By: Holger Besch

Seyfarth Synopsis: News Flash: “Caveat Propraetor” or “Proprietor Beware” might soon replace “Eureka” as the state motto of California.  Okay, that’s just melodramatic hyperbole, but one can imagine that business owners in the state might feel similarly given California’s increasingly hostile business environment. Ever expanding litigation exposure, particularly with regard to labor and employment class actions, weighs heavily on the minds of businesses operating in California, and increasingly nationwide.  It should come as no great surprise that class action costs to U.S. companies are at their highest in a decade. According to a recent report by Carlton Fields, spending on class action litigation has reached its highest level in the United States since 2008, and that figure is expected to climb even further. [1]  Of the $2.46 billion spent in 2018, labor and employment matters account for a full quarter of the total, with most legal departments highlighting wage and hour class actions as their chief area of concern.[2] Private equity firms should thus take note as these escalating expenses pose increased risks to their investments, particularly because of labor and employment law.

Potential class action exposure may not even be immediately evident under the existing state of the law. Witness California’s recent judicial and subsequent legislative erosion of piece-rate compensation methods (including mandating complex separate calculations for rest periods and potentially nonproductive time) in favor of hourly pay.  Another example is the recent California Supreme Court decision in Dynamex Operations v. Superior Court, 4 Cal. 5th 903 (2018), which created a brand new standard for determining whether workers are misclassified as independent contractors in the state.  The Supreme Court in Dynamex wove its opinion out of new cloth, imposing a never-before imposed standard that makes the classification of a worker as an independent contractor far more difficult. The subject is also presently before the California legislature as Assembly Bill 5 and awaits possible codification.  Might such dramatic shifts in the law have been predicted? Perhaps not, but they were certainly in keeping with the judicial trend over the years to protect workers’ base pay and to favor employment relationships over independent work—all the more reason for private equity firms to seek the advice of seasoned labor and employment counsel familiar with upcoming trends in the law.

So what are wary private equity firms and other proprietors in the state to do to guard against the growth in class-action costs? As part of the pre-investment due diligence process, investors seeking to mitigate class action risks should scrutinize potential labor and employment liabilities (and potential trends) at target companies ranging from such topics as exempt / nonexempt employee and independent contractor classification issues to compensation methods and pay equity issues. Post-acquisition, when more detailed information is available, investors can reduce potential exposure by conducting thorough labor and employment audits of acquired entities, particularly on wage and hour topics. Companies should also strongly consider implementing enforceable arbitration agreements with class action waivers (particularly in light the Supreme Court’s Epic Systems decision)- which can often substantially reduce potential exposure associated with class and collective action litigation. Even then, companies should be aware that California exempts Private Attorney General Act representative actions from such class action waivers.  In short, the principle of Caveat Propraetor applies – so it is imperative to know what potential liabilities are being bought in evaluating the terms of a deal.

[1] 2019 Carlton Fields Class Action Survey, available at https://ClassActionSurvey.com

[2] Id.

By: Jeff Glaser and Katy Smallwood

Seyfarth Synopsis: The Motor Carrier Act exemption to the FLSA (“MCE”) is a powerful defense against overtime claims brought by interstate truck drivers and others involved in the interstate shipment of goods.  Importantly, the exemption is not limited to drivers who cross state lines.  Instead, numerous courts have made clear that the exemption applies to intrastate drivers, so long as the drivers complete one leg of a larger interstate transport of goods and, thus, the goods they transport are part of the “continuous stream of interstate travel.”  Plaintiffs’ attorneys, however, continue to test the limits of the application of the MCE, particularly as it relates to drivers who complete trips solely within a single state.  One frequent angle of attack is to argue that the goods transported by intrastate drivers are not in the continuous stream of interstate travel, unless the shipper identified the final customer of the goods at the time of shipment.  The Eleventh Circuit Court of Appeals recently rejected this argument in a favorable decision for employers.

In Ehrlich, et al. v. Rich Products Corporation, the Eleventh Circuit affirmed the district court’s order finding that the plaintiffs, who worked for Rich Products as Route Sales Representatives, were exempt pursuant to the MCE.

The plaintiffs delivered frozen dessert products from a storage facility in Florida to retail locations throughout Florida.  The products, which were manufactured in Connecticut and other locations outside of Florida, arrived in Florida after what the Court described as a “long journey from their place of manufacture to the ultimate consumer.”  A third-party trucking company transported the products from the manufacturing facilities to a Florida warehouse where another third-party company loaded them onto shuttle trucks to take them from the warehouse to the delivery trucks driven by the plaintiffs.

