By Abigail Cahak and Noah Finkel

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

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

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

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

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

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

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

By Christopher M. Cascino

Seyfarth Synopsis: The DOL issued an opinion letter approving a pay model where an employer in the home health field paid its employees at an hourly rate for time spent with patients without additional hourly pay for time spent by the employees traveling to and from patient homes.  In that same letter, the DOL provided guidance on how that employer should calculate its employees’ overtime rates.  The DOL opinion letter provides employers who pay non-exempt employees using certain methods other than the traditional straight hourly rate across all hours worked method reassurance that their pay model complies with the FLSA, and provides them with guidance about how to calculate overtime rates for such employees.

While many employers pay their employees at a single hourly rate for all hours worked, in some industries, other pay models make more sense.  For instance, some employers in the home health field pay their workers based on the services they provided to patients with the intention of having that pay compensate their employees for all their work time, including time spent traveling to and from patient homes.

One such employer from the home health field asked the DOL whether its pay model complied with the FLSA.  That employer paid its employees at an hourly rate for time spent in patient homes.  It did not provide its employees additional pay for time spent traveling to and from patient homes.  But because such travel time is work time under the FLSA, the employer took hourly earnings divided by total time worked, both in patient homes and in transit to patient homes, to ensure that it paid each of its employees at least the minimum wage for all of those hours.  The DOL found that this complied with the FLSA’s minimum wage requirements.

To calculate overtime, the employer assumed that its employees earned an average of $10 per hour when their pay was divided by all hours worked and paid their employees time and a half based on that rate.  The DOL found that, in assuming it paid all of its employees at a $10 per hour regular rate, the employer could have violated the FLSA’s overtime provision if any employees earned more than $10 per hour.  Instead, the employer should have divided each employee’s base pay by the total number of hours worked, including travel time, to calculate the regular rate.

While addressing one particular pay model, the DOL’s opinion letter provides useful guidance for employers who use other pay models, such as commission or piece rate pay models without base hourly pay, on how to calculate overtime rates as well as reassurance that such pay models comply with the FLSA.

By Abigail Cahak and Noah Finkel

Seyfarth Synopsis: The DOL has reissued a long-awaited opinion letter withdrawing its previous 20% tip credit rule and making clear that “no limit is placed on the amount of [related but non-tipped] duties that may be performed,” so long as they are performed “contemporaneously with the duties involving direct service or for a reasonable time immediately before or after” direct service.

For about a decade, restaurant employers have faced the daunting prospect of collective and class action litigation by their servers and bartenders paid under the tip credit claiming that they spent more than 20% of their time on so-called side work that didn’t directly produce tips  Without incredibly detailed time records showing exactly when each server engaged in each of their various duties, restaurants have had a hard time rebutting such claims.  Further, because servers and bartenders at restaurants usually are asked to perform somewhat similar duties, restaurateurs usually have not fared well in defeating certification efforts in such cases.

Those collective and class actions all stem from DOL guidance that the tip credit may not be used to the extent an employee spends more than 20% of their time on non-tip producing work.

Late last week, however, the DOL’s Wage-Hour Division issued a long-awaited opinion letter intended to clear up “confusion and inconsistent application” stemming from guidance contained in its Field Operations Handbook (“FOH”) regarding use of the tip credit to pay regularly tipped employees.  The opinion letter provides clarity as to when and how often a tipped employee may perform non-tipped tasks and is welcome guidance to many employers.

Under the FLSA regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation.  The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.”  Yet, DOL guidance interpreting the regulations, contained first in the DOL’s FOH and then set forth in an amicus brief, imposed time and duty-based limitations not present in the regulations themselves: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating.  Deference to the DOL’s guidance and enforceability of the 20% rule has caused a circuit split, with the Eighth and Ninth Circuit Court of Appeals following the rule, and the Eleventh Circuit refusing.  (We previously blogged on the Eighth and Ninth Circuit decisions.)

On November 8, the DOL reissued an opinion letter it had previously handed down in the final days of the Bush Administration, but subsequently withdrew in the first months of President Obama’s first term.  The letter provides clarity as to the DOL’s position on the 20% rule, stating that “no limit is placed on the amount of [related but non-tipped] duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.”   (emphasis added)

With respect to whether a particular duty is related to the tipped occupation, the opinion letter refers readers to O*NET, an occupational database created under the sponsorship of the DOL.  O*NET provides reports of the tasks involved for various occupations, including servers and bartenders.  O*NET’s task list is often very detailed and includes, for example, many tasks plaintiffs’ counsel regularly argue are completely outside a server’s occupation (e.g., “[p]erform cleaning duties, such as sweeping and mopping floors, vacuuming carpet, tidying up server station, taking out trash, or checking and cleaning bathroom”).  The opinion letter further states, however, that if a task is not on the O*NET list, an employer may not take the tip credit for time spent performing the duty (while nonetheless acknowledging that such time may be subject to the FLSA’s de minimis rule).

