Co-authored by Robert A. Fisher and Christina Duszlak

Seyfarth Synopsis: A recent decision by the Massachusetts Supreme Judicial Court limits the scope of the Wage Act to exclude sick time payments and potentially other types of contingent compensation.

The Massachusetts Wage Act has been a boon to plaintiffs, as it provides for automatic treble damages for late or unpaid wages. As a result, plaintiffs’ lawyers have sought to cram every form of compensation into the scope of law. A recent decision by the Massachusetts Supreme Judicial Court seemingly curtails those efforts by limiting the scope of what is a wage under the Wage Act and the availability of triple damages. In that case, an employee manipulated the terms of his employer’s generous sick leave policy and then sought to claim that the employer’s late payment of over $46,000 in unused sick time entitled him to triple damages under the statute. Demonstrating that there is still justice in the world, the Court shut the door on that theory, holding that unused sick time payments do not count as “wages” under the Massachusetts Wage Act.

The case Mui v. Massachusetts Port Authority began when a Massport employee, Tze-Kit Mui, was indicted for attempted murder and arson. Not surprisingly, his employer was not impressed by his alleged off-duty conduct and initiated proceedings to terminate Mui’s employment. Under the terms of Massport’s sick leave policy, an employee who is terminated for cause is not entitled to a payout of unused, but accrued sick time. In Mui’s case, the value of his unused sick time exceeded $46,000. In order to avoid the loss of this windfall, Mui basically said, “You can’t fire me, I quit” and applied for his retirement. When Massport went ahead and fired him anyhow, Mui took the issue to arbitration. Ultimately, the arbitrator overturned Mui’s termination, concluding that Massport could not fire an employee who had already quit. As a result, Massport paid Mui the value of his unused sick time a year after his “retirement.”

Rather than accept his victory at arbitration, Mui sued Massport for treble damages, claiming that his sick time payment qualified as “wages” and that the one year delay in payment violated the Wage Act. The superior court allowed Mui’s motion for judgment on the pleadings, and Massport appealed.

On appeal, the Massachusetts Supreme Judicial Court held that accrued, unused sick time payouts did not fall within the definition of “wages” because an employee had to meet certain conditions to receive the payment. The court compared sick pay with vacation pay (which is covered by the statute) and contingent bonuses (which are not covered by the statute). Unlike vacation pay, which could be used for any purpose, sick time was limited to a specific type of use—illness of the employee or a family member. Thus, employees did not have a right to be compensated for not using sick time. The Court found that Massport’s sick time payment was more like a contingent bonus because it was paid as a reward to employees for not using all of their accrued sick time and not behaving in a manner that justified termination for cause.

Importantly, the Court went out of its way to explain that except for commissions (which are expressly covered by the statute), contingent compensation generally is not covered by the Wage Act. Thus, because payment of sick time under the Massport policy was contingent on meeting the eligibility criteria, Mui could not bring a Wage Act claim based on the delay in the sick time payout.

Mui is significant because it seemingly limits the scope of Wage Act claims—and the risk of automatic treble damages—in connection with contingent compensation not specifically enumerated in the statute. Plaintiffs’ lawyers have tried to expand the scope of the Wage Act, claiming that the statute should be interpreted broadly, but this decision signals that these arguments may not be successful in the future.

The Story Thus Far

As outlined in a previous blog article, the decision in Dynamex Operations v. Superior Court will be extremely important for all companies that use independent contractors, especially those in the emerging “gig economy.” Misclassifying workers can have painful consequences, involving not only liability for unpaid wages and employee benefits but also statutory penalties for each violation considered “willful.”

The Issue

In agreeing to review the case, the California Supreme Court defined the issue on appeal as whether, in a misclassification case, a class may be certified based on the expansive definition of employee as outlined in the California Wage Order language construed in Martinez v. Combs (2010), or on the basis of the common law test for employment set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989). In short, the California Supreme Court focused on whether to continue using the Borello test and on what test, if any, to apply instead.

The definition of employment identified in the California Wage Orders is broader than the prior common law test. California’s Wage Orders define “employ” broadly to mean “to engage, suffer or permit to work.” In contrast, Borello focuses instead on a multi-factor balancing test that depends on the unique facts of each situation and that is more likely to recognize the existence of an independent contracting relationship.

Oral Argument

Dynamex Operations Goes First

In its opening argument, Dynamex praised the Borello test as a tried and true California rule and warned against the danger that uncertainty in the classification of workers would pose to California’s booming “gig economy.” Dynamex raised concerns with any judicial adjustment to the definition of employment that would usurp the legislature role.

