By: Daniel I. SmallRobert T. SzybaHoward M. Wexler, and Glenn J. Smith

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By: Ariel Fenster and Noah Finkel

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

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

What is Currently on the Tip Credit Menu?

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

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

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

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

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

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

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

The Old/New Recipe for the Tip Credit

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

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

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

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

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

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

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

 

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

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

The panel will discuss:

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

REGISTER HERE

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

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

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

On Thursday, May 20th at 1:00 p.m. ET / 12:00 p.m. CT / 10:00 a.m.  PT , Seyfarth attorneys Brett Bartlett, Noah Finkel, Kerry Friedrichs, and Scott Hecker will present a webinar entitled Navigating Wage and Hour Risks Under the Biden Administration.

In February 2021, Seyfarth’s Wage Hour Litigation Practice Group published the inaugural edition of the FLSA Handbook. The handbook not only summarizes the substance of the federal wage and hour laws but also provides guidance for employers’ responses to investigations as well as checklists for conducting self-audits. It is intended to provide a ready resource on frequently encountered issues arising in the rapidly evolving wage and hour compliance space.

Join members of Seyfarth’s Wage Hour Litigation and Government Relations & Policy Practice Groups for a deep dive on this important resource. As we provide a curated look at wage and hour considerations for employers under the new administration, specific topics covered will include:

  • The Biden Effect on FLSA Enforcement by the Federal Wage and Hour Division (“WHD”)
  • How to Respond to a WHD Investigation
  • 16(b) Litigation Trends
  • Mitigating Wage and Hour Risks: Best Practice Pointers for Conducting an Effective Self-Assessment

Click Here for More Information and to Register. 

By: Robert Whitman and Bill Varade

Seyfarth Synopsis: In Whiteside v. Hover-Davis, Inc., the Second Circuit upheld the dismissal of an FLSA claim because the plaintiff failed to allege facts sufficient to invoke the three-year limitations period for willful violations.

If a plaintiff merely alleges a willful violation of the Fair Labor Standards Act (“FLSA”), without more, will that suffice to invoke the FLSA’s three-year statute of limitations for willful violations?  The Second Circuit said “No” when it recently affirmed a district court’s dismissal of a plaintiff’s overtime violation claim.

The case was not without controversy, though, as the court had to navigate a circuit split on this issue, and a split between the districts courts within the Second Circuit.  Further, the opinion generated a forceful dissent, which suggests this matter, although settled in the Circuit, may rise again at the Supreme Court one day.

Case Background

The plaintiff, Mark Whiteside, worked for years at Hover-Davis as a Quality Engineer, a salaried, non-exempt position.  In January 2012, an unnamed manager asked Whiteside to switch to Repair Organization Technician, an hourly, non-exempt position.  Whiteside regularly worked 45-50 hours at his new position, but never received overtime pay.  However, his salary remained the same as before this change.

Whiteside was terminated in 2018 when Hover-Davis ceased manufacturing the product he worked on.  He then commenced suit, alleging, among other claims, that he was not paid overtime wages from January 2012 to January 2016 in violation of the FLSA.

Although his claim fell outside the FLSA’s two-year limitations period, Whiteside tried to save his untimely claim by alleging that the company’s violation was willful, and that he should benefit from the FLSA’s three-year statute of limitations for willful violations.  However, the district court disagreed, dismissing his claim because (1) his claim was untimely under the FLSA’s two-year statute of limitations, and (2) he failed to allege facts raising an inference of a willful violation.

The Second Circuit Affirms

To resolve this pleading issue, the Second Circuit considered two previously laid paths.  Both the Tenth and Sixth Circuits had encountered this issue before, but came to opposite conclusions.

The Tenth Circuit allows a plaintiff to merely allege a willful violation in order to benefit from the longer statute of limitations.  The Sixth Circuit, however, requires that a plaintiff plead facts raising a plausible inference that a willful violation has occurred.  Further, the district courts within the Second Circuit disagreed on the proper approach, with some judges following the Tenth Circuit’s approach and others following the Sixth’s.

