John Ayers-Mann and Kerry Friedrichs

Seyfarth Synopsis: In a recent decision, the Third Circuit Court of Appeals rebuked a Pennsylvania district court’s skeletal analysis of plaintiffs’ class action claims. Particularly, the court took issue with the district court’s failure to define the classes with sufficient specificity and failure to undertake a rigorous analysis of Rule 23’s predominance and commonality requirements.

In a recent decision, the Third Circuit strongly affirmed the rigorous analysis that courts must apply when determining whether wage-hour claims should be certified.

In Reinig v. RBS Citizens, N.A., the Third Circuit Court of Appeals reviewed a Pennsylvania district court’s order certifying classes of Mortgage Loan Officers (“MLOs”) in a wage-hour lawsuit against their employer, Citizens Bank. The MLOs argued that, although Citizens maintained a policy which allowed employees to work overtime with pre-approval, Citizens perpetuated a firm-wide “policy to violate the policy” by encouraging MLOs to work overtime hours off the clock.  Certifying numerous subclasses under state laws, the district court found that the plaintiffs had introduced sufficient evidence to support certification.  Citizens took an interlocutory appeal, contending that the certified classes were insufficiently definite and that the plaintiffs had failed to meet the commonality and predominance elements of Rule 23.

The Third Circuit first examined the lower court’s determination that plaintiffs had provided a sufficiently discernible class. The court found that the lower court’s  certification order, which granted the state law subclasses in a conclusory fashion, failed to provide any analysis of the scope of plaintiffs’ class definition. The Third Circuit found that this lack of specificity required it to “comb through and cross-reference” multiple documents in an effort to “cobble together the parameters defining the class and a complete list of the claims, issues and defenses to be treated on a class basis.”  Accordingly, the court found these definitions inadequate and remanded the issue of the class definitions back to the district court.

The court next examined the district court’s treatment of Rule 23’s commonality and predominance requirements, and found that the district court relied on insufficient evidence to support its finding that these requirements were met. Specifically, the Third Circuit took issue with the district court’s reliance upon the report of a special master overseeing the case, as this report merely summarily referred to testimony of two dozen MLOs that supported plaintiffs’ theory of a uniform “policy to violate the policy ” without actually identifying the testimony that supported this theory.   The Third Circuit further noted the fact that the district court undertook no analysis of whether Citizens had actual or constructive knowledge of the alleged policy, and provided no explanation as to how it reconciled its conclusion with testimony from some  plaintiffs that they were not required to work overtime off the clock. Expressing serious doubt as to whether the plaintiffs’ proffered evidence could meet the commonality and predominance requirements of Rule 23, the court remanded the issue and implored the district court to more rigorously examine the record and reconsider its ruling.

The Third Circuit’s decision in Reinig safeguards two critical protections for employers facing class action claims. First, it affirms that plaintiffs and courts must define class claims with a level of specificity that permits employers to gauge the scope of class action liability. Second, the decision affirms the rigorous analysis district courts must undertake when evaluating commonality and predominance under Rule 23 — requirements that often are the strongest lines of defense for employers against far-reaching class definitions and claims.

 

 

 

 

 

It’s the week before Christmas, and in our practice group meeting,

We look back and consider the year that’s completing.

The wage-hour nuggets that earn all our favor,

Wond’ring “Is this the last time I’ll be rhyming ‘class waiver’?”

 

Because the Supreme Court weighed in and said it is OK.

In exchange for employment, you can give class away.

Justice Gorsuch’s words left employers’ hearts smitten:

“[A]rbitration agreements . . . must be enforced as written.”

 

And for those who may read the decision and grouse,

SCOTUS says, don’t blame us, ask the Senate or House.

About the only bad thing in the case is the name,

And the infinite puns that were Epically lame.

 

Amazingly, the Supremes were not done with wages,

As they addressed a construction that’s lingered for ages.

When determining whether overtime has accrued,

How should FLSA exemptions have to be construed?

 

For decades, the knee-jerk response has been “narrow,”

But the Court made no bones, it went straight for the marrow:

“The flawed premise [of a] remedial purpose ‘at all costs,’”

Meant that narrow construction to the side had been tossed.

 

With dozens of exemptions (in § 213, mainly),

A new command to the courts:  construe those things plainly.