Justice Kruger, however, wondered whether judicial adoption of a bright-line rule would not be more instructive for employers, and suggested, as a possibility, adopting the ABC test followed in such jurisdictions as New Jersey and Massachusetts. The ABC test says that three conditions must all concur for a worker to be an independent contractor: (1) freedom from actual control over the work, (2) work beyond the usual course of business and off company premises, and (3) engaging in an independent trade. Unless A, B, and C all concur, then the worker is an employee.

Chief Justice Cantil-Sakauye raised an additional response to Dyanamex’s plea to leave this issue to the Legislature: if the ABC test is a stricter version of the Borello test, then why should the Supreme Court be precluded from adopting a new version of the test to ensure clarity in enforcement when, after all, it was the Supreme Court that had adopted the Borello test in the first place? Finally, Justice Kruger and Dynamex had a robust discussion about adopting a modified rule, where the ABC test would govern for some Labor Code provisions, but a different test may apply to others. Dynamex opined that this result would be confusing for employers and might result in individuals being employees for some purposes but independent contractors for others.

Aggrieved Independent Contractors Respond

In their responsive argument, the workers portrayed what they saw as the sorry plight of California independent contractors. The workers called independent contracts the new “serf-class”: people who work hard while receiving none of the California Labor Code’s basic employee benefits. They argued that the court should adopt a new, broader definition of employee to protect workers from harm. The workers seemed open to several outcomes, including (a) a broader definition for some California Labor Code provisions, (b) the definition outlined in the state’s Wage Orders, or (c) any other new employment test that the California Supreme Court might come to favor.

Justice Liu seemed skeptical about a broader test. He referred to an “Amazon Analogy.” Although most people know Amazon sells goods online, many people also view Amazon Prime (with its delivery services) as within Amazon’s usual course of business. Justice Liu then asked: if the Justices were to adopt a strict interpretation of the ABC test, at what point would Amazon be considered a shipping business, meaning that all drivers who ship Amazon Prime goods would be employees of Amazon under the second ABC prong? This analogy caught the attention of Justices Cuellar and Justice Chin, who both seemed to appreciate how complicated, and blurry, a new test could be.

Dynamex Makes A (Brief) Comeback

In its rebuttal, Dynamex took up Justice Liu’s “Amazon Analogy” to argue why a flexible test is needed to ensure just results. Two justices followed up. The first was Justice Liu, who asked whether other jurisdictions have applied the ABC prongs strictly. The second was Justice Chin, who closed oral argument with a pointed question that represents the concerns of many observers: which employment test best fits the modern economy? Dynamex responded that the body of developing case law as well as the uniformity of Borello’s application has suited California well and that it provides all of the factors needed to fully determine employment relationships.

Our Crystal Ball

Although one cannot read the minds of seven justices, we sense the court will likely reject the call to leave this matter for the legislature and will lean instead toward a judicially fashioned test that, in the view of most justices, will best fit the needs of the modern economy. The court’s decision is expected within the next 90 days.

As always, we will remain vigilant and on the scene. Look for more updates about this case as they come out and in the meantime do not hesitate to reach out to your friendly neighborhood Seyfarth attorney for guidance or with any questions you might have.

Co-authored by Kevin Young and Kara Goodwin

Even as FLSA litigation has surged to historic highs, it is rare to see a nefarious violation of the Act by a manager or supervisor. Far more prevalent, it seems, are stories of managers who, while intending to afford employees freedom and flexibility, instead trip over one of many hurdles scattered across the 1938 legislation. At a time when plaintiffs’ attorneys are more regularly naming individual managers, not just corporations, as FLSA defendants, preventing these stories is important as ever.

In our experience, managers across the corporate landscape grasp broad wage-hour ground rules and concepts, such as requiring employees to clock in before they start work and paying employees at least minimum wage. Training is important in these areas, but it is not quite where the rubber meets the road.

Far more important a topic, in our experience, are the ways in which a manager’s well-intentioned decisions can result in potential violations of the FLSA. Here, in honor of the Act’s upcoming 80th birthday, we offer eight hypothetical examples of this. (Eighty was a bridge too far for this post.) While far from exhaustive, these are the types of examples that can provide a basis for meaningful conversations with managers and supervisors about the relevant—and sometimes hidden—contours of the FLSA.

