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

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

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

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

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

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

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

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

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

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

By: Alex Simon

Seyfarth Synopsis: The Seventh Circuit held that out-of-state plaintiffs must be dismissed from FLSA collective actions when the court lacks personal jurisdiction over them.

In a 2-1 decision reversing the lower court, the Seventh Circuit last week joined the Third, Sixth, and Eighth circuits in holding that the Supreme Court’s 2017 decision in Bristol-Myers Squibb Co. v. Sup. Ct. of Cal. applies to FLSA collective actions. This means that four of the five circuit courts to analyze this issue agree that out-of-state plaintiffs must be dismissed from FLSA collective actions when the court lacks personal jurisdiction over them.

Ultimately, this means that a “nationwide FLSA collective action” can only proceed in jurisdictions where the employer is “essentially at home,” or where the employer otherwise consents to the Court’s general jurisdiction. A court must establish its jurisdiction over claims one at a time—and every employee who participates in an FLSA collective action has an independent claim.

This ruling does not act as a complete bar against nationwide collective actions. What it does do is disincentive forum shopping: absent the employer’s consent, a plaintiff cannot bring a nationwide collective action in a court within the Seventh Circuit where the employer has only “minimal contacts.”

For example, if an Illinois based employee wants to sue her Georgia-based employer for an overtime violation, she will be required to (a) pursue her claim individually in Illinois, (b) pursue a statewide collective action in Illinois, (c) pursue the case as a nationwide collective action in Georgia, or (d) convince the employer to consent to the Illinois courts’ jurisdiction with respect to out-of-state plaintiffs. In Luna Vanegas, a Wisconsin-based employee overreached in his bid to invite other out-of-state H-2A construction workers to join his case against his Texas employer in the Western District of Wisconsin.

Although this decision represents an emerging consensus, defining exactly what an FLSA collective action is supposed to be continues to confound courts. In BMS, the Court recognized that in true class actions, the court would not have to re-establish personal jurisdiction over absent class members. But as the Seventh Circuit observed, FLSA collective actions are not class actions. Although they are a form of “aggregate litigation,” every participant in a collective action becomes a “party plaintiff.” Each party plaintiff is entitled to present their own evidence at trial, and the outcome is not binding on absent plaintiffs. Unlike in class actions, the court is not required to undertake a “rigorous analysis” before conditionally certifying a collective action. That means, the named plaintiff in an FLSA collective is not required to prove that she will “fairly and adequately protect the interests of the class.” So while in a true class action, the “class as a whole is the litigating entity,” the FLSA collective action is not afforded any independent legal status. And because of this, BMS requires a claim-by-claim personal jurisdiction analysis in the FLSA context.

In the end, this is a well reasoned opinion that is favorable to employers. Undoubtedly, district courts in the circuits that have yet to decide this issue will look to Luna Vanegas for guidance, just as they have done for the last three years with the conforming decisions in Fischer (3d Cir. 2022), Canaday (6th Cir. 2021), and Vallone (8th Cir. 2021). The anomalous decision in Waters (1st Cir. 2022) will now appear as an even greater outlier—its persuasiveness outside of the First Circuit is now diminished even further.

Nonetheless, when confronted with a potential nationwide FLSA collective action, employers would still be well advised to invoke Luna Vanegas cautiously. While precluding a single court from overseeing a nationwide collective action will be the right choice in many instances—especially in hostile jurisdictions—it is not necessarily costless. In the absence of a single, consolidated court proceeding, employers could easily become embattled with fragmented litigation over the same minimum wage or overtime claims across many courts across the country. Whether this is preferable to a single nationwide collective can depend on many factors, including but not limited to the state of the case law in the original forum, and opposing counsel’s ability to independently recruit case participants absent the formal “collective action notice” procedures. But again, this is overwhelmingly a favorable decision.

By: Phillip J. Ebsworth and Brian B. Gillis

Seyfarth Synopsis: The California Supreme Court held that PAGA does not apply to public entity employers.

The California Supreme Court overturned the Court of Appeal and prior appellate court decisions to conclude that the PAGA statute, legislative history, and public policy support the conclusion public entity employers are not subject to PAGA actions for civil penalties. In doing so, the Supreme Court considered PAGA’s statutory language, which provides for penalties against “the person [who] employs one or more employees,” along with “person” defined by the Labor Code as “any person, association, organization, partnership, business trust, limited liability company, or corporation.” Labor Code § 2699(b); Labor Code § 18. The Supreme Court noted that a public entity does not fit the Labor Code’s definition of “person.”

