By: Paxton Moore and Rob Whitman

Seyfarth Synopsis: New York Governor Kathy Hochul has signed legislation that, effective immediately, adds wage theft to the definition of “larceny” under the state’s penal code, creating potentially harsh penalties for the state’s employers.

Under a recently enacted New York statute, wage theft is considered a form of “larceny” under the state’s penal law. The statute adds to existing criminal penalties for wage theft and allows prosecutors to seek even stronger penalties against violators.

Expanding the Definition of Larceny

Governor Hochul signed the Wage Theft Accountability Act (S2832-A/A154-A) on September 6, 2023. Effectively immediately, the Act amends the Penal Law to include “wage theft” in the definition of “larceny.”

Under the Penal Law, “[a] person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof.” Penal Law § 155.05(1). The recent amendment revises the definition of “property” to include “compensation for labor or services.” Id. § 155.00(1). It further adds a definition for “workforce,” which “means a group of one or more persons who work in exchange for wages.” Id. § 155.00(10).

Most significantly, the Act adds a subsection that defines larceny by wage theft to mean the following:

A person obtains property by wage theft when he or she hires a person to perform services and the person performs such services and the person does not pay wages, at the minimum wage rate and overtime, or promised wage, if greater than the minimum wage rate and overtime, to said person for work performed. In a prosecution for wage theft, for the purposes of venue, it is permissible to aggregate all nonpayments or underpayments to one person from one person, into one larceny count, even if the nonpayments or underpayments occurred in multiple counties. It is also permissible to aggregate nonpayments or underpayments from a workforce into one larceny count even if such nonpayments or underpayments occurred in multiple counties.

Id. § 155.05(2)(f).

Although the bill’s sponsors fixated on the vulnerability of low-income earners—including non-union construction workers and undocumented immigrants—the new law potentially impacts all employers in the state. It does not include any carve-out provisions or exemptions for particular positions or industries.

An open question is whether the law applies to compensation paid to independent contractors in addition to employees. The Act is not part of the Labor Law, which generally governs the employer-employee relationship, and refers generically to “hir[ing] a person to perform services,” rather than hiring “employees.” But it refers to “wages” and “wage theft”—concepts that derive from the Labor Law and assume an employer-employee relationship—and not to “fees” or the like, which suggests that it is limited to employment and not independent contractor arrangements.

The new law allows for the aggregation of nonpayments or underpayments to one victim employee and for the aggregation of victims, which has two distinct effects. Prosecutors may now (1) seek stronger penalties against employers who steal wages from workers, and (2) try incidents of wage theft committed by the same employer in multiple counties in a single venue. The ability to aggregate claims could result in harsh penalties for both corporate and individual employers. Under the Penal Code, petit larceny includes theft of up to $1,000 and is a Class A misdemeanor. See NY Penal Law § 155.25. A corporation can be fined up to $5,000 for conviction of a Class A misdemeanor. Id. § 80.10(1)(b). Theft of $1,000 or more constitutes grand larceny of varying degrees—the lowest of which, Grand Larceny in the Fourth Degree, constitutes a Class E felony. Id. §§ 155.30-155.42. An individual could face a maximum prison sentence ranging from four to twenty-five years depending on the amount stolen. Id. § 70.00(2)(b-e). For corporations, conviction of a felony carries a fine of up to $10,000. Id. § 80.10(1)(a).

The Labor Law already provides for criminal penalties for wage theft. See Labor Law § 198-a (listing certain offenses as misdemeanors or felonies). The addition of wage theft to the definition of larceny does not appear to alter, replace, or repeal these existing criminal penalties.

The Act, which passed with near unanimous majorities in both chambers of the Legislature, is the latest in an ongoing effort to combat wage theft in New York. According to the bill’s sponsors, beginning in December 2017, the Wage Theft Initiative—a collaboration among seven District Attorney’s Offices, including the five in New York City as well as Westchester and Nassau Counties; the Department of Investigation; the New York City Comptroller’s Office; the New York State Department of Labor; and the New York State Attorney General’s Office—has led the prosecution of ten criminal cases accounting for more than $2.5 million in stolen wages affecting over 400 construction workers. On February 16, 2023, the Manhattan District Attorney announced the creation of the Worker Protection unit to investigate and prosecute wage theft, among other offenses.

According to a co-sponsor, Assemblymember Catalina Cruz, wage theft accounts for almost $3.2 billion in lost wages each year—affecting over 2 million New Yorkers. Cornell University’s Worker Institute sets forth a more conservative estimate, asserting wage theft in New York to account for nearly $1 billion in lost wages affecting tens of thousands of workers.

Outlook for Employers

New York is taking an expansive approach to protect employees and their wages. Failure to properly navigate the State’s complex wage and hour laws now carries potentially harsher outcomes than the already existing criminal and civil penalties. While criminal prosecutions for these offenses will likely be rare and limited to the most egregious violators, all employers are well advised to pay close and careful attention to compliance with their wage payment obligations, and to consult with wage-and-hour counsel if they have any concerns about the administration of their payroll.