Ultimately, the Second Circuit followed the Sixth Circuit, holding that “willfulness operates as an independent element of claims for willful violations of the FLSA,” because such claims subject an employer to heightened liability.  “[R]equiring FLSA plaintiffs plausibly to plead willfulness” upholds the distinction between ordinary and willful violations of the FLSA.  Thus, it was “incumbent on the plaintiff to plead facts that make entitlement to the willfulness exception plausible.”

Here, willfulness could not be inferred from the fact that Whiteside was asked “to perform job responsibilities typically performed by non-exempt employees even though he was classified as exempt.”  Furthermore, he failed to allege any details “suggesting an awareness of impropriety” on behalf of defendant or any of defendant’s managers.  So, the Second Circuit said he had failed to allege sufficient facts to benefit from the FLSA’s longer statute of limitations for willful violations.

Dissent And Circuit Split Suggest This Issue May Rise Again

This reasoning found support from only two of the three judges on the panel, and generated a forceful dissent by Judge Denny Chin.

Judge Chin argued that at the motion to dismiss stage, a plaintiff need only “plausibly allege” a willful violation occurred.  Here, he said, Whiteside had done just that by alleging: (1) he was assigned to a non-exempt role; (2) his supervisor and manager knew he performed this role for years; (3) he regularly worked over 40 hours a week; and (4) he was never paid overtime.  This, Judge Chin said, could “support the inference that defendants were aware of their obligation to pay him overtime and . . . either intentionally or recklessly failed to do so.”

While the dissent’s reasoning failed to carry the day, it suggests that this issue remains controversial.  Considering the current Circuit split, this issue could very well see review by the Supreme Court in the near future, perhaps in this very case.  But as it currently stands in the Second Circuit, the burden lies on “the plaintiff to plead facts that make entitlement to the willfulness exception [of the FLSA] plausible.”

By: Scott Hecker and Kevin Young

Gone are the days when the U.S. DOL’s Wage & Hour Division (“WHD”) invited employers to proactively identify and collaborate with the Division to fix their wage and hour missteps. Closed is the chapter in which employers could expect WHD to stand down on the threat of double damages outside of egregious cases. After years of a prior administration focused on compliance assistance, there’s a new guard at the DOL, and its approach thus far might be described as less carrot and more stick.

We have observed the shift at WHD both through formal announcements and anecdotal experience. Mere weeks after the new administration’s arrival, the DOL confirmed its termination of the PAID program, which invited employers to conduct self-audits and work with WHD to remediate identified issues and provide back wage payments to employees. And just last month, the Division issued new guidance to its field staff confirming a reversal of prior policy that reserved the imposition of liquidated damages for rare and egregious cases.

Unsurprisingly, these shifts in policy have been coupled, in our experience, with a change in the temperament and approach of many WHD investigators who knock on employers’ doors and pursue investigations. We’ve seen more investigators push for near-instantaneous document production, threatening use of subpoena power or imposition of civil money penalties and citing a regulation requiring employers to make documents available for inspection within 72 hours of WHD’s demand. Some have rapidly issued investigatory conclusions to employers, sometimes with document requests still pending, both in FLSA cases and in the prevailing wage law context. Demands that employers enter into compliance agreements drafted by WHD also seem to be increasing in popularity.

Employers we work with are linked by their desire to do right by their employees and comply with the FLSA. Certainly WHD and its investigators want the same. But for many businesses, the change in approach at the Division, from policymakers at the top to enforcement agents in the field, presents a new type of pressure that demands a different level of preparedness.