The Court of Appeal, agreeing with prior appellate decisions, had held that Labor Code § 18’s definition of “person” was limited to alleged Labor Code violations where PAGA’s default penalties applied but not for Labor Code violations where a civil penalty is already provided. However, the Supreme Court held that Labor Code § 18’s definition of “person” applied to PAGA as a whole and not just default penalties such that public employers are not subject to PAGA. In doing so, the court noted that PAGA penalties could impose a significant financial burden on public entities, and in turn taxpayers, which would ultimately serve to hinder public employers’ ability to carry out their public missions.

Seyfarth Synopsis: While reversing a grant of summary judgment in favor of an employer based on the de minimis doctrine, the Ninth Circuit held that the doctrine still can apply under the FLSA.

As readers of this blog, and particularly fans of The Princess Bride, know well, the de minimis doctrine is considered by many to be “mostly dead” in wage-hour litigation.

Indeed, the doctrine was feared to be close to its demise last week when it was considered by the Ninth Circuit Court of Appeals in Cadena v. Customer Connexx, LLC, a long-running case in which call center employees claim that they are owed additional overtime pay for time spent booting up and shutting down their computers. 

Nearly two years ago, the Ninth Circuit reversed a district court grant of summary judgment to the employer, holding that time these call center workers spent booting up their computers is an integral and indispensable part of their duties. But on remand last summer, the district court granted summary judgment to the employer yet again, this time on the grounds that time spent booting up and shutting down a computer is de minimis. 

The call center workers appealed, this time urging the Ninth Circuit to hold that the de minimis doctrine should no longer be recognized under the FLSA, particularly in light of Justice Scalia’s passage in Sandifer v. U.S. Steel Corp. (U.S. 2014) that the “de minimis doctrine does not fit comfortably within the [FLSA], which, it can fairly be said is all about trifles.” The workers’ contention stood a good chance of gaining acceptance, as the Ninth Circuit often is regarded as more protective of workers than several other circuits. Indeed, an intermediate appellate court in California and the Supreme Court of Pennsylvania both recently invalidated the de minimis doctrine under their state wage-hour laws.

The Ninth Circuit, however, did not take the bait, holding that the de minimis doctrine remains a potentially viable defense to a claim for overtime wages. In doing so, the court cabined Justice Scalia’s Sandifer language to the FLSA Section 203(o) concerning clothes changing time and relied on its prior precedents on the de minimis doctrine. At least in the Ninth Circuit, the de minimis doctrine remains, in the words of Miracle Max, “slightly alive,” taking into account in each case the practical administrative challenges of recording the time spent on the activity at issue, the aggregate amount of payable time, and the regularity of the activity in question.

The Ninth Circuit’s ruling also makes clear that the de minimis doctrine remains in a precarious position, as it reversed the district court’s grant of summary judgment to the employer. First, it reiterated that, within the Ninth Circuit, it is the employer’s burden to show that the time spent on the activity at issue is de minimis. Second, it stressed that employers may have to compensate employees for even small amounts of daily time, especially if it occurs regularly, unless that time cannot, as an administrative matter, be recorded for payroll purposes.

Third, in applying those principles to this case, the court concluded that disputed questions of material fact necessitate reversal of the district court’s decision because there exists evidence that all workers engaged in booting up, and shutting down, their computers each and every shift; that while some workers spent only seconds on such activities, others testified that the process could take even more than ten minutes each day; and that there are methods the employer potentially could have used to estimate time spent booting up computers or that it could have recorded time on that activity through a separate time clock.

Employers must bear in mind that several of these factors could apply in many call center environments and in several other contexts and make it difficult to sustain a de minimis defense.

The district court, perhaps through a jury, is now tasked with reconsidering the difficulty for the employer in tracking its workers’ boot up and shut down time and how much time booting up and shutting down a computer really takes (everyday experience suggests that jurors may believe that, while there are occasions after outages or system updates that booting up can take a bit of time, it usually takes only seconds to type CTRL+ALT+DELETE, a username, and a password).

This decision’s impact on employers underscores the importance of accurately recording and compensating all time employees spend on job functions, including preparatory activities such as booting up a computer. Although the de minimis doctrine still has a place in litigation under the right circumstances, the trends of recognizing such preparatory activities as compensable time, as well as questioning time rounding practices, suggests that employers only rarely should rely on the doctrine as a defense.

Instead, they should review timekeeping practices to ensure compliance with the FLSA to avoid potential litigation; ensure they mandate compensation for all hours worked, including delays encountered by slow computer boot-ups due to software updates, bugs, or other issues; include a method for employees to report any delays that may impact their duties; train employees and their supervisors about their timekeeping policies and practices; and evaluate the startup process for essential applications to understand the actual time required for employees to be ready to work.