By: Rachel V. See, Christopher J. DeGroff, and Andrew L. Scroggins

Seyfarth Synopsis: The EEOC and the Department of Labor Wage Hour Division (WHD) have taken an important step toward inter-agency coordination, committing to information sharing, joint investigations, training, and public outreach. The Memorandum of Understanding between the EEOC and DOL contemplates referring complaints between the two agencies, a move that should catch the attention of all employers.  What is more, the agencies have agreed to share swaths of information, including EEO-1 reports and FLSA records.  This coordination will not just occur at the agency leadership level – the MOU enables front-line personnel from both agencies to receive shared information quickly and expeditiously. This enhanced and elevated level of agency cooperation should be top of mind for all employers.

On September 14, 2023, the EEOC and WHD announced that they had entered into a Memorandum of Understanding enabling information sharing, joint investigations, training, and outreach. The MOU now empowers the agencies’ field staff to coordinate efforts on both individual matters and larger investigations.

The EEOC’s press release, and some initial media coverage, have focused on the agencies’ coordinated efforts relating to the recently enacted PUMP Act (extending to more nursing employees the rights to receive break time to pump and a private place to pump at work) and the Pregnant Workers Fairness Act (requiring reasonable accommodations for limitations related to pregnancy, childbirth, or related medical conditions). But the MOU’s information-sharing and other contemplated coordinated activity provisions go far beyond those statutes, covering a broad range of activities, touching on all aspects of EEOC and WHD jurisdiction.

For example, the MOU explicitly describes that each agency will make complaint referrals to the other, and that the two will share complaint or investigative files, EEO-1 reports and FLSA records, and “statistical analyses or summaries,” and that the agencies “will explore ways to efficiently facilitate” the data sharing.

Information sharing under the MOU is not limited to just top-level agency officials in Washington, DC; leadership from each agency’s District (or Regional) offices may request information without the need to first obtain approval from HQ in Washington, DC. Importantly, the EEOC District Directors and Regional Attorneys also may designate other EEOC employees to make the request. This means that front-line EEOC staff involved in enforcement and litigation can quickly access a wide range of information held by WHD. It is also noteworthy that the MOU allows any EEOC Commissioner to directly request information from WHD, without first channeling the request through EEOC career staff. This is significant because it enables EEOC Commissioners from different political parties than the Chair to obtain information directly from WHD.

But the elephant lurking in the corner of the room may be the potential for broad-based data-sharing between the two agencies. The MOU specifically contemplates that the EEOC may share employer EEO-1 reports with WHD. Notably, Title VII prohibits the EEOC from disclosing EEO report data to the public, but the MOU does not bind the WHD in the same way. Instead, the WHD agrees to “observe” Title VII’s confidentiality requirements.

Whether these provisions of the MOU might be sufficient to ward off a FOIA request directed to WHD may, at some point, be tested in the courts. WHD’s sibling agency at the Department of Labor, OFCCP, has been involved in contested FOIA litigation seeking large volumes of EEO-1 reports in OFCCP’s possession. For more information about this litigation, see our most-recent client update on OFCCP’s release of EEO-1 reports.

Implications for Employers

Employers can expect the MOU to lead to more information sharing between the EEOC and WHD when it comes to individual charges and investigations. (The MOU contains a high-level framework for coordinated investigations involving the same employer.)  More concerning is the potential for data sharing to fuel broader systemic investigations. Indeed, as we recently wrote, the EEOC’s five-year Strategic Plan announced just last month that it is committing to developing these “big cases,” in the hope that this will enable the EEOC “to increase its impact on dismantling discriminatory patterns, practices, or policies.” The ability to gather additional data through this partnership with the WHD adds another powerful tool to the EEOC’s investigative powers. 

For more information on the EEOC and WHD, and how both may affect your business, contact the authors or a member of Seyfarth Shaw’s Complex Discrimination Litigation Group or Wage Hour Litigation Practice Group.

By: A. Scott Hecker

As one does, I was recently reading U.S. DOL Wage and Hour Division (“WHD”) Field Assistance Bulletin (“FAB”) 2023-3 regarding “Prohibitions against the shipment of ‘Hot Goods’ under the Child Labor Provisions of the Fair Labor Standards Act.”  You may be disappointed to learn that the term “hot goods” does not appear in the FLSA, but section 212(a) of the Act provides the operative definition for this fun phrase: “any goods produced in an establishment situated in the United States in or about which within thirty days prior to the removal of such goods therefrom any oppressive child labor has been employed.”