So what can employers do when facing increased pressure from WHD? Here are a few tips:

  • Ensure that records are in order. WHD has broad authority to request FLSA-related records required to be maintained under 29 C.F.R. Part 516. All employers should take proactive steps to ensure that their records required under these regulations, as well as other documents pertinent to wage-hour compliance, are in good order so that they can be efficiently accessed and reviewed if the WHD comes knocking.
  • Be prepared for the knock. Employers operating across multiple physical locations should ensure that front-line managers know what to do when an investigator from any government agency, including WHD, shows up in person, sends them a letter, or contacts them by phone. While investigators should be treated with the utmost respect, their inquiries should be promptly deferred to a pre-designated point of contact who can help coordinate a response. We encourage employers to carefully consider what their response team and protocols should look like.
  • Be respectful and reasonable. Responding promptly and respectfully to an investigator’s inquiries should help limit fireworks in a potentially combustible situation. While WHD has fairly broad subpoena authority, it’s fair to question whether the Division would get much traction in court in the event that an employer isn’t objecting to or stonewalling an investigator’s requests, but is simply asking for a more reasonable approach, whether in terms of time to respond or the types of documents to produce.
  • Seek counsel. With WHD becoming increasingly zealous with its demands—both in terms of what must be produced and when—the potential for business disruption and missteps is greater than ever. We strongly encourage employers to retain counsel familiar with these investigations to assist. Experienced and capable counsel can help to manage the flow of information and work with the investigator to identify efficiencies to avoid overburdening an employer’s personnel. When necessary, counsel can support employers who choose to contest WHD’s conclusions.
  • Self-audit. The FLSA’s statute of limitations forces employers to live with missteps for two (and sometimes three) years, and the termination of programs like PAID makes it more difficult to resolve those missteps in a decisive way when they are identified. As a result, there’s no time like the present for employers to take reasonable steps to ensure compliance. The need is even greater in businesses where employees are performing different duties, or working in different settings or circumstances, as a result of the pandemic. Areas of focus will vary by business, but at a minimum they should include exempt classification, recordation of all hours worked, and proper calculation of overtime pay. As noted in our update last month, Seyfarth’s FLSA Handbook offers useful material on these topics, including:
  1. Chapter 14, “Compliance and Prevention Matters,” which provides an overview of steps employers can take to comply with wage and hour laws, and an outline to assist employers in structuring their own self-assessment process and to address any issues identified through that process.
  2. Chapter 7, “Exempt Employees,” which explains the most common, “white collar” minimum wage and overtime pay exemptions.
  3. Appendix 8, “Sample Job Assessment Questionnaire Form” which contains a practice and user-friendly set of recommendations to assist employers in reviewing exempt classifications.

As President Biden’s appointees settle in at WHD, we expect to see ramped up enforcement not only under the FLSA, but also under the Davis Bacon Act, Service Contract Act, and other statutes in the Division’s wheelhouse. Prevailing wage laws may represent a particular area of emphasis, given the Biden Administration’s focus on infrastructure projects.

In short, employers must be prepared for a shift in approach at the Division and be ready to demonstrate and defend their compliance. Please feel free to reach out to the authors or your friendly, neighborhood Seyfarth attorney with any questions.

By: Noah Finkel

Seyfarth Synopsis:  After delaying the effective date of a finalized Trump-era interpretive regulation that would have brought much needed clarity to the definition of employee under the Fair Labor Standards Act, the DOL yesterday formally repealed that guidance. The result is that companies, workers, and courts will continue to struggle in classifying which workers are employees and which ones can be independent contractors.

Companies, workers, and courts long have wrestled with how to draw the line between an employee who is subject to various employment laws and an independent contractor who is not.  This confusion occurs at several levels:

▪      Companies are subject to a hodgepodge of federal employment laws, many of which provide differing definitions of employee, or none at all;

▪      States also regulate the employment relationship with varying sets of laws and a myriad of different tests to determine who is an employee;

▪      Most tests for employee versus independent contractor are balancing tests that require a multi-factor analysis under which courts can balance those factors in various ways, often depending on the court’s particular jurisdiction or circuit;

▪      The factors that are balanced under these tests often are open to many interpretations by each court; and

▪      These tests for employee versus independent contractor usually were developed before the current era in which workers rarely retain one full-time job throughout their working years and need to be applied to a rapidly evolving economy.