By: Alison Silveira and Lilah Wylde

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

On Thursday, the Third Circuit held that collegiate athletes may assert a claim under the Fair Labor Standards Act.  The decision in Johnson v. National Collegiate Athletic Ass’n, — F.4th –, 2024 WL 3367646 (3d Cir. July 11, 2024) is the first of its kind at the federal appellate level, as it breaks from the precedent of its sister circuits which have historically dismissed such claims over the past 30 years by “grant[ing[] the concept of amateurism the force of law.” Id. at *6.  That these athletes may continue to pursue their claims under the FLSA and state wage laws, however, is akin to winning a tennis set – but far from finishing the match.  The ball is now back in the athlete-plaintiff’s court, to see whether the economic reality of their athletic endeavors is sufficient to establish that they are employees of either the NCAA or the universities for which they competed. 

The Game …

In 2019, six then-current and former collegiate athletes filed a putative collective and class action against the NCAA and 25 NCAA Division 1 universities.  The plaintiffs, who competed in football, swimming/diving, baseball, tennis, and soccer, allege that they and all other similarly situated collegiate athletes were jointly employed by the defendants and 100 additional NCAA Division 1 universities.  According to the district court, the premise of their claim is that “student athletes who engage in interscholastic activities for their colleges and universities are employees who should be paid for the time they spend related to those athletic activities.” Johnson v. Nat’l Collegiate Athletic Ass’n, 556 F. Supp. 3d 491, 495 (E.D. Pa. 2021).  Defendants moved to dismiss the Complaint on the ground that they do not employ the plaintiffs (whether directly or under a joint employer theory of liability), but the court denied that motion.

In reaching its decision, the district court first addressed the concept of amateurism, which has historically served as the foundation upon which collegiate athletics are distinguishable from anything akin to a business or employment model.  The idea that amateurism – i.e., the practice of participating in athletics on an unpaid as opposed to professional basis – exempts collegiate athletes from the federal wage laws grew out of the Supreme Court’s opinion in NCAA v. Board of Regents, 486 U.S. 85, 120 (1984), which recognized that “[t]he NCAA plays a critical role in the maintenance of a revered tradition of amateurism in college sports.”  However, in 2021, just two months before the district court’s denied the motion to dismiss, the Supreme Court revisited this language, explaining:

Board of Regents may suggest that courts should take care when assessing the NCAA’s restraints on student-athlete compensation, sensitive to their procompetitive possibilities. But these remarks do not suggest that courts must reflexively reject all challenges to the NCAA’s compensation restrictions. Student-athlete compensation rules were not even at issue in Board of Regents.

National Collegiate Athletic Ass’n v. Alston, 594 U.S. 69, 92 (2021); see also id. at 108 (“The Court makes clear that the decades-old ‘stray comments’ about college sports and amateurism made in [Board of Regents] were dicta and have no bearing on whether the NCAA’s current compensation rules are lawful.”) (Kavanaugh, J., concurring) (citation omitted). 

Relying on this new guidance, the district court rejected the concept of amateurism as an exemption to the FLSA, and handed plaintiffs a win in the first game of their (legal) set.

…The Set…

Defendants appealed to the Third Circuit, and while the matter was argued in early 2023 it took nearly 15 months for the Court to declare that the plaintiffs are entitled to assert a claim for employment status under the Fair Labor Standards Act.

The Third Circuit’s opinion begins with an interesting and instructional summary of the  history of college athletics, reasoning that it is necessary to understand how collegiate sports generate revenues to answer the question of whether the amateur status of a collegiate athlete renders them ineligible for payment of the minimum wage.2024 WL 3367646, at *2-*4.  The 1843 Boat Race between Harvard and Yale was the first college athletic contest designed for profit that set the stage for what has become a multi-billion dollar industry.[1] College athletics steadily evolved to increase institutional prestige through revenues[2] and increased applications for admission following highly publicized football or basketball games.[3]

Ultimately, the Third Circuit’s decision in Johnson upholds the district court’s decision and announced a new “test” to determine what constitutes an employee in the world of collegiate athletics, finding:

“[C]ollegiate athletes may be employees under the FLSA when they (a) perform services for another party (b) necessarily and primarily for the other party’s benefit, (c) under that party’s control or right of control, and (d) in return for express or implied compensation or in-kind benefits.”

2024 WL 3367646, at *11 (internal citations and quotations omitted).  This test stems from what the Third Circuit saw as a “need for an economic realities framework that distinguishes college athletes who ‘play’ their sports for predominantly recreational or noncommercial reasons from those who play crosses the legal line into work protected by the FLSA.” Id. at *13.