FABs are meant to provide enforcement guidance to WHD field personnel, and this one “clarified” elements of the hot goods provisions, as well as discussed potential penalties and the availability – in certain circumstances – of a good faith defense for purchasers of hot goods.  According to section 212(a), to demonstrate good faith, purchasers must show they relied “on written assurance from the producer, manufacturer, or dealer that the goods were produced in compliance with the requirements of this section, and . . . acquired such goods for value without notice of any such violation.”  FAB 2023-3 indicates the good faith analysis is case-specific and requires a purchaser’s “objectively reasonable” actual knowledge or belief “that the written assurance of compliance was true, and [the purchaser] was not aware of any other child labor violations.”  Purchasers cannot claim the defense if they:

  • “[A]cquire[] goods after becoming aware of child labor violations.”
  • Did “not receive actual written assurance from the producer, manufacturer, or dealer.”
  • “[R]eceive[] written assurance of compliance after acquiring the goods.”
  • Rely on “[w]ritten assurances with respect to the future production of goods,” rather than addressing goods already produced.

When WHD finds child labor violations, it “may request that the producer, manufacturer, or dealer voluntarily refrain from shipping the goods until the child labor violation has been remedied.”  If these entities won’t voluntarily comply, WHD “may pursue legal action . . . and may notify other downstream parties in the supply chain of the shipment restrictions.”  WHD can also assess civil money penalties and consider requiring “enhanced compliance terms” before lifting its embargo on hot goods.

All very interesting and important information.  But the section of the FAB that struck me most, and that illustrates why we need to read “the fine print” in sub-regulatory guidance, advised when “a company sends [a 17-year-old] minor to perform landscaping work at a clothing company’s factory where goods are produced and eventually shipped out of state,” and “the minor uses a power-driven saw to cut wood, which is a hazardous occupation under 29 C.F.R. 570.55, and therefore constitutes ‘oppressive child labor,’” then,

[e]ven if the minor is not themself engaged in commerce or the production of goods for commerce and is not employed by an enterprise that is engaged in commerce or the production of goods for commerce, section 212(a) may still apply because oppressive child labor occurred in or about the establishment where the goods were produced.

Put another way, “even if the minor is employed by the landscaping company, not the clothing company, and the landscaping company is not engaged in commerce or the production of goods for commerce, section 212(a) may apply,” so “[a]ny goods produced at the clothing factory that are removed from the establishment within 30 days of the minor using the power-driven saw, or any other child labor violation, are considered ‘hot goods’ and are thereafter barred from being shipped in commerce.”

Having podcasted and presented on the importance of child labor compliance, and how it might be achieved, please don’t read this as suggesting my kids should be able to work anywhere with a power-driven saw (not sure I should be allowed), but to stay on the right side of the law, employers must remain cognizant of how agencies view their enforcement authority, including – especially? – when they suggest a company, which doesn’t employ the minor and may well appear fully compliant with child labor laws, could nonetheless run afoul of statutory requirements.

Perhaps this attention to detail is even more important in our current environment where state and federal child labor laws aren’t always aligned.  Indeed, responding to a request from Iowa State Senator Nate Boulton, Solicitor of Labor Seema Nanda and Principal WHD Deputy Administrator Jessica Looman recently wrote “provisions of Iowa’s child labor law . . . appear to be inconsistent with federal child labor law,” and “employers covered by the FLSA who only follow a less restrictive Iowa law will be in violation of federal law.”

For more on this or any related topic, please do not hesitate to connect with the author or your favorite member of Seyfarth’s Wage and Hour Practice Group.

By: Robert S. Whitman and Kyle D. Winnick

In Perry et al. v. City of New York, the Second Circuit upheld a large jury verdict in favor of a collective of workers regarding off-the-clock work.  In doing so, the Court reaffirmed the principle that employers will ordinarily not be liable under the FLSA when employees fail to follow a reasonable process to report time worked.

Many wage-and-hour lawsuits involve “off-the-clock” claims—allegations that employees performed work outside of their recorded working hours for which they were not compensated.   One issue that often arises in such cases is whether the employer is liable for work not recorded by employees in the timekeeping system. 

In Perry v. City of New York, a certified collective of 2,519 EMTs and paramedics for the New York City Fire Department sued under the FLSA, contending that they were not compensated for all overtime worked because their various pre- and post-shift activities was not counted as time worked.  After a rare collective action trial, the jury found these activities were compensable and awarded the plaintiffs $17,780,063 for unpaid overtime, liquidated damages, and attorneys’ fees. 

The City appealed, arguing that it was not liable because the plaintiffs did not record the time spent on these activities in the City’s timekeeping system, such that it could not have known that the plaintiffs performed such work or failed to receive compensation for it.

The Second Circuit upheld the jury award, but reaffirmed principles favorable to employers.  It explained that compensable work under the FLSA is work that employers require, know about, or should have known about.  Thus, employees’ failure to report overtime work, for example by failing to include it on their time sheets, “will in many circumstances allow the employer to disclaim the knowledge that triggers FLSA obligations.” 