  1. You had a great January, but let’s have an even better in February. Whoever makes 50 sales will get a $150 bonus. This isn’t the company’s thing, it’s my thing.” In a vacuum, incentivizing employees to perform isn’t just okay—it is good management. Unfortunately, the nature of the incentive can have serious wage-hour implications. First, if the incentive is non-discretionary, it must be included in the “regular rate” of pay, upon which overtime pay is based. It makes no difference if the incentive is offered company-wide or only on a small team. As a distant second, occasionally production bonuses can have an unintended effect of encouraging after-hours work, which could be an issue if those hours aren’t recorded and paid. Supervisors should take care to ensure that any incentive payment is: (i) accounted for, if necessary, in the overtime calculation; and (ii) not interpreted as a relaxation of standing policies, such as those prohibiting off-the-clock work.
  2. Of course you can take it home!” It’s 5 pm and an hourly employee scheduled until 6:00 asks his supervisor if he may leave early to pick up his kid—he promises to finish his work at home later that night. Wanting to promote balance and flexibility, the supervisor agrees. While there is nothing illegal about this, the supervisor must understand potential wage-hour ramifications. An employer must pay for work it knows about or reasonably should know about, regardless of when or where the work occurs. If a supervisor is going to authorize after-hours remote work, it is essential that he or she also enforce timekeeping practices that prevent that work from going unrecorded and unpaid.
  3. Have a minute to help me out? You can take the remaining 20 minutes of your 30-minute lunch break after we’re done.” It seems harmless enough—after all, the employee will end up getting a full 30 minutes either way. But if the employer treats meal breaks, including this one, as unpaid, this could create an issue. The FLSA generally requires that an unpaid meal break like this one be uninterrupted and contiguous. Here, the supervisor should know that the employee must either (a) be paid for the whole break, or (b) be permitted to take his or her full break at a later time.
  4. Rather than recording overtime this week, why don’t you take off a few hours early next Friday and spend the afternoon with your kid?” If an employee works over 40 hours in a workweek, the FLSA requires that the employee be paid overtime. Private-sector employers should not offer or allow compensatory time off in future workweeks in lieu of overtime, even if an employee requests it.
  5. Jim volunteered an additional hour last night because he wants to prove he’s worth the promotion. I respect that sort of drive…heck, I did the same thing.” In nearly every context, the fact that an employee “volunteers” his or her work time is not a sound reason for failing to pay the employee for the associated work.
  6. Our team party starts at 3 pm. You can work through it, but I’d certainly prefer to see you there—it’s important to our team culture.” Social gatherings during the workday should typically be paid. Even if scheduled after hours, the time needs to be paid for nonexempt employees required to attend. The grey area, of course, lies between mandatory and purely voluntary attendance. Proof that attendance was strongly encouraged could support a finding that attendance was not purely voluntary and that the time should be paid.
  7. My team knows that if they ask for OT, I will always approve it. The only reason I didn’t pay Alexa’s overtime last week is that she forgot to seek preapproval—I can’t allow that to happen, and Alexa realizes that.” It is certainly permissible to require employees to seek approval prior to working overtime. It is not permissible, however, to condition payment of overtime hours worked on an employee’s compliance with that requirement. As a general rule, once the overtime is worked, the employer must pay for the time.
  8. We actually don’t need you today. And didn’t you tell me your daughter is home from college today? This works out perfectly—why don’t you head home and spend the day with her.” A growing number of states require employers to pay for “show up” or “reporting” time. This refers to a minimum amount of pay—for instance, 3 or 4 hours at the applicable minimum wage—if an employee scheduled to work longer is sent home after reporting to work for the day. There are exceptions, of course, but these rules can create traps for the unwary.

As these examples help to demonstrate, the FLSA is too thorny a place to entrust compliance to managers’ and supervisors’ intentions alone. Even top-notch, employee-first managers can find themselves trapped in one of the FLSA’s various pitfalls, potentially exposing the employer—and possibly even the supervisor herself—to potential liability.

Given these realities, employers are well served by considering the subtle ways in which FLSA issues may arise in their workplace and taking a proactive approach to training supervisors to address those issues. If we can be of assistance in that effort, please do not hesitate to reach out to us.

By Loren Gesinsky and Jacob Oslick

Seyfarth Synopsis: The DOL has reissued 17 opinion letters it withdrew in 2009.  It has also issued two new field assistance bulletins.  The DOL’s new openness to answering employer questions, and providing written guidance, harbors good things for both employers and employees.

Hey-la, hey-la, opinion letters and field assistance bulletins are back!  They’ve been gone for such a long time.  But they’re back, and they’re coming to provide needed clarity on how employers can comply with wage and hour laws.  That’s the message the U.S. Department of Labor’s Wage and Hour Division sent last Friday, January 5th, when it reissued 17 opinion letters that it withdrew in March 2009.

The reissued letters include 15 drafted by former DOL Acting Administrator Alex Passantino, now a Seyfarth Partner.  They cover topics such as whether athletic coaches qualify as “teachers” for purposes of the administrative exemption (generally yes, if coaching is their “primary duty”), and whether a per diem “job bonus” could be excluded from a non-exempt employee’s regular rate (in short, “no”).   The reissuances follow on the heels of the DOL’s decision, in June 2017, to once again respond to employer questions regarding wage and hour laws by issuing formal guidance in the form of an opinion letter.  [We previously covered the DOL’s announcement here].   And it was accompanied by the issuance, also on January 5th, of two new field assistance bulletins, with one concerning interns at for-profit employers [see our blog post here].

