Seyfarth Synopsis. Democrats in the U.S. House and Senate have reintroduced a bill to increase the federal minimum wage to $15 for virtually all non-exempt workers. While the “Fight For Fifteen” has made several trips to Congress before, the circumstances are much different this time around. While the proposed law likely won’t pass quickly, its enormous potential impacts command attention from the business community.
On January 26, 2021, Democrats in Congress reintroduced the Raise the Wage Act, H.R. 601 (the “Act”), a bill to amend the Fair Labor Standards Act to gradually increase federal minimum wage to $15, in addition to peeling back relaxed wage requirements for tipped and youth workers. Developments on the Hill late last week make it increasingly likely that the Act could be seriously considered this year. In this post, we review the Act’s key features, its potential impacts, and its path forward.
Overview of the Raise the Wage Act
The Act’s core features are as follows: (i) the minimum wage would increase to $15 by 2025, beginning with an increase to $9.50 in 2021 and annual increases thereafter; (ii) the minimum wage would be indexed to median wage growth after 2025; and (iii) the FLSA’s relaxed wage thresholds for tipped employees, youth workers, and certain other workers would be gradually eliminated.
The following table provides an overview of the scheduled minimum wage increases under the Raise the Wage Act, beginning with current minimum wage thresholds and continuing through 2027:
*The FLSA allows employers to pay employees under 20 years old a sub-minimum wage during the first 90 calendar days of their employment.
**Section 14(c) of the FLSA authorizes employers, after receiving a certificate from the U.S. DOL’s Wage and Hour Division, to pay subminimum wages to workers with disabilities that impair their earning or productive capacity for the work being performed.
The Act’s Potential Impacts
While a graduated increase to a $15 minimum wage is a familiar proposal, it would nevertheless present a drastic change for employers in numerous states, as well as for employers throughout the restaurant industry.
The Fight for $15 has visited most parts of the country and prevailed in many. In 2016, California and New York passed laws to gradually pull the minimum wage within their borders up to $15. Massachusetts followed suit in 2018. Other states, like Illinois, Florida, and New Jersey, have since done so as well, and so too have many cities, such as San Francisco, Seattle, and Los Angeles. A $15 wage floor is already in place in Washington, D.C.
But the proposed increase to $15, familiar as it may be, will still have massive implications in many parts of the country. Though many states have pushed their wage floors above the current federal threshold of $7.25, more than 20 states—primarily those with lower costs of living, such as Georgia, Louisiana, and Texas—have not. Employers in these jurisdictions are, as a result, currently bound by a minimum wage threshold that the Raise the Wage Act would more than double over the next four years.
Additionally, the Act could have a seismic impact on the restaurant industry. Currently, the FLSA allows employers to pay tipped employees a direct wage of $2.13 per hour, with the remaining portion of minimum wage—i.e., $5.12 per hour—can be paid via tips. Tipped employees are still guaranteed at least $7.25 per hour, the only difference is that it may be paid in the form of tips.
The Act would eliminate this so-called “tip credit.” Restaurants would be required to directly pay tipped employees the full minimum wage, irrespective of tips they receive. Restaurants accustomed to paying tipped workers a direct wage of $2.13 would have to find a way to pay them more than double that amount in 2021, and more than seven times that amount by 2026. In a restaurant industry that has spent most of the last year on life support, this change has been met with heavy resistance.
The Path Forward for Raise the Wage—Reconciliation or Bust
While the Raise the Wage Act is not particularly complex, its path to enactment is fairly muddled. As such, a brief trip through the very recent history of the minimum wage policy debate is helpful.
As noted above, dozens of states, cities, and counties have raised their minimum wage thresholds over the past few years. Heated debate over the minimum wage, and the cascading consequences of the same, has moved from city council halls, to the floors of state legislatures, to the forefront of the national discourse.
Even casual followers of the news likely heard about the controversy surrounding President Biden’s proposal to include a massive minimum wage hike in a legislative package aimed at addressing the pandemic. Last Friday, however, Biden for the first time conceded that he does not foresee a path forward for raising the wage floor via an immediate COVID-19 package.
This statement came after Senator Joni Ernst (R-IA) introduced, and the Senate passed—with a surprising vote from the foremost proponent of a wage hike, Senator Bernie Sanders (I-VT)—a nonbinding amendment authorizing the Senate Budget Committee chairman to remove any $15-minimum-wage provision from the reconciliation bill.
Democrats’ willingness to budge on the wage hike in the COVID-19 stimulus appears to stem from confidence in their ability to enact a minimum wage increase through future legislation. President Biden, as part of his comment last week, said he would seek to raise the minimum wage in future legislation. And as part of his vote on the Ernst amendment, Senator Sanders referred specifically to the Raise the Wage Act. In short, the Democratic coalition seems to be coalescing around this piece of legislation.
So, what is the likelihood the Raise the Wage Act will pass? Well, Democrats are going to run into the same problem: the political dynamics in the Senate will preclude passage through normal legislative mechanisms. As a result, Democrats would still have to press such a hike without any Republican support, through either reconciliation, or by doing away with the filibuster, which is not likely.
Using reconciliation comes with its own problems, not the least of which would be convincing moderate Democrats like Senator Kyrsten Sinema (AZ) to back this progressive policy. But the February 5th senatorial victories, as well as the last Congress’ failure to pass a FY 2021 reconciliation bill, gives Democrats two bites at the reconciliation apple this year. That, combined with the fact that the Democratic machine appears to be coalescing behind this measure, raises the likelihood that this stand-alone measure passes later this summer. Notably, however, the general consensus is that an increase in minimum wage is not quite as a high of a Biden priority as other initiatives, such as comprehensive immigration reform and infrastructure.
How Else Could the Administration Accomplish its Policy Goals?