One caveat to this principle is if the employer otherwise had notice of the work.  The court held that there was sufficient evidence for this caveat to apply in this case.  Specifically, there was evidence showing that the collective members could not have performed their jobs without completing these pre- and post-shift activities, and that they had complained to supervisors about being uncompensated for performing them.  Thus, according to the court, the City should have been aware that compensable work was being performed. 

The City made another argument: even if it had notice of the pre- and post-shift activities, it was unaware that collective members were not paid for such work.  The court rejected this argument, holding that “knowledge of non-payment is irrelevant to FLSA liability.”  In other words, if an employer is on notice that work is performed, the employer must ensure that such time is compensated. 

Perry is a good reminder that employers can protect themselves from FLSA liability through sound wage-and-hour practices.  One way discussed by the court is by establishing “a reasonable process for an employee to report work time,” because “an employer with such a system will not ordinarily be chargeable with constructive knowledge of unreported work.”  But the Second Circuit explained that such a process must be administered so as not to impede “employees’ ability to report their work, such as by surreptitiously deleting overtime requests, punishing workers who ask for overtime pay, or otherwise discouraging employees from reporting.”  It is therefore critical for employers to train supervisors and non-exempt employees on what work activities are compensable and how to report work time outside their normal work shifts, and to ensure that employees are not impeded from reporting work time.  By establishing robust reporting procedures, employers can protect themselves from liability for off-the-clock work.

By: A. Scott Hecker and Ted North

Seyfarth Synopsis:  This alert summarizes the IRS’s recent notice of proposed rulemaking on complying with prevailing wage and apprenticeship requirements under the Inflation Reduction Act and explains key provisions including (i) identification of a qualifying project’s applicable wage determination(s), (ii) penalties for non-compliance, and (iii) the new exception for incorporating Project Labor Agreements. Understanding these requirements and the IRS’s proposed rule is important to businesses seeking to claim the enhanced tax credits under the Act, as failure to comply can result in not only monetary penalties, but also loss of eligibility for the enhanced credits.

On August 30, 2023, the Federal Register published the IRS’s notice of proposed rulemaking (“NPRM”), “Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements,” which provides compliance guidance to employers seeking enhanced tax credits under the Inflation Reduction Act (“IRA”). Earlier in the week, the IRS had announced its NPRM and issued FAQs on the IRA’s prevailing wage and apprenticeship (“PWA”) compliance requirements. In its press release, the Treasury Department explained the NPRM’s guidance “marks the end of the first phase of [the Department’s] implementation of the Inflation Reduction Act’s clean energy provisions.”

As we have discussed before, the IRA incorporates prevailing wage requirements from the Davis-Bacon Act (“DBA”) and extends those requirements to private businesses seeking to claim enhanced tax credits worth up to five times as much as base credits. The proposed rule seeks to clarify implementation of the PWA requirements in several important areas, such as: (i) the applicable wage determinations; (ii) enforcement and penalty provisions for failing to comply with PWA requirements when claiming the IRA’s enhanced tax credits; and (ii) waivers of PWA penalties, including through the use of Qualified Project Labor Agreements (“PLA”). While businesses may claim enhanced tax credits for projects dating back to January 1, 2023 in their upcoming tax filings, key aspects of implementation remained unclear until the NPRM’s publication. The NPRM should help employers better understand IRS’s approach to PWA compliance, so they can successfully claim the IRA’s valuable tax credits.

Applicable Wage Determinations

The proposed rule clarifies the wage determination applicable to a qualifying project as “the wage determination in effect for the specified type of construction in the geographic area when the construction, alteration, or repair of the facility begins.” NPRM at 1.45-7(b)(2). The proposed rule indicates the wage determination applicable at the start of the project generally remains valid for the duration of the work being performed. Id.at 1.45-7(b)(5). Locking in historical wage determinations appears in at least some tension with U.S. DOL Wage and Hour Division’s recent final rule, “Updating the Davis-Bacon and Related Acts Regulations,” which, as we wrote previously, will obligate government contractors to more frequently incorporate updated wage determinations after contract awards.

Similarly, for businesses seeking tax credits for alteration or repair of a facility, the applicable wage determination is the one in effect at the time the alteration or repair work begins. Id.That said, businesses would have to apply a new wage determination when (i) work on a facility is changed to include additional construction, alteration, or repair work not within the scope of the original project; or (ii) work is performed for an additional time period not originally obligated (this includes exercising an option to extend the term of the underlying contract). Id.

In addition, the proposed rule identifies entities that can request supplemental wage determinations when no general applicable wage determination exists, or the relevant determination does not list all needed labor classifications. According to the proposed rule, as well as published FAQs, taxpayers, contractors, and subcontractors can all make requests for supplemental determinations to U.S. DOL’s Wage and Hour Division. See id. at 1.45-7(b)(3); see also IRS Wage Determination FAQ No. 3.