For employers, the benefits of DOL opinion letters and field assistance bulletins are obvious.  The Fair Labor Standards Act contains a “good faith” defense that allows employers to avoid liability if they can prove the challenged pay practice aligns with the DOL’s written guidance.  Thus, if an employer requests and receives an opinion letter stating that a particular pay practice is compliant, that can protect employers from lawsuits — effectively telling overly zealous plaintiffs’ attorneys to take a permanent vacation from challenging the practice.

What is less well known is how employees also stand to benefit from the DOL’s decision to again issue opinion letters.  To this end, it’s important to remember that the DOL’s job isn’t to give employers a legal beating or make them sorry they were ever born..  It’s to ensure that employers pay their workers properly, and otherwise comply with the law.  And, just as a “positive” opinion letter can help an employer defend a policy in court, a “negative” opinion letter sends an awfully strong warning to the requesting employer and similarly situated employers to change their policies fast.

For employees — although not necessarily plaintiffs’ attorneys — this seems far preferable to simply letting a potentially unlawful pay practice continue indefinitely.  True, at some point, a disgruntled employee may file suit and claim that the employer is cheating him or her.  And, ultimately, that may lead to a jackpot verdict with liquidated damages for the employee or a collective.  But lawsuits are comparatively rare and, when successful, often result in the plaintiffs’ attorneys receiving far more money than the affected employees.  By the time a lawsuit may happen to get filed and a collective is conditionally certified (if conditional certification is granted), employees may have worked for many years under an improper practice — and thus be time-barred from recovering damages for the entire period.   Then the lawsuit may not succeed, or it may take years to recover anything.   Most likely, it will lead to a settlement that will offer employees a fraction of their allegedly lost pay.   Conversely, if an employer changes its pay practices in response to “negative” guidance from the DOL, employees obtain relief immediately.

All that said, the impact of the DOL’s new openness to opinion letters is not yet known.  Opinion letters will take some wage and hour disputes and cut them down to size.  But, historically, the DOL was not able to answer all employer inquiries. Those to which the DOL did respond generally involved highly-detailed, specific fact patterns that did not necessarily afford comfort to anyone other than the employers who posed the questions.  Indeed, although the DOL began accepting requests for opinion letters back in June, and reissued the withdrawn letters from 2009, it has not yet issued a new opinion letter.  Is that a harbinger of little to come?  We hope not.  Now that opinion letters are back, there’s reason to hope that things will be fine. [Cue to “My Boyfriend’s Back”, by the Angels.]

Authored by Robert Whitman

Seyfarth Synopsis: The Department of Labor has scrapped its 2010 Fact Sheet on internship status and adopted the more flexible and employer-friendly test devised by Second Circuit.

In a decision that surprised no one who has followed the litigation of wage hour claims by interns, the US Department of Labor has abandoned its ill-fated six-part test for intern status in for-profit companies and replaced it with a more nuanced set of factors first articulated by the Second Circuit in 2015. The move officially eliminates agency guidance that several appellate courts had explicitly rejected as inconsistent with the FLSA.

The DOL announced the move with little fanfare. In a brief statement posted on its website on January 5, it said:

On Dec. 19, 2017, the U.S. Court of Appeals for the Ninth Circuit became the fourth federal appellate court to expressly reject the U.S. Department of Labor’s six-part test for determining whether interns and students are employees under the Fair Labor Standards Act (FLSA).

The Department of Labor today clarified that going forward, the Department will conform to these appellate court rulings by using the same “primary beneficiary” test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.

The DOL rolled out the six-part test in 2010 in a Fact Sheet issued by the Wage and Hour Division. The test provided that an unpaid intern at a for-profit company would be deemed an employee under the FLSA unless all six factors—requiring in essence that the internship mirror the type of instruction received in a classroom setting and that the employer “derive[] no immediate advantage from the activities of the intern”—were met. The upshot of the test was that if the company received any economic benefit from the intern’s services, the intern was an employee and therefore entitled to minimum wage, overtime, and other protections of the FLSA.

Spurred by the DOL’s guidance, plaintiffs filed a flurry of lawsuits, especially in the Southern and Eastern Districts of New York. But despite some initial success, their claims were not well received. The critical blow came in 2015 from the Second Circuit, which in Glatt v. Fox Searchlight Picture Searchlight emphatically rejected the DOL’s test, stating, “[W]e do not find it persuasive, and we will not defer to it.” Instead, it said, courts should examine the internship relationship as a whole and determine the “primary beneficiary.” It crafted its own list of seven non-exhaustive factors designed to answer that question. Other courts soon followed the Second Circuit’s lead, capped off by the Ninth Circuit’s ruling in late December.

