Seyfarth Synopsis: A federal district judge has vacated the U.S. DOL’s 2024 rulemaking increasing the minimum salary employers must pay to exempt executive, administrative, and professional employees. That minimum now reverts to an annualized threshold of $35,568, and $107,432 in total pay for the highly compensated employee exemption. While current DOL leadership may appeal, it is highly unlikely that the incoming Administration would continue that fight come January.

On Friday, Judge Sean D. Jordan, a federal judge in the Eastern District of Texas, vacated the Biden DOL’s 2024 revisions to the minimum salary for employees to satisfy the FLSA’s executive, administrative, and professional (“EAP”) exemptions, as well as the highly compensated employee (“HCE”) exemption. The court ruled that the DOL exceeded its statutory authority by raising the salary level too high and rejected its addition of an auto-increase mechanism to the rule.

Flashback to 2016

This story may feel familiar to many employers.

In 2016, the Obama DOL instituted a rule increasing the EAP exemption salary threshold and adding an inflation-based, auto-increase feature to the rule. But that rule was challenged in a Texas federal court, which halted the rule just days before it was set to take effect.

In the earlier case, the court said the increased salary threshold was too high because it “makes an employee’s duties, functions, or tasks irrelevant if the[ir] salary falls below the new minimum salary level.” The court also found the auto-increase feature violated statutory rulemaking requirements because, among other things, it circumvented notice and comment.

The Obama DOL quickly appealed the Texas court’s ruling, but the Trump Administration later pulled out of that fight and focused on new rulemaking. That effort led to the 2019 institution of a new earnings threshold: a salary of $684/week (or $35,568/year) for EAP employees, and total earnings of $107,432 for HCE employees.

The 2024 Rule

In April 2024, the Biden DOL picked up the mantle to narrow the group of workers who may be classified as exempt under the FLSA. It issued a new rule that made three changes, including a sizeable salary level increase that was set to take effect in just six weeks:

  1. Effective July 1, 2024, it increased: (a) the minimum weekly salary to qualify for the EAP exemptions from $684/week (or $34,568/year) to $844 per week (or $43,888/year); and (b) increased the HCE’s annual earnings threshold to $132,964, up from $107,432.
  • Effective January 1, 2025, it would have further increased: (a) the EAP salary threshold to $1,128 per week (or $58,656 per year); and (b) the HCE annual earnings threshold to $151,164 per year.
  • It called for these earnings thresholds to be automatically increased every three years.

Like the 2016 rule before it, the 2024 rule was promptly challenged in Texas. It was actually challenged in multiple lawsuits, several of them overseen by Judge Jordan. Earlier this year in one of those cases, Judge Jordan enjoined the rule, but only with respect to one employer: the State of Texas (i.e., employees who worked for the State of Texas as an employer).

Meanwhile, this separate litigation—calling for the same relief, but on a nationwide basis—moved forward on the judge’s docket.

The End of the 2024 Rule

All eyes were on the pending litigation when Judge Jordan delivered a Friday afternoon knockout blow to the 2024 rule. As a result, the salary threshold returns to $684/week (or $35,568/year) for EAP employees, while the annual earnings threshold for HCE employees returns to $107,432.

In his late afternoon ruling, Judge Jordan “set[s] aside and vacate[s]” the entirety of the 2024 rule, including the portion that went into effect earlier this year, the portion that was set to take effect in January 2025, and the automatic inflation adjustment feature. Judge Jordan made clear that his ruling had nationwide impact and was not limited to the litigants before him.

For guiding principles, Judge Jordan examined the FLSA’s text, which refers to the exempt status of “employee[s] employed in a bona fide executive, administrative, or professional capacity…” The judge explained that the terms “executive,” “administrative,” and “professional” all relate to duties. While the court noted that the qualifying term “bona fide” introduces some leeway for the DOL to use a minimum salary level, he found that this leeway is limited to where the salary is a reasonable proxy for an employee’s exempt status.

Stated differently, “a salary test cannot displace the duties test.”

Under these principles, Judge Jordan rejected the 2024 rule in its entirety—not just the January 2025 increase, but the increase that took effect in July 2024 and the auto-adjustment feature that would have raised the minimum salary level every three years. The court explained that earlier increases to the EAP salary threshold had rendered no more than 10% of employees who meet the duties test as non-exempt, but that the 2024 rule would have rendered a third of otherwise exempt employees non-exempt based on salary alone.

What Now?