… And On to The Match

Johnson is the first appellate court to find that collegiate athletes can assert a claim to employment status under the FLSA.  As any tennis player knows, however, winning a set is a far cry from winning the match.  In issuing its opinion, the Third Circuit (without having before it any facts, given that no factual record has been developed below) recognized that the application of its test will be fact dependent, and may vary among sports, universities, and even individual athletes, opining “merely playing sports, even at the college level, cannot always be commercial work integral to the employer’s business in the same way that the activities performed by independent contractors or interns are assumed to be” in other contexts. 2024 WL 3367646, at *9.  The Court further acknowledged that under both Supreme Court precedent and the Department of Labor’s regulations, “the FLSA does not cover a person who, ‘without promise or expectation of compensation, but solely for his personal purpose or pleasure’ performs ‘activities carried on by other persons either for pleasure or profit.’” Id. (quoting Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947)).  It remanded the matter back to the district court to undertake this factual inquiry.

Depending on how the factual record develops, these distinctions are likely to create roadblocks against Johnson proceeding in the manner that it is currently pled.  For example, whether an individual collegiate athlete’s “services” are for their own benefit, or for the benefit of either the NCAA or the university that they attend, is the type of individualized inquiry that could preclude class certification.  Even if “benefit” were interpreted to mean strictly financial benefit (which is very much an open issue), revenue is by definition inconsistent year over year.  And while some sports may historically drive more revenue than others (i.e., football and men’s basketball), this is only true at certain universities – and certainly not all 125 Division 1 schools that are covered by the putative class that the plaintiffs seek to represent.  Further, even among teams that historically generate significant revenue, not all athletes on a particular team in a given year will be able to establish that they engaged in athletic endeavors with an expectation of compensation; some will have walked on to teams in the hopes of having the opportunity to compete, as opposed to being recruited to play.  And for universities that have historically never provided compensation to athletes (i.e., Ivy League schools which do not offer scholarships), an argument that any athlete who competes for those teams does so with an expectation of compensation or in-kind benefits is likely to face a steep uphill climb.

What Johnson does provide is a new lens to evaluate the unique characteristics of the NCAA and the individual universities’ student athletes and athletic programs.  The entire landscape of compensation for collegiate athletes is currently in flux, including with respect to name, image and likeness rights, collective bargaining rights,  and a pending settlement in House v. NCAA which, as currently reported, will open the door, for the first time, to direct compensation to collegiate athletes in the form of revenue sharing. There are years of litigation to come before we see whether there will be further appellate review, how the trial court applies Johnson to the individual plaintiffs in that case, whether any subset of those plaintiffs will prevail on an employment claim, and whether the decision may have implications beyond just those plaintiffs.  Only then will we be able to declare who has won this match. 

[1] The race was actually not proposed or organized by the students of Yale or Harvard, but instead by a railroad superintendent who hoped to increase ridership by staging a regatta on his rail line. 2024 WL 3367646, at *3.

[2] At least 38 NCAA member colleges currently gross more than $100 million annual in sports revenue. Id. at *3.

[3] Boston College applications jumped 30% the year following an exciting football game won by Boston College with a 48-yard Hail Mary touchdown pass with six seconds on the clock. Id. at *2.

Seyfarth Synopsis: The DOL’s revised overtime exemption rule takes effect today, July 1, 2024. While several lawsuits are challenging the rule, a last-minute injunction was ultimately granted for only one employer: the State of Texas. The rule is in effect for all other businesses, including businesses in Texas.

In April 2024, the U.S. Department of Labor published its final rule revising the FLSA’s executive, administrative, and professional exemptions—the so-called “EAP” or “white-collar” exemptions. The rule was promptly challenged in court. With the rule set to take effect today, many wondered if the rule would meet the same fate as a similar rule issued in 2016, which was halted at the last minute by a federal judge in Texas.

Employers now have their answer: The rule will take effect for all but one employer—the State of Texas. That’s because on Friday evening, a federal judge overseeing a case filed by the State of Texas granted the Lone Star State’s request for a preliminary injunction. But the injunction benefits only the State of Texas in its capacity as an employer of state employees—it does not benefit any other employer, whether inside or outside of Texas.

The rule is still being challenged in several cases. It is quite possible that the rule will ultimately be enjoined on a nationwide basis. But whether that will happen (and if so when) is uncertain. What is certain, for now, is that the new rule is in effect for all but one employer.

The Rule

It is well-known that the FLSA generally requires employers to pay time-and-a-half to employees who work more than 40 hours in a week. But the law exempts some employees from this overtime pay requirement. While hardly the only exemptions available to an employer, the “EAP” exemptions are the most commonly utilized (and litigated) exemptions.

While the EAP exemption is set out by statute, it is defined through regulations issued by the U.S. DOL. Under the DOL’s rules, to qualify for an EAP exemption, an employee must generally satisfy a three-part test: their primary duty must be the performance of exempt work; they must be paid on a salary basis; and their salary level must exceed a minimum threshold. This last requirement—salary level—is the focus of the DOL’s recent rulemaking.