Penalties and Cures

The proposed rule establishes opportunities for businesses to cure non-compliance with PWA standards to remain eligible for the enhanced tax credits. In the event a business claiming the enhanced tax credit did not meet the prevailing wage requirements, the business may correct its non-compliance and claim the credit if it:

1. pays the affected workers the difference between what they were paid and the amount they were required to have been paid, plus interest at the Federal short-term rate plus 6 percentage points, and

2. pays a penalty to the IRS of $5,000 for each worker who was not paid at the prevailing wage rate in the year.

NPRM at 1.45-7(c)(1)(i)-(ii). If a business fails to meet the apprenticeship requirements, the business may correct its non-compliance and claim the credit if the business pays a penalty of $50 multiplied by the total labor hours for which the apprenticeship requirements were not met. Id.at 1.45-8(e)(2)(i). Penalties are more severe for non-compliance with PWA requirements when claiming the tax credit if the IRS determines a business intentionally disregarded its PWA obligations. See id.at 1.45-7(c)(3) and 1.45(e)(2)(ii).

However, penalties may be waived entirely if the business corrects the error within 30 days of becoming aware of its non-compliance or when the enhanced tax credit is claimed. Id. at 1.45-7(c)(6)(i). This option is only available in the event that the worker was being paid less than the prevailing wage for not more than 10% of all pay periods of the calendar year during the life of the project or if the difference between what the worker was paid during the calendar year and the amount they should have been paid is not greater than 2.5% of the amount the worker should have been paid.  Id.at 1.45-7(c)(6)(i)(A)-(B).

While the NPRM maintains a good faith exception regarding meeting apprenticeship requirements, “[t]he taxpayer will not be deemed to have exercised a Good Faith Effort beyond 120 days of a previously denied request unless the taxpayer submits an additional request,” id.at 1.45-8(e)(1)(i)(A)(2), so “[i]f a request was not responded to or was denied, the taxpayer must submit an additional request(s) to a registered apprenticeship program after 120 days to continue to be eligible for the good faith effort exception,” IRS Penalty and Cure Provisions and Recordkeeping FAQ No. 2.

Project Labor Agreement Exception

Businesses may also avoid penalties for non-compliance if there is a qualifying PLA for the project the business is claiming the enhanced tax credit. To qualify for this waiver, PLAs must:

1. Bind all contractors and subcontractors on the construction project through the inclusion of appropriate specifications in all relevant solicitation provisions and contract documents;

2. Contain guarantees against strikes, lockouts, and similar job disruptions;

3. Set forth effective, prompt, and mutually binding procedures for resolving labor disputes arising during the term of the project labor agreement;

4. Contain provisions to pay prevailing wages;

5. Contain provisions for referring and using qualified apprentices; and

6. Be a collective bargaining agreement with one or more labor organizations of which building and construction employees are members.

Having a PLA in place does not exempt a business from PWA requirements, but may allow the business to avoid penalties for non-compliance if the PLA meets the conditions listed above, and the business corrects the failure to pay the prevailing wage in a timely manner.

Employers should seek competent counsel when considering entering into collective bargaining with labor organizations.

Comment Period and Effective Date

The published NPRM lists a 61-day comment period, which will remain open until October 30, 2023. Comments and requests to appear at a scheduled November 21 public hearing must both be submitted by that date. After the comment period closes, the agency will review and analyze all comments it receives. This may result in changes to the NPRM – or it may not.  In either event, the agency will eventually publish its final rule with an effective date no less than 30 days after its official publication in the Federal Register.

The NPRM suggests there may be some nuanced differences between DBA and IRA PWA obligations, so impacted employers must remain aware of these compliance considerations. For any clarification of the proposed rule, or assistance with submitting comments or requests prior to October 30, please do not hesitate to connect with Scott, Ted, or your friendly, neighborhood Seyfarth attorney.

By: Kevin Young, Brett Bartlett, Scott Hecker, Noah Finkel, and Leon Rodriguez

Just days before Labor Day, the U.S. Department of Labor (“DOL”) unveiled its Notice of Proposed Rulemaking (“NPRM”), aimed at revising the Fair Labor Standards Act’s overtime exemptions for executive, administrative, and professional employees. While the proposal—the cornerstone of which is a minimum salary increase to slightly more than $55,000 per year (up from $35,568)—is more measured than many anticipated, it could still have a massive impact across industries and commands employers’ attention.

The Proposed Changes

Contrary to the whirlwind of speculation, the DOL’s proposed changes are more evolutionary than revolutionary. If finalized, the changes would entail:

  1. Increased salary for “white collar” employees: The proposed rule would increase the minimum salary level from $684 per week ($35,568 per year) to $1,059 per week ($55,068 per year). Note, however, that, as explained in the Preamble to the proposed rule, the final rule likely will provide for an even higher minimum salary level because, when the final rule is issued, it will use updated wage data.
  2. Increased total compensation threshold for the “HCE” exemption: The proposed rule would raise the total annual compensation requirement for the highly compensated employee exemption from $107,432 to $143,988.
  3. Automatic updating every three years: The proposed rule would implement a triennial automatic update to these thresholds, designed, the DOL says, to align with shifts in worker salaries and provide employers with a predictable timetable for future adjustments.
  4. Additional updates for certain territories and industries: The DOL proposes to update salary levels in U.S. territories and for employees in the motion picture industry.