As our colleagues have previously noted, the Biden Administration can and will press the policy rationale behind a minimum wage hike through federal employment agencies. To some extent, we’ve already seen the opening machinations of that agenda: President Biden immediately fired and replaced the top attorneys at the NLRB, presumably so his hand-picked replacements can move cases with the right factual predicate in front of decision-makers. By bringing the right cases in front of the board, the Biden Administration will be able to accomplish many of the policy goals underlying the exceedingly union-friendly PRO Act, which will almost assuredly not pass in its current form.
Similarly, should the Raise the Wage Act not come to fruition, employers should expect Marty Walsh, Biden’s pick to take the helm at the U.S. DOL, to move quickly through rulemaking and beefed up enforcement of wage requirements. For example, the DOL could presumably alter the tipped employee rule through rulemaking. Given the structural barriers facing the Act, employers should be prepared for enhanced movement from the DOL’s Wage & Hour Division on this front.
As noted, the Raise the Wage Act contains a number of provisions that could prove particularly challenging for employers in certain areas of the country, as well as certain industries. The Biden Administration’s placement of raising the minimum wage close to the top of its labor and employment policy agenda, combined with the Act’s extra shot at reconciliation and the will of the Democratic Party to get this done, all form a legislative recipe that just might just result in the President’s signature.
That said, now is not the time to be reactionary. At the end of the day, the Act currently lives in Washington D.C., a place where earth-shaking legislation has not emerged quickly or smoothly in decades. The Act will face structural, procedural, and political barriers, all of which make a quick passage of the legislation in its current form very unlikely.
In short, the message to employers is simple: watch closely and stay tuned.
 Simply stated, reconciliation permits, once every year, the passage of one bill with only a simple majority in the Senate, as opposed to the normal 60 votes required due to the filibuster rule. What can (and can’t) move through reconciliation is further restrained by the so-called Byrd Rule, which provides that bills are only eligible if they affect federal revenue or spending.
By: Noah A. Finkel
Seyfarth Synopsis: The Seventh Circuit Court of Appeals last week affirmed a district court’s denial of class certification of a state overtime claim on numerosity grounds, reasoning that the touchstone for that element is whether joinder of putative class members is practicable, and a factor to consider is how easily the plaintiff could contact those class members for joinder. Because the FLSA’s collective action mechanism makes joinder easy, this ruling suggests that district courts should consider whether to reject class treatment when a collective action is available for members of a proposed class.
Outside of California, the FLSA’s collective action mechanism long has garnered the greatest amount of attention of most wage-hour practitioners because it applies nationally, contains the most developed case law, and allows for early conditional certification of a collective action based on a “lenient standard” under which a plaintiff need made only a “modest showing” to carry a “low burden.” Indeed, as our colleagues showed us last month in Seyfarth’s annual Workplace Class Action Report, federal district courts granted 84% of conditional certification motions in 2020.
But collective actions have their limits. While conditional certification of a collective action results in a notice of the lawsuit being sent to all of those eligible to be in the collective, participation in a collective action requires one to affirmatively file a consent to join, or opt in. Anecdotally, we tend to see about 5 to 25 percent of those eligible actually join a collective action, thus limiting a defendant’s FLSA exposure.
Enter state overtime laws, however. Usually very similar to the FLSA substantively, state overtime laws differ from the FLSA in one huge way: they allow for an opt-out class action, rather than an opt-in collective action. An opt-out class action does not require a class member to do anything to participate. Once a state overtime law class is certified, a class member is a participant unless they opt out, and opt outs are very rare. A case that has, say, 15% participation under the FLSA often sees 100% participation under state overtime class action claim, thus inflating a defendant’s potential exposure. This is why the plaintiff’s wage-hour bar prefers to file hybrid collective/class actions rather than just one or the other.
Last week, however, the 7th Circuit may have made hybrid cases more difficult for the plaintiff’s bar in Anderson v. Weinert Enterprises, Inc., No. 20-1030 (7th Cir. Jan. 28, 2021), by putting some teeth into Rule 23(a)(1)’s numerosity requirement. It is rare to see class treatment denied on numerosity grounds. Indeed, courts often have assumed that a 40-member class meets numerosity. This approach, however, miscomprehends the numerosity requirement, reasoned the 7th Circuit. A class plaintiff bears the burden of proving that a class is, in the language of Rule 23(a)(1), “so numerous that joinder of all members is impracticable.” To do so, they must show that “it is extremely difficult or inconvenient to join all members of the class.” Answering that question, the 7th Circuit reasoned, involves evaluating “the nature of the action, the size of the individual claims, and the location of the members of the class … .” In the Anderson case, the 7th Circuit held that the district court did not abuse its discretion in declining to certify a class action, given (i) the proposed class’s geographic dispersion (the class members all worked at the same facility), (ii) the overall size of the class (it numbered 37, but the 7th Circuit said that if it were larger, it probably wouldn’t have mattered), (iii) the dollar amounts involved with each individual claim (considering the availability of attorney fee shifting), and (iv) the plaintiff’s ability to easily contact the class members.
The last two factors discussed by the 7th Circuit warrant emphasis. Wage-hour claims typically involve a relatively small dollar amount for each individual claim, which might help a plaintiff show that joinder is impracticable. But the 7th Circuit noted that fee-shifting provisions, which are present in the FLSA and all state overtime laws, lower the barrier to joinder of these claims.
The plaintiff’s ability to easily contact the class members, which the 7th Circuit weighed against finding numerosity in this case, is present in just about every hybrid collective/class action. If conditional certification is granted, the defendant is compelled to provide the plaintiff with the name and address or other contact information for all collective action members, and there likely is substantial overlap between the collective action and class action members. The plaintiff is then authorized to send notice to each of them to invite them join the case. The collective action mechanism thus is a practicable method for joinder — and one that may preclude class certification.
To be sure, and as the 7th Circuit recognized, availability of a collective action does not mean that every class action in a hybrid matter fails to establish numerosity. But the 7th Circuit’s decision is a reminder that Rule 23 numerosity requires the plaintiff to show the impracticality of joinder, and that, the availability of the collective action device may mean the plaintiff cannot show that.
Often, what happens in California is a good bellwether for what could happen in the policy space on a federal level. And we believe worker classification is no different.