In late April 2024, the DOL published a rule revising the EAP exemptions, with changes set to take effect today, July 1, 2024. The changes, which the DOL intends to extend overtime pay to around 4 million workers, increase the minimum salary level; increase the annual compensation threshold for the highly-compensated employee (or “HCE”) exemption; and call for automatic increases to these thresholds every three years.

Under the new rule, effective today, an EAP employee must receive a weekly salary of at least $844 per week (equivalent to $43,888 per year) to be exempt.[1] Then, on January 1, 2025, the threshold will increase more dramatically to $1,128 per week (equivalent to $58,656 per year). Meanwhile, the annual compensation threshold for the HCE exemption increases to $132,964 as of today, and then again to $151,164 on January 1, 2025.

Also, as noted above, the new rule calls for automatic increases to these thresholds every three years, starting on July 1, 2027.

Injunction for One

The new rule is similar to one issued under the Obama Administration in 2016. That rule was ultimately enjoined on a nationwide basis by a federal judge in Texas just a few days before it was scheduled to take effect. Given that history, it is no surprise that multiple challenges have been filed to the DOL’s latest rule—once again in Texas.

Three cases present similar arguments to those that stymied the 2016 rule, arguing at a high level that the DOL has gone too high (with its salary level increases) and too far (with its introduction of an auto-increase mechanism). One is brought by the State of Texas; a second, assigned to the same judge, is brought by various business interest groups; a third case is brought by a software company.

A fourth case, which predates the new rule and is already before the Fifth Circuit Court of Appeals, challenges whether the DOL has the authority to set a salary level at all.

Many have been watching to see if any court would halt the DOL’s rule before today’s effective date. That answer came on late Friday night, when Judge Sean Jordan, who is overseeing the State of Texas’s case and the business interest groups’ case, issued an order specific to the former in which he granted the State’s request for a preliminary injunction. Judge Jordan reasoned that the State had shown a likelihood of ultimate success that the DOL exceeded its authority in including automatic increases every three years.

Importantly, the preliminary injunction applies only to the State of Texas as an employer. It does not apply to any other employer within or outside of Texas. Judge Jordan noted that the plaintiffs in the business interest group case had not moved for a preliminary injunction and the record before him was insufficient to justify an injunction beyond the limited one he granted.

Continued Challenges

The cases challenging the DOL’s rule will continue from here. The rule could ultimately be enjoined on a broader and permanent basis. Or it could not.

It is possible that certainty will come fairly soon. In the preliminary injunction order issued in the State of Texas case, Judge Jordan noted that “the Court expects that this case will be resolved in a matter of months”—which could mean before January 1, 2025, when the more sizable salary level increase is set to take effect. Alongside the order, Judge Jordan also consolidated the State of Texas’s case with the case filed by the business interest groups. Together, the cases provide a path to strike down the rule nationwide. So do the other cases noted above.

As an added layer, judges overseeing these cases may feel called to more seriously question the DOL’s EAP rule framework in light of the Supreme Court’s landmark three-day-old ruling striking down the Chevron doctrine. 

Looking Ahead

We will be watching these battles unfold in the months ahead. In addition to court challenges, Congress passed joint resolutions in the House and Senate seeking to eliminate the new rule—though such a bill, if passed, would have a hard time surviving President Biden’s veto.

Whether the DOL’s rule will be enjoined on a nationwide basis, and if so when, is unknown. And unless and until that happens, the rule is in effect for employers other than the State of Texas—the new EAP salary threshold is $844 per week, the HCE annual compensation threshold is $132,964 per year, and these numbers are set to increase again on January 1.

Compliance is crucial. Determining who needs to be reclassified is an important step. It’s also important to keep in mind that reclassifying employees has rippling impacts that are important to plan for and manage. You should feel free to contact the blog authors or your favorite Seyfarth lawyer to help navigate these waters.

[1] There are some limited exceptions to this, for example for: certain doctors and lawyers; employees compensated on a fee basis at a sufficient level; and employees who qualify for the computer employee exemption who are instead paid an hourly rate of at least $27.63 per hour.

By: Phillip J. Ebsworth and Andrew Paley

Seyfarth Synopsis: AB 2288 and SB 92 collectively amount to the most substantive changes ever to be seen to PAGA. The changes include numerous pro-employer provisions which seek to address longstanding concerns such as standing, penalties, and manageability.

On June 21, 2024, AB 2288 and SB 92 were introduced proposing significant reforms to PAGA following an agreement brokered between Governor Newsom, legislative leaders, and business and labor groups. Below are the top 5 things to know about the proposed reforms:

1. Traditional Concept of Standing Restored.  Plaintiffs must prove that they experienced the same Labor Code violations they seek to pursue on a representative basis.