Notably, the proposed changes would leave the “duties” tests for the exemptions untouched.

The NPRM’s Road Ahead

The NPRM process includes a 60-day public comment period, set to commence once the proposals are formally published (which they have not yet been as of the time of this post). We would anticipate that a final rule will not be published until at least several months after that comment period ends. Then, if the new rules are not subjected to any other delay—whether because of court or congressional challenges—employers would most likely be provided between 60 and 90 additional days to prepare for the rules’ official effective date.

With respect to court challenges, it is worth remembering that the Obama Administration’s 2016 attempt to overhaul these exemptions in a similar fashion—i.e., an increased salary threshold with automatic, inflation-based increases—was stymied by legal challenges and never came into effect. The DOL’s new proposal is not immune to similar challenges, particularly as we approach another election cycle where compensation issues often become political footballs.

Next Steps for Employers

As the DOL opens the floor for public comment, employers have an opportunity to weigh in on these proposed changes and begin preparing for their potential implementation.

While it is possible that a final rule will look different in some ways than the proposed rule, businesses should not wait to start planning. At a minimum, it is important for employers to develop an accurate picture and understanding of their exempt workforce—i.e., what roles it comprises, how many incumbents occupy the roles, where they are located, what functions they perform, and, of course, how much they are paid. Understanding the contours of the exempt population will allow employers to begin thinking strategically to identify and triage the roles that are most likely to be impacted by the new rule or that otherwise command attention during this time of change.

In short, while the DOL’s proposed changes may not be the seismic shift some had predicted, they nonetheless represent a significant evolution in this area of the law that employers will need to plan for, monitor, and be ready to act upon.

Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.

By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: After a trial court upheld the validity of the Department of Labor’s 2021 regulation codifying the 80/20 rule following an initial remand from the Fifth Circuit, the plaintiffs filed an appeal of the final judgment, sending the case back to the Fifth Circuit.

As we previously wrote about here at TIPS, an ongoing lawsuit brought on behalf of national and local restaurant industry associations seeks to invalidate the Department of Labor’s new regulation codifying the “80/20” rule—the Department’s longstanding enforcement position that an employer cannot take a tip credit when an employee spends more than 20% of their hours on non-tip-producing activities.  Under the previous administration, the Department issued an opinion letter walking back the 80/20 approach, but that rule never went into effect and the Department withdrew the regulation in 2021. The new rule largely codifies the existing 80/20 enforcement guidance, but it adds a new, potentially onerous requirement: non-tipped work could not be performed for continuous periods in excess of thirty minutes even if that work does not exceed 20% of the employee’s hours worked.

On appeal from the trial court’s denial of a preliminary injunction, the Fifth Circuit issued an opinion in April of 2023 that evinced, shall we say, a healthy dose of skepticism regarding the new regulation’s validity. On remand, though, the trial court issued a decision upholding the regulation’s validity under the Chevron doctrine of agency deference.  We predicted that the plaintiffs would appeal.  After some initial confusion, the appeal has now been filed in the Fifth Circuit, and will go forward.

So, dear readers, stay tuned as we continue to follow the latest developments in this ongoing case.

Though the 80/20 rule deals with the tip credit under federal law, restaurant and hospitality employers face a patchwork of state laws, too. Luckily, the team at Seyfarth has a repository of nifty survey charts — available for free to our clients — that map out the various federal and state requirements. Reach out to the authors if you’d like to learn more about these survey resources. And, of course, if you want more in-depth analysis of the rules of the road for taking the tip credit, do not hesitate to reach out to the authors or your favorite member of Seyfarth’s Wage and Hour Practice Group.

Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.

By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: The Connecticut General Assembly failed to pass a proposal to eliminate the tip credit for restaurant and hospitality workers before the end of the 2023 legislative session, but restaurant and hospitality employers in the Nutmeg State—and nationwide—should expect advocates to continue their efforts in years to come.

For today’s edition of Tips, we posit the following scenario. The owner of a small restaurant nestled in a bucolic New England town wakes up one morning to learn that her state legislature has just introduced a bill that (if enacted) would, overnight, more than double her labor costs for servers and bussers, likely forcing her to consider cutting those workers’ hours or eliminating some of their jobs altogether. Inconceivable, right?

Wrong. It almost happened this year in Connecticut, and similar proposals are gaining ground in other states, too.

In most states, businesses that employ workers who customarily and regularly receive tips—such as servers and bartenders in restaurants and places of lodging—may pay those workers a minimum hourly wage below the minimum wage that applies to all other workers, provided that the employee receives enough in tips to make up the difference. If, as it turns out, the worker’s actual tips plus cash wages do not equal or exceed the state’s minimum wage, then the employer must make up the difference.  An employer that uses some or all of its employees’ tips toward its minimum wage and overtime obligations is said to take a “tip credit.” The tip credit has been a part of federal wage and hour law since 1966.  It is a long-established practice in these industries, one that recognizes that service employees’ earnings in cash and tips usually far exceed the minimum wage.

