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. 

              The United States Supreme Court unanimously held that when a district court compels claims to arbitration, the district court must stay – rather than dismiss – the district court case.  In Smith v. Spizzirri, the Supreme Court resolved a circuit split.  It overruled precedent from the First, Fifth, Eighth, and Ninth Circuits and agreed with decisions from the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits.

              The decision is good news for employers who want to arbitrate.  If an employer establishes in district court that a plaintiff’s claims must be arbitrated and the district court dismisses the case, the plaintiff can immediately appeal the dismissal.  An employer that wants only to arbitrate could nevertheless be forced to litigate a potentially lengthy appeal.  But if a plaintiff’s case is stayed in the district court while arbitration proceeds, the plaintiff typically has no immediate avenue of appeal.  The dispute actually moves to arbitration. 

              The Spizzirri decision does not affect whether claims should be compelled to arbitration.  But it provides uniformity across circuits about what happens in the district court after a case is compelled to arbitration.  The decision allows employers who enter into arbitration agreements with their employees to get their disputes into arbitration more efficiently. 

              Seyfarth Synopsis: On April 29, 2024, the U.S. Department of Labor’s Wage and Hour Division released a Field Assistance Bulletin addressing the application of the Fair Labor Standards Act to use of artificial intelligence and other automated systems in the workplace.

              Artificial Intelligence (AI) is seemingly ubiquitous.  By 2025, half of Human Resource departments are predicted to use AI in some capacity.  Employers are increasingly using AI-powered timekeeping systems or applications that can generate timecards, determine schedules and staffing, monitor performance, and process payroll (among many other benefits).  Against this backdrop, and pursuant to Executive Order 14110 (Oct. 30, 2023), the U.S. Department of Labor’s Wage and Hour Division (WHD) released a Field Assistance Bulletin (FAB) highlighting some of the compliance risks under the Fair Labor Standards Act (FLSA) associated with the use of AI in the workplace. 

              Tracking Work Time

              The FLSA generally requires that covered employees be paid at least the federal minimum wage for every hour they work and at least one and one-half times their regular rate of pay for each hour worked in excess of 40 in a single workweek.  One issue that often arises in wage-hour litigation is whether the employer had knowledge of any uncompensated work performed by an employee.  As noted here, courts generally hold that compensable work under the FLSA is work that employers require, know about, or should have known about.  

              Traditionally, employers tracked time worked through either time clock machines or timesheets.  Increasingly, however, AI is being used for automated timekeeping in which software tracks when workers sign in and out of work and then determines an employee’s “active” and “idle” time.  For example, some AI-driven software monitors remote workers by taking screenshots of their computers at set intervals and collecting data, including keyboard activity and application use, to generate a timecard every 10 minutes throughout the day.  The software only records as time “worked” when the system detected “active” work, such as moving a mouse or a keystroke. Any periods of perceived inactivity are considered non-compensable idle time, which would not be reflected in the employees’ pay. 

              WHD notes that this type of software may lead to wage-hour liability.  “An AI program that incorrectly categorizes time as non-compensable work hours based on its analysis of worker activity, productivity, or performance could result in a failure to pay wages for all hours worked.”  Although WHD does not provide examples of incorrectly categorized idle time, such examples may include AI-powered monitoring software failing to fully account for the time employees spend working away from their workstation; offline time spent thinking, strategizing, or resolving problems; time employees spend reviewing and researching hard copy documents or taking handwritten notes; or any offscreen engagement with clients or customers (among other “offline” activities).        

              Monitoring Break Time          

              The FAB also provides that employers must ensure that any AI-powered monitoring software recognizes compensable breaks.  Generally, short breaks of 20 minutes or less taken during the workday are generally counted as compensable hours worked, while uninterrupted breaks of 30 minutes or more are not.  See 29 C.F.R. §§ 785.18, 785.19. 

              Traditionally, employers monitored break time through employees recording the start and end of their break.  By as WHD notes, “[s]ome timekeeping systems now incorporate AI to make predictions and to auto-populate time entries based on a combination of prior time entries, regularly scheduled shift times and break times, business rules, and other data.”   Moreover, automatic meal and break deductions are often a preferred default setting for employer timekeeping software, where a set period of time (e.g., 30 minutes) is automatically deducted from non-exempt employees’ pay for any given lunch period. 