      2. One-Year Statute of Limitations On Individual Violation.  The plaintiff must have experienced their individual Labor Code violation within the one-year statute of limitations to have standing to be a private attorney general.

        3. Manageability Codified.  AB 2288 has codified a Court’s ability to limit the scope of a PAGA claim or the evidence to be offered at trial so that a PAGA claim can be manageably tried.

          4. Significant Changes to Penalty Structure.  AB 2288 places caps on penalties for employers who take reasonable steps to be in compliance with the law. Additionally, AB 2288 limits when a $200 penalty can be imposed, eliminates penalties for derivative claims, and places caps on wage statement violations that do not cause injury.

          5. Overhauled Cure Provisions For Employers.  Small employers (less than 100 employees) can inform the LWDA that it would like to cure the alleged violations and request a settlement conference with the agency. Large employers can file a request for a stay and Early Neutral Evaluation with the court which will assess whether the alleged violations have been cured or whether the claims can proceed in court.

              Both bills are expected to pass the legislature and be signed into law by Governor Newsom this week at which point, the new provisions will apply to PAGA claims where the PAGA authorization letter was submitted to the LWDA on or after June 19, 2024.

              For a more detailed breakdown of the reforms proposed in AB 2288 and SB 92, you can find Seyfarth’s analysis here.

              Water droplet in shallow tank
              Terry Vlisidis, Unsplash

              By: Kevin M. Young

              Seyfarth Synopsis: With the DOL’s new overtime exemption rule weeks from taking effect, employers must consider the impacts of reclassifying exempt employees. Some potential impacts are obvious, others not so much. Proactive, thoughtful planning is key for employers to navigate these waters for their business and impacted employees alike.

              With the U.S. DOL’s final overtime exemption rule taking effect in a few weeks, many employers are deciding whether to reclassify certain salaried exempt employees. Because the DOL’s primary change—a moderate increase to the salary threshold for exempt executive, administrative, and professional employees on July 1, followed by a substantial increase on January 1—seems simple on its face, an employer’s decision-points may seem simple, too. But like most things relating to employee classification and pay, reclassifying an exempt employee presents rippling impacts that must be accounted for—some obvious, others less so. We explore five potential impacts below.

              1. Reclassification + Budget Impacts

              Employers who reclassify exempt employees to nonexempt status will need to decide how, and how much, to pay the impacted employees.

              There are plenty of options available to employers for paying non-exempt employees, from a traditional hourly rate, to a weekly salary, to day or piece rates—and various other options (or combinations of options) in between. Whatever the method, however, as a general matter the employee must accurately record their hours worked, and the employer must pay at least minimum wage plus a statutory premium for any overtime hours worked.

              With the flexibility available to them, employers can craft a compensation plan aimed at maintaining cost neutrality after reclassification. But an employer’s ability to realize that goal depends on their ability to accurately forecast impacted employees’ overtime work. If the employees work more overtime than expected—whether on a weekly basis, or on a daily basis in states with daily overtime requirements—labor costs will grow. If they work less than expected, the employer will fall short in its effort to ensure a cost neutral impact for the employee.

              In short, employers reclassifying employees to nonexempt status have decisions to make with respect to how and how much they will pay impacted employees. Their ability to accurately budget for overtime costs depends not only on the method and rate of pay they choose, but also on their ability to accurately forecast their employees’ workloads going forward.

              2. Reclassification + Work Habits

              Many exempt employees enjoy freedom to manage their schedule as they deem fit, as long as they get the job done. And especially post-pandemic, many also are entrusted to work remotely. This flexibility aligns not only with the discretion that defines many exempt roles, but also with the notion that an exempt employee’s salary is intended to cover all of their time worked each week, whether it’s a light week or a heavy one.

              That flexibility is not consistent, however, with the traditional image of a nonexempt worker. Allowing an overtime-eligible employee to make their own schedule on the fly each day, working whenever and wherever they please, can be a recipe for an “off the clock” claim.

              Consequently, employers are more likely to control when and where a nonexempt employee is allowed to work, for example by establishing a work schedule for the employee, carefully managing deviations from the schedule, and, of course, requiring the employee to accurately record and submit their working time each day. Most also establish guardrails regarding who may work remotely (and under what circumstances) and when meal/rest breaks are to be taken.

              Telling a reclassified employee that they are now nonexempt and must accurately record their time is a good start. But if they carry with them the habits from their salaried-exempt days—e.g., the mindset that they can work where and when they want, with the only concern being to get the job done—they risk running up large overtime costs (or a thorny “off the clock” claim).