While the DOL will likely appeal to the Fifth Circuit Court of Appeals, it is highly unlikely that the court will rule on the matter before the arrival of a new administration on January 20, 2025. And it is even less likely that a Trump DOL, upon its return, would care to continue an appeal or restore the 2024 rule. Indeed, those connected with the prior Trump Administration have signaled they believe that the pre-2024 rule sets the appropriate threshold for exemption.

So what do employers do now?

Many planned on making changes on January 1, 2025 as a result of the now-vacated rule, whether to reclassify exempt employees making less than $58,656 per year, or to hike their salaries to or above that level to maintain their exempt status. Federal law no longer requires them to do so, and near-term developments are highly unlikely to change that.

Even the July 1, 2024 salary threshold increase exits the picture of what employers are required by federal law to do. Employers that made changes as a result of that increase—which, again, lifted the EAP salary threshold from $684/week to $844/week—have the option, if they want, to roll back their changes. Doing so, however, could be very difficult as a practical matter, and would require weighing the impact on employee morale, retention, and recruiting.

Further, employers must consider state laws, which are untouched by this ruling. Many states have their own overtime laws, and some (e.g., Alaska, California, Colorado, Maine, New York, and Washington) contain EAP exemptions that are narrower than the FLSA’s, including higher minimum salary levels. For example, effective January 1, 2025, the minimum threshold in New York City and certain New York counties will be $64,350/year; in California, it will increase to $68,640/year; and in Washington State, it will increase to $77,968.80/year for employers with more than 50 employees (or $69,305.60/year for smaller employers). It would not be surprising to see additional states enact higher minimum salaries for exempt employees.

Employers should consult with counsel before deciding what changes to make or unwind as a result of these developments. In addition to being here to assist with those considerations, we will continue to monitor these important developments and keep our readers informed.

Seyfarth Synopsis: The Second District again held that issue preclusion barred plaintiff’s PAGA claim because he failed to establish any violation of the Labor Code and arbitral findings have a preclusive effect on a plaintiff’s standing in a stayed PAGA claim.   

The Second District again grappled with the issue of whether an arbitrator’s previous adjudication of Labor Code violations preclude a plaintiff from asserting a PAGA claim based on those same Labor Code violations. The Court of Appeal held that issue preclusion applies—that is, when an arbitrator concludes that a PAGA plaintiff failed to establish that they suffered any individual violations under the California Labor Code, issue preclusion bars that PAGA plaintiff from relitigating those same violations for the purpose of standing under PAGA. The Court reached the same conclusion as its colleagues in Division One of the Second District in Rocha v. U-Haul Co. of California.

The Second District found that the defendant established the four elements of issue preclusion: (1) there was a final adjudication, (2) of an identical issue, (3) that was actually litigated and necessarily decided in the first suit, and (4) asserted against one who was a party in the first suit or one in privity with that party. The Court of Appeal explained that for purposes of there being an “identical issue,” it is sufficient that a single, dispositive element is identical and shared between different claims. Given that both individual Labor Code claims and PAGA claims require a preliminary showing that a violation of the Labor Code occurred, and the arbitrator conclusively established there was no Labor Code violation, plaintiff did not have standing as a PAGA plaintiff since he did not personally suffer a Labor Code violation. The Court also noted that its analysis and result was also endorsed by the California Supreme Court in Adolph v. Uber Technologies, Inc.

Seyfarth Synopsis: In March 2024, the Sixth Circuit in Parker v. Battle Creek Pizza, Inc. announced a new standard for assessing vehicle reimbursements under the FLSA. The Sixth Circuit rejected both employees’ requests for the use of the IRS rate and employers’ use of a reasonable approximation of expenses, instead requiring the use of actual expenses. A recent decision from the Northern District of Alabama indicates that Parker may have limited import outside of the Sixth Circuit.

Delivery drivers and employers have long disagreed on how vehicle expenses should be calculated for determining whether the driver’s effective pay is above the $7.25 minimum wage set by the FLSA. Drivers have typically argued that vehicle expenses should be reimbursed using the IRS standard rate, which is $0.67 per mile for 2024. Employers, on the other hand, have generally argued that the IRS rate is not required, and that a reimbursement is compliant with the FLSA, as long as it is a “reasonable approximation” of the driver’s expenses. Although the DOL issued an opinion letter on the issue in 2020, caselaw on the issue has been sparse, consisting largely of scattershot district court opinions.