In this episode of Seyfarth’s Policy Matters Podcast, Counsel Scott Mallery and Partner Eric Lloyd provide an overview of where the law on misclassification at the federal level stands today, the background and impact of AB 5 and AB 2257 in California, and insight into what we might see down the road from the Department of Labor, now under the Biden Administration.
Listen to the episode here.
Seyfarth Synopsis: The COVID-19 pandemic thrust remote working upon many employers without notice or adequate time to prepare. Now that employees are settling into longer-term remote working arrangements, employers are increasingly confronted with questions regarding their expense reimbursement obligations. Employers are therefore well advised to re-evaluate the scope of potential expenses, legal obligations for reimbursement, and the state of written policies to ensure the greatest measure of compliance with law. To assist in these efforts, below, we provide a high-level summary of relevant laws, policy considerations, and best practices. We recommend you direct state specific inquiries directly to your Seyfarth lawyer of choice.
The Legal Landscape
Under the Fair Labor Standards Act (“FLSA”), there is no direct expense reimbursement requirement. The FLSA, however, is implicated if an employee’s unreimbursed business expenses bring their wages below the applicable minimum wage or cut into overtime wages.
Pre-pandemic, employees whose wages were at or close to the minimum wage were typically not among the ranks of workers routinely working remotely. As a result, many employers may be facing the interplay of remote working expenses with the minimum wage for the first time. Under this “new normal,” employers must be mindful of the expenses these workers might be incurring; in particular, with respect to one-time higher ticket purchases that could drop them below minimum wage, such as a printer or other home office equipment that is necessary for their job (more to come on the critical modifier “necessary”).
At the state and local level, there are currently 10 jurisdictions that have statutes or case law specifically addressing an employer’s requirement to reimburse business expenses: California, Iowa, Illinois, Massachusetts, Montana, New Hampshire, North Dakota, South Dakota, District of Columbia, and Seattle, Washington. Several other states require an employer to reimburse employees in a manner consistent with its written policies.
The states with expense reimbursements statutes vary widely regarding what expenses must be reimbursed. By way of example, some of these states—notably California and Illinois—have strict reimbursement laws. As explained below, reimbursement might be required in these states for business-related use even if the employee will not incur an extra expense, such as when an employee has an unlimited amount of data and minutes on their cell phone. In that instance, even if there is no additional cost to the employee, the employer must reimburse so as not to enjoy a “windfall,” some courts have reasoned.
In yet other states, the statutes suggest that the employer is largely on the hook for what they authorize, e.g., explicitly or via a written policy. And in other states still, employers are obligated by statute only to reimburse for losses suffered that fall outside of “ordinary risks” of the business in which he is employed. Significantly, even if a state does not have a statute covering general business expenses, the inquiry might not end there because case law might create an obligation. While state law cannot be characterized as “uniform” across states, below are some key components to consider when revisiting any such obligation under these state laws.
But, Is It Really Necessary?
One of the key components of the most onerous expense reimbursement laws is the requirement to reimburse for any necessary expense, which begs many a question about what types of expenses must be reimbursed. Internet service and cell phone data are the most commonly considered, but what about printers and paper? Some employees might prefer to print out documents, but does the job actually require it? A ring light might be nice for all those Zoom meetings, but is it necessary?
While the question of necessity will turn on the specific job at issue, it is imperative that employers set clear expectations for what tools they require for an employee’s home office and what is not needed to do the job. Employers, of course, want to ensure employees working from home have a workspace that is safe and productive. But they must also be mindful that the more requirements they put in place for minimum home office standards—such as minimum WiFi bandwidth, a room with a door to ensure confidentiality of calls, locking filing cabinets—the more likely an expense incurred in complying with those standards is to be considered necessary.
Another component of assessing whether an incurred expense was necessary is whether the employee could have fulfilled the need at a lower cost. Maybe a webcam is necessary due to the manager’s expectation for regular video meetings, but does it have to be the state-of-the-art model or would a less expensive option suffice? Setting expectations in written policies with guidelines and procedures for advance approval of such purchases will allow the employer to define the universe of necessary expenses.
Employers should also consider whether it is more cost-effective to provide equipment, cell service or Wifi service, or other necessary equipment directly than to reimburse. Often, employers have bulk discounts or stock on hand at the office that can be shipped to an employee’s home at a lower cost.
Was the Expense Actually Incurred?
It seems straightforward enough that only those expenses actually incurred must be reimbursed, but this question is not always so simple. This is particularly true in certain states with respect to “mixed use” items that an employee uses for both business and personal reasons, such as a cell phone data plan or home internet. Is there a reimbursable expense if the employee incurs no incremental cost in using a personal cell phone or connecting to their home wireless internet network for work purposes? The answer likely depends on where the employee is located.
In California, for example, the statutory language requires employers to reimburse for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of the employee’s duties” or at the direction of the employer. While that might sound like only those costs that would not have been incurred but for work, that is not how the statute has been interpreted. Quite the contrary, courts in the Golden State interpret this to require reimbursement of a “reasonable percentage” of employee’s monthly cellular data and internet costs even if the employee had unlimited data plans and home internet network for personal use and even if the employee’s monthly bills did not increase as a result of the business use.
In Illinois, although there is similar statutory language requiring reimbursement of “necessary expenditures” there is additional helpful language in the law that allows employers to set parameters on how much they will contribute toward such expenses (so long as it is not “de minimus”).
There are a variety of ways employers can fulfill their obligations to reimburse business expenses.
A common approach is to provide a fixed monthly stipend based on a good faith and reasonable estimate of an employee’s reimbursable expenses. This approach will usually cover the vast majority of expenses but it should nevertheless be coupled with a process by which employees can seek reimbursement of additional expenses that were not covered by the stipend. Also, we advise that employers maintain documentation to support the reasonableness of the stipend that they establish, in case the amount of the stipend is ever attacked as being too little (such that it does not cover an employer’s full reimbursement obligation) or too much (such that the excess should be treated as compensation for work rather than reimbursement).