The plaintiffs argued that the products’ journey ended at the warehouse, before being transported by the plaintiffs, because, at the time of shipment, Rich Products had not received specific orders from the customers who ultimately received the products.  The Court rejected this argument, explaining that “no such strict requirement applies” to the application of the MCE.

Rich Products, the Court concluded, intended a continuity of movement of the products through the warehouse and to the final customers because it made shipment decisions based on its projections of the demand for the products, and shipped only the volume of products that it reasonably expected to meet immediate customer demands.

Despite the fact that some products remained at the warehouse for several months, the Company’s “fact-based forecasting” confirmed its fixed and persisting intent, at the time of shipment, that the goods continue on in interstate commerce to the ultimate retail consumer.  Accordingly, the final leg of that journey, completed by the plaintiffs, constituted travel in interstate commerce.

In reaching its conclusion, the Court conclusively shut the door on the argument that a shipper must intend to deliver the product to a specific customer at the time of shipment in order to claim the MCE with respect to drivers who complete one leg of the journey.  In fact, the Court indicated that storage for up to six months would not necessarily defeat the fixed and persistent intent when the shipper made its shipment decisions based on fact-based projections.

This decision is a welcome addition to the growing body of case law affirming the application of the MCE to intrastate drivers who complete part of an interstate shipment of goods.

By James M. Hlawek, Shireen Wetmore, Gena Usenheimer, and Richard L. Alfred

Seyfarth Synopsis: Today the Supreme Court issued a 5-4 decision in the Lamps Plus, Inc. v. Varela class action arbitration case.  The holding and rationale are important to employers because the Court decisively ruled that class arbitration “fundamentally” changes the nature of the “traditional individualized arbitration” envisioned by the Federal Arbitration Act and, for that reason, requires an express agreement of the parties to be compelled.  In so ruling, the Court rejected the basis of the Ninth Circuit’s contrary ruling, which had found the arbitration agreement at issue to be ambiguous and, applying California state contract law that contractual ambiguities should be construed against the drafter, held that the agreement allowed for class arbitration.  Relying on its prior class action arbitration decisions, the Court found that such an approach is “flatly inconsistent with the ‘foundational FAA principle that arbitration is a matter of consent.’”  How this part of today’s decision will impact Plaintiffs’ efforts to use state laws to invalidate arbitration agreements will undoubtedly be the subject of future litigation, but it is now clear that courts can no longer order class arbitration unless there is an arbitration agreement expressly authorizing it. 

What Did The Supreme Court Hold?

The Supreme Court held today that courts cannot order an arbitration to be conducted on a class-wide basis unless there is an arbitration agreement that expressly authorizes class arbitration.  The Supreme Court previously held in its Stolt-Nielsen decision that a court may not compel class arbitration when an agreement is “silent” on the availability of such arbitration.  Now the Supreme Court has gone a step further.  Courts cannot compel arbitration when an arbitration agreement is ambiguous about the availability of class arbitration.

The parties — Lamps Plus and Varela, an employee of Lamps Plus — had an arbitration agreement that was ambiguous about the availability of class arbitration.  Certain phrases, particularly the use of “I” and “my” throughout the agreement, seemed to contemplate purely individual arbitration.  Other phrases, such as one stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment,” the employee argued, were broad enough to suggest class arbitration.  The employee sued Lamps Plus on behalf of a class of employees whose personal information had allegedly been compromised.

The Ninth Circuit affirmed the district court’s order compelling not individual arbitration, as the company had sought, but class arbitration.  In deciding whether to compel class arbitration, the Ninth Circuit relied on California state law principles in applying a doctrine know as contra proferentem, which means that ambiguous terms in a contract should be construed against the drafter.  In applying this doctrine, the Ninth Circuit found that the ambiguous terms of the parties’ agreement should be interpreted against Lamps Plus — the drafter of the agreement — and in favor of the employee, who argued for class arbitration.