The reasoning of those courts that followed the 20% rule was deference to the DOL’s expertise in interpreting its own dual jobs regulation.  Now, however, that rule is gone (indeed, the opinion letter states that a revised FOH is “forthcoming”), leaving it unlikely (but not impossible) that courts will continue to follow the FOH.  And although state laws may differ, because many court interpretations of state wage and hours laws have depended on analogy to the federal FLSA, it also is unlikely that the 20% rule will continue to apply to such claims.

Of course, it is possible that the rule could reemerge under a future Democratic administration, but even so, courts may no longer defer to a re-instituted 20% rule because they often reject administrative agency guidance that changes with the political winds.

By: Alexander Passantino

The Department of Labor issued its Fall 2018 regulatory agenda, and the Wage & Hour Division is front and center. New to the agenda is a proposed rule on joint employment under the FLSA. Acknowledging that its regulations have not been updated in 60 years and no longer reflect the realities of the workplace, WHD is proposing changes “intended to provide clarity to the regulated community and thereby enhance compliance. WHD also “believes the proposed changes will help to provide more uniform standards nationwide.” A proposed rule is expected in December.

Remaining on the agenda are WHD’s proposals to (1) update the salary level required for the FLSA exemption for executive, administrative, and professional employees and (2) clarify, update, and define basic rate and regular rate requirements. The salary level proposal is expected in March 2019, and the regular rate proposal is expected December 2018.

It’s shaping up to be an incredibly busy couple of months at WHD. We’ll update you as more information becomes available.

By Abigail Cahak and Noah Finkel

Seyfarth Synopsis: In an en banc decision, the Ninth Circuit reverses its prior panel opinion rejecting the DOL’s interpretation of FLSA regulations on use of the tip credit to pay regularly tipped employees, finding that the interpretation is consistent with the FLSA regulations.

The Ninth Circuit Court of Appeals sitting en banc issued a decision reversing a prior panel opinion from the court that rejected the Department of Labor’s interpretation of FLSA regulations on the use of the tip credit when paying regularly tipped employees. The ruling joins other circuits, other than the Eleventh, that explicitly or implicitly accept the DOL guidance. That DOL guidance, however, can be withdrawn by the DOL at any time.

Under the FLSA regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” Yet, current DOL guidance interpreting the regulations, contained first in the DOL’s Field Operations Handbook and set forth in an amicus brief, imposes time and duty-based limitations not present in the regulations themselves: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating. The guidance provides that an employer also may not take the tip credit for time spent on duties not related to the tipped occupation because such an employee is “effectively employed in dual jobs.” The DOL’s guidance has previously been followed by the Eighth Circuit Court of Appeals in Fast v. Applebee’s International, Inc. and several lower courts. (We blogged about the Fast decision here.) The Eleventh Circuit Court of Appeals, adopting a decision from the Southern District of Florida, has been the other circuit to refuse to follow the Field Operations Handbook’s guidance, albeit without a detailed discussion of deference to administrative agencies.

In September 2017, a panel of the Ninth Circuit issued its ruling in Marsh v. J. Alexander’s, addressing a number of actions brought by servers and bartenders who alleged that their employers improperly used the tip credit. Relying on the DOL guidance in the Field Operations Handbook, the plaintiffs asserted that their non-tip generating duties took up more than 20% of their work hours, that they were employed in dual occupations, and that they were thus owed the regular minimum wage for that time. The Ninth Circuit panel concluded that the DOL’s Field Operations Handbook was both inconsistent with the FLSA regulations and attempted to create a de facto new regulation such that it did not merit Auer deference. It explicitly rejected the Eighth Circuit’s reasoning in Fast. The plaintiffs shortly thereafter filed a petition for rehearing en banc, which was granted in February 2018.

On September 18, 2018, the Ninth Circuit issued its en banc decision reversing its prior holding. It concluded that, like the statute, the FLSA regulations do not define “related duties” or “occupation,” but suggest that the “DOL likely intended to tie a person’s occupation to her duties.” And, although they define those duties in temporal terms like “occasionally,” the regulations leave undefined the point at which the “transformation” from “occasionally” to a “dual occupation” occurs. According to the Ninth Circuit, the DOL’s Field Operations Handbook therefore addresses these ambiguities by defining “related duties,” imposing a 20% threshold for them, and “mak[ing] explicit the regulations suggestion that occupations are defined by their tasks.” In so holding, the Ninth Circuit expressly realigned itself with the Eighth Circuit’s decision in Fast, leaving the Eleventh Circuit the only one to reject the 20% rule in a brief 2008 decision.