The Sixth Circuit’s Parker Decision

At least that was the case until the Sixth Circuit weighed in on the issue in Parker v. Battle Creek Pizza, Inc., 95 F.4th 1009 (6th Cir. 2024). In Parker, the Sixth Circuit charted a path that few expected. Rather than endorse the use of the IRS rate or a reasonable approximation of expenses, the Sixth Circuit concluded that the minimum wage calculation must be made through assessment of the driver’s actual expenses. Given the novelty of the Sixth Circuit’s holding, there has been significant uncertainty about what, if any, impact the Parker court’s decision would have outside of the Sixth Circuit.

The Allen Decision

In one of the first decisions addressing Parker, the district court in Allen v. PJ Cheese, Inc., No. 2:20-cv-1846-RDP, 2024 WL 2884170 (N.D. Ala. June 7, 2024), signaled that predictions of a wholesale sea change in driver reimbursement litigation were premature. In Allen, the plaintiff moved for summary judgment on the question of whether he could prove his claims through estimates of vehicle costs, rather than by showing actual costs. The Allen court observed that the answer to that question hinged on two questions: (1) whether 29 C.F.R. § 778.217 allows an employer to reasonably approximate vehicle costs; and (2) if so, whether an employee may also reasonably approximate his vehicle costs.

The Allen court began by observing that virtually all district courts analyzing the question prior to Parker had determined that § 778.217 allowed an employer to reasonably approximate an employee’s vehicle costs for reimbursement purposes. The court observed that the Parker court had determined that § 778.217 did not apply to the question of how vehicle expenses must be reimbursed based on its conclusions that (1) § 778.217 “deals exclusively” with overtime compensation (not assessing minimum wage compliance, and (2) § 778.217 does not apply to “tools,” of which a vehicle is one). The Allen court noted, however, that the Sixth Circuit’s reasoning was contrary to the DOL’s 2020 opinion letter, in which the DOL observed that § 778.217 applied to minimum wage claims and reimbursement for a delivery vehicle is governed by § 778.217.

The Allen court observed that the Parker decision was entitled to no greater weight than the DOL’s opinion letter or district court decisions. And ultimately, the court determined that the 2020 opinion letter was entitled to Skidmore deference for at least three reasons. First, the DOL opinion letter had thoroughly analyzed the DOL’s recordkeeping requirements and had found that none required an employer to track an employee’s actual vehicle-related expenses to reimburse that exact amount. Second, the court observed that the opinion letter was consistent with the DOL’s previous pronouncements on the issue. Specifically, the Wage and Hour Division’s Field Operations Handbook had made clear that reimbursement of actual costs was not the only option for reimbursement. Finally, the court noted that it found the DOL’s conclusion compelling, particularly given the impracticality of tracking individual expenses. Thus, the Allen court held that an employer could approximate an employee’s vehicle costs for reimbursement purposes.

The court further observed that, while a driver could not rely on the Mt. Clemens “just and reasonable inference” standard for establishing damages because an employer has no obligation to maintain an employee’s personal vehicle records, an employee could attempt to establish damages through a reasonable approximation.

Implications

Although Parker marked the first federal appellate decision assessing how vehicle reimbursements should be calculated for purposes of assessing FLSA compliance, its ultimate impact may be limited. The Allen decision suggests that whether district courts outside of the Sixth Circuit follow Parker may hinge on whether those courts believe the 2020 DOL opinion letter is entitled to Skidmore deference. In the meantime, employers with national operations should prepare for the possibility of varying FLSA reimbursement standards in different geographical footprints.

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.

Seyfarth Synopsis: On October 29, 2024, the Fifth Circuit granted the Department of Labor’s Petition for Panel Rehearing in the 80/20 Rule Litigation, Which Sought Clarification About the Scope of the Court’s Ruling.

Here at TIPS, we’ve been closely following the ongoing litigation in the Fifth Circuit surrounding the U.S. Department of Labor’s December 2021 codification of the “80/20 Rule.”  In our last update, we wrote about the Fifth Circuit’s opinion granting summary judgment to the challengers of the DOL’s 80/20 Rule, which would have both codified longstanding DOL guidance requiring that tipped employees spend no more than 20% of their workweek on tasks that “directly support” their tip producing work (“directly supporting work”) and added a completely new requirement that any such directly supporting work not be performed for more than 30 continuous minutes at a time.  The Fifth Circuit held that the DOL’s regulation ran afoul of the plain text of the FLSA’s tip credit provision. It therefore vacated the rule.