              According to WHD, such software may result in an FLSA violation, and provides the following example: “an employee usually takes a 30-minute unpaid meal break but skips the break on a particular day due to their workload.  Without appropriate human oversight, a system that automatically deducts the break from the employee’s work hours based on the employee’s past time entries could result in the employer failing  to properly record and pay the employee’s hours worked.”

              Waiting Time

              Not all idle time is compensable.  Instead, under the FLSA, idle time is compensable when employees are “engaged to wait,” but not when they are “waiting to be engaged.”     

              Many companies have relied (and are relying) on AI tools and AI-driven software to manage staffing levels in a manner more finely tuned to changing demand, including having employees “on standby” and thus ready to work as needed.  For example, WHD found that “automated systems used by some hotels independently prioritize and assign tasks to housekeeping workers.  When a guest checks out of their room or requests service, these systems automatically delegate the task of cleaning that hotel room to a worker based on their availability and other factors.” 

              The efficiencies achieved through use of this technology may also, however, pose wage-hour compliance risks.  “When the employee is not provided with sufficient time that they can use for their own purposes, is not completely relieved from their duties, or is expected to remain nearby their workstation and is not given a set time when to report back to work, they are generally considered to be ‘engaged to wait.’”  Therefore, WHD states that “employers must ensure that they accurately account for increments of time when the employee was waiting for their next assigned task,” unless the employee was sufficiently able to use his or her time effectively for personal activities.

              Work Performed at Multiple Geographic Locations

              Another area WHD identified where AI can result in unforeseen wage-hour risk involves the continuous workday rule, which provides that the period between the start and finish on the same workday of an employee’s principal activity or activities is generally considered compensable.  See 29 C.F.R. § 790.6.  Thus, travel from job site to job site during the workday is also generally compensable.  See id. § 785.38.

              WHD found that some employers use location-based monitoring to track employees, which an automated system processes to determine whether an employee is “working.”  According to WHD, using such technology may inadvertently lead to wage-hour liability, and WHD provided the following example: “A system that records only the time the worker spent at the worksite as compensable work hours when the worker is performing work away from the worksite may fail to account for travel time between worksites or hours worked at other locations and may result in minimum wage or overtime pay violations.”

              Calculating Overtime Compensation Owed

              The amount of overtime pay due to an employee is based on the employee’s “regular rate of pay,” which is found by dividing the total pay for employment in any workweek (minus certain statutory exclusions) by the total hours worked during a given workweek.   

              Issues sometimes arise when non-exempt employees are paid multiple wage rates (e.g., different hourly rates for different types of work).  In such a scenario, the employee’s regular rate of pay for that week is typically the “weighted average” of such rates.  See 29 C.F.R. § 778.115. 

              WHD found that some AI-driven “systems have the ability to automatically recalculate and adjust a worker’s pay rate throughout the day . . ., which may result in significant different regular rates from one workweek to the next.  Similarly some automated task assignment systems have the ability to determine the number of types of tasks assigned to individual workers, based on a variety of factors and metrics,” and then pay workers at different rates based on tasks performed. 

              WHD instructs that employers who use such technologies “must ensure that the different rates are properly calculated into the regular rate of pay[.]”     

              Conclusion

              AI and the use of automated technologies for scheduling, timekeeping, and calculating overtime may pose wage-hour risk.  Any such technologies, therefore, should be vetted to ensure that they do not lead to wage-hour liability.  

              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.

              By: Ariel Cudkowicz and Michael Steinberg

              Seyfarth Synopsis: During oral argument on April 29, 2024, a panel of the Fifth Circuit appeared poised to vacate the DOL’s 2021 80/20 Rule.

              Here at TIPS, we’ve been closely following the ongoing litigation in the Fifth Circuit surrounding the U.S. Department of Labor’s December 2021 codification of the “80/20 Rule.”  That 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. 

              What is the 80/20 Rule, you ask? In essence, it addresses whether an employer can take the tip credit for time a service employee spends performing tasks that support her tip-producing work, even if such supportive tasks do not themselves directly produce tips. For most of the period since 1988, under the 80/20 approach, the DOL’s answer has been: Yes, but only if the time spent on the directly supportive work is not “a substantial amount,” which the DOL says is time in excess of 20% of total hours in a workweek for which the employer sought to take a tip credit.  In 2009 and 2018, the Eighth and Ninth Circuits granted deference to this administrative guidance and thus blessed the 80/20 Rule.  More recently, in 2021, the Eleventh Circuit also adopted the 80/20 principle as a reasonable construction of the FLSA.