Alternatively, employers can establish a process by which employees are only reimbursed after submitting a receipt or other documentation confirming that they indeed incurred the expense. There could also be some tools and equipment that the employer can provide in a more cost-effective manner if it purchases them directly.
Regardless of the specific avenue for ensuring the employer does not improperly shift business expenses to its employees, all employers should be aware of their obligations to reimburse and review and update their expense reimbursement policies to take into account the applicable law and the expenses their newly-expanded remote workforce might incur. The policy should clearly articulate the employer’s expectations for the tools and equipment that are necessary to do the job from home, and establish guardrails for when and how employees can purchase equipment with the expectation that the company will foot the bill.
By: Kevin Young
Seyfarth Synopsis: On January 8, the U.S. DOL’s Wage & Hour Division issued an opinion letter confirming the exempt status of Account Managers at a life sciences manufacturing company under the FLSA’s administrative exemption. The letter offers useful guidance to employers assessing this notoriously murky exemption, as well as potential ammunition for those defending the exempt status of similar roles.
While job title alone does not determine exempt status under the FLSA, certain titles tend to carry preconceived notions with them. Sometimes, these notions are associated with a clear view of exempt status, for instance in the case of a CEO (exempt) or a Janitor (not so much). More often, however, the most ubiquitous titles across industries are associated with less certainty and a greater need for inspection. It’s hard to think of a better example than a title like “Account Manager.”
Account Manager roles are a common focus for employers, their advocates, and the plaintiffs’ attorneys circling the wage and hour waters. A leading reason for this is that the exempt status of these jobs typically turns on the applicability of the FLSA’s administrative exemption. The administrative exemption is the Act’s greyest exemption—it includes phrases like “the exercise of discretion and independent judgment with respect to matters of significance”—and is thus a magnet for litigation. In addition, these roles have been attacked by some who argue that Account Managers perform “inside sales” work, which is generally not regarded as exempt work..
On January 8, 2021, the U.S. Department of Labor’s Wage & Hour Division weighed in on the exempt status of Account Managers at a life sciences manufacturing company, finding the role was properly classified under the administrative exemption despite performing sales-related work. Though fact-intensive and not binding on federal courts, the opinion letter offers useful insight, and potential ammunition, for employers seeking to defend the exempt classification of similar roles.
So what were these Account Managers doing? In short, they performed a consultative function with potential clients, working to understand and assess their needs and identifying product solutions to meet those needs. The Account Managers worked to learn about the needs of potential clients, analyze what products would meet those needs, and communicate with the potential clients about how the company’s products can fulfill those needs. They were neither closely supervised nor scripted in carrying out their work—they had discretion in deciding how to engage with potential clients.
On these facts, WHD concluded that the Account Managers met the duties requirements of the FLSA’s administrative exemption. Those requirements include that the employee’s primary, or most important duty, must: (1) be non-manual or office work generally related to the management or general business operations of the employer or its clients; and (2) include the exercise of discretion and independent judgment with respect to important matters.
With respect to the first requirement, WHD referred to the so-called “administrative-production” dichotomy, finding that Account Managers fell on the management or administrative side of the business, which is suitable for exempt status, rather than the production side, which is not. The Account Managers developed relationships with target customers—typically high-level professionals—in order to facilitate the sales process and weighed in on which products were likely to satisfy their needs. They represented the company with respect to those prospects. Likening the role to those deemed exempt by various federal circuit courts in cases involving pharmaceutical sales representatives and hotel sales managers, WHD concluded that the Account Managers’ work “promoting sales through a sophisticated consultative marketing process … is not ‘production’ work, and is instead related to the management of [the company’s] operations.”
As for the other duties-based requirement—the exercise of discretion and independent judgment with respect to significant matters—WHD observed that the Account Managers were given wide latitude in deciding how to promote products to potential customers, as well as what products to market to which prospects. Though they received training on sales techniques, it was up to them to develop account plans and strategies with minimal supervision and to develop relationships with potential customers. The Account Managers’ independence in carrying out these types of tasks sufficed, according to the Division, to demonstrate the requisite judgment and discretion.
It’s important to note that opinion letters are provided in response to fact-specific circumstances and are generally regarded as persuasive, rather than binding, authority. Moreover, with a new administration en route to Washington, D.C., a withdrawal or revision of various DOL guidance, including WHD opinion letters, is certainly possible.
By: Ryan McCoy
Seyfarth Synopsis: Following the Federal Motor Carrier Safety Administration’s determination in December 2018 that federal law preempts California’s meal and rest break rules, observers questioned whether California courts would find that the preemption was valid. Shortly after the determination was issued, the State of California and several other groups appealed directly to the Ninth Circuit, arguing the federal agency overstepped had its authority. On January 15, 2021, a panel of the Ninth Circuit Court of Appeals published its decision, ruling that the FMCSA’s preemption determination, as applied to drivers of property-carrying commercial motor vehicles, was valid. Employers should still proceed with caution, however, as this decision is still subject to further review and appeal, and regardless of what happens in the courts, the Biden Administration may seek to unravel the preemption determination.
The FMCSA’s Preemption Determination:
On December 21, 2018, the FMCSA concluded that the federal Motor Carrier Safety Act (the “Act”) preempts California’s meal and rest break rules when a driver is subject to federal hours-of-service requirements. The FMCSA found that California’s rules “are incompatible with the federal hours of service regulations and that they cause an unreasonable burden on interstate commerce.” Consequently, “California may no longer enforce the [state meal and rest break rules] with respect to drivers of property-carrying [commercial motor vehicles] subject to FMCSA’s [hours of service] rules.” Given the ramifications of this preemption determination, observers question whether, and to what extent, California courts would defer to the federal agency’s determination in future meal and rest break cases brought by drivers. Indeed, the determination is at some odds with the Ninth Circuit 2014 decision in Dilts v. Penske, which held that the Federal Aviation and Administration Authorization Act does not preempt California state law mandating meal and rest breaks for drivers.