              New habits aren’t just important for impacted employees. If a reclassified employee’s manager will be managing nonexempt labor for the first time, they will likely need education on the policies they are expected to enforce with respect to their subordinates, such as policies concerning timekeeping, overtime, and meal/rest breaks.

              These impacts are manageable, but they require careful planning and comprehensive strategies that go beyond deciding who will be reclassified and messaging that decision to impacted employees. A well-rounded strategy must also account for the communications, trainings, and other change management efforts necessary to ensure that the impacted employees’ habits evolve appropriately with their new classification.

              3. Reclassification + Morale

              The shift from exempt to nonexempt status can impact employee morale and retention. Many salaried-exempt employees are prone to viewing their classification as a proxy for prestige. Having that classification taken away, particularly if coupled with a relative restriction on their autonomy and flexibility (as discussed above), may cause them to feel like they have been demoted—even if their target total compensation remains the same.

              Employers should aim to account for these concerns by establishing a thoughtful communication plan and inviting dialogue—and the engagement that dialogue cultivates—with impacted employees. Also, in addition to accounting for employee morale, a well-thought communication plan must account for requirements in some states regarding how, and how far in advance, an employee must be made aware of a change to their rate or method of pay.

              4. Reclassification + Fair Workweek/Predictive Scheduling Requirements

              Jurisdictions across the country have implemented fair workweek laws (also referred to as predictive scheduling laws. These laws are incredibly thorny, and depending on industry and location, reclassified employees may be covered by their requirements.

              Fair workweek laws differ by jurisdiction, but they typically include requirements such as: the provision of a good faith estimate of hours worked upon hire; advance posting of work schedules, usually at least 14 days before the start of the schedule; premium payments for most types of schedule changes within the advance posting window; and restrictions on “clopening” (i.e., requiring an employee to return to work within a certain period after their last shift ends). Some laws go further than this.

              Importantly, an employee’s classification can impact whether they are covered by these laws. For example, Philadelphia’s fair workweek law applies to overtime-eligible employees of covered employers in the retail, hospitality, and food services industries. Likewise, New York City’s fast food fair workweek law applies to hourly managers, but not salaried-exempt managers.

              Fair workweek laws present the opportunity for massive penalties for unwary businesses—fines can rack up easily and multiply quickly. Employers in industries and jurisdictions covered by these laws must assess these laws’ potential impacts on reclassified employees in order to ensure smooth operational transitions and avoid compliance concerns.

              5. Reclassification + Restrictive Covenant Nuances

              Even if the FTC’s non-compete ban never goes into effect, plenty of states restrict employers’ ability to enter non-compete and other restrictive covenant agreements with their employees. Some of these laws apply to certain employees and not others depending on how and/or how much the employee is paid. Nevada, for example, provides that “a noncompetition covenant may not apply to an employee who is paid solely on an hourly wage basis, exclusive of any tips or gratuities.” Massachusetts law likewise provides that “a noncompetition agreement shall not be enforceable against … an employee who is classified as nonexempt under the [FLSA].”

              Bottom line: Employers that rely on restrictive covenant agreements will need to consider how their agreements might be impacted by a given employee’s reclassification.

              Takeaway: It’s Not That Simple; Proactivity and Forethought Are Key

              While the new exemption rules may seem simple on their face, the decision to reclassify an employee is rarely so. Reclassification presents myriad ripple effects impacting compliance, operations, and employee morale and retention. By anticipating and accounting for the potential impacts—from the obvious to the not so obvious—businesses can effectively manage the transition, promote compliance, and maintain a satisfied workforce.

              Please feel free to connect with the author or your favorite Seyfarth attorney with any questions about this topic or any other compliance concerns.

              By: Kyle D. Winnick and Robert T. Szyba

              Seyfarth Synopsis: The New Jersey Supreme Court held that amendments to New Jersey’s Wage and Hour Law and Wage Payment Act that increase employer wage-hour liability are not retroactive.

              In Maia v. IEW Construction Group, the New Jersey Supreme Court decided a critical issue in employer’s favor regarding the “look-back” periods and availability of liquidated damages under New Jersey’s Wage and Hour Law (WHL) and Wage Payment Act (WPA).

              Background

              As background, the WHL requires covered employers to pay non-exempt employees overtime compensation and minimum wage. The WPA regulates the time, manner, and mode of wage payments.

              Effective August 6, 2019, New Jersey passed the Wage Theft Act (the Act), which amended the WHL and WPA by adding enhanced damages to prevailing plaintiffs, such as liquidated damages “equal to not more than 200 percent of the wages lost or of the wages due.” The Act also amended the “look-back” period for the WHL from two years to six years.