After the Fifth Circuit issued its decision, though, the DOL asked the Court to clarify the scope of the vacatur in a narrow petition for panel rehearing.  In its petition, DOL pointed out that the DOL’s 2021 regulation—in addition to making changes to the existing dual jobs regulation—also withdrew a December 2020 rule published under the Trump-era DOL that, if it had ever gone into effect, would have replaced the DOL’s dual jobs regulation with much squishier language permitting employers to take a tip credit so long as the non-tip producing duties were performed “contemporaneously with tipped duties” or for a “reasonable time.” (What is a “reasonable time,” you ask? The rule didn’t say.) In its petition for panel rehearing, the DOL argued that the Fifth Circuit’s opinion could not have intended to resurrect a withdrawn rule from 2020 in vacating the DOL’s 2021 regulation.

On October 29, 2024, the Fifth Circuit granted the petition, and substituted its previous opinion with a new one. The only change: at the end of the opinion, the Court clarified that its vacatur of the new 80/20 regulation only vacated the rule “insofar as it modifies” the Department’s 1967 dual jobs regulation. In other words, the court clarified that its ruling was not intended to resurrect the withdrawn Trump-era dual jobs rule.

Although the Fifth Circuit’s opinion means that the DOL’s 2021 80/20 regulation is no longer operative, that does not mean that there are no longer any limitations on the amount of non-tip-producing work permitted for an employer to be able to take the tip credit. As readers of this blog will be well familiar with by now, the 80/20 rule has its roots in DOL sub-regulatory guidance—in particular, the Department’s Field Operations Handbook—going at least as far back as 1988.  Other federal appellate courts, including the en banc Ninth Circuit in 2018 and the Eleventh Circuit in 2021, have previously found that guidance to be a reasonable interpretation of the statute. So, while the DOL’s 2021 regulation may no longer be operative, restaurant and hospitality employers should tread carefully in determining their policies and practices around timekeeping and assignment of non-tip producing tasks.

If you are a restaurant or hospitality employer and are looking for guidance on how to proceed in the wake of these recent developments regarding the 80/20 Rule, we encourage you to reach out to one of us—or your favorite member of Seyfarth’s Wage and Hour Litigation Practice Group!

And, stay tuned.

By: Alex Simon and Kyle Petersen

Seyfarth Synopsis: In a welcome turn of events, the Seventh Circuit has taken up the question of what is the appropriate standard for court-authorized notice in collective actions.

When this Blog wrote two weeks ago, “Swales, Clark, and Laverenz pave the way for additional district and appellate courts to depart from Lusardi,” we did not expect the Seventh Circuit to take up the issue so quickly.

But just eight days after Judge Griesbach’s blistering opinion came down in Laverenz, criticizing the still-predominant “modest factual showing standard” for being contrary to the FLSA’s text—the Seventh Circuit has authorized an interlocutory appeal to answer a question raised by an appellant-employer about when a court overseeing a collective action may authorize notice to “similarly situated” potential plaintiffs.

More specifically, in a pending collective action brought under the Age Discrimination in Employment Act (“ADEA”)—which explicitly incorporates the FLSA’s collective action procedure—the Seventh Circuit Court of Appeals will weigh in for the first time on whether a district court may order this notice upon a “modest showing” of similarity without regard to the evidence submitted by the defendant.

After ordering nationwide notice to a collective based on the lax Lusardi framework, the district courtcertified the matter for interlocutory review and stayed issuance of notice pending that review. Initially, the Seventh Circuit denied the petition for permission to appeal. While the  Court admitted that “certifying a collective action under the Fair Labor Standards Act is a recurring issue for district courts,” it concluded that it would be “better” to review that process on a more complete record (i.e. after the second step of the two-step process).

In response, the employer filed a petition for rehearing and petition for rehearing enbac—respectfully pushing back on the notion that review after the second step of the two-step process would be “better.” Specifically, the employer explained that a review at that time would be “impossible,” and completely defeat the purpose of their interlocutory appeal. After all, the very issue to be reviewed on appeal concerns the harms that district courts can cause when they authorize the distribution of notice to a collective on an undeveloped factual record—harms such as “soliciting baseless claims, imposing unfair settlement pressure, and subjecting defendants to costly merits discovery for ‘collectives’ that could never hold up.”

Fortunately, this persuaded the Court of Appeals to take up the cause. This means that it will now decide whether district courts in the Seventh Circuit will be required to determine whether plaintiffs have made a meaningful showing, under all of the evidence, that employees in a collective action are “similarly situated” before notice can be sent.

The lower court’s decision to authorize notice upon a mere “modest” factual showing highlights the harmful and unfair nature of that standard. The plaintiff successfully convinced the court that she should be able to send notice to all of the employer’s 40+ year old employees who had been denied promotions in the last three years, even though she had just four supporting affidavits, and the employer produced substantial evidence that the plaintiff was not similarly situated to anyone. While not every district court that uses the “modest” factual showing standard sets the bar so low, there are some that certainly do. New guidance from the Seventh Circuit clarifying what courts must consider and find before authorizing notice is certainly welcome.