Shortly after the FMCSA’s determination was issued, the State of California and several other groups filed petitions to challenge its authority to invalidate California’s rules. While the appeal was pending before the Ninth Circuit, in 2019, California courts began applying the FMCSA’s preemption determination to dismiss drivers’ meal and rest period claims. As these rulings came down, observers still waited for the Ninth Circuit to weigh in on the validity of the FMCSA’s preemption determination.
The Ninth Circuit Finds the FMCSA’s Preemption Determination Deserves Deference and is Reasonable and Neither Arbitrary nor Capricious.
The issues presented on appeal were whether federal law preempts California’s state meal and rest break claims, or whether the FMCSA exceeded its authority in issuing the preemption determination.
First, the Ninth Circuit’s decision finds the FMCSA has the authority, under the Act, to review for preemption any state laws and regulations “on commercial motor vehicle safety.” Finding this phrase ambiguous, the Ninth Court ruled that the FMCSA’s interpretation of the Act was entitled to deference. Still, because the same agency in 2008 had interpreted the same phrase differently (such that the meal and rest break rules were not preempted), the FMCSA had to explain why it changed its mind on the same preemption subject ten years later.
Addressing the charge of inconsistency, the FMCSA reasoned in 2018 that the phrase was one that “imposes requirements in an area of regulations that is already addressed by a regulation” under the Act, such as the federal hours-of-service regulations.
The fact that California regulated meal and rest breaks, regardless of industry, did not negate the FMCSA’s finding that the meal and rest break rules still were “on commercial motor vehicle safety.” Indeed, many observers had suspected the Ninth Circuit may find difficulty in upholding the new preemption determination because of its recent case law holding that federal law did not preempt meal and rest break rules in light of the general application of those rules. Here, the Ninth Circuit found the FMCSA permissibly determined that the meal and rest break rules were state regulations “on commercial motor vehicle safety,” and therefore within the agency’s authority to find preempted under the Act. The Ninth Circuit distinguished its 2014 decision in Dilts v. Penske Logistics, LLC, which found no preemption arising from the FAAAA, an entirely different statute than the Motor Carrier Safety Act, and which prohibits state laws that are “related to” prices, routes, or services of commercial motor vehicles. Dilts also involved short-haul drivers who were not covered by the federal hours-of-service regulations.
Finally, the Ninth Circuit’s decision held that the Act permits the FMCSA to find preemption where the state rules were “additional to or more stringent than” the federal regulations. On this point, because California law requires more breaks, more often, and provides less timing flexibility than one sees under federal law, the FMCSA’s determination was reasonable and supported. As a result, the Ninth Circuit dismissed the State of California’s arguments that the FMCSA acted arbitrarily or capriciously in finding that enforcement of the meal and rest break rules “would cause an unreasonable burden on interstate commerce.”
Employers Still Should Proceed With Caution Before Changing Their Current Meal and Rest Break Practices In California
While the Ninth Circuit’s decision is welcome news to employers of drivers subject to federal rules, employers still should, as always, proceed with caution in California. The decision itself could be subject to a rehearing en banc by the full Ninth Circuit, where its fate would be uncertain. Even if this decision stands at the Ninth Circuit, the Supreme Court could be asked to weigh in on the issues raised by the appeal, including whether the FMCSA’s determination is subject to Chevron deference. (Justice Gorsuch is an avowed opponent of Chevron deference and may be influential in the next Supreme Court decision addressing it.) Additionally, the Biden Administration, decidedly more favorable to the interests of employees and unions than the prior administration, may work to undo the preemption determination that was rolled out in December 2018.
As a result, the issue of whether drivers are subject to California’s meal and rest break rules remains in flux. There also is the ever-present question of whether this preemption determination would have retroactive application, such that pre-December 2018 claims would be barred. In any event, employers should continue to keep their eye on this developing area of law, especially given the ramifications that preemption (or no preemption) of California’s meal and rest break rules would have on many employers’ policies and practices, and given the consequences of not complying with these rules, when required.
Seyfarth Synopsis: In a unanimous decision, the California Supreme Court held that the worker friendly “ABC” test set forth by the Court in its 2018 landmark ruling, Dynamex Operations West, Inc. v. Superior Court, applies retroactively. The ABC test thus applies to all pending cases governed by the California Wage Orders in determining whether a worker is an independent contractor or an employee. Vazquez v. Jan-Pro Franchising Int’l, Inc.
Jan-Pro Franchising, International, Inc. is a franchisor whose franchisees offer cleaning and janitorial services. In May 2017, the U.S. District Court for the Northern District of California granted Jan-Pro summary judgment in a case brought by independent contractor franchisees claiming they should have been treated as Jan-Pro employees. The plaintiffs then appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit.
While the appeal was pending, the California Supreme Court issued its decision in Dynamex. In Dynamex, the high court held that, for purposes of claims arising from the California Industrial Welfare Commission’s Wage Orders, the “ABC” test governs whether workers are properly classified as independent contractors rather than employees. To satisfy the ABC test, a hiring entity must prove: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. Dynamex represented a major shift in the law in the eyes of many businesses, practitioners, and courts, who presumed (incorrectly, as explained below) that the multi-factor common law test for employment articulated in a 1989 California Supreme Court case, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, governed the classification question where the Wage Orders were at issue.
On May 2, 2019, the Ninth Circuit vacated the summary judgment ruling for Jan-Pro entered prior to Dynamex, holding that Dynamex applied retroactively, and remanded the case for further proceedings. Then, on September 24, 2019, the Ninth Circuit asked the California Supreme Court to determine whether Dynamex applied retroactively.
The California Supreme Court’s Decision
On January 14, 2021, the California Supreme Court held that the Dynamex decision applies retroactively to its April 30, 2018, publication in all cases currently pending. The Supreme Court based its decision on two grounds.