The Supreme Court reversed the Ninth Circuit’s decision with five justices joining in the opinion.  Relying on its past decisions in Stolt-Nielsen, Concepcion, and Epic Systems, the Court made clear that class arbitration “fundamentally changes” the nature of “traditional individualized arbitration” envisioned by the Federal Arbitration Act in several ways, including making the process slower, more costly, and “more likely to generate procedural morass than final judgment.”  Because arbitration under the Federal Arbitration Act is strictly a matter of the parties’ consent, the Court found that applying contra proferentem to allow class arbitration under an ambiguous agreement is “flatly inconsistent with the ‘foundational FAA principle that arbitration is a matter of consent.’”  The Court, therefore, found that the Ninth Circuit decision ordering class arbitration was improper and reversed.

No Decision On Who Should Decide Whether An Agreement Allows For Class Arbitration  

In a footnote, the Court stated that it was not deciding whether the availability of class arbitration is a “question of arbitrability” that is presumptively for courts (rather than arbitrators) to decide.  The Court pointed out that the parties had agreed that a court should decide the issue, and therefore concluded that the question was not at issue.  Thus, while every circuit court that has addressed the issue has found that the availability of class arbitration is a “question of arbitrability” for courts to decide in the absence of an express agreement to the contrary, the Supreme Court still has not decided the issue.

What Does The Lamps Plus Decision Mean For Employers?

The decision is an important victory for employers.  Courts can no longer order class arbitration under the Federal Arbitration Act unless the employers’ arbitration agreement unambiguously authorizes class arbitration.  Under the Lamps Plus decision, employers no longer face the risk that ambiguous phrases in their agreements will lead to class arbitration.  Only express agreements can lead to class arbitration.  While many employers have revised existing arbitration agreements or adopted new ones since Epic Systems that include express class arbitration waivers, those employers with older clauses using generic language to the effect that all employment disputes are subject to arbitration benefit from today’s opinion.

The decision did not, however, close the door on future litigation as far as the availability of class arbitration.  Plaintiffs will likely continue attempts to use principles of state contract laws to invalidate arbitration agreements.  Lamps Plus, however, should significantly narrow the successful use of such laws to the extent they “target arbitration either by name or by more subtle methods…”  In this light, even general contract principles such as unconscionability cannot stand in the way of arbitration enforcement if they over-ride the “foundational FAA principle that arbitration is a matter of consent.”

Additionally, Justice Ginsburg argued in her dissenting opinion that Congress should act to “correct” the elevation of the FAA over “the rights of employees and consumers” to bring class actions.  Congress could, therefore, someday pass legislation that would make class arbitration more widely available.

Thus, despite the fact that the Lamps Plus decision makes it less likely that employers will face class arbitration, we continue to urge employers to have their employment agreements reviewed by experienced counsel and revised consistently with this and prior Supreme Court opinions.

Co-authored by Alex Passantino and Kevin Young

Seyfarth Synopsis: On April 1, 2019, the U.S. DOL announced a proposed rule to clarify joint employment under the FLSA. The rule would establish a four-factor balancing test for joint employer status. It also rejects various factors that have fueled recent litigation, e.g., a worker’s economic dependence on a potential joint employer, the potential employer’s business model, and its unexercised power over the worker.

This is the third proposed rule that the DOL has issued in a month’s time. Like the other proposals (concerning overtime exemptions and the regular rate of pay), this rule—if adopted—should provide welcome clarity for many businesses. This is particularly true for those most targeted by joint employment litigation, such as franchisors, staffing agencies, and businesses with subsidiaries or affiliates.

Continue Reading April Rules: DOL Continues Rulemaking Sprint With New Proposed Joint Employment Standard

By Alex Passantino

Since 2015, we have been following the saga of the salary threshold for the FLSA’s white-collar exemptions (most of them, at least).  In June 2015, the Department of Labor proposed a level of $50,440.  When the final rule was published in May 2016, that level turned out to be $47,476.  In the Fall of 2016, the regulation was enjoined, keeping the required salary level at $23,660.  Then we’ve had an Administration change, a lengthy request for information, and many, many listening sessions.

Shortly, the Department will be publishing a new proposal, with a new minimum threshold of $35,308 ($679/week).  Up to 10% of the salary may be made up of nondiscretionary bonuses, with an annual “true-up” to ensure the $35,308 level is met.  The standard for the highly compensated employee exemption would rise to $147,414.

The Department did not propose automatic updates to the salary level, but said it was “affirming its intention to propose increasing the earnings thresholds every four years.”