Should the Seventh Circuit decide to follow the Fifth and Sixth Circuits in setting a higher evidentiary bar for plaintiffs to clear before sending notice to “similarly situated” employees—it would send a very clear signal across the country that the Lusardi framework must be discarded. Indeed, the very fact that the Seventh Circuit has taken on this appeal sends a message to district courts throughout the country that just because the “modest factual showing” standard may have been “endorsed” in the past, does not mean that it will hold up on appeal going forward.

In the end, the Seventh Circuit’s willingness to consider this very important issue at this stage of the litigation is a welcome development. We will continue to monitor the case for updates. In the meantime, if you are facing a collective action in the Seventh Circuit, it may be in your interest to seek a stay of the pre-notice proceedings pending a decision about the appropriate standard for notice moving forward. Courts in the Sixth Circuit were, by and large, willing to do this pending the decision on Clark.

Seyfarth Synopsis: On September 11, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit held in Mayfield v. U.S. Department of Labor that the Secretary’s salary tests for evaluating overtime exemptions are valid and do not exceed the Department of Labor’s authority under the Fair Labor Standards Act (“FLSA”).

Robert Mayfield, a Texas-based fast-food purveyor, challenged the U.S. DOL Wage and Hour Division’s 2019 rule, promulgated during the Trump Administration, regarding executive, administrative, and professional (“EAP”) exemptions from overtime under the FLSA. Mayfield argued the rule exceeded the Secretary of Labor’s authority because the FLSA only allows DOL to address a worker’s duties, not to set a salary threshold as part of the exemption analysis.

The district judge dismissed Mayfield’s case a year ago, holding that the FLSA gave DOL broad authority to “define and delimit” the EAP exemptions, which the DOL did not exceed with the 2019 rule. Mayfield appealed to the Fifth Circuit, which held oral argument just last month.

The Fifth Circuit panel issued a ruling upholding the district court’s opinion, finding that setting a minimum salary level for the EAP exemption is within DOL’s power to “define and delimit” the terms of the exemptions. That power, the panel held “is guided by the FLSA’s purpose and the text of the exemption itself.”

This decision, which stands (at least for now) as a win for the DOL, comes on the heels of multiple noteworthy decisions questioning and curtailing agency authority and action. This summer, in Loper Bright Enterprises v. Raimondo, the Supreme Court overruled the principle of Chevron deference. And just last year, the Court waded into the FLSA exemption arena in Helix Energy Solutions Group, Inc. v. Hewitt, with Justices Kavanaugh and Alito issuing a dissent effectively inviting litigants to challenge the EAP salary basis tests as exceeding DOL authority.

In reaching this holding, the Fifth Circuit explained that its precedent did not dictate the case’s outcome and that the major-questions doctrine is inapplicable. It then turned to “whether the Rule is within the outer boundaries of” Congress’s “uncontroverted explicit delegation of authority” to DOL.

The Fifth Circuit panel was “not persuaded” by Mayfield’s argument that, in defining and delimiting exemptions, the Department could address only work duties, since “[u]sing salary level as a criterion for EAP status has a far stronger textual foundation than Mayfield acknowledges.” Further, the Court approved “[u]sing salary as a proxy for EAP status . . . because the link between the job duties identified and salary is strong.” The Court cautioned, however, that where “the proxy characteristic frequently yields different results than the characteristic Congress initially chose, then use of the proxy is not so much defining and delimiting the original statutory terms as replacing them.”

The Fifth Circuit appeared to question whether Skidmore deference remains a viable analytical tool after Loper Bright, but unlike many post-Loper Bright opinions, the Fifth Circuit at least acknowledged Skidmore’s existence, suggesting

if Skidmore deference does any work, it applies here. DOL has consistently issued minimum salary rules for over eighty years. Though the specific dollar value required has varied, DOL’s position that it has the authority to promulgate such a rule has been consistent. Furthermore, it began doing so immediately after the FLSA was passed. And for those who subscribe to legislative acquiescence, Congress has amended the FLSA numerous times without modifying, foreclosing, or otherwise questioning the Minimum Salary Rule.

In approving DOL’s authority to promulgate the rule, the Fifth Circuit stated it was “join[ing] four of its sister circuits.”