The Ninth Circuit’s reversal is relatively unsurprising given its often employee-friendly rulings. It will also likely embolden plaintiffs’ counsel who have largely driven tip credit litigation premised on the interpretive guidance’s 20% rule. This trend has forced many restaurant and hospitality industry clients to choose between asking servers and bartenders to track their tasks down to the minute, or risk defending a collective action lawsuit based solely on plaintiffs’ testimony that they spent excessive amounts of time on non-tip producing tasks.

Hospitality employers are left with two potential avenues for relief. First, it is possible that the Supreme Court could grant cert in this case. Though the only circuit court to reject the 20% guidance is the Eleventh Circuit, and in an opinion that does not squarely discuss deference to the DOL, at least four justices on the Court may be interested in reviewing a case that grants considerable power to an administrative agency.

Second, and in what could provide immediate relief to restaurant employers, the DOL’s Wage-Hour Division simply could withdraw and revise its Field Operations Handbook guidance setting for the 20% rule. A rule created by an agency without notice and comment rulemaking can be killed without notice and comment rulemaking. The 20% rule is unworkable and breeds litigation, and the DOL could withdraw it and engage in listening sessions and notice and comment rulemaking to generate a more sensible way to ensure that employers pay tipped employees in a fair manner without subjecting them to an impracticable division between tip-producing and non-tip-producing work.

For now, however, hospitality employers should assume the 20% rule is one to be followed and should consult with counsel on ways to minimize so-called “side work” by tipped employees and to reduce exposure to difficult to defend collective and class actions that claim that tipped employees spend more than 20% of their time on work that is not related to tipped duties.

By: Alexander J. Passantino

Seyfarth Synopsis:  Employees on certain government contracts must be paid in accordance with the requirements of a 2014 Executive Order on Minimum Wage.  Effective January 1, 2019, the minimum wage for covered workers is $10.60 per hour, with a minimum direct wage of $7.40 per hour for tipped employees.

In 2014, President Obama issued an Executive Order establishing a minimum wage for certain federal contractor employees, and requiring that the minimum wage be adjusted on an annual basis.  That Executive Order continues to be in effect, and, in the September 4, 2018 Federal Register, the Department of Labor’s Wage & Hour Division announced that the wage rate will increase to $10.60 per hour. The minimum cash wage for covered tipped employees will increase to $7.40 per hour.

Workers performing on or in connection with covered contracts must be paid these new rates beginning January 1, 2019. We discussed many of the applicable definitions and coverage issues in our prior coverage.

Authored by Cheryl Luce

Seyfarth Synopsis:  If it becomes law, a new bill will expand the FLSA’s tip provisions into areas traditionally regulated by state law and create new areas of ambiguity that could be a breeding ground for yet more wage-hour litigation.

We have been covering the saga of a controversial 2011 DOL regulation that gave employees the right to receive tips even when they were paid the federal minimum wage of $7.25 per hour. As courts agreed again and again, the rule was contrary to the FLSA’s plain language and inconsistent with its remedies. In late 2017, the DOL proposed to rescind the rule, noting concerns about its scope. But that proposal has been highly politicized and labeled an attack on workers, authorizing employers to pocket employees’ tips (even though federal law never regulated an employee’s right to receipt of tips, even before the rule).

Ultimately, the fallout around the DOL’s 2017 proposal has resulted in a proposed law amending the FLSA called the Tip Income Protection Act of 2018, announced in principle on March 6, 2018 and receiving bipartisan support in Congress as well as from Secretary of Labor Alex Acosta. The bill has been added to the omnibus budget spending bill that the House passed yesterday and the Senate passed this morning. (The Tip Income Protection Act’s text begins on page 2,025 of the bill.) Barring a presidential veto, the bill will become law.

The Tip Income Protection Act amends the FLSA by adding a provision to 29 U.S.C. § 203(m) that states:

An employer may not keep tips received by its employees for any purpose, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.

The Act further creates a remedy for violating this provision “in the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and an additional equal amount in damages” and imposes a civil penalty of up to $1,000 for each violation.

As currently written, § 203(m) only regulates tips when the employer has taken a tip credit against its minimum wage obligations, and the FLSA only provides a remedy for the unpaid minimum wage (not for the amount of the tips retained). The Tip Income Protection Act thus expands the FLSA’s tipping provisions from ensuring tipped employees are properly notified of any tip credits and paid minimum wage to guaranteeing that employees are paid the tips they receive in full.