For the new leadership at the DOL, that was the final blow. In the wake of the Ninth Circuit’s decision, the agency not only scrapped the six-factor test entirely, but adopted the seven-factor Glatt test verbatim in a new Fact Sheet.

While the DOL’s action marks the official end of the short-lived six factors, the history books will note that the Glatt decision itself was the more significant event in the brief shelf-life of internship litigation. As we have noted previously in this space, the Glatt court not only adopted a more employer-friendly test than the DOL and the plaintiffs’ bar had advocated; it also expressed grave doubts about whether lawsuits by interns would be suitable for class or collective action treatment. The DOL’s new Fact Sheet reiterates those doubts, stating, “Courts have described the ‘primary beneficiary test’ as a flexible test, and no single factor is determinative. Accordingly, whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

That aspect of the ruling, more than its resolution of the merits, was likely the beginning of the end for internship lawsuits. In the months and years since Glatt was decided, the number of internship lawsuits has dropped precipitously.

At this point, only the college student depicted recently in The Onion  seems to be holding out hope. But as we’ve advised many times, employers should not get complacent. Unpaid interns, no matter how willing they are to work for free, are not a substitute for paid employees and should not be treated as glorified volunteer coffee-fetchers. As the new DOL factors make clear, internship experiences still must be predominantly educational in character. If not, it will be the interns (and their lawyers) giving employers a harsh lesson in wage and hour compliance.

By Robert A. Fisher and Molly C. Mooney

Seyfarth Synopsis: In an important decision, the Massachusetts Supreme Judicial Court clarified the scope of personal liability for unpaid wages under the Massachusetts Wage Act.  The SJC held that board members and directors of a company generally cannot be held personally liable for unpaid wages, unless they take on significant management duties of the company. 

On December 28, 2017, the Massachusetts Supreme Judicial Court clarified the scope of individual liability under the Massachusetts Wage Act (Massachusetts General Laws Ch. 149, §§ 148 and 150). While the statute specifies that the president and treasurer of a corporation may be liable for unpaid wages, “agents having the management” of a company may be liable, as well.  The SJC has now clarified exactly who those “agents” are not.  In Segal v. Genitrix, the SJC held that investors and board members, when acting solely in those capacities, do not fall within the purview of the Wage Act and may not be held personally liable for unpaid wages.

In Segal, the plaintiff Andrew Segal was the president and chief executive officer of Genitrix LLC, a biotechnology startup. Defendants H. Fisk Johnson, III and Stephen Rose were former board members and investors in the company. Under the terms of his employment agreement, Segal was responsible for conducting the company’s business and managing its finances, subject to the overall direction and authority of the board. Consistent with the terms of his agreement, Segal was responsible for all day-to-day operations and was the only person authorized to sign checks from the company’s bank accounts, including payroll checks for employees’ wages.

In 2006, Segal informed the board that the company was running out of money to pay its employees. Despite this, Rose limited further investments into the company, and those that were made were earmarked for specific purposes. In 2007, Segal stopped taking his salary so that he could continue paying the one remaining employee. Segal proposed a cost-cutting plan, but that proposal was not authorized by the board. By the middle of 2007, the company had run out of money, and the board was deadlocked.

In 2009, Segal sued Fisk and Rose in Massachusetts Superior Court for unpaid wages under the Massachusetts Wage Act. The case ultimately went to trial and the jury concluded that both Johnson and Rose were individually liable under the Wage Act.

On appeal, the Supreme Judicial Court held that Johnson and Rose could not be liable under the Wage Act. Because the parties agreed that neither Johnson nor Rose were officers of the company, they could only be liable if they were “agents having the management” of Genitrix. The Court found it significant that the statute does not include board directors or investors in its definition of employer. Further reviewing the statutory language and the legislative history, the Court determined that only individuals who have assumed significant management responsibilities over a corporation, in their individual capacities, similar to those performed by a president or treasurer, should be liable under the Wage Act.

The Court held that investors and board members are ordinarily not considered agents of a company. With respect to Johnson and Rose, because management powers, particularly over the payment of wages, were expressly delegated to Segal as president and CEO, the Court found that they had limited agency authority. Similarly, the Court explained that individual board members exercising normal corporate oversight, and acting collectively with other board members, do not have the management of the company. Segal argued that the board’s rejection of his cost-cutting plan established that Rose and Johnson had authority.  The Court disagreed, explaining that “corporate boards are regularly required to make difficult decisions that have an impact on the company’s finances.” The Court concluded that such decisions are not the acts of individual board members as agents and do not impose Wage Act liability. Segal also argued that Rose’s restrictions on additional investments constituted management of Genitrix.  Again, the Court disagreed, explaining that investors invariably exercise some control over the businesses in which they invest, including when the business seeks new funds. The Court concluded this is separate and distinct from having the management of the company.