Once the proposal is formally published in the Federal Register, the public will have 60 days to comment on the proposal. The Department will then review the comments and prepare a final rule.  In all likelihood, no new salary level will be implemented until at least 2020.

By:  Alexander Passantino

On February 28, the Wage & Hour Division sent to the White House Office of Information and Regulatory Affairs its long-awaited regulatory proposal on joint employment.  Not much is known about the proposal, which was described in the Regulatory Agenda as addressing the changes in the workplace in the 60 years since most of 29 CFR 791 was issued.  WHD stated that it was proposing changes “intended to provide clarity to the regulated community and thereby enhance compliance . . . and help to provide more uniform standards nationwide.”  The joint employer regulation joins WHD’s proposed rules increasing the minimum salary level for exemption and revising the basic and regular rate regulations in the White House review process.  We expect the exemption and regular rate proposals to be made public in the next couple of weeks, with the joint employer proposal following shortly thereafter.

By: John Phillips and Steve Shardonofsky

Seyfarth Synopsis:  In a must-read decision and case of first impression at the federal appellate level, the Fifth Circuit Court of Appeals held late last week that a district court may not approve sending notice of an FLSA collective action to employees who had agreed to arbitrate employment claims.  This decision may curtail an alarming tactic in FLSA litigation in which plaintiffs’ counsel use the collective-action conditional certification procedure (1) to send notice to large numbers of potential opt-in plaintiffs inviting them to join the lawsuit as plaintiffs even though they had previously agreed to arbitrate their claims on an individual basis and not to participate in court in a class or collective action; and then (2) using the information gathered from the notice process, to submit (or threaten to submit) hundreds or even thousands of individual arbitration claims against the company.

Arbitration agreements with class and collective action waivers (recently approved by the U.S. Supreme Court in its landmark Epic Systems decision) have helped employers manage large-scale litigation risks, including wage-hour collective actions, while at the same time providing a fair and relatively expeditious forum for aggrieved employees.  But what happens when an employee, who has not signed the company’s arbitration agreement, brings an FLSA collective action and seeks to conditionally certify and send notice to a large group of employees, the vast majority of whom are bound by such an agreement?  May a court conditionally certify a collective and allow notice of the lawsuit to be sent to the larger group of current and former employees, including those who signed an arbitration agreement?

In recent years, some district courts have allowed plaintiffs to send notice to the entire group of employees, including those who agreed to arbitration and agreed not to participate in class or collective actions.  In 2017, for example, a federal district court in Tennessee authorized notice of an FLSA lawsuit to approximately 80,000 current and former employees, even though at least 50,000 of them had agreed to arbitrate their employment claims.  Although decisions on FLSA conditional certification are typically not immediately reviewable by an appellate court, the employer in that case sought an immediate appeal under a provision in the Federal Arbitration Act that allows an interlocutory appeal after the denial of a motion to compel arbitration.  The Sixth Circuit Court of Appeals declined to overturn the district court’s decision, however, reasoning that it did not have jurisdiction to take the appeal because the district court had not declined to enforce an arbitration agreement (but had instead granted the plaintiffs’ motion for conditional certification).  Because the Sixth Circuit could not decide the issue on the merits, the district court’s ruling was allowed to stand.

The Fifth Circuit Steps In

In a key decision for employers with arbitration programs, the Fifth Circuit Court of Appeals held late last week in In re: JPMorgan Chase & Company that district courts should not send collective-action notices to current or former employees who agreed to arbitrate their employment claims.  The Fifth Circuit’s decision (a case of first impression for the federal appellate courts) is a must-read for all wage-hour practitioners and employers with mandatory arbitration programs.

Case Background

In December 2017, several call-center employees at JPMorgan Chase sued the bank, asserting that Chase failed to pay them for all overtime owed.  The plaintiffs brought their lawsuit as a collective action under the FLSA and sought to represent a group of approximately 42,000 current and former employees.  More than 85 percent of those employees (about 35,000) had signed arbitration agreements with the bank, however, requiring them to arbitrate any employment claims on an individual basis instead of going to court.