The proposed Tip Income Protection Act is a major deviation from the FLSA’s core purpose. Since its enactment in 1936, that purpose has been to: (i) ensure that all employees are paid at least the federal minimum wage, (ii) ensure that employees are paid at a rate of at least 1.5 times their regular rate of pay for all hours worked over 40 in a workweek, unless an exemption applies, and (iii) prohibit unlawful child labor. Never has it been the FLSA’s aim to ensure that employees are paid all of their wages. That historically has been left to the states. Indeed, if an employee makes at least the minimum wage and overtime according to the FLSA’s requirements, the FLSA can provide no further relief. The FLSA’s monetary remedies are currently limited to “unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.” 29 U.S.C. § 216(b). By allowing employees to recover the full amount of tips, the Tip Income Protection Act represents a major departure from the purposes of the FLSA.

Perhaps the bigger concern with the Tip Income Protection Act as written is that it is vague and will leave employers scrambling to understand how the new law applies to them. First, the bill states “managers and supervisors” are prohibited from sharing any portion of employees’ tips and thus cannot participate in a tip pool. But the bill does not define “managers and supervisors,” and there are various ways in which these terms are interpreted in different contexts: does a lead bartender who can’t hire or fire employees, but serves as a manager-on-duty when the owner is not around and who also primarily serves customers, get to share in the tip pool? when he is acting as a manager? or never? Additionally, the bill selects the ambiguous word “to keep” as the operative commanding verb. Restaurants and their agents are not allowed “to keep” employees’ tips. Is “keeping” tips limited to circumstances in which the employer actually uses the tips for its own purposes? Or would it also apply to the distribution of tips to other employees, as appears to be the case for tips distributed to “managers and supervisors”? Would “improper” tip pools be subject to the new standard or the old one?

The Tip Income Protection Act appears to respond to fears that no federal regulation of tips opens the floodgate to pocketing employee tips. But tips have and will continue to be regulated by state law; indeed, federal law has never regulated wage payment generally and the source of that protection has been state laws. Although its sponsors are characterizing the bill as restoring a right for employees that was created by the Obama DOL, that right never existed in federal law (and apparently has not needed to exist in federal law until now). It only existed in the form of an administrative rule that exceeded agency authority and was largely rejected by courts.

Finally, the bill appears not to disturb the DOL regulations’ definition of a tip and guidance that “a compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip.” 29 C.F.R. § 531.55. No new definition of “tip” would be added to the FLSA as a result of the bill, and service charges should be spared from the bill’s new rules.

Co-authored by Alex Passantino and Kevin Young

On Tuesday, the Wage & Hour Division announced a new program for resolving violations of the FLSA without the need for litigation. The Payroll Audit Independent Determination program—or “PAID”—is intended to facilitate the efficient resolution of overtime and minimum wage claims under the FLSA. The program will be conducted for a six-month pilot period, after which time WHD will review the results and determine how best to proceed.

PAID should be welcome news for compliance-minded employers. In the vast majority of cases, FLSA claims must be resolved through litigation or under WHD’s supervision. Given the proliferation of FLSA litigation, many employers have, in recent years, conducted proactive audits with legal counsel to ensure compliance with the Act. Oftentimes, employers who identified past issues through those efforts were reluctant to approach an enforcement-happy WHD to request supervision of back wage payments due to concern that doing so would trigger litigation. Employers were stuck between a rock and a hard place.

By providing a mechanism for proactively resolving wage-hour issues without the need for litigation, the PAID program should increase the incentive for employers to conduct formal audits of their wage-hour practices.

While we expect details on the PAID program, including an official launch date, to crystallize in the weeks to come, the WHD has already provided guidance on the contours of the program. According to WHD, an eligible employer who wishes to participate in the program must:

  • Specifically identify the potential violations,
  • Identify which employees were affected,
  • Identify the timeframes in which each employee was affected, and
  • Calculate the amount of back wages the employer believes are owed to each employee.

The employer must then contact WHD to discuss the issue(s) for which it seeks resolution. Following that discussion, WHD will inform the employer of the manner in which the employer must provide required information, including:

  • Each of the calculations described above—accompanied by evidence and explanation;
  • A concise explanation of the scope of the potential violations for possible inclusion in a release of liability;
  • A certification that the employer reviewed all of the information, terms, and compliance assistance materials;
  • A certification that the employer is not litigating the compensation practices at issue in court, arbitration, or otherwise, and likewise has not received any communications from an employee’s representative or counsel expressing interest in litigating or settling the same issues; and
  • A certification that the employer will adjust its practices to avoid the same potential violations in the future.

At the conclusion of the process, the employer must make back wage payments. That process may look similar to the end of a WHD investigation in which violations are found. If an employee accepts the back wages, she will waive her rights to a private cause of action under the FLSA for the identified issues and timeframe. An employee who chooses not to accept the back wages will not be impacted.

We will share more as additional information becomes available. If you have any questions about the PAID program, the planning or execution of a proactive wage-hour audit, or any related issues, please do not hesitate to contact 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.