First, the California Supreme Court emphasized that the misclassification test applicable to Wage Order claims was a question of first impression, rather than a settled rule. The Wage Orders define the term “employ,” in part, to mean “suffer or permit to work.” But the Wage Orders do not define the term “independent contractor,” nor do they address the distinction between workers entitled to the protections of the Wage Orders and independent contractors who are not. Dynamex represented the first time the Supreme Court explicitly ruled on the meaning of the “suffer or permit to work” language in the Wage Orders in the context of independent contractors. Because Dynamex did not overrule a prior Supreme Court decision nor disapprove any prior Court of Appeal decision, the Supreme Court held that Dynamex applied retroactively.
Second, the Supreme Court found no reason to depart from the general rule that judicial decisions apply retroactively. Jan-Pro, backed by numerous business groups, argued that in classifying workers as independent contractors it reasonably relied on the multi-factor common law test set forth in Borello, and businesses could not reasonably have anticipated that the ABC test would apply. The Supreme Court was not persuaded. The Supreme Court noted that Borello was not a Wage Order case and that the Supreme Court in two cases had expressly declined to rule on whether Borello applied to Wage Order claims. Moreover, the Supreme Court rejected the contention that litigants must have foresight of the exact rule that a court ultimately adopts in order for the rule to have retroactive effect. The Supreme Court then went on to state that because the ABC test drew on the factors set forth in Borello, its retroactive application was within the scope of what businesses reasonably could have expected. The Supreme Court also claimed that fairness and policy considerations justified retroactive application of Dynamex, as some workers would be denied the protections of the Wage Orders if Dynamex applied only prospectively.
What Vazquez Means For Businesses
Dynamex was characterized as a sea change in the law by its proponents and its detractors alike. Vazquez, however, insists that it was not, as the California Supreme Court suggests that businesses reasonably could have foreseen that the ABC test applied to Wage Order claims all along. While reasonable minds will disagree with that suggestion, what is clear is that businesses must comply with an increasingly complex web of statutory and case law governing independent contractor relationships in California.
As a result of Vazquez, the ABC test applies to all independent contractor misclassification-related claims arising from the Wage Orders arising prior to 2020, while the Borello test applies to non-Wage Order misclassification-related claims arising during the same time period. And, as of January 1, 2020, when California’s infamous Assembly Bill No. 5 (“AB 5”) took effect, the ABC test applies to all independent contractor misclassification-related claims arising from the California Labor Code, as well as Wage Order claims—that is, unless a business can find comfort in one of the myriad occupation-based exemptions from the ABC test set forth in Assembly Bill No. 2257 (which recently repealed and replaced AB 5) applies. App-based transportation and delivery drivers may also be exempted from the ABC test with the passage of Proposition 22 in November 2020.
Seyfarth Synopsis: In an important decision for employers, the Fifth Circuit Court of Appeals rejected the all-too lenient but commonly accepted Lusardi standard for conditional certification under the FLSA. In its place, the court adopted a more practical, common sense approach in deciding whether trial courts should send notice to past and current employees advising them that a lawsuit against their employer has been filed and that they have the right to join or “opt into” the lawsuit. Instead of Lusardi’s modest factual showing that other employees are “similarly situated” to the plaintiff, the court held that before allowing notice to be sent, a trial court should (1) decide what facts and legal questions are material to the “similarly situated” analysis; (2) authorize preliminary discovery on these issues; and (3) analyze all available evidence to determine whether the employees and the plaintiff are similarly situated, including “merits-based” evidence (which under Lusardi courts typically do not consider). This case marks an important win for employers and is a must read for anyone facing an FLSA collective action in the Fifth Circuit (or elsewhere).
On January 12, 2021, the Fifth Circuit issued a significant opinion in Swales v. KLLM Transport Services, L.L.C. that drastically alters the landscape of wage and hour litigation in the Fifth Circuit. The two-step Lusardi approach, which ignores the “merits” of the case at the conditional certification stage, no longer applies. Instead, courts must initially determine the facts and legal questions material to the “similarly situated” analysis early in the case and allow discovery directed towards these issues, including “merits-based” issues. The court may then analyze those “merits-based” issues in reaching a determination as to which potential opt-in plaintiffs are similarly situated to the plaintiff. This is significant because it counters the oft-used mantra from plaintiffs’ counsel that the “merits” of the case are irrelevant to conditional certification. In other words, the Swales decision gives employers the ammunition to fight back at the conditional certification stage.
Setting the Stage
The onslaught of collective actions against employers under the FLSA, which continues to grow, has been fueled in part by the relatively low standard for obtaining conditional certification under Lusardi. Unlike opt-out class actions under Rule 23 of the Federal Rules of Civil Procedure, plaintiffs’ counsel often are able to obtain conditional certification before any discovery takes place and without the need for expert witnesses. In fact, in 2020, the plaintiffs’ bar won 84% of conditional certification motions (231 out of 274), a higher percentage of successful conditional certification motions than in any of the past 15 years. Thus with the Lusardi standard, Plaintiffs’ counsel are able to pursue lucrative cases with little up-front investment.
Moreover, once certification is granted, there are real consequences for employers. Court-sanctioned notice of the case must be sent to past and current employees advising them of their right to join the case, which, given the relative size of the population to be notified, can be very disruptive in addition to creating significant exposure. As a result, employers face enormous pressure early in wage and hour cases to reach a settlement—before a case is conditionally certified and before notice goes out.
But nothing in the FLSA requires that conditional certification be so routine. In fact, nothing in the FLSA mentions conditional certification (or certification for matter) at all; the entire concept is a court-creation. Rather, the FLSA permits employees to sue for unpaid minimum wage and overtime compensation, and it states that the lawsuit may be brought “by any one or more employees for and in behalf of himself or themselves and other employees similarly situated.” It also requires that each plaintiff who joins the case file a written consent to join. There is no mention of conditional certification or mailing notice of the case to putative collective members.
The Lusardi Framework
So where did conditional certification come from? It was created by federal courts to manage wage and hour litigation. And because there are few appellate court decisions on the issue—and even fewer Supreme Court decisions—the result is a hodgepodge of district court decisions that rely on shifting standards with predictably diverse (and sometimes contradictory) outcomes.