The plaintiffs asked the district court to conditionally certify the case and grant plaintiffs permission to send notice of the lawsuit to the entire group of 42,000 current and former employees.  Chase opposed this, arguing in part that sending notice to the entire group was improper because a vast majority of them had agreed to arbitrate their claims individually and were, therefore, not eligible to participate in the lawsuit.  The district court reasoned that, even if Chase was correct, until the arbitration-bound employees joined the case and Chase moved to compel arbitration against specific individual, the court could not definitively ascertain whether any of the agreements were, in fact, enforceable.  Because Chase had not moved to compel arbitration, the district court ordered that notice be sent to the entire group of 42,000 and ordered Chase to produce contact information (including names, and physical and e-mail addresses) for each individual.  After the district court declined to grant an interlocutory appeal, Chase filed a mandamus petition with the Fifth Circuit.

The Fifth Circuit’s Decision

The Fifth Circuit overturned the district court’s decision to send notice to the entire group of workers, holding “that district courts may not send notice to an employee with a valid arbitration agreement unless that record shows that nothing in the agreement would prohibit that employee from participating in the collective action.”  Whose burden is it to meet this threshold?

According to the Fifth Circuit, if there is a genuine dispute as to the existence or validity of an arbitration agreement, the employer has the burden to show (by a preponderance of the evidence) the existence of a valid arbitration agreement as to any particular employee.  In such circumstances, district courts should allow the parties to submit additional evidence “carefully limited to the disputed facts” to resolve the issues.  Only if the employer fails to meet this burden should the employee receive the same notice as others.  The Fifth Circuit sent the case back to the district court to address these issues in the first instance.

Along the way, the Fifth Circuit recognized the dearth of authority guiding district courts on these important issues, highlighted that this was the first appellate ruling on point, and also made the following important observations:

  • Whether to send collective action notice to employees who signed arbitration agreement is an “increasingly recurring issue” that has resulted in divergent outcomes at the district court level. The Court noted it was deciding the issue to “settle a new and important problem.”
  • Hoffmann-La Roche Inc. v. Sperling, 493 U.S. 165 (1989), the seminal Supreme Court decision on the conditional certification notice process, does not grant employees a right to receive notice of potential FLSA claims (as some courts have held in this context) and “does not give district courts discretion to . . . require notice of a pending FLSA collective action to employees who are unable to join the action because of binding arbitration agreements.”
  • Sending notice to employees with valid arbitration agreements “merely stirs up litigation,” which “Hoffmann-La Roche flatly proscribes.” It also undermines the “efficient resolution in one proceeding of common issues,” the fundamental purpose of facilitating the notice process.

Takeaways

This is an important decision for employers with mandatory arbitration programs, especially those in the Fifth Circuit.  It removes the plaintiffs’ most effective weapon in FLSA lawsuits following the landmark Epic Systems ruling: using the conditional certification process to obtain contact information for and send notice of the lawsuit to large numbers of potential opt-in plaintiffs (even those who agreed to arbitrate their claims), and then using the information gathered to submit (or threaten to submit) hundreds or even thousands of individual arbitration claims, resulting in “death by a thousand cuts.”

Nevertheless, the Fifth Circuit’s ruling still left some important questions unanswered: When should the parties and the district court delve into these issues—during the briefing on conditional certification or after the court rules that notice should go out? How do plaintiffs establish a genuine dispute as to the existence or validity of an arbitration agreement without a mechanism for obtaining the arbitration agreements for the entire putative collective?  How will any evidentiary issues be addressed efficiently in cases involving hundreds or thousands of potential plaintiffs?  Should the district courts undertake in camera review of arbitration agreements or lists of employees with arbitration agreement to prevent plaintiffs’ counsel from obtaining those names?  Do defendants have an obligation to meet their burden for each individual in the putative collective who have an arbitration agreement?

While defeating conditional certification will continue to be a key focus for employers in FLSA cases, given all of these outstanding questions, employers and defense-side practitioners should be ready from the outset with a clear strategy to compel arbitration and, if necessary, to assemble and muster evidence to establish the existence of a valid arbitration agreement as to any particular employee at issue.

 

By Kevin M. Young and Renate M. Walker

Seyfarth Synopsis: Each year, droves of employers are hauled into court to defend lawsuits in which salaried-exempt employees claim that, because of their job duties, they should have been classified as non-exempt and paid overtime. While a written job description alone cannot defeat such a claim, it will nearly always be one of the primary exhibits in the case.