Segal is significant because it limits the circumstances that corporate directors and investors can be on the hook for unpaid wages, particularly when the company itself is defunct. So long as investors and board members act solely in those capacities and do not take on the day-to-day management of the business, they should not be personally liable for the company’s failure to pay wages.

 

‘Twas the week before Christmas, and the WH-L-PG

Contemplated the wage-hour year lyrically;

We considered the issues our readers would most like to savor

And decided the tastiest one was class waiver.

 

“Employers and employees,” begins the debate,

“Are free to agree that they shall arbitrate.”

But a critical question remains–it is whether

Employees can be stopped from proceeding together.

 

Will class waivers be cool?  Can’t we be more prophetic,

Than continuously repeating that the case will be Epic?

Well, we expect that class waivers will finally be decided,

More likely than not, from a Court that’s divided.

 

But which way it breaks, we’ll have to just see

On which side of the case we find Justice Kennedy.

So for now, just sit tight and await the decision

(Unless Congress intervenes with a “minor” revision.)

 

Where shall we go next?  It’s a place we know well.

As we take a close look at this year’s DOL.

They started out slowly, yes a slight hesitation.

As the Senate could not seem to provide confirmation.

 

But the overtime reg case could simply not wait,

Until it did, then the new guys pronounced the reg’s fate:

“That double-high salary, we firmly reject.

But our authority to set it at all, please respect.”

 

Then in an effort to avoid an adverse citation,

DOL told the court “We need more information.”

Now we’ll wait and we’ll see what the Department will do,

And we’ll see a new level in a year (prob’ly two).

 

WHD also announced the opinion letter’s return,

And the guidance on J/E and I/C got burned.

And when the tip pooling reg lost in the Ninth Circuit,

DOL finally gave up and declared “We’ll rework it.”

 

Tipped employees and janitors and bankers grew frustrated

As increasingly courts determined they were not situated

Similarly to those for whom they wanted to proceed.

It may be a low hurdle, but it still can impede.

 

Maybe that is why cases are down . . . although slightly

They’re still filed at a rate of 320, fortnightly.

They crowd up the dockets, they test judges’ mettle,

Yet it seems like they’re making it harder to settle.

 

But the cases get filed, regardless of position,

From the lowest-paid worker to half a mil in commission.

And up to this point, we’ve neglected to warn ya

About salary increases — New York, California.

 

Just a couple of points that are worth a short mention,

The debate on the reading of narrow exemptions,

Bag checks, franchises, and PAGA, so zany!

Up to our eyeballs in wagehour miscellany.

 

From calculating rates (which requires division)

To ordinances that require scheduling with precision.

Franchise liability, meal breaks, and more,

Who knows what 2018 has in store?

 

But before we proceed to the next year apace,

Let us make sure our commas are properly placed,

And let’s get one last thing off our chests:

We thank you, dear readers, you guys are the best!

 

THANKS TO ALL OF OUR READERS. BEST WISHES FOR A HAPPY, HEALTHY, AND PROSPEROUS NEW YEAR!

Co-authored by Howard M. Wexler and Robert S. Whitman

Seyfarth Synopsis: Governor Andrew Cuomo has directed the Commissioner of Labor to schedule public hearings to address the possibility of eliminating the tip credit. A tip credit allows an employer to pay less than minimum wage to employees who receive the bulk of their pay in customer tips.

As we say goodbye to 2017, New York employers should also start preparing to say goodbye to minimum wage tip credits.

Governor Andrew Cuomo has directed the Commissioner of Labor to schedule public hearings to address the possibility of eliminating the tip credit. A tip credit allows an employer to pay less than minimum wage to employees who receive the bulk of their pay in customer tips.

As we reported in 2015, the then-Commissioner issued a report questioning the continuation of the minimum wage tip credit. Governor Cuomo appears to be in favor of the elimination of tip credits; he called for the public hearings “to ensure that no workers are more susceptible to exploitation because they rely on tips to survive.” While the Governor has not made any specific proposal, it is likely that, even if the tip credit goes away, employees could still be tipped, and participate in tip pooling/sharing arrangements, but they would have to be paid at least the standard minimum wage that non-tipped employees receive.

As with the minimum wage for all employees across the state, the minimum wage for tipped employees across the state is set to increase on December 31. The Department of Labor has summarized the revisions applicable to the tipped minimum wage for hospitality employers, employers in “miscellaneous industries,” and employers in the “building service industry.” Employers should consult these summaries to determine how much they can deduct for the appropriate minimum wage tip credit as the amount varies based on the industry, job classification, location of the employee and size of the employer.

Seyfarth Synopsis: The New York Court of Appeals holds that the state’s class action rules require notice of settlements to be sent to putative class members – even though no class has been certified.