A proposal introduced at the beginning of the 2023 session of the Connecticut General Assembly, though, would have abolished the state’s tip credit, requiring restaurants and hotels to pay their tipped employees the current state minimum wage ($15.00 per hour) before tips. That’s more than double the current hourly cash wage for servers in Connecticut ($6.38). And, heading into the spring, it looked like the effort had momentum: the legislature’s Labor and Public Employees committee approved the bill, advancing it for consideration and a possible vote in the state’s House and Senate later in the year.

Last month, though, the legislature wrapped up the 2023 session for the beginning of the summer, and it appears that lawmakers left the abolition of the tip credit on the table, so to speak.

While this means that our small New England restaurateur can (for now) breathe a sigh of relief, we fully expect that advocates of the measure will push for it to be reintroduced next year. Moreover, similar proposals to eliminate the tip credit have been or are under consideration in other states, too, including Illinois, Maryland, and the District of Columbia—where a voter initiative phasing out the tip credit took effect late last year.  Some states, such as California, Minnesota, Washington, and Oregon, already require restaurants and hotels to pay tipped employees the full state minimum wage before tips.

Simply put, the laws in this area are more varied than it might seem at first, and the landscape is quickly changing. Luckily, Seyfarth’s Wage and Hour Practice Group is keeping tabs on all of the latest developments. If you have questions about how tip credit requirements may affect your business, feel free to reach out to the authors, your favorite Seyfarth attorney, or Seyfarth’s Wage and Hour Practice Group.

Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.

By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: After a remand from the Fifth Circuit, a trial court has upheld the validity of the Department of Labor’s 2021 regulation codifying the 80/20 rule, raising the possibility of another appeal.

Welcome to the inaugural edition of Tips from Seyfarth, where we discuss developments in the world of wage and hour law of particular importance to the restaurant and hospitality sectors.  We hope you find the content useful; if you do, and would like to receive our regular updates, we invite you to subscribe to Seyfarth’s Wage and Hour Litigation Blog.

For our kickoff of Tips, we write with an update in the latest challenge to the federal Department of Labor’s “dual jobs” regulation codifying the job duties requirements for employers who seek to use the tip credit to satisfy their minimum wage and overtime obligations for tipped workers.

By way of background, under federal law (and many states’ wage and hour laws), employers may take a tip credit to satisfy their minimum wage and overtime obligations for tipped employees. The tip credit is a longstanding and common component of compensation for service workers in the restaurant and lodging sectors. One thorny question that often arises: who counts as a tipped employee? The Fair Labor Standards Act (FLSA) defines a tipped employee as an “employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” Simple enough in theory, but the concept can be hard to apply in practice, because service workers often engage in both tip-generating work and non-tip-producing work. For example, a server performs non-tip-producing work when he or she cleans the restroom, or rolls silverware at the end of a shift. How the law deals with these scenarios matters a great deal, because a restaurant or hotel can only take a tip credit if an employee is considered to be engaged in a tipped “occupation.”

Beginning in 1988, the federal DOL sought to address this situation by updating the enforcement guidance in its Field Operations Handbook (FOH) to include the so-called “80/20 rule”:  DOL field investigators were advised that the tip credit is not available when tipped employees spend more than 20% of their hours worked on non-tip-producing activities.  In November of 2018, the Department issued an opinion letter walking back the 80/20 rule approach, stating that there was no ceiling on the amount of non-tip-producing work an employee could perform so long as the tasks were performed at the same time as the employee’s direct tip-producing work (or for a reasonable amount of time immediately before or after). In December of 2020, DOL issued a final rule adopting largely the same approach, but that rule never went into effect—DOL withdrew the regulation in 2021.

Then, on October 29, 2021, DOL issued a new regulation that codified the 80/20 rule that had been featured in the FOH since 1988.  It also added a new requirement of great concern to the restaurant and lodging industries: in addition to the requirement that non-tipped work be no more than 20% of work performed in the workweek, non-tipped work could not be performed for continuous periods in excess of thirty minutes.

In February of 2022, organizations representing the national and local restaurant industries sought a preliminary injunction against the DOL’s new 80/20 regulation. The District Court denied the preliminary injunction after concluding that the plaintiffs’ members would not suffer irreparable harm from being forced to comply with the new rule. On appeal, the Fifth Circuit reversed in a decision issued on April 28, 2023, concluding that plaintiffs showed irreparable harm in the form of unrecoverable compliance costs. So, the case went back the District Court to consider the merits of the plaintiffs’ challenge to the 80/20 regulation.