In this post, we offer a few tips for ensuring that this likely Exhibit A is helpful rather than harmful:

  1. Accuracy is King. The job description must be accurate. If the job description paints an inaccurately dim a view of a role, the worker-turned-plaintiff will cite it in support of her claim that her duties did not justify exempt status. Conversely, if the description overinflates a job, the plaintiff’s attorney may use it to suggest the employer did not understand the job that it chose to classify as exempt.
  2. Accuracy Does Not Mean Exhaustion. Focus on what the job exists to do. Even a CEO might, on occasion, file a document or open mail, but saying so in a CEO job description needlessly distracts from the job’s core function. Likewise, there is seldom reason to list tasks that can be assumed of any job, such as “execute tasks assigned by supervisor.” It is not necessary to list every last task an exempt employee might perform, and doing so can backfire by providing fodder for a plaintiff bringing a misclassification claim.
  3. Strong Verbs, Clear Impact. Use strong action verbs, and focus on value and impact, to describe a job’s essential duties. Though it might not be wrong to state that a manager “view P&L reports monthly,” this is a weakly worded description that fails to relay any value in the manager’s role. If it is no less accurate, then it would be far better to write: “Analyze monthly P&L reports to identify growth opportunities and plan or adjust related strategies.”
  4. Focus on Exempt Functions. Highlight the duties that justify a job’s exempt classification. (Those duties are set out in the FLSA’s white-collar exemption regulations.) For example, if a job’s core duties involve executing major projects and negotiating on the company’s behalf, the description should prominently convey this. Likewise, if a managerial role has authority in hiring, firing, disciplinary, or termination decisions—all of which go directly to the executive exemption’s requirements—the description should highlight this.
  5. Don’t Shy Away From Degree Requirements. Sometimes we see job descriptions for professional jobs (e.g., accounting, engineering, various sciences) which state that a bachelor’s or master’s in a given area is preferred, only to find out that every incumbent in the role holds the degree. Certainly there can be a business case for writing job qualifications in a way that attracts, and does not weed out, the desired candidate. That said, if the reality of the job requires a specific degree, then saying so makes sense and can help support a defense under the professional exemption.
  6. “Assist With” Can Diminish a Role. You can diminish an exempt employee’s role by suggesting that she cannot perform a given duty on her own. As an example, an architecture firm where numerous architects touch a blueprint might describe one of a mid-level architect’s core duties as: “Draft or assist in drafting blueprints for commercial buildings.” We prefer: “Draft blueprints for commercial buildings.” The latter statement is more direct, it likely remains accurate, and it avoids diluting the function the employer is trying to describe.
  7. Consider Requiring Acknowledgement. When employers require employees to periodically review and sign their job description to acknowledge its accuracy, the description can become an even more powerful piece of evidence in the event of litigation. The process can also provide a terrific way to foster an open dialogue that allows employees to communicate whether any core aspects of their jobs have changed.

While a job description is not dispositive of an employee’s exempt status, it can be a very helpful (or harmful) exhibit in the event of a legal challenge. Above all else, job descriptions must paint a clear, accurate picture of a given role’s key purpose and function. Given the proliferation of FLSA litigation, employers should also take care to ensure that job descriptions for exempt jobs help to support (rather than undercut) the reasons they chose to classify the jobs as such.

By Abigail Cahak and Noah Finkel

Seyfarth Synopsis: Even though the DOL abandoned its 20% tip credit rule in November 2018, one federal district judge has refused to defer to the agency, opting to defer to the old guidance instead.

As employers using the tip credit know full well, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. FLSA regulations clarify, however, that duties related to a tipped occupation, but not themselves directed toward producing tips, are not considered a separate occupation.  For example, a waitress may nonetheless spend part of her time “cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses” without being employed in “dual occupations.”  Although the regulations impose no limitation on the amount or type of “related duties,” an internal DOL Field Operations Handbook (“FOH”) — a document meant originally for investigators but later made available on the DOL’s website — required that employees may not spend more than 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating.

This “20% rule” was followed by the Eighth and Ninth Circuit Court of Appeals, and several lower courts (but not by the Eleventh Circuit and some district courts), under the reasoning that the DOL’s interpretation of its own regulations was reasonable and thus entitled to deference.  Tracking servers, and bartenders’ time on various tasks has proven impracticable for hospitality employers and has led to a wave of collective actions that often have been expensive to settle.  Mercifully, the DOL laid the 20% rule to rest by issuing an opinion letter last fall stating its position that “no limit is placed on the amount of [related but non-tipped] duties that may be performed . . . as long as they are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties” (emphasis added).  That opinion letter also noted that a revised FOH would be forthcoming.

