) rulemaking plans, which may be limited in number, but could be outsized in their impacts on employers.

When last we blogged about the Biden Administration’s efforts to increase the minimum salary that employers must pay to most of their exempt employees, DOL expected to issue a Notice of Proposed Rulemaking (“NPRM”) on “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” in October 2022. But Halloween came and went, and the New Year brings with it a new NPRM target date of May 2023. Clearly, these deadlines are flexible, but given the resources DOL has invested in this rulemaking, we anticipate WHD will strive to timely meet its goal this time around. Accordingly, employers should monitor the kinds of changes WHD signals concerning the FLSA’s overtime requirements under the executive, administrative, professional, and computer employee exemptions. One likely and impactful change will be an increase in the minimum salary for exempt status — currently $684 per week, which annualizes to $35,568.

Once the NPRM — and its proposed minimum salary — issues, DOL will provide time for public comment. Then, WHD will need several months to review submitted comments, create a final rule, and put it into effect. We saw President Obama’s attempt to revise the FLSA exemption regulations face legal challenge, and the same could happen with this effort, depending on how high the salary threshold climbs. It remains possible that a new rule could issue in 2023 or 2024.

Another significant rule, currently in the proposed rule stage, is WHD’s “Employee or Independent Contractor Classification Under the Fair Labor Standards Act.” According to regulations.gov, DOL’s NPRM for this rulemaking received 54,000 comments, so query whether WHD will be able to review and incorporate that public input into a final rule by its suggested deadline, also May 2023. The high number of comments suggests that some stakeholders may challenge this rule in court as well; indeed, some commenters appeared to lay out their legal arguments in their submissions.  For more information on what to expect when you’re independent contracting see our prior blog.

For those living in the Venn overlap between the wage-hour and government contracting worlds, WHD has a couple rules for you too:

  1. WHD is working on implementing regulations for Executive Order 14055, “Nondisplacement of Qualified Workers Under Service Contracts,” requiring contractors and their subcontractors awarded Federal Government service contracts “to offer qualified employees employed under the predecessor contract a right of first refusal of employment under the successor contract.” The regulatory agenda suggests WHD may still be reviewing comments on this proposal, so timing for a final rule remains unclear.
  2. Last, but not least, the only WHD rule listed on DOL’s regulatory agenda in the final rule stage is titled “Updating the Davis-Bacon and Related Acts Regulations.” In it, “[t]he Department proposed to update and modernize the regulations implementing the Davis-Bacon and Related Acts to provide greater clarity and enhance their usefulness in the modern economy.” We previously blogged and podcasted on the issuance and impacts of this proposed rule, so we commend you to the preceding resources for more on how the rulemaking may change DOL’s Davis-Bacon prevailing wage processes. Spoiler alert: the revised protocols are likely to increase prevailing wage rates.

For questions on these or other DOL regulatory actions, please reach out to your friendly, neighborhood Seyfarth attorney.