Finally, the Court agreed with the District Court’s determination—and two of its sister circuits—that the “EAP exemption is guided by an intelligible principle,” so does not violate the nondelegation doctrine.

What’s Next?

Mayfield may request an en banc rehearing and/or seek Supreme Court review. But this decision could have ramifications for pending challenges to the DOL’s 2024 rule, which increased the salary level threshold for the EAP exemptions to $43,888 per year as of July 1, 2024, with another increase (to $58,656) taking effect on January 1, 2025.

The Mayfield ruling, as long as it stands, clears at least one impediment to the rulemaking, as the Fifth Circuit has blessed DOL’s authority to use the salary level tests within reason, i.e., so long as it serves as an acceptable “proxy.” That said, other challenges are still being litigated that focus on other aspects of the 2024 rule.

For now, employers should continue to prepare for the January 1, 2025 salary threshold increase. We will provide updates on further developments concerning the DOL’s new overtime exemption rule and the challenges to it.

The rules governing the employment relationship are always changing. Laws creating new employer obligations, technology solutions making work more efficient and more complicated, and rules governing the resolution of disputes between employers and their workers are around every corner.

Seyfarth’s Wage Hour Litigation Practice Group is excited to announce a new blog series, Wage and Hour Around the Corner, to help employers stay on the cutting edge of wage and hour changes happening now and those on the horizon. We encourage you to check out our first two posts: DOL Issues Guidance on Wage-Hour Risk Posed by Artificial Intelligence and Game, Set,… and On to the Match: Third Circuit Breaks Precedent, Recognizing That Collegiate Athletes May Assert a Claim Under the FLSA. More to come!

We hope you find these updates helpful. Do not hesitate to reach out to our authors if you ever need a longer explanation! Please note that Wage and Hour Around the Corner will be distributed only to those who subscribe to the Wage & Hour Litigation Blog. You can do so by clicking the following link:

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Seyfarth Synopsis: As reported by Seyfarth, the Fifth Circuit’s January 2021 decision in Swales v. KLLM Transport Services, LLC and the Sixth Circuit’s May 2023 decision in Clark v. A&L Homecare and Training Center, et al. represent significant shifts in the standard for court-authorized notice in Fair Labor Standards Act collective actions. Last week, the Eastern District of Wisconsin followed suit in Laverenz v. Pioneer Metal Finishing LLC, and adopted Swales, furthering the already-underway shift away from the long-standing “fairly lenient” two-step framework used in most FLSA cases. 

Raising the Bar for FLSA Certification: From Lusardi to Swales and Clark

In Hoffmann-La Roche, Inc. v. Sperling (1989), the Supreme Court allowed courts to send notice of an FLSA collective action to potential opt-in plaintiffs. Courts initially followed the Lusardi v. Xerox Corp. (1987) two-step process fashioned by the District of New Jersey: conditional certification based on minimal evidence, followed by a stricter decertification stage after discovery. Under Lusardi’s approach, stage one certification has historically been a “lenient standard” under which the plaintiff must make only a “modest showing” to clear the “low burden” necessary to send notice. While many employers are successful on decertification, any win can taste bittersweet due to the expenditures of time and money involved in litigating a collective action through discovery and decertification briefing.

The Fifth Circuit’s 2021 Swales decision rejected Lusardi, requiring proof of similar situation, and discovery on issues affecting that determination if necessary, before certifying a collective action.  The Sixth Circuit in 2023 also decried Lusardi’s leniency at the “conditional” certification stage, but did not reject outright the sending of notice prior to a final determination about whether plaintiffs are similarly situated. Instead, Plaintiffs in the Sixth Circuit now must demonstrate a “strong likelihood”—a standard Clark likened to that for granting a preliminary injunction—that they are similarly situated to the potential collective members to justify court-authorized notice.

The Western District of Wisconsin Adopts Swales, Tightening FLSA Certification Standards

Laverenz adopted Swales and its bright line prove-similarity-before-notice-issues rule in a case involving an employer rounding employees’ time punches to the nearest quarter hour and compensating them based on the rounded time values. The plaintiff moved for conditional certification of a collective action, arguing that she and all hourly employees subject to time rounding were similarly situated.

The court first noted that the Seventh Circuit has never required a specific certification procedure, with district courts generally following the lenient Lusardi framework.  It then identified a key issue with the Lusardi process: it risks notifying and including employees who are not “similarly situated,” as required by the FLSA. Although decertification can occur at the second stage, said Laverenz, by then many employees may have joined the suit, potentially without valid claims, which contradicts the FLSA’s plain text and intent.