Look how they’re written, with no bias impeding,

Because every exemption deserves a fair reading.

 

From the Judicial Branch, we jump to Article II

And the Wage Hour Division’s annual review.

A year that’s been filled with some policy flips

In the combat zone that lies between wages and tips.

 

A regulatory proposal that encouraged more sharing

With back of house workers, but was viewed as uncaring.

Was withdrawn when a law was passed in its stead

Turning old DOL guidance on top of its head.

 

And “what’s a tipped occupation?”; they got sued on that

So they reissued a letter and resolved the spat.

Now if there are questions of when tips are proper,

You can just check the work in the O*Net task hopper.

 

More opinions were issued, but will more courts be swayed?

More employees got wages through investigations and PAID.

But if the overtime reg is what makes your eyes glisten,

They can’t get it done, but, man, can they listen.

 

From D.C. we head out to the West Coast

For the head-shaking section of this annual roast.

Your flat-rate bonus calculations, just tear them to shreds;

California proclaimed “We are not like the feds.”

 

The federal regular rate is mathematical fact.

Divide the bonus by hours, the answer, exact.

But a single pay system, California’s impaired;

Their divisor is 40; and next year, it’s pi squared.

 

Some workers on gigs (and probably some in ceramics)

Learned that they’d become employees because of Dynamex.

The single conclusion from that ABC test?

It looks like they no longer want contractors out West.

 

But one big decision gave employers there hope.

Criminalized arbitration?  Gov. Brown, he said “Nope.”

Now back to those places where “pro-employer” ain’t fiction

And courts do not stretch to find their jurisdiction.

 

Where fluctuating workweeks exist, and interns do, too.

Where arbitration precedes certification in queue.

To all our blog readers across the whole nation:

Happy New Year to you!!! (and think about arbitration).

By: Patrick Bannon and Michael Steinberg

Seyfarth Synopsis: Two recent decisions by federal courts in Massachusetts highlight barriers to litigating FLSA cases on a nationwide basis — including a personal jurisdiction defense that could preclude a nationwide collective in many FLSA cases. 

The defendant in the first case was a Fortune 100 company that conducts business pervasively throughout the country.  Yet the defendant defeated conditional certification of a nationwide FLSA collective action by showing that the court lacked personal jurisdiction as to claims by non-Massachusetts workers.

In denying a motion to allow workers nationwide to join the suit, the United States District Court for the District of Massachusetts noted that defendant isn’t incorporated in and doesn’t have its principal place of business in Massachusetts.  Therefore, under the Supreme Court’s rulings in Daimler and Bristol-Myers Squibb, the defendant could be subject to personal jurisdiction in Massachusetts only if the conduct forming the basis for a plaintiff’s claim occurred in Massachusetts.  As the defendant argued, however, nothing that happened in Massachusetts affected the claims of workers who never lived or worked there.  Accordingly, the district court ruled that it had no power to consider the claims of any non-Massachusetts workers and that only Massachusetts workers should receive notice and an opportunity to opt in to the action.

In the second case, brought by employees of a multi-state debt collection company, the court found insufficient evidence that the employer had a company-wide commission policy, and therefore ruled that plaintiffs did not show that employees nationwide suffered from a common policy or practice.  Accordingly, the court limited the issuance of notice of the collective action to a group of Massachusetts employees.

Taken together, these recent cases demonstrate two ways in which employers can resist litigation of FLSA claims on a nationwide basis.  As a threshold matter, an employer that is sued in a state where the employer is not a “citizen” should evaluate whether a proposed nationwide action may be dismissed for lack of personal jurisdiction as to out-of-state plaintiffs.  Additionally, even in the context of an early motion for conditional certification, plaintiffs still must show that a proposed group of opt-in plaintiffs suffered from a common unlawful policy or plan.  Where such evidence is lacking, even employers with widespread operations may be able to prevent nationwide certification.

By: Ariel Fenster

Seyfarth Synopsis:  Courts across the country have frequently weighed in on the unpaid interns/ trainees versus paid employee debate.  Now, the 10th Circuit has jumped into the fray with a decision affirming that a massage therapy student was not an employee under the FLSA and thus need not be paid.