The 20% rule was not enacted by Congress.  Nor was it imposed by judges.  It did not undergo notice-and-comment rulemaking to become a legislative regulation.  It was not even an interpretive bulletin placed by the DOL into the Code of Federal Regulations.  Rather, the 20% appeared in a handbook given to DOL investigators, and then was urged by the DOL onto courts for the first time in an amicus brief.  Deemed as a reasonable interpretation of the DOL’s own regulations by many courts, the 20% is thus purely a creature of deference.  And if the 20% rule can live only by deference, it stands to reason that it dies by deference too.

But earlier this month, a federal district judge attempted to resurrect DOL tip credit guidance that even the Department had left for dead.  The ruling takes a results-oriented approach and dismisses more recent, well-reasoned guidance to the contrary.

The case brought by current and former servers and bartenders of a group of restaurants, alleged that they were owed unpaid wages due to improper use of the tip credit, including spending more than 20% of their time on non-tip producing work.  In ruling on the employer’s motion for decertification, the court concluded that the DOL did not offer any reasoning or evidence of thorough consideration for “reversing course” with the opinion letter, yet the decision neglected to fully consider that the same opinion letter had previously been handed down in the final days of the Bush Administration, only to be withdrawn in the first months of President Obama’s first term.  The ruling also failed to consider that the 20% rule itself has never been fully explained by the DOL, nor has the Department clearly articulated why 20% is an appropriate number, how duties should be categorized, or how time should be tracked.  In contrast, the November 8 opinion letter provides a detailed explanation for the basis of the rule it articulates and a methodology for ensuring compliance.  The decision is also premised on facts likely distinguishable from future cases.  The court found it significant that the 20% rule was in effect during the three years at issue, such that application of the DOL’s new guidance would be an “unfair surprise” to the plaintiffs.

The decision is one of the first to rule on deference to the DOL’s new opinion letter, but it may be short-lived due to appeal or due to other courts distinguishing or refusing to follow it.  In an attempt to ensure that plaintiffs who had been litigating for years did not have the rug pulled out from underneath them, the court did not fully address the thoroughness or reasoning of the two divergent interpretations.  The decision may very well end up an outlier, particularly as previously-filed tip credit litigation dries up, sending the 20% rule to its grave once and for all.

By: Ariel Fenster, Ryan McCoy, Steve Shardonofsky

Seyfarth Synopsis: Arbitration of employment claims continues to be a hot topic at the Supreme Court.  In a unanimous 8-0 decision yesterday (Justice Kavanaugh recused), the Supreme Court ruled in New Prime Inc. v. Oliveira that non-employee drivers engaged by a transportation company cannot be forced to arbitrate their wage-hour claims under the Federal Arbitration Act’s (“FAA”) exclusion for transportation workers engaged in foreign or interstate commerce because that exclusion covers independent contractors as well as employees.

The ruling marks a departure from the Court’s long-held stance favoring arbitration.  Most notably, it may result in non-enforcement of arbitration agreements for hundreds of thousands of workers in the transportation industry, and it may also put in jeopardy any corresponding class/collective action waiver provisions.  In the wake of this ruling, transportation companies should review and consider making changes to their arbitration agreements to ensure they remain enforceable (perhaps under state arbitration laws or as a function of severability clauses) despite the broad exclusion under the FAA.

Case Background and the Court’s Prior Interpretation of the FAA’s Section 1 Exception

Over the years, the Supreme Court has liberally interpreted and applied the FAA in favor of arbitration, consistently enforcing mandatory arbitration provisions at almost every opportunity. Just last week, Justice Kavanaugh wrote his first opinion for an unanimous Court in Henry Schein Inc. v. Archer & White Sales Inc., holding that courts must compel arbitration of gateway arbitrability questions whenever the agreement includes “clear and unmistakable evidence” that the parties delegated the determination of those questions to the arbitrator.

Despite the Court’s broad application of the FAA, the Act does contain several sweeping exceptions to coverage.  Section 1 of the FAA excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” (emphasis added).  In its 2001 Circuit City Stores, Inc. v. Adams decision, the Court held that this provision does not apply to employment contracts of all employees, but is limited only to the employment contracts of transportation workers actually engaged in interstate commerce.  Since Circuit City, a majority of courts have further limited the exception, ruling that it applies only to employees and does not preclude arbitration of claims by independent contractors in the transportation industry.  This case gave the Court an opportunity to decide whether the FAA’s “contracts of employment” exemption also applies to independent contractor agreements.