Laverenz also found that Lusardi can compromise the appearance of judicial neutrality and conflicts with the Portal-to-Portal Act, which aimed to reduce the financial burden on employers from extensive data requests. Lusardi, the court reasoned,leads to notice and significant discovery before a final similarly situated determination, forcing employers to litigate the case as if it were a certified collective, thus favoring plaintiffs and increasing settlement pressure on employers.  Citing Seyfarth’s Workplace Class Action Report, Laverenz noted that courts granted 81% of conditional certification motions in 2021, but later decertified the majority (53%) of those. This suggests many notices go to employees who are not similarly situated, contrary to the FLSA’s intent.

A more rigorous initial review like that mandated by Swales, by contrast, would ensure efficiency and fairness. Adopting that approach, the court permitted pre-certification discovery into facts and legal considerations relevant to the similarly situated inquiry. Thereafter, it applied a preponderance of the evidence standard and assessed three factors—factual and employment settings, individual defenses, and fairness. 

Laverenz ultimately found that the plaintiff had not met her burden to show her similarity to other employees. Significant individual differences in how the rounding policy affected employees, Lavarenz’s personal de minimis damages, the employer’s individualized defenses, and the inefficiency and unfairness of litigating such personalized claims in an aggregate setting led the court to deny the plaintiff’s certification motion. 

Takeaways From Swales, Clark, and Laverenz

Swales, Clark, and now Laverenz pave the way for additional district and appellate courts to depart from Lusardi and apply a certification rubric that adheres more closely to the FLSA’s text and does not create perverse incentives in favor of one side or the other, minimizes untoward settlement pressure on employers, and limits the costs of litigating collective actions to those cases that in fact involve similarly situated plaintiffs. 

The rules governing the employment relationship are always changing. Laws creating new employer obligations, technology solutions making work more efficient and more complicated, and rules governing the resolution of disputes between employers and their workers are around every corner. Wage and Hour Around the Corner is a new blog series for employers, in-house lawyers, and HR, payroll, and compensation, that helps employers stay on the cutting edge of wage and hour changes happening now and those on the horizon.

Seyfarth Synopsis: The viable use cases for Artificial Intelligence are skyrocketing as AI models become capable of more and more. Some of those include various applications in remote work environments, like tracking employees’ time worked and work activities. According to the DOL, however, using AI-driven surveillance software to track time worked poses risks under the Fair Labor Standards Act.

Working remotely is here to stay.  Although declining from pandemic-era levels, telework remains popular, especially hybrid-style arrangements where employees work remotely part of the time.  That poses certain problems from a wage-hour perspective.  Generally, under the Fair Labor Standards Act, employers have an obligation to pay employees for all work the employer knows or should know has been performed.  But it is not always clear when an employer “should know.”  As the Department of Labor has noted, this is especially so with respect to telework, when employees are working without any direct oversight.  This has important implications for employers who use Artificial Intelligence tools to monitor and track time worked by remote employees.   

Those tools have made it easier to work remotely.  Increasingly, AI is also being used for automated timekeeping in which software tracks when workers sign in and out of work and then determines an employee’s “active” and “idle” time.  ‎These tools capture data such as application and website usage, mouse and keyboard activity, and even physical movement.  Some AI tools act as a fully digital time clock that allows businesses to calculate an employee’s weekly, bi-weekly, or monthly pay.     

But as noted here, reliance on AI also poses certain risks from a wage-hour perspective.  While AI-driven software allows employees to monitor and record when employees login and logout, employers may face FLSA exposure if the software fails to account for all time worked, including offline tasks.  According to the DOL, “[a]n AI program that incorrectly categorizes time as non-compensable work hours based on its analysis of worker activity, productivity, or performance could result in a failure to pay wages for all hours worked.”  AI-powered monitoring software can potentially fail to fully account for the time employees spend working away from their workstation, offline time spent thinking about or reviewing a document, or offscreen engagement with clients or co-workers. 

Other risks include if AI-monitoring tools automatically code all non-productive work as non-compensable time.  Short breaks lasting 20 minutes or less are generally deemed to be for the employer’s benefit and, therefore, compensable.  29 C.F.R. § 785.18.  If AI-monitoring tools automatically deduct from pay all time deemed non-productive time, even non-productive time of short duration, employers may unwittingly run afoul of the FLSA.    