The DOL’s Proposal and Its Short Tenure

The FLSA is among the oldest and most influential employment law statutes and yet it contains no statutory definition of employee. Until January 6, 2021, it had not contained a regulatory definition of the term.  That is when the DOL issued its final rule on “Employee or Independent Contractor Classification” in the waning weeks of the Trump administration.

In that rulemaking, the DOL — and consistent with case law and its own sub-regulatory guidance — focused on whether, as a matter of economic reality, the worker is dependent upon the company for work or instead in business for him or herself.  In doing so, it set forth two core factors to be considered: (1) the nature and degree of the worker’s control over the work; and (2) the worker’s opportunity to earn a profit or loss.

The rule further provided that, if both factors point toward the same classification, whether employee or independent contractor, then the worker is very likely to be that classification. If, however, those factors point in opposite directions, then three other factors should be considered: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the company; and (3) whether the work is part of an integrated unit of production.

The rule, which was to be effective March 8, 2021, provided a simpler clearer analysis for determining whether a worker can be classified as an independent contractor under the FLSA. While there was no guarantee that judges would defer to it, it had the potential to be highly influential in courts and possibly harmonize how different circuits analyze whether a worker is an employee or independent contractor.

But following the change in administrations, the DOL delayed the effective date of that rule, proposed withdrawing it, and then, yesterday, formally withdrew its prior guidance. Its main reason for doing so is that the rule elevated two factors — the degree of control and the worker’s opportunity for profit or loss — above other factors that historically had been considered, which the DOL considers in tension with the text and purpose of the FLSA. This is despite the fact that, in 2015 (the last time the DOL was under a Democratic administration), the DOL issued sub-regulatory guidance in the form of an Administrator Interpretation effectively changing the employee vs. independent contractor test from the historic economic realities test to one that focused on economic dependence.

Barring successful litigation, the DOL’s independent contractor regulation is a dead letter.

What Now and What Next?

So what is now the test for employee versus independent contractor under the FLSA?  It is the same as it ever was:  a balancing test that varies from circuit to circuit, creating litigation results that often seem like they are dependent on each judge’s particular views.

That may not be the case for long, as the DOL under President Biden is expected to issue its own interpretation of how it believes courts should define employee under the FLSA. It remains to be seen when that will occur, what form it will take (will it be by notice-and-comment rulemaking, amicus briefs, opinion letter(s), Administrator Interpretation, or other?), and what its substance will be.

Many in the plaintiffs’ bar have advocated and will advocate for the DOL to adopt the so-called ABC test, which is used with some variations in several states for wage-hour purposes. The version of the ABC test that all but guarantees employee status in most scenarios (and which is currently used in California and Massachusetts), presumes that a worker is an employee unless the company can show that the worker is free from company control and direction in actual practice and per contract, performs work outside the company’s usual course of business, and the worker is customarily engaged in an independently established trade, occupation, or business. Federal adoption of this test, though, is unlikely. Even those who favor a broad definition of employee recognize that the ABC test could not be adopted by the DOL without legislation from Congress. Such legislation exists within the PRO Act, which has been passed by the House, but it is highly unlikely to make it out of the Senate.

More likely, and particularly if, as rumored, David Weil is tapped to be Administrator of the Wage-Hour Division, the DOL will propose a standard similar to the one it issued in its 2015 Administrator Interpretation (which Dr. Weil authored). That standard — focusing on economic dependence — lacks the simplicity and clarity of the now repealed test and likely would be interpreted in a manner to render a greater number of workers employees than under various tests currently used in most circuits.