The issue of whether interns and trainees must be paid under the Fair Labor Standards Act (“FLSA”) is a hot topic among companies.  Over the years, courts hearing these suits, and agencies enforcing and interpreting the law, have applied different tests and reached different answers in determining the nature of the employment relationship and the circumstances under which interns must be paid.  Figuring out which test applies and how it applies has been for many employers a pain in the neck for which massage therapy is needed.

Fortunately, in steps a massage therapy school.

This month, in Nesbitt v. FCHN Inc., et al., the 10th Circuit affirmed the District of Colorado’s grant of summary judgment holding that massage therapy students were not employees under the FLSA and thus not entitled to payment.  As part of the curriculum to become a licensed massage therapist, the plaintiff-student was required by the defendant massage therapy school to complete both classroom and clinical education requirements.  The clinical education component included approximately 100 massages to the public, each lasting about 50 minutes.

The schools charged the public discounted rates for the massages because they were being performed by students.  The massages took place at the school where clinic managers and teaching assistants were on site to supervise and provide feedback (the extent of that supervision was disputed by the parties).

In its decision, the district court applied a six-factor totality of the circumstances test.  The six-factor test was originally set out in the landmark Supreme Court case of Walling v. Portland Terminal and later applied by the 10th Circuit in Reich v. Parker Fire Protection District.  The district court applied that test to find the students to not be employees.  It specifically held as follows:

Factor One: The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school.  Here, the students received vocational training from the school.

Factor Two: The training is for the benefit of the trainees.  Here, the training primarily benefitted the students because they were required to complete these clinical hours to obtain their licenses

Factor Three: The trainees do not displace regular employees, but work under close observation.  Here, the students did not displace regular employees and they worked under the supervision of school instructors.

Factor Four: The employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion its operations may actually be impeded.  Here, there was no dispute regarding the profit that the company made from operating its school.

Factor Five:  The trainees are not necessarily entitled to a job at the completion of the training period. Here, the students were not entitled to employment upon completion of their training.

Factor Six:  The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training. Here, the students and Defendant both understood that they were not entitled to wages for time spent training.

The student appealed the district court’s decision on two bases.  First, the student argued that the district court applied the wrong test and instead should have used the “primary beneficiary test.”  Notably, the primary beneficiary test has been adopted in the 2nd, 6th, and 9th Circuits.  Additionally, on January 5, 2018, the United States Department of Labor (“DOL”) announced that going forward, it would utilize the primary beneficiary test. The DOL’s updated Fact Sheet #71, explains the test, which examines “the ‘economic reality’ of the intern-employer relationship to determine which party is the ‘primary beneficiary of the relationship.”  The 10th Circuit, however, felt bound to follow its prior Reich precedent.

Second, the student argued that even if the Reich test is applied, the factors weigh in favor of an employee-employer relationship, particularly because the massages were not carefully supervised.  But in affirming the district court’s decision, the Court explained that one factor alone is not sufficient to weigh in favor of an employer-employee relationship. As the district court had stated, “I look at the forest, not just the trees.”

The Takeaway for Employers:  Employers interested in establishing or maintaining an unpaid internship or trainee program should ensure that  the program is connected to a formal educational program.  And although no single factor is dispositive, certain factors can and should be clarified in a written agreement between the intern, the employer, and the employee with an eye toward the various tests courts use to decide whether an intern or trainee must be considered an employee, and thus whether the intern or training must be paid minimum wage and overtime.

By Abigail Cahak and Noah Finkel

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

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

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

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

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

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

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

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

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

By David S. Baffa, Noah A. Finkel, and Joseph S. Turner

Seyfarth Synopsis: Congress has once again proposed legislation that would seek to ban mandatory workplace arbitration of employment claims, despite a string of United States Supreme Court decisions upholding arbitration and class/collective action waivers as a lawful and appropriate mechanism to resolve workplace disputes. 

H.R. 7109, the Restoring Justice for Workers Act, was introduced by Representative Jerrold Nadler, D-N.Y., and Representative Bobby Scott, D-Va., with 58 Democratic co-sponsors.  Similar legislation is expected to be introduced in the Senate by Senator Patty Murray, D-Wash, with eight Democratic co-sponsors.  The proposed legislation would  overturn the U.S. Supreme Court’s decision in Epic Systems, and would amend the National Labor Relations Act to specifically prohibit class and collective action waivers under a new “Section 8(a)(6).”