              The plaintiffs in Maia alleged that their employers violated the WHL and WPA by failing to pay them and similarly-situated individuals for pre- and post-shift work. The plaintiffs asserted that they were entitled to the six-year look-back period because they filed their complaint after August 6, 2019, the effective date of the Act. In other words, they argued that the longer statute of limitations, effective at the time they filed their lawsuit, should apply, instead of the shorter statute of limitations that was effective at the time the underlying conduct occurred. In turn, the longer statute of limitations would mean a longer time period for which potential damages could be alleged and more potential plaintiffs that could have been impacted.

              The Wage Theft Act’s Amendments Are Not Retroactive

              The issue before the New Jersey Supreme Court was whether the Act’s amendments are retroactive. The Court held that they are not. Consequently, the plaintiffs’ wage-hour claims arising prior to August 6, 2019 were dismissed with prejudice.

              The Court undertook a detailed analysis of the factors to be considered when weighing retroactivity. Ultimately, the Court reasoned that the Act’s amendments should only apply prospectively because the statute was silent on retroactivity and by adding liquidated damages and other remedies and extending the statute of limitations in the WHL, the Act “impose[d] new legal consequences to events that occurred prior to its enactment.”

              Accordingly, “for claims based on conduct that occurred prior to August 6, 2019—[the Act’s] effective date—plaintiffs cannot rely on [the Act’s amendments]. Any claims for new damages or remedies added by [the Act] can be brought only as to conduct that took place on or after August 6, 2019.”

              Takeaways

              The immediate takeaway from Maia is that it provides New Jersey employers a defense to wage-hour allegations predating August 6, 2019 that were not brought within the then-existing two-year statute of limitations. This also means that employers will not face the full six-year potential liability period until August 6, 2025. It also provides powerful precedent that any subsequent amendments to New Jersey’s wage-hour and other employment laws, especially laws that increase penalties and potential damages, should also only apply prospectively unless the legislature specifies otherwise.

              Seyfarth Synopsis: The first challenge to the Department of Labor’s overtime rule has landed, but what the U.S. District Court for the Eastern District of Texas will do with it and how any decision will affect businesses remains up in the air.  As this litigation develops, businesses must still prepare for the upcoming July 1, 2024 salary threshold increase.

              What Does the Complaint Allege?

              On Wednesday, May 21, 2024, several businesses and industry groups submitted a legal challenge to the Department of Labor’s (“DOL”) new overtime rule raising the salary threshold for professional exemptions.

              The lawsuit was filed in the Eastern District of Texas – a familiar venue. In 2016, a similar – successful – suit was filed against the Obama-era overtime rule, which sought to raise the salary threshold for executive, administrative, and professional (“EAP”) exemptions to $47,476. In 2017, U.S. District Judge Amos Mazzant ruled that the Obama DOL’s rule was so lasered in on raising the salary threshold that it lost sight of the plot – the job duties which are the focus of the EAP exemptions.

              Plaintiffs in the recently-filed complaint argue that the Biden Administration’s rule exceeds DOL’s authority under the Fair Labor Standards Act and violated the Administrative Procedure Act. The lawsuit argues that the rule ignores precedents and that “[j]ust as in 2017, the Department’s new salary threshold is so high that it is no longer a plausible proxy for delimiting which jobs fall within the statutory terms ‘executive,’ ‘administrative,’ or ‘professional.” Accordingly, “[t]he 2024 Overtime Rule thus contradicts the congressional requirement to exempt such individuals from the minimum wage and overtime requirements of the FLSA.” As we predicted, the lawsuit also challenges the DOL’s planned three-year automatic increase to the EAP salary threshold and its phased approach to increases in July 2024 and January 2025 as violating notice and comment requirements under the APA.

              Notably, a separate legal challenge is pending in the US Court of Appeals for the Fifth Circuit against the Trump-era overtime rule, which argues that the DOL doesn’t have the authority to consider a worker’s earnings at all when determining whether they are exempt from overtime.  Justice Brett Kavanaugh alluded to this possibility in a dissent to the Supreme Court’s 2023 Helix decision.

              The newly filed lawsuit acknowledges that if the Fifth Circuit were to find that the DOL can’t use salary levels as part of the overtime exemption test, then the rule should also be blocked.

              What Should Business Do?

              Businesses must operate strategically under the assumption that the new rule will go into effect July 1, 2024. The lawsuit requests that the District Court provide expedited consideration given the looming deadline, but businesses cannot assume the Court will quickly rule.

              As of now, businesses have 5 weeks to comply and should take note of any salaried-exempt employees earning below $43,888 per year.  Seyfarth attorneys have invested considerable time into preparing its clients for reclassification, and are actively monitoring legal developments.  Reclassification requires legal analysis, strategic business decisions, and thoughtful communications, so please connect with competent counsel to explore your options.