              Then, in a regulation promulgated in 2021, 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, 29 U.S.C. § 203(t)—which does not define what it means to be an employee “engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips”— under the Supreme Court’s Chevron doctrine of agency deference.

              Yesterday, a panel of the Fifth Circuit heard arguments on appeal. The panelists, consisting of Judges Jennifer Walker Elrod, James E. Graves Jr., and Judge Barry W. Ashe of the Eastern District of Louisiana (sitting by designation), appeared to be skeptical of the validity of the DOL’s newest iteration if the 80/20 Rule. 

              During the argument, lawyers for both the appellants and appellees seemed to agree that the FLSA leaves some room for the DOL to elaborate on what it means to be a tipped employee.  The problem, according to appellants, is that the line the DOL has drawn is not consistent with the statutory text, because its rule conflates the pursuit of tips with a tipped occupation.  In questions directed to the government’s lawyer, Judge Ashe asked what other meaning the FLSA’s reference to being “engaged in an occupation” could have, if not to define the occupations to which the tip credit applies. Judge Elrod echoed this, pressing counsel for the DOL how the FLSA’s text could have any other meaning.  Judge Elrod also pointed out that the new rule’s continuous 30-minute requirement, unlike any prior iteration of the 80/20 Rule, would represent “a new imposition” on restaurant and hospitality employers “to track to the minute the work of every wait person.”

              Judge Graves, meanwhile, appeared doubtful that the rule’s 20% threshold is even rational under traditional principles of review of agency rulemaking.  He asked the DOL’s counsel about a hypothetical service worker for whom the equivalent of 5% of each workweek per shift is idle time.  Over the course of a five-day workweek, Judge Graves questioned, wouldn’t that relatively modest amount of daily idle time trigger the 20% threshold? Can it be, Judge Graves asked, that such an employee is “not a tipped employee anymore?”  The other panelists also focused on the issue of idle time, and they seemed unsatisfied with the DOL’s position that substantial amounts of such time—such as during a lull when a restaurant has no diners—could transform a tipped employee into a non-tipped worker.

              The judges also struggled throughout the argument with a series of swirling legal questions they’ll need to confront should they decide that the new rule is invalid.  Would such a decision from the Fifth Circuit create a circuit split with the Eighth, Ninth, and Eleventh Circuits? Lawyers for both sides seemed to acknowledge it would.  What impact would it have on the validity of decades of DOL enforcement guidance embodying the 80/20 Rule? Should the case be decided under principles of Chevron (deference to agencies’ reasonable interpretations of ambiguous statutes they administer), Auer (deference to agencies’ interpretations of their own ambiguous regulations), review under the Administrative Procedure Act, or some other framework?

              Though the answers to those questions are uncertain, one prospect seems increasingly likely in the wake of yesterday’s arguments before the Fifth Circuit: Supreme Court review of the 80/20 Rule.

              Stay tuned. 

              Seyfarth Synopsis: Last week, a Washington healthcare company was ordered to pay 33,000 workers $98.3 million in damages in a class action related to its meal break and timeclock rounding practices.  The vast majority of the awarded damages pertain to missed meal breaks, but the award included an offset of about $1 million to account for the fact that some employees signed meal break waivers.  This case is a potent reminder of the importance of training managers on meal break requirements, scheduling and providing meal breaks in compliance with Washington law, and clearly documenting employee meal break waivers.

              Background
              In September 2021, a class action lawsuit was filed against the healthcare company claiming that the company systematically failed to provide employees with a second 30-minute meal break when employees worked shifts longer than ten hours (Washington law requires employers to provide non-exempt employees with a 30-minute unpaid meal break for every five hours worked). 

              Plaintiffs also claimed that the healthcare company’s payroll policy of rounding time worked to the nearest 15-minute increment generally deprived workers of wages due, though plaintiffs conceded that, in some instances, the rounding practice resulted in workers being paid more than they were due. 

              In January 2024, King County Superior Court Judge Averil Rothrock granted partial summary judgment in the plaintiffs’ favor on both claims.  Accordingly, the issue remaining for trial was damages: plaintiffs asked the jury to award them approximately $9.3 million in damages related to the rounding system and $90.3 million for missed second 30-minute meal breaks.

              On April 18, 2024, the jury awarded plaintiffs $98.3 million in damages.  Although the jury verdict form reportedly indicated that the jury initially awarded the workers their full request of $99.6 million in damages, the jury ultimately reduced that amount by about $1.3 million, finding that the company had shown some employees had signed written meal break waivers.