As proposed, the new law would prohibit any pre-dispute agreement requiring arbitration of employment disputes.  The law also would prohibit post-dispute agreements to arbitrate, unless the agreement is obtained without coercion or condition of employment-related privilege or benefit.  Employees entering into voluntary post-dispute agreements also must be made aware of their rights under what would be a new section of the National Labor Relations Act.  That new section would make it an unfair labor practice to “enter into or attempt to enforce any [pre-dispute] agreement” that would bar or prohibit class or collective actions relating to employment, or to retaliate against any employee for refusing to promise not to pursue a class claim.

While there is no chance that this bill will move in the House of Representatives as currently comprised, it previews the legislation Democrats are likely to pursue if the House changes control next week.  A bill like this could even put a narrowly-controlled Republican Senate to the test, as the perceived unfairness of pre-dispute mandatory arbitration has been the target of considerable media attention, social media campaigns, and as recently as yesterday — large-scale employee activism.  As such, protecting mandatory arbitration of workplace disputes may be an issue on which even conservative legislators might waver.

Indeed, this is not Congress’ first attempt to ban workplace arbitration.  Before the Supreme Court’s decision in Epic Systems, and as part of the #metoo movement, Congress introduced in December 2017, bi-partisan legislation ostensibly aimed at preventing employers from enforcing arbitration agreements of sexual harassment claims.  That bill, “Ending Forced Arbitration of  Sexual Harassment Act,” was introduced by Senator Kristen Gillibrand, D-NY (and attracted some Republic support), but was penned in a way that would actually ban workplace arbitration in its entirety.  We figured it was an oversight at the time, as written in our blog, “Slow Down Congress: You Are About to Render the FAA Inapplicable to Employment Disputes (and Class Waivers), and You Probably Don’t Realize It.”  Clearly, this week’s Halloween bill was no accident.

Most legislative action against workplace arbitration has centered on the idea of prohibiting arbitration of sexual harassment claims, and by extension all other Title VII claims.  Among the earliest efforts begun in 2009, when — perhaps ironically — then-Senator Al Franken pursued the Arbitration Fairness Act, which sought to prohibit the mandatory arbitration of sexual harassment claims.  While that legislation was not successful, Senator Franken’s efforts led to provisions in the Department of Defense Appropriations Act of 2010, which to this day prohibits contractors to the U.S. DoD, with limited exceptions, from requiring arbitration of Title VII claims (including sexual harassment claims).  Under President Obama, the DoD prohibition was expanded by his Fair Pay and Safe Workplaces Executive Order on July 31, 2014, effective January 2016, to all federal contractors.  President Trump, however, rescinded this EO shortly after taking office in late 2016.

Several state legislatures have sought to ban mandatory arbitration of sexual harassment claims.  Washington, Maryland, and New York each passed laws that would prohibit mandatory arbitration of sexual harassment claims, but those laws are either explicitly or presumptively preempted by the Federal Arbitration Act.  See our Client Alert on the New York Ban.

Facing increasing headwinds against mandatory arbitration of sexual harassment claims, several large companies have proactively and publicly declared that they will exempt sexual harassment claims from existing mandatory arbitration programs.  Other companies also are considering more limited arbitration programs, such as mandatory arbitration and class waivers for wage-hour claims only.  But the Halloween bill and other attempts to ban workplace arbitration altogether are also becoming more common following Epic.  The California legislature passed a law that would have barred arbitration of any violation of the California Labor Code or the Fair Employment and Housing Act, but it was vetoed by Governor Brown on September 30, 2018.  Governor Brown’s term ends this year, and on November 6th Californians will pick a new Governor of California to take office on January 7, 2019.

Kentucky also recently joined the fray.  On September 27, 2018, the Kentucky Supreme Court, in Northern Kentucky Area Development District v. Snyder shot down a workplace arbitration agreement on the basis that a mandatory arbitration agreement for employment claims is prohibited by Kentucky law, and not preempted by the Federal Arbitration Act.   Kentucky’s law prohibits any employer from requiring as a condition of employment an employee to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit…”.  The Court ruled that the statute was not an anti-arbitration clause provision, but an anti-employment discrimination provision.  Of course, calling arbitration a diminution of rights are “fightin’ words” to the U.S. Supreme Court, so we remain on the lookout for a cert petition.