A little history: in 1989, in the seminal Hoffmann-La Roche, Inc. v. Sperling decision, the U.S. Supreme Court held that courts have discretion (within limits) to send notice of a collective action to potential opt-in plaintiffs. But the Court also cautioned that a district court’s “intervention in the notice process” cannot devolve into “the solicitation of claims.” And the Court instructed district courts to “avoid even the appearance of judicial endorsement of the merits of the action.” Since Hoffmann-La Roche, the Supreme Court has not provided additional guidance on the issue.
Without guidance from the text of the FLSA or higher courts, district courts have searched for the right approach. They have largely settled on two general approaches: the Lusardi ad hoc approach (from the District of New Jersey’s 1987 decision in Lusardi v. Xerox Corporation) and the Shushan approach (from the District of Colorado’s Shushan v. University of Colorado decision). The overwhelming majority of courts—including most courts in the Fifth Circuit—have used some form of the Lusardi approach.
Under the Lusardi approach, courts apply a two-step “ad hoc” process to determine whether FLSA plaintiffs are “similarly situated” under the FLSA. At stage one, i.e., conditional certification, the court looks at whether the proposed collective members are similarly situated enough to receive notice. This stage is often based solely on the pleadings and some affidavits, and courts typically require nothing more than “substantial allegations that the putative [collective] members were together the victims of a single decision, policy, or plan.” Courts also take great pains not to delve into the merits and routinely credit plaintiffs’ assertions, even when those assertions are not based in evidence. As a result, conditional certification is often granted.
Stage two of Lusardi approach typically takes place after discovery has been completed. At that point, the defendant may move to “decertify” the collective, and the court applies a stricter test to determine whether the named plaintiff and opt-in plaintiffs are sufficiently similarly situated to proceed together as a collective at trial. If the court decides the plaintiffs are not similarly situated, it dismisses the opt-in plaintiffs leaving only the original named plaintiff’s claims.
The second test (the Shushan test) borrows concepts from class actions under Rule 23 and looks at numerosity, commonality, typically, and adequacy of representation when deciding whether to certify the collective. As mentioned above, the majority of district courts across the country have adopted some version of the Lusardi approach (rather than the Shushan test); although the actual application differs from court-to-court and even judge-to-judge.
The Fifth Circuit’s Decision
Over the years the Fifth Circuit has taken great pains not to endorse (or reject) the Lusardi framework. This changed with the Fifth Circuit’s recent decision in Swales v. KLLM Transport Services, L.L.C. In a lively and engaging opinion, the Court went through the history of conditional certification, examined the text of the FLSA, and analyzed the Supreme Court’s Hoffmann-La Roche decision. After doing so, the Court rejected the Lusardi approach (and the Shushan approach) and set out a new test.
First, the Court explained that “Lusardi frustrates, rather than facilitates, the notice process.” And the Court pointed out that “[t]he use of ‘Lusardi’ or even collective-action ‘certification’ has no universally understood meaning.” Accordingly, the approach provides district courts with little guidance.
Second, the Court concluded that Lusardi does not comport with the text of the FLSA. The FLSA says nothing about “conditional certification,” and the Fifth Circuit refused to read the Lusardi approach into the FLSA. The Court explained:
Two-stage certification of § 216(b) collective actions may be common practice. But practice is not necessarily precedent. And nothing in the FLSA, nor in Supreme Court precedent interpreting it, requires or recommends (or even authorizes) any “certification” process. The law instead says that the district court’s job is ensuring that notice goes out to those who are “similarly situated,” in a way that scrupulously avoids endorsing the merits of the case. A district court abuses its discretion, then, when the semantics of “certification” trump the substance of “similarly situated.”
The Court explained that the refusal to look at the “merits” under the Lusardi approach ignores the requirement under the FLSA that plaintiffs be similarly situated and leads courts to certify collective actions of putative collective members that are not similarly situated. The Court stated:
Considering, early in the case, whether merits questions can be answered collectively has nothing to do with endorsing the merits. Rather, addressing these issues from the outset aids the district court in deciding whether notice is necessary. And it ensures that any notice sent is proper in scope—that is, sent only to potential plaintiffs. When a district court ignores that it can decide merits issues when considering the scope of a collective, it ignores the “similarly situated” analysis and is likely to send notice to employees who are not potential plaintiffs. In that circumstance, the district court risks crossing the line from using notice as a case-management tool to using notice as a claims-solicitation tool. Hoffmann-La Roche flatly forbids such line crossing.
Accordingly, the Court rejected the Lusardi approach and set out a completely different test for conditional certification:
[A] district court should identify, at the outset of the case, what facts and legal considerations will be material to determining whether a group of “employees” is “similarly situated.” And then it should authorize preliminary discovery accordingly. The amount of discovery necessary to make that determination will vary case by case, but the initial determination must be made, and as early as possible.
And the Court made clear that a district court should consider all of the evidence available when deciding whether and to whom notice should be issued. In short, the Fifth Circuit set out the following framework: (1) courts should decide what facts and legal questions will be material to the “similarly situated” analysis early in the case; (2) courts should authorize preliminary discovery directed toward these issues; and (3) the court should then analyze all of the evidence available to determine whether the putative collective is similarly situated. If the proposed group is “too diverse” to be similarly situated, the court may decide the case cannot proceed on a collective basis.
The new test represents a sea change in the conditional certification framework, and the case is a welcome decision for employers. The decision should curtail some of the success the plaintiffs’ bar has enjoyed of obtaining conditional certification early in FLSA cases on little more than allegations alone. Although it may result in increased discovery costs early in the case, it promises to provide an avenue for employers to meaningfully oppose conditional certification; especially in misclassification, joint employment, “off-the-clock,” and similar-type FLSA cases where plaintiffs have had success in pushing back “merits” arguments at stage one of the Lusardi test. In short, this decision is required reading for all employers facing wage and hour litigation in the Fifth Circuit (Louisiana, Mississippi, and Texas), and even employers outside of those jurisdictions.