In a decision sure to send shivers up the spines of wage and hour practitioners in New York, the State’s highest court has held that notice of a class action settlement must be distributed to all members of the putative class, even when the settlement comes before a class has been certified.  Together with Cheeks v. Freeport Pancake House, a Second Circuit ruling that pertains to FLSA settlements, the decision erects some very high hurdles for parties seeking early settlements in wage and hour cases in New York.

The case involved appeals in two separate wage and hour cases:  Desrosiers v. Perry Ellis Menswear, brought by an unpaid intern seeking wages, and Vasquez v. National Securities Corporation, in which a financial products salesperson alleged that his pay fell below minimum wage.  Both cases were brought in state court as putative class actions under the New York Labor Law.  Both were settled early – before class certification – but the plaintiffs filed motions seeking leave to send notice of the settlement to members of the putative classes.

In a 4-3 decision, the Court of Appeals (New York’s highest court) held that notice is required, even though the classes had not been certified in either case.

At issue was the language of CPLR 908, which states that a class action “shall not be dismissed, discontinued, or compromised without the approval of the court,” and that “[n]otice of the proposed dismissal, discontinuance, or compromise shall be given to all members of the class in such manner as the court directs.”  The defendants argued that the statute’s reference to a “class action” means a certified class action, while the plaintiffs contended “that an action is a ‘class action’ within the meaning of the statute from the moment the complaint containing class allegations is filed.”

Finding ambiguity in the statutory text, the majority looked to the legislative history and other interpretive guidance.  It placed particular weight on the State legislature’s failure to amend CPLR 908 in the decades since a 1982 decision from an intermediate appellate court holding that it does apply to pre-certification settlements.  The court held that this failure, in the face of the “sole appellate judicial interpretation of whether notice to putative class members before certification is required,” amounts to legislative acceptance of that decision’s construction of the rule.

The majority also drew a distinction between CPLR 908 and Federal Rule of Civil Procedure 23(e), on which it was modeled.  Rule 23 was amended in 2003 to provide that a district court is required to approve settlements only in cases where there is a “certified class” and that notice must be given only to class members “who would be bound” by the settlement.  In contrast, CPLR 908 has not be so amended, despite proposals by the New York City Bar Association and scholarly criticisms of the rule.

Thus persuaded that the text of the rule requires notice before certification, the court declined to consider the practical implications of its decision on the desirability of early settlements in class actions:

Any practical difficulties and policy concerns that may arise from [the court’s] interpretation of CPLR 908 are best addressed by the legislature, especially considering that there are also policy reasons in favor of applying CPLR 908 in the pre-certification context, such as ensuring that the settlement between the named plaintiff and the defendant is free from collusion and that absent putative class members will not be prejudiced. The balancing of these concerns is for the legislature, not this Court, to resolve.

In dissent, three judges took the majority to task for what they described as an unwarranted reading of the rule in light of the overall context of the class action provisions in CPLR Article 9.  In their view, the fact that the plaintiffs had never moved for, let alone received, a ruling granting class certification meant that the case was not a class action at all.  “In each of the actions here,” they said, “plaintiffs did not comply with the requirements under article 9 of the CPLR that are necessary to transform the purported class action into an actual class action, with members of a class bound by the disposition of the litigation.”

Responding in particular to the plaintiffs contention that a case becomes a “class action” from the moment it is filed putatively as such, the dissent said:

There is nothing talismanic about styling a complaint as a class action. Indeed, any plaintiff may merely allege that a claim is being brought “on behalf of all others similarly situated.” However, under article 9 of the CPLR, the court, not a would-be class representative, has the power to determine whether an action “brought as a class action” may be maintained as such, and may do so only upon a showing that the prerequisites set forth in CPLR 901 have been satisfied.

As we have observed repeatedly in this blog, the Second Circuit’s holding in Cheeks, which requires court approval of FLSA settlements and tends to preclude various customary settlement provisions like confidentiality clauses, poses obstacles that may lessen the desirability of settlements in wage and hour cases.  And in Yu v. Hasaki Restaurant, the Second Circuit is now being asked to decide whether court approval is required even for a settlement achieved through an Offer of Judgment under FRCP 68.  Now, with Desrosiers on the books, the challenges for early settlements have been extended to wage hour settlements brought in state court under New York law.  (The case will presumably not apply to New York Labor Law claims brought in federal court, where Rule 23 rather than CPLR Article 9 would apply.)

The lesson for New York practitioners is as simple as it is daunting: if you want to settle a wage and hour case early, be prepared to jump through some significant procedural hoops.

Authored by Robert Whitman

Seyfarth Synopsis: The Second Circuit has upheld summary judgment against magazine interns seeking payment as “employees” under the FLSA.

In an end-of-semester decision that may represent the final grade for unpaid interns seeking minimum wage and overtime pay under the FLSA, the Second Circuit has firmly rejected claims by Hearst magazine interns challenging their unpaid status.