              Takeaways

              • Meal break waivers – Under Washington law, employees can waive meal breaks. If an employee chooses to waive their meal break(s), the waiver should be clearly documented.
              • Manager meal break training – Managers should be trained on meal and rest break requirements so that they are empowered to ensure compliance.
              • Rounding policy review – Although limited payroll rounding is allowed under Washington law, restrictions apply. Rounding policy and other related policies (such as punctuality and timekeeping policies) should be reviewed holistically for compliance.

              Certainly a verdict so sizeable puts a spotlight on Washington employers’ wage and hour compliance. Meal break and rounding practices, however, present compliance challenges in other states and under the FLSA, as well. And the size of this Washington verdict will certainly attract plaintiffs’ lawyers’ attention to those challenges nationally.

              Seyfarth synopsis: Today, the U.S. DOL unveiled its final overtime rule. The rule significantly increases the minimum salary for so-called “white collar” employees to be exempt from the federal FLSA’s overtime pay requirements. This development requires attention from virtually all employers.

              The DOL’s final overtime rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, revises the Fair Labor Standard Act’s overtime exemptions for executive, administrative, professional, and highly compensated employees. Effective July 1, 2024, an  executive, administrative, or professional employee must receive a salary equivalent to $43,888 per year in order to be classified as exempt. This will increase to $58,656 on January 1, 2025. Meanwhile, the annual compensation threshold for the highly compensated employee exemption will increase to $132,964 on July 1, 2024, and then again to $151,164 on January 1, 2025.

              These numbers are higher than what the DOL previewed in its August 2023 proposed rule. And they represent a significant jump from the current $35,568 salary level for executive, administrative, and professional employees, and the $107,432 minimum compensation level for highly compensated employees.

              These significant increases will have substantial implications and impacts across industries and command employers’ attention.

              The Changes

              The final rule presents three core changes to the rules framing whether and when an employee may be classified as exempt from the FLSA’s overtime pay requirements:

              1. Increased salary for “white collar” employees:The proposed rule increases the minimum salary level from $684 per week ($35,568 per year) to $844 per week ($43,888) effective July 1, 2024, and to $1,128 ($58,656) effective January 1, 2025.
              2. Increased total compensation threshold for the “HCE” exemption:The rule raises the total annual compensation requirement for the highly compensated employee exemption from $107,432 to $132,964 by July 1, 2024, and to $151,164 by January 1, 2025.
              3. Automatic updating every three years:The rule implements a triennial automatic update to these thresholds, designed, the DOL says, to align with shifts in worker salaries and provide employers with a predictable timetable for future adjustments. The updates will begin on July 1, 2027, and then occur every three years thereafter.

              As expected, the changes leave the “duties” tests for the exemptions untouched. So, as before, an employee generally must meet both the duties and pay requirements of at least one exemption in order to be classified as exempt.

              The Rule’s Road Ahead

              The final rule will go up on the Federal Register for public inspection before formal publication, likely in the next few days.

              The rule will face challenges in courts and potential scrutiny in the event of presidential administration turnover following the November 2024 election. It is worth remembering that the Obama Administration’s 2016 rule revising the FLSA exemptions in a similar fashion—i.e., an increased salary threshold with automatic, inflation-based increases—was stymied by legal challenges and a new administration and never came into effect.

              The DOL’s new rule is not immune to similar challenges, particularly as we approach another election cycle where compensation issues often become political footballs. Depending on Congress’s make up, the rule might also face challenges under the Congressional Review Act.

              Next Steps for Employers

              Despite likely legal challenges, employers cannot and should not bank on their success. Businesses must prepare for a final rule that takes effect on July 1, 2024, with a more pronounced change on January 1, 2025. While there are major variables in the upcoming presidential election, employers need to prepare for the current finalized rule.

              Employers should promptly develop an accurate picture and understanding of their exempt workforce—i.e., what roles it comprises, how many incumbents occupy the roles, where they are located, what functions they perform, and, of course, how much they are paid. Understanding the contours of the exempt population will allow employers to begin thinking strategically to identify and triage the roles that are most impacted by the new rule or that otherwise command attention during this time of change.

              Employers should partner with their attorneys internally and externally to understand how these changes affect their workforce. Seyfarth is on the cutting edge of these changes, with its comment on the proposed rule having been cited by DOL 17 times in the preamble to the final version. With the new rule, many exempt employees will become non-exempt, implicating a new set of state-by-state laws with which to comply. Employers may need to consider other workforce changes, as well as important training and communication strategies.