For now, employers are staying the course.  Many companies remain interested in implementing dispute resolution procedures and mandatory arbitration programs that would limit their exposure to class and collective actions.  Most employers report faster and more efficient resolution of workplace grievances and concerns, with more ability to direct money and time to the resolution of real complaints, rather than simply to line the pockets of class action plaintiffs’ lawyers.

For more information on this topic, please contact the authors, your Seyfarth Attorney, or any member of the Firm’s Labor & Employee Relations Team.

By: Alexander Passantino

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

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

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

By: John Yslas

Arbitration agreement resolution of commercial disputes on a desk.

Seyfarth Synopsis: In vetoing the California Legislature’s attempt to criminalize arbitration agreements (AB 3080), Governor Brown displayed common sense and the legal learning provided by recent U.S. Supreme Court authority.

Haven’t high courts already upheld mandatory arbitration agreements?

Yes, they have. The California and U.S. Supreme Courts have repeatedly ruled that employers may require employees to enter valid arbitration agreements (waiving the right to judge and jury trial). The most recent vindication of arbitration agreements was the U.S. Supreme Court’s May 2018 decision in Epic Systems, which upheld the enforceability of an arbitration agreement that waived participation in class waivers, against an argument that such a waiver violated employee rights to concerted activity under the National Labor Relations Act.

Hasn’t the California Legislature got the message?

Apparently not yet. The Legislature has tried again and again to outlaw arbitration agreements in ever more inventive ways, notwithstanding the clear authority to the contrary. Governor Brown, meanwhile, has learned that these efforts will not pass constitutional muster. In 2014, Governor Brown signed into law AB 2617, which outlawed mandatory arbitrations for goods and services; but a March 2018 appellate decision held that the law was preempted by the Federal Arbitration Act. Meanwhile, in 2015, Governor Brown vetoed AB 465, which would have outlawed mandatory arbitration as a condition of employment. In doing so, Governor Brown noted that bans on arbitration have been consistently struck down as violating the FAA, and that California courts have made arbitrations more employee-friendly by requiring certain protections (neutral arbitrator, adequate discovery, no limit on damages or remedies, written decision subject to some review, cost limits). He even questioned whether arbitration is really less fair than traditional litigation for employees.

While Governor Brown’s learning curve has progressed, the California Legislature’s has regressed, as evidenced by AB 3080

In August 2018—just three months after the Epic Systems decision—the Legislature passed AB 3080, which banned mandatory arbitration agreements, which outlawed “opt-out” provisions (allowing employees to refuse to enter into arbitration agreements), and which even criminalized employer conduct to implement such an agreement. The legislative committee analyses argued that there must be “consent and fairness” in entering into an agreement, that the Supreme Court “has never ruled that the FAA applies in the absence of a valid agreement,” that the FAA would not preempt AB 3080 because it “regulates behavior prior to an agreement being reach[ed],” and that AB 3080 does not “outright ban or invalidate arbitration agreements.”

The apoplectic reaction to the outrage that was AB 3080

The employer community reacted strongly to AB 3080. Leading law firms urged Governor Brown to veto AB 3080. They noted that the proponents were making old, tired arguments that the U.S. and California Supreme Courts have rejected. They protested the disingenuousness of saying that arbitration agreements could not be voluntary even where employees have the right to opt out. They reminded Governor Brown of his veto of AB 465 in 2015.

Most emphatically, they pointed out that criminalizing employer conduct that the FAA so clearly protects could coerce fearful employers into abandoning arbitration agreements until the courts clearly rule AB 3080 unconstitutional. In this respect the Legislature, ironically, was engaging in something that a private party could not do without engaging in an unfair business practice. After all, an unfair business practice occurs when a party inserts an obviously unlawful provision into a contract, aiming to intimidate the other party into abiding by the unlawful provision.

Governor Brown’s veto and what’s next

On September 30, 2018, Governor Brown vetoed AB 3080. His accompanying letter rejected the Legislature’s argument that AB 3080 only regulates behavior prior to an agreement being reached. The Governor pointed out that in a 2017 Supreme Court decision, even Justice Kagan (“an appointee of President Obama”) acknowledged that the FAA “cares not only about the ‘enforcement’ of arbitration agreements, but also about their initial ‘valid[ity].’ ” Governor Brown emphatically stated that AB 3080 “plainly violates federal law.”