These are not hypothetical concerns.  In a case brought in the Western District of Texas, a plaintiff brought a proposed collective action under the FLSA for unpaid off-the-clock work and her purported former employer.  The plaintiff, who primarily worked remotely, alleged that she and others similarly-situated were monitored through tracking software and compensated based on the software’s tracking of her activities.  For example, she claimed that if the surveillance software did not see her working, she would not be paid for that interval of inactivity, such as “10-minute time frame[s].”  The plaintiff claimed that the system failed to account for various offline work, including reviewing and annotating hard copy documents, receiving work-related phone calls away from her computer webcam, and participating in online conferences on her mobile phone away from her workstation.  The parties eventually settled for an undisclosed amount.     

The upshot is that reliance on AI-powered monitoring software may provide insight into employees’ work habits, but it should not be used as a panacea for time tracking.  Best practices include auditing any AI-powered software to ensure it does not lead an employer to unwittingly violate the FLSA.  Best practices also include implementing a reasonable reporting system that allows non-exempt employees to report hours worked that they believe were not captured by the software.  By doing so, employers will help guard against potential off-the-clock claims.       

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.

Seyfarth Synopsis: In a unanimous decision, a panel of the Fifth Circuit invalidated the DOL’s 2021 rule codifying the 80/20 rule.

As we here at TIPS predicted not too long ago, the Fifth Circuit on Friday issued an opinion striking down the DOL’s December 2021 regulation codifying the Department’s longstanding “80/20 rule.” The Fifth Circuit’s decision roundly rejects the 80/20 rule’s focus on whether employees’ discrete work activities are tip-producing or not, and instead concludes that the plain meaning of the statute is clear: an employer may claim the tip credit for any employee who, when engaged in her job—whatever duties the job entails—customarily and regularly receives more than $30 per month in tips.

To back up for a moment, the 80/20 rule, as we’ve explained, stems from a provision the DOL added to its 1988 Field Operations Handbook (“FOH”)—guidance that itself purported to synthesize enforcement positions taken in opinion letters dating back to 1979.  Under the DOL’s guidance, employers could take a tip credit, and therefore pay a service rate of pay (currently $2.13/hour under federal law), for tipped workers—but only for time spent engaged in “tip producing” work and work that “directly supports” the tip producing work. And, only if the time spent on the directly supportive work was not “a substantial amount,” which the DOL said was time in excess of 20% of total hours in a workweek for which the employer sought to take a tip credit.  Then, in the 2021 rulemaking, the DOL largely codified the 80/20 Rule, but added a new onerous limitation: employers would also not be able to take a tip credit for any directly supporting work performed for more than 30 continuous minutes.

Organizations representing the national and local restaurant industries promptly sued to enjoin enforcement of the new 80/20 regulation.  After an initial battle over whether a preliminary injunction should issue ended up at the Fifth Circuit, the District Court upheld the new rule, concluding that it was a permissible construction of the relevant statutory text under the Supreme Court’s Chevron doctrine of agency deference.

The challengers appealed again. Back at the Fifth Circuit, the panelists seemed more than a little skeptical of the 80/20 rule’s validity. Then, while the appeal was pending, the Supreme Court overruled Chevron, instructing lower federal courts that they need not defer to agency rules construing federal statutes even when those statutes are ambiguous.

In the Fifth Circuit’s view, though, the 80/20 rule would fail under any test, Chevron or not, because the relevant statutory text, 29 U.S.C. § 203(t), is not ambiguous.  That provision says that employers may take a tip credit for any employee “engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”  The court rejected the DOL’s position, codified in the 80/20 rule, that determining whether an employee is “engaged” in such an occupation for hours worked depends upon how much of that time is spent doing tasks for which the employee receives tips.  Instead, the court held, “engaged in an occupation” means something much more straightforward: employed in a job. As the court put it, the statutory definition “indicates a focus ‘on the field of work and the job as a whole,’ rather than on specific tasks.”

Additionally, the Fifth Circuit was unmoved by the fact that the 80/20 rule has reflected the DOL’s interpretation of § 203(t) for most of the period since at least 1988. Although courts should pay attention to longstanding agency interpretations of the law, the Fifth Circuit explained, the court in this case was “not persuaded that the 80/20 standard, however longstanding, can defeat the FLSA’s plain text.”

After finding the 80/20 rule to be contrary to the FLSA and therefore invalid, the court vacated the rule and set it aside. Simply put, the 80/20 rule—for now—is dead, at least in the Fifth Circuit (which encompasses the federal district courts in Texas, Louisiana, and Mississippi). Although we don’t pretend to know the future, we think it is a pretty safe bet that this case is now on a fast track to the Supreme Court.

In an upcoming TIPS post, we will discuss how restaurant and hospitality employers should respond in the wake of the Fifth Circuit’s decision. Stay tuned.