The interns served on an unpaid basis for various magazines published by Hearst Corporation, either during college or for a few months between college and graduate school. They sued, claiming they were employees because they provided work of value to Hearst and received little professional benefit in return.

Following discovery, District Judge J. Paul Oetken rejected the interns’ claim of employee status and granted summary judgment to Hearst. On appeal, the Second Circuit framed the question succinctly: “whether Hearst furnishes bona fide for‐credit internships or whether it exploits student‐interns to avoid hiring and compensating entry‐level employees.” If the former were true, the interns would be deemed trainees, who could permissibly be unpaid; if the latter were true, the interns would be entitled to minimum wage and overtime pay.

In support of their appeal, the interns argued that many of the tasks they performed were “menial and repetitive,” that they received “little formal training,” and that they “mastered their tasks within a couple weeks, but did the same work for the duration of the internship.” These points, they contended, outweighed their receipt of college credit and other indicia of an academic flavor to their experience.

The appeals court, in Wang v. Hearst Corp., appeared to have little trouble upholding the grant of summary judgment in favor of Hearst. Applying its test for assessing whether interns are employees or trainees, the court held that the factual record favored non-employee status on six of the seven pertinent factors, enough to sustain the judgment in the company’s favor.

Those seven factors, as loyal blog readers will recall from prior posts, first appeared in the court’s 2016 decision in Glatt v. Fox Searchlight, in which the court held that the “primary beneficiary” test governed whether interns were considered employees or trainees. The Glatt court rejected the Department of Labor’s multi-factor test and devised its own:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa;
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands‐on training provided by educational institutions;
  3. The extent to which the internship is tied to the internʹs formal education program by integrated coursework or the receipt of academic credit;
  4. The extent to which the internship accommodates the internʹs academic commitments by corresponding to the academic calendar;
  5. The extent to which the internshipʹs duration is limited to the period in which the internship provides the intern with beneficial learning;
  6. The extent to which the internʹs work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern;
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The factors are non-exhaustive, and as the Second Circuit reiterated in the current case, need not all point in the same direction to support a conclusion of non-employee status.

The “heart of the dispute on appeal” was factor two — whether the interns received “training that would be similar to that which would be given in an educational environment.” The plaintiffs argued that, in order for this factor to weigh in favor of non-employee status, the internships would have to provide “education that resembles university pedagogy to the exclusion of tasks that apply specific skills to the professional environment.”

The court was not convinced. It recognized that the Hearst internships varied in many respects from classroom learning. But as it had said earlier in Glatt, this was precisely the point. “The [plaintiffs’] tacit assumption is that professions, trades, and arts are or should be just like school; but many useful internships are designed to correct that impression…. [P]ractical skill may entail practice, and an intern gains familiarity with an industry by day to day professional experience.”

Perhaps the most significant part of the ruling comes at the end, where the court discusses the propriety of summary judgment. The interns, and various amici curiae (unions, advocacy groups, and professors) who advocated on their behalf, argued strenuously that various “mixed inferences” on the seven internship factors precluded a grant of summary judgment. While acknowledging that application of the factors required some weighing of evidence, the court nonetheless said this did not mean the case required a trial.

“Status as an ‘employee’ for the purposes of the FLSA is a matter of law,” the court said, “and under our summary judgment standard, a district court can strike a balance on the totality of the circumstances to rule for one side or the other.” It continued: “Many of our FLSA tests that are fact‐sensitive and require the judge to assign weight are routinely disposed of on summary judgment [citing cases]. The amici contend that summary judgment is inapposite in all unpaid intern cases that turn on competing factors. Such a rule would foreclose weighing of undisputed facts in this commonplace fashion.”

In many ways, the Wang decision may be the epilogue to a textbook that has already been written. After the Glatt decision in 2016, the number of lawsuits filed by interns seeking unpaid compensation dropped precipitously. That may have been due to Glatt’s highly-employer-friendly resolution, both as to the merits of the employee-or-intern question and its pronouncements on the high threshold for collective/class certification on the question. Or perhaps it was due to the decisions by employers, reacting to the onslaught of intern lawsuits seeking pay under the FLSA and state law, to curtail or limit their internship programs or to pay interns compensation at or above minimum wage. Whatever the reason, the Wang decision cannot be heartening for plaintiffs’ lawyers, and the days of widespread lawsuits by interns are likely over.

Still, companies who remain interested in sponsoring unpaid interns should not get complacent. Paying minimum wage, of course, remains a fail proof antidote to the possibility of FLSA claims by these individuals. But if that is not an option, companies should take care to ensure that their programs have primarily educational aims and coordinate wherever possible with the interns’ educational institutions to ensure they meet the factors articulated by the court. Otherwise, the interns may be the ones teaching them a lesson.