Dominic Oliveira worked for New Prime Inc. as a truck driver, but never as a traditional employee.  Instead, Oliveira signed an operating agreement classifying him as an independent contractor.   Oliveira filed suit claiming he was paid significantly less than the minimum wage rate required for traditional employees.  His operating agreement with New Prime contained several common arbitration-related provisions that loyal readers of this blog know are generally enforceable: first, the contract required that all disputes must be resolved through individual arbitration and second, the agreement provided that any threshold questions regarding the arbitrability of Oliveira’s claims should be decided by an arbitrator, and not the court. The second provision is typically known as a “delegation” clause.

Despite the mandatory arbitration provision, Oliveira filed a class-action lawsuit on behalf tens of thousands of other “contractors” who signed similar operating agreements with New Prime.  In the lawsuit, Oliveira alleged that New Prime had misclassified him and other drivers as independent contractors to avoid paying them the federal minimum wage and other protections afforded to employees (but not contractors).

Two Questions Before the Supreme Court: 

Who Should Decide Whether the Section 1 Exclusion Applies?

First, the Court was tasked with deciding who should rule on the applicability of the Section 1 exception—a court or the arbitrator?  New Prime sought to enforce the terms of the agreement requiring the arbitrator to decide all issues regarding arbitrability, while Oliveira insisted that the court must first decide whether or not the FAA given the Section 1 coverage exclusion.  Both the District Court and the First Circuit Court of Appeals sided with Oliveira on this question.

In affirming the First Circuit’s decision, the Supreme Court explained that a district court must make an “antecedent determination” of whether the Section 1 exemption applies to a contract before compelling arbitration.  And because the question of whether the contract triggers the FAA’s coverage is within the court’s jurisdiction, the Court held that the question was non-delegable.

Does “Contracts of Employment” Also Mean Independent Contractors?

Next, the Court was tasked with determining if the FAA’s exemption for “contracts of employment” includes only traditional (read: W-2) employees or whether it also applies to independent contractors.  For a unanimous Court,  Justice Gorsuch wrote that while today there may be a formal distinction between “employment” and contract work, that was not true when Congress passed the FAA in 1925.  Back then, “[d]ictionaries tended to treat ‘employment’ more or less as a synonym for ‘work’” and “all work was treated as employment,” whether or not “formal employer-employee or master-servant relationship” existed.  To establish this historical context, Justice Gorsuch pointed to six dictionaries from the era in addition to contemporaneous statutes and rulings. Given this framework, Justice Gorsuch concluded that “[a]t that time, a ‘contract of employment’ usually meant nothing more than an agreement to perform work” and, “[a]s a result, most people then would have understood Section 1 to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.”  Justice Gorsuch also pointed out that Congress’ use of the term “workers” in Section 1 and not “employees” or “servants” suggested that it was meant to be interpreted broadly. Because Oliveira’s independent contractor agreement falls under the FAA’s exclusion for “contracts of employment” in the transportation industry, New Prime cannot compel arbitration of Oliveira’s claims and must instead now defend itself in court.

Where Does the Road Lead From Here?

Based on the Court’s decision in New Prime, independent contractors engaged in foreign or interstate commerce in the transportation industry now fall squarely within the FAA’s Section 1 coverage exclusion.  This could result a significant spike of class- and collective-action wage and hour lawsuits.  In light of this case, transportation and logistics’ companies should revisit and consider updating their mandatory arbitration agreements with any independent contractors, as they may now be held unenforceable under the FAA.

Options for revising your arbitration agreements in light of New Prime may include:

  • Ensuring the arbitration agreements contains a broad and valid severability clause. This may ensure that any class/collective action waiver provisions remain enforceable even if the claims must be litigated in court.  It may also ensure that arbitration can take place under applicable state arbitration laws as opposed to the FAA.
  • Revising arbitration agreements to provide for enforcement of under applicable state law, assuming the state law does not contain a similar transportation worker exception. Several states have adopted arbitration acts similar to the FAA, and many of those arbitration acts do not contain an exclusion for transportation workers. It may be that, as to a transportation worker, a company can enforce an arbitration agreement with a class waiver under state law (whether under an arbitration act or even traditional contract law), even if it cannot under federal law.