Despite the Fifth Circuit’s evident skepticism of the new 80/20 rule’s validity, the District Court worked promptly on remand, and on July 6, 2023, it issued a decision upholding the regulation’s validity. In short, the court concluded that the statutory text— “engaged in an occupation”—is ambiguous.  Accordingly, under the Supreme Court’s Chevron doctrine of agency deference, the court upheld the DOL’s 80/20 rule because it was based on what the court determined to be a “permissible construction of the FLSA.” We expect that the plaintiffs will appeal once again to the Fifth Circuit, this time placing the validity of the regulation squarely before a federal appellate court. In the meantime, though, restaurant and hospitality employers should carefully review their current practices for monitoring compliance with then new 80/20 rule – especially the new 30-minute limitation on continuous performance of non-tip-producing work. Feel free to contact the team at Tips From Seyfarth, or your favorite attorney in Seyfarth’s Wage and Hour Practice Group, for guidance on how your business can best position itself for compliance under the new regulation.

By: Bailey K. Bifoss, Andrew M. Paley, and Michael Afar

Seyfarth Synopsis: The California Supreme Court held that a plaintiff whose individual PAGA claims are compelled to arbitration retains standing to pursue representative PAGA claims in court in Adolph v. Uber Technologies, Inc., meaning that their claims may live on way past the first volley.

Wimbledon may be over but, on Monday, the California Supreme Court returned Viking River’s serve and took the match with its highly anticipated decision in Adolph v. Uber. The headline? A plaintiff whose individual PAGA claims are compelled to arbitration retains standing to pursue representative PAGA claims in court.

Game

Those following the play at home may remember the California Supreme Court’s 2014 decision in Iskanian v. CLS Transportation. Iskanian set the rules of play that PAGA claims could not be split into their individual and representative parts. It also said the right to bring a PAGA claim in court was unwaivable, using the dropshot to make otherwise enforceable arbitration agreements inapplicable to these claims. As a result, for many years California employers were forced to defend against PAGA claims in Court even where employees signed arbitration agreements with class and representative action waivers.

Set

Iskanian lasted nearly a decade as good law—a lifetime in PAGA litigation—until the U.S. Supreme Court issued last year’s decision in Viking River. As we previously blogged about, SCOTUS held that the FAA preempted California’s rule preventing courts from dividing PAGA actions. PAGA actions could be split, and an employee’s individual PAGA claims could be compelled to arbitration. Without the individual claims though, a PAGA plaintiff lacked standing to pursue the representative claims and those claims had to be dismissed.

But Justice Sotomayor noted in dissent that the majority’s foot may have been on the line when it issued its decision. She warned that California law would govern what happens to a PAGA plaintiff’s representative claims after the individual claims are compelled to arbitration and, under the right circumstances, California courts would “have the last word.”

Match

Taking Justice Sotomayor up on her invitation, the California Supreme Court held in Adolph that an order compelling a PAGA plaintiff’s individual claims to arbitration does not strip the plaintiff of standing to pursue representative claims in court. The Court relied heavily on the legislative purpose of PAGA, as well as statutory language establishing (in the Court’s view) that a worker achieves PAGA standing if they have had one Labor Code violation committed against them by their employer.

In sending Uber’s volleys back to their side of the net, the Court also resolved several other points concerning the litigation of PAGA actions, including:

  • The outcome of a PAGA plaintiff’s individual arbitration will be binding on issues of standing. If the plaintiff prevails at individual arbitration, they get to keep the representative claims and pursue them. If the plaintiff loses, they do not.
  • Sending an employee’s individual PAGA claims to arbitration does not split the underlying PAGA action into two cases. The PAGA action remains a single case that is subject to the mandatory stay provisions of applicable California statutes.

Takeaways For Those In The Stands

Although California may have taken the match, points were scored for employers.

15 – Under Adolph, employers can (and ought to) vigorously defend against individual PAGA claims in arbitration knowing that, if they prevail, the plaintiff will be unable to proceed with their representative PAGA claims. Going to individual arbitration first should allow employers the chance to defeat an individual PAGA plaintiff’s claim without facing the burden and expense of responding to overbroad discovery and fishing expeditions requesting information as to every non-exempt employee.

30 – Even if the individual defense in arbitration is unsuccessful, employers retain the ability to challenge a plaintiff’s representative claims on substantive and/or procedural (e.g., manageability) grounds.

40 – Because the Court specifically held that ordering an employee’s individual claims to arbitration does not sever a PAGA action, trial courts should apply a mandatory stay to the representative PAGA claims pending the outcome of individual arbitration, potentially tying up any kind of representative litigation for an extended period of time.

The winner of the game thus remains undetermined.

Workplace Solutions

The fight over PAGA claims is far from over, and the next tournament is right around the corner. Other important decisions are still pending from the California Supreme Court and talk of proposed ballot measures that would make wholesale changes to the PAGA framework. Employers wanting to stay up to date on the latest should be in touch with their Seyfarth attorney to ensure they do not miss any important updates in this developing area of the law.