The extent to which courts would defer to the DOL’s eventual replacement test is an open question.  The fact that the definition of employee is becoming one that depends on which party holds the White House — and thus runs the DOL — may make courts view any DOL test with skepticism and thus cause them to fall back on the same varying and elastic tests they have used over the last 80 years in the absence of a DOL definition of employee. The one certainty for independent contractor jurisprudence seems to be a lack of it.

By: Ryan McCoy and Andrew Paley

Seyfarth Synopsis: Back in January 2020, a federal district court enjoined the State of California from enforcing AB 5 against interstate motor carriers. Now, in a split 2-1 decision, a Ninth Circuit panel has reversed the district court, on the rationale that AB 5 is just another generally applicable labor law that affects all businesses regardless of industry, and is no different from many prior state laws the Ninth Circuit has upheld. Casting aside the dissent’s description of the wide-ranging impact that AB 5 would have on motor carriers, the panel majority held that the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) does not preempt AB 5. The district court’s injunction is expected to be lifted in the coming weeks. The panel’s decision could be subject to a rehearing en banc by the full Ninth Circuit, and eventually the U.S. Supreme Court will likely be asked to address the circuit split on whether the FAAAA preempts “all or nothing” state laws like AB 5. 

The District Court’s Injunction Prohibiting Enforcement

On January 16, 2020, a federal judge in the Southern District of California, following up on a temporary restraining order issued on December 31, 2019, granted the California Trucking Association’s request for a preliminary injunction blocking enforcement of AB 5 against interstate motor carriers. The district court found that AB 5’s ABC test destroys the historical owner-operator model, in direct contravention of the FAAAA, a 1994 deregulation measure that forbids any state law “related to a price, route, or service of any motor carrier … with respect to the transportation of property.” The district court concluded that the FAAAA “likely preempts ‘an all or nothing’ state law like AB 5 that categorically prevents motor carriers from exercising their freedom to choose between using independent contractors or employees.”

The Ninth Circuit’s Decision

A  2-1 panel decision overturned the district court’s decision, effectively permitting the State of California to enforce AB 5 against interstate motor carriers who have long contracted with truck drivers who are owner-operators. The panel majority rejected the district court’s analysis, reasoning that AB 5 is like other state laws (such as those regarding meal and rest periods) that the Ninth Circuit has upheld as generally applying to all industries as opposed to a targeted group. The panel majority concluded that AB 5 is a generally applicable labor law that, while affecting a motor carrier’s relationship with its workforce, is not aimed specifically at the trucking industry.

The panel majority threw out the district court’s finding that the FAAAA preempted AB 5’s enforcement against interstate motor carriers, because AB 5 does not “bind, compel, or otherwise freeze into place the prices, routes, or otherwise freeze into place the prices, routes, or services of motor carriers,” as required for FAAAA preemption.

The Dissent

A lengthy dissent by Judge Mark Bennett faulted the panel majority for failing to consider the full scope of AB 5’s impact on interstate motor carriers, including the impact on their customer relationship and services. AB 5, Judge Bennet argued, differs from the prior state laws of general applicability that the Ninth Circuit has upheld. AB 5 establishes an “all or nothing” rule for interstate motor carriers and mandates how motor carriers must engage with their workers. Judge Bennett cited the district court’s finding that Prong B was the “Achilles heel” of AB 5 for interstate motor carriers because AB 5 makes a truck driver an employee unless the motor carrier proves that the driver “performs work that is outside the usual course of its business.”

Finally, in an evident effort to garner attention from the U.S. Supreme Court, Judge Bennett pointed out the circuit split that the panel majority has created, in that other Circuits have ruled that the FAAAA preempts “all or nothing” statutes.

Motor Carriers Should Examine Current Practices While Keeping A Close Eye On Further Developments

The Ninth Circuit did not immediately lift the injunction, but one can expect the injunction to be lifted by court order in the coming weeks, which would permit California agencies to enforce AB 5 against motor carriers. The panel’s decision could be subject to a rehearing en banc by the full Ninth Circuit, and eventually one might expect that the Supreme Court will be asked to weigh in on the issues raised by the appeal, especially in light of Judge Bennett’s characterization of a circuit split on “all or nothing” rules.”