Moreover, employers who are currently in pending FLSA litigation may want to ask the court to reconsider a prior ruling on a motion for conditional certification that is inconsistent with Swales. To the extent the case has not reached the conditional certification stage, or if the conditional certification briefing is pending, employers should immediately apprise the court of this significant decision.
With the growth of the gig economy, the increased desire of some workers to control their own work hours to ensure a work-life balance, and the evolution of the modern workplace to one in which workers rarely retain one full-time job throughout their working years, the demand by workers and companies alike for independent contractor relationships has grown. The line between employee and independent contractor status, however, has remained frustratingly unclear. In more than 80 years since the FLSA’s enactment, neither the FLSA’s text nor formal rulemaking have provided businesses or courts a broadly-applicable rule regarding where to draw that line. That is, until now. Tomorrow, the DOL’s final rule on “Employee or Independent Contractor Classification” will be published in the Federal Register, with an effective date of March 8, 2021. An unofficial, advance copy of the final rule is available here.
The Notice of Proposed Rulemaking and Request for Comments (“NPRM”) was announced in September 2020, and we summarized it here. The final rule largely adheres to the rule proposed by the NPRM. In the final rule, the DOL has attempted to harmonize decades of its own employer- and industry-specific opinion letters and court decisions that have considered slightly different factors and interpreted similar factors in different manners. It has done so by articulating five non-overlapping factors to be considered in the determination of whether an individual qualifies as an employee or an independent contractor under the FLSA.
Be forewarned that it remains to be seen whether president-elect Joe Biden’s administration will permit the final rule to take effect, whether it could be rejected under the Congressional Review Act, particularly if the Senate majority changes, and whether certain state attorneys general might seek an injunction against the rule the way they did with respect to the DOL’s recent interpretation of the joint employer standard under the FLSA. Further, the independent contractor standard under other federal laws and some state laws also need to be considered for compliance. Nonetheless, the DOL’s new rule provides clearer guidance for companies on independent contractor classification under the FLSA.
What Does the DOL’s Final Rule Provide?
The DOL’s final rule adheres to the earliest Supreme Court decisions and long-standing DOL guidance by continuing to focus the inquiry on whether, as a matter of economic reality, the worker is dependent upon the company for work or is instead in business for him- or herself. The new rule, however, offers previously missing guidance on what factors should be used to assess a worker’s economic-dependence or independence and how much weight should be given to each factor. And while the rule falls short of providing absolute clarity—indeed, it expressly declines to set forth an exhaustive list of considerations—it provides a balanced approach to analyzing independent contractor status under the economic realities test, and sets forth five factors, with two of the factors being “core factors” on which greater weight should be placed.
These two core factors are (1) the nature and degree of the worker’s versus the potential employer’s control over the work; and (2) the worker’s opportunity to earn profits or incur loss based on either the worker’s exercise of initiative or the management of investments in or expenses for items such as helpers, equipment, or material to further the work.
With respect to the first core factor, examples of a worker’s control include setting one’s own schedule, selecting one’s own projects, and having the ability to work for other entities. More critically, the rule provides that a number of issues some courts have previously afforded weight—such as requiring compliance with laws and regulations, health and safety standards, contractual deadlines, and quality control standards—should not impact the analysis. On the other hand, a company’s vigilant enforcement of a non-compete clause or its punishment of a worker for turning down available work may demonstrate control by the company over the worker that is indicative of an employment relationship.
With respect to the second core factor, the worker need not have an opportunity for profit or loss based on both initiative and management of investments or expenses. The ability for a contractor to satisfy this factor through initiative without also needing to show investment, or vice versa, was a point of dissatisfaction for some commenters but, as the DOL noted, makes sense in the modern economy in which many contractors are in knowledge-based jobs that require little investment in materials or equipment. In addition, the DOL states in its preamble to the final rule that it agrees with comments submitted by Seyfarth Shaw that the worker’s use of initiative to impact profit or loss is intended to cover acumen that can be present in a wide variety of contractor jobs, such as acumen in sales, management, customer service, marketing, distribution, communications, and other learned and technical skills, and can exist independent of the skill set needed to perform the work, as in the case of the exercise of general business acumen that impacts a contractor’s ability to profitably run their own business.
If these two core factors point clearly toward either independent contractor or employee classification, they are substantially likely to yield the correct classification. If, however, these core factors do not point toward the same classification or if the considerations under one or both core factors point to different classifications or cause the factors overall to be in equipoise, then the three remaining factors gain importance in determining the correct classification.
The three remaining factors are (1) the amount of skill required for the work, (2) the degree of permanence of the working relationship between the worker and the company, and (3) whether the work is part of an integrated unit of production.
Significantly, the rule places the focus for all five factors primarily on the actual circumstances of the working relationship rather than what is merely contractually or theoretically possible in the relationship. And notably, with respect to the last factor, the rule declines to place import on whether an individual’s work is “integral” to the potential employer’s business, focusing instead on whether the individual’s work can be segregated from the potential employer’s production process.
What Happens Next?
The DOL’s final rule provides much-needed guidance for businesses and workers alike, particularly as technological, social, and business developments have highlighted a need for clarity and uniformity in the economic realities test. However, for now, businesses are well-advised to treat the new rule as precisely that: guidance.
While the final rule is slated to go into effect on March 8, 2021, it remains to be seen how the new administration will deal with the rule. Nevertheless, the rule provides necessary guidance that can be used to assist companies in understanding the impact of various modern workplace and business practices for independent workers and the businesses with which they contract. A question remains as to the impact of the balanced approach provided by the DOL with respect to interpretation of various relevant factors that are present in the economic realities test under the FLSA and are also relevant to determination under other federal and state tests used for determining independent contractor status. The DOL has noted specifically in the rule that the various versions of the ABC test used in certain state laws have defined employment more broadly for certain purposes.
If you would like to discuss the impact of the DOL’s final rule, or the various state laws that are unaffected by the rule, please feel free to contact the authors or your typical Seyfarth contact.