So what does all this mean? The lesson is that our systems of checks and balances can still work, where a governor learns not to permit a legislature to flout federal law. Will this trend continue as our great state ushers in a new governor in 2019? Stay tuned.

Webinar Reminder

Don’t forget to sign up and attend our complimentary webinar on October 10, 2018 for a discussion of all of the newly-enacted employment-related laws, and implications for employers.

By Abigail Cahak and Noah Finkel

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

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

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

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

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

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

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

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

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

By: Howard M. Wexler and Vlada Feldman

Seyfarth Synopsis: The Second Circuit’s recent rulings in Munoz-Gonzalez v. D.L.C. Limousine Service, Inc. and Flood v. Just Energy Marketing Corp. further demonstrate the impact of the Supreme Court’s holding in Navarro, et al. v. Encino Motorcars, LLC as it pertains to FLSA exemptions by rejecting the traditional “narrow construction” approach in favor of a “fair interpretation.” 

We previously wrote about how the Supreme Court put the brakes on the outdated view that FLSA exemptions should be “construed narrowly” in Navarro, et al. v. Encino Motorcars, LLC.   This past week, the Second Circuit Court of Appeals issued two decisions finding two different categories of workers exempt under the FLSA based on a fair (rather than a narrow) interpretation of FLSA exemptions, as the Supreme Court held is the correct approach.

Stalling Out in Munoz-Gonzalez v. D.L.C. Limousine Service, Inc.

In Munoz-Gonzalez v. D.L.C. Limousine Service, Inc. a group of limo drivers argued that DLC, a “chauffeured car service” violated the FLSA by not compensating them for the overtime hours they worked.  When the district court granted summary judgment in favor of DLC, Munoz-Gonzalez appealed arguing that DLC was an “airport limousine service” and therefore did not qualify for the taxicab exemption.

On the second lap around the racetrack, Munoz-Gonzalez stalled out once again.  In determining whether the taxicab exemption was applicable, the Second Circuit drove straight through the tracks made by the Supreme Court in Encino Motorcars.  The court inspected the ordinary meaning of the word “taxicab”  and found that a “taxicab” is “(1) a chauffeured passenger vehicle; (2) available for hire by individual members of the general public; (3) that has no fixed schedule, fixed route, or fixed termini” and therefore DLC qualified for the exemption and the drivers were not entitled to overtime pay.

Notably, in affirming the grant of summary judgment in favor of DLC, the Second Circuit rejected Munoz-Gonzalez’s admonition to construe the FLSA narrowly.  Instead, the opinion cited Encino Motorcars holding that FLSA exemptions should be construed “‘fair[ly]’ . . . with full attention to the text” instead of in favor of the plaintiff.  In the words of the Second Circuit: “a taxicab is a taxicab is a taxicab.”

Hard Knock Life for Flood v. Just Energy Marketing Corp.

In Flood v. Just Energy Marketing Corp., the Second Circuit answered Plaintiff Flood’s door knock but ultimately rejected his sales pitch.  Kevin Flood, a door-to-door salesman, sued his employer alleging that the company violated the FLSA by failing to pay him and the class that he hoped to represent overtime for the weeks that they worked in excess of forty hours.  The district court bought into the employer’s argument that Flood was not entitled to overtime pay based on the “outside salesman” exemption, 29 U.S.C. § 213 (a)(1).  On appeal, the Second Circuit upheld the district court’s ruling and rejected Flood’s argument after quoting Flood’s own statement: “sales is ‘what I do.’”

The Second Circuit once again reiterated that although “[u]ntil recently, it was a rule of statutory interpretation [to] . . . narrowly construe an exemption to the FLSA in order to effectuate the statute’s remedial purpose,” the Supreme Court rejected that view in Encino Motorcars because “exemptions under the FLSA are ‘as much a part of the FLSA’s purpose as the overtime-pay requirement.’”

A Shifting Tide

Both cases can be viewed as lighthouses signaling a tide shift in FLSA interpretation based on Encino Motorcars and the continued banishment of the “construe narrowly” canon of construction some courts previously used in making exempt status determinations.