By: Louisa J. Johnson

Today marks two additional efforts by President Biden’s Administration to reverse the Trump Administration’s rulemaking. This time, two U.S. Department of Labor rules that were both published in the Federal Register as final rules before President Biden’s inauguration are in the crosshairs. One of the rules concerns when a company might be deemed a joint employer of another company’s employees. The other concerns when a worker can be deemed an independent contractor, rather than an employee. Each is discussed in turn below.

The Joint Employer Rule

In January 2020, the DOL under President Trump issued a joint employer rule. It took effect March 16, 2020. But as we wrote about here, a number of states’ attorneys general filed suit to peremptorily challenge the rule, and the U.S. District Court for the Southern District of New York largely invalidated the rule on September 8, 2020. The District Court’s decision is currently on appeal before the Second Circuit Court of Appeals, with the DOL having already announced in its briefing in early January 2021 before the Second Circuit its support of the challenged rule.

Despite this recently-professed support for the rule (while President Trump was still in office), today the DOL under President Biden has published a Notice of Proposed Rulemaking and Request for Comments in which it proposes rescinding the joint employer rule based on the opposing views of the District Court and the states’ attorneys general that the rule is contrary to the Fair Labor Standards Act and prior DOL guidance. How it plans to explain its about face in light of the DOL’s briefing before the District Court and the Second Circuit remains to be seen. The period for commenting on the proposal to rescind the joint employer rule will close on April 12.

The Independent Contractor Rule

On January 6, 2021, Trump’s DOL also issued an independent contractor rule, which was scheduled to take effect on March 8, 2021. But as we anticipated in our January 6 blog would occur, the rule did not take effect on March 8. Instead, on January 20, 2021, within hours after Biden’s inauguration, the White House Chief of Staff issued a memorandum entitled “Regulatory Freeze Pending Review” that delayed the effective date of the independent contractor rule until March 21. A few weeks later, the DOL issued a notice proposing further delay of the rule’s effective date to May 7, 2021 and inviting public comment about that proposal of delay.

Many strenuous objections were made in comments submitted by the business community regarding the untimely nature of the proposed rule of delay and regarding the DOL’s failure to follow procedural requirements. And as the comments submitted by Seyfarth Shaw and others explained, the independent contractor rule provided straightforward, balanced guidance to independent workers and businesses to distinguish between employees and independent contractors under the economic realities legal standard that has governed such relationships for over 70 years.

Over such objections, on March 4, 2021, Biden’s DOL published as a final rule its decision to delay the effective date of the independent contractor rule until May 7. Today, it has taken the next step by publishing a Notice of Proposed Rulemaking and Request for Comments in which it proposes withdrawing the independent contractor rule, which it describes in an announcement as purportedly creating “a new” economic reality test that it claims is not supported by prior court decisions.

The period for commenting on the proposal to withdraw the independent contractor rule also will close on April 12. It is possible, however, that litigation may ensue regarding the propriety of delaying the rule’s effective date and of seeking to withdraw it.

What Does This Mean For Companies?

While we await the issuance of final rules by the DOL and the resolution of any litigation challenging the DOL’s actions, the best that companies can do is (1) continue to look to federal court decisions in applicable jurisdictions (and, yes, decisions do vary by jurisdiction concerning the relevant factors for independent contractor and joint employer status), and (2) consider applicable state laws that might be different. Prepare also for the future possibility that the Biden Administration will, through legislation, rulemaking, or non-binding guidance, seek to substantially narrow the situations in which a company would not be deemed a joint employer and the situations in which a worker could be classified as an independent contractor.

If you would like to discuss any of these development further, please feel free to contact the author or your typical Seyfarth contact.