By: John Phillips and Andrew Scroggins

Seyfarth Synopsis:  On March 17, the House of Representatives passed the “Forced Arbitration Injustice Repeal Act of 2022” or the “FAIR Act,” which would ban the use of mandatory arbitration agreements and class and collective action waivers in the employment context (as well as for consumer, antitrust, and civil rights disputes).  If the Act were to pass the Senate and be signed into law, it would represent a sea change for employers, overturn decades of Supreme Court case law, and require employers to completely rethink their arbitration programs.  Although the Act’s prospects for passing the Senate are very uncertain, employers should pay close attention to developments in Washington, D.C., because, if passed, the Act would upend employers’ settled expectations with regard to their arbitration programs—not to mention impact businesses with regard to consumer and antitrust claims.

As we reported previously (here, here, and here), there has been a push in Congress and several states to ban enforcement of mandatory arbitration agreements for employment claims.  State efforts have largely—although not in every instance—been stymied by the Federal Arbitration Act, which provides that most arbitration agreements are enforceable according to their terms and which preempts states’ efforts to limit the enforceability of arbitration agreements.  And at the federal level, at least until recently, there was not a bipartisan majority in Congress sufficient to pass bills limiting the enforceability of arbitration agreements.

Nonetheless, there has been more and more support for arbitration agreement reform in Congress over the last several years.  For example, in April 2019 the Senate Judiciary Committee held a hearing entitled “Arbitration in America.”  The hearing was chaired by Senator Lindsey Graham (R-SC), and the Committee heard detailed testimony both for and against mandatory arbitration.  At the hearing, although they differed on how to address the issue, Senators in both parties expressed support for making arbitration more transparent.

This increased support in Congress recently culminated in a broad bipartisan agreement to limit the arbitrability of sexual assault and sexual harassment claims.  Last month, Congress passed H.R. 4445 or the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” and President Biden signed the bill into law on March 3.  A synopsis of that bill is available here.

Now, Congress’s push to limit the scope of arbitration continues—albeit on a much more party-line basis.  On March 17, the House of Representatives took up and passed the “Forced Arbitration Injustice Repeal Act of 2022” or the “FAIR Act” (H.R. 963).  When doing so, numerous members referenced testimony that Congress heard previously at the “Arbitration in America” hearing.  Representatives also relied on many of the same fairness arguments invoked recently to support the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.  Ultimately the FAIR Act passed the House by a vote of 222-209, with 1 Republican joining 221 Democrats in voting yes, and no Democrats voting no.

In a nutshell, the Act would prohibit, among other things, mandatory pre-dispute arbitration agreements in the employment, consumer, antitrust, and civil rights contexts.  The Act’s impact on consumer and antitrust claims are beyond the scope of this article, but, relevant here, it would prohibit mandatory arbitration of employment claims, including wage-hour and discrimination claims.  It would also preclude employers from maintaining class and collective action waivers.  Thus, the Act represents an attempt to overturn decades of pro-arbitration decisions applying the Federal Arbitration Act in the employment context, including a number of seminal Supreme Court decisions.

The FAIR Act would amend the Federal Arbitration Act as follows:

  • The Act would prohibit pre-dispute agreements that require arbitration of employment, consumer, antitrust, or civil rights disputes.
  • The Act would prohibit stand -alone class and collective action waivers for employment, consumer, antitrust, or civil rights disputes.
  • The Act defines employment and civil rights disputes broadly, to cover most employment-based claims, including discrimination and wage-hour claims.
  • The Act covers all arbitration agreements on the covered topics, regardless of whether the individual at issue is an employee or an independent contractor.
  • The Act specifically covers employment and civil rights disputes brought as class or collective actions under Federal Rule of Civil Procedure 23 or Section 216(b) of the Fair Labor Standards Act.
  • Federal law determines whether the Act applies to any particular dispute, and a court, not an arbitrator, decides the applicability of the Act to any specific arbitration agreement, even if the parties have delegated questions of arbitrability to an arbitrator.
  • The Act does not apply to most arbitration provisions in a contract between an employer and a labor organization or between labor organizations, such as grievance and arbitration provisions in labor contracts. However, the Act precludes such arbitration agreements from waiving the right of a worker to seek judicial enforcement of a right arising under the Constitution, a state constitution, or a federal or state statute or public policy.
  • The Act is effective on the date it is enacted—if that were to occur—and it would apply with respect to any dispute or claim that arises or accrues on or after the enactment date.

The Act now goes to the Senate.  It is unknown whether the Act can garner the support it needs to pass the Senate.  Although several Republican senators have expressed support for arbitration reform, the Act would need the support of at least 10 Republicans to survive a filibuster, if one were to be made.  Currently, it is unclear whether the Act has that amount of support.  By way of comparison, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act had 10 Republican co-sponsors before it came to vote, while the FAIR Act currently has none. That being said, opponents of mandatory arbitration for employment claims currently have momentum.  As such, employers should continue to monitor events in Washington, D.C., as change may happen quickly, and, if passed, the FAIR Act would change employment arbitration as we know it.

By: Robert Whitman and John Phillips

If Appraisal Is Governed by the Federal Arbitration Act, What Is the  Process? | Property Insurance Coverage Law Blog | Merlin Law GroupSeyfarth Synopsis: Recently, Congress passed significant new legislation amending the Federal Arbitration Act and precluding employers from mandating that employees arbitrate sexual harassment or sexual assault claims.  Importantly for employers, however, this new law does not impact employers’ ability to require arbitration of wage-hour claims, which, for most employers, is benefit of employment arbitration programs.

Mandatory arbitration agreements with class and collective action waivers play an important role in managing workplace disputes.  As a condition of employment, the employee and the employer agree that any claims will be resolved in arbitration, which is the less formal and usually more expeditious than court.  The Supreme Court has consistently supported the use of arbitration agreements in employment, and explicitly upheld employment-related class and collective waivers in its 2018 decision in Epic Systems Corp. v. Lewis.

Last week, Congress passed H.R. 4445, known as the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021.”   The legislation, which is now awaiting President Biden’s signature, permits any person alleging sexual harassment or sexual abuse, at his or her election, to invalidate an arbitration agreement or class/collective action waiver that otherwise would require the harassment/abuse claim to be arbitrated.

The law is the culmination of years of scrutiny and criticism of arbitration, especially in light of the “Me Too” movement.  Several states have passed laws either limiting the use of mandatory arbitration agreement in employment altogether (such as California), or limiting the arbitrability of certain harassment- and discrimination-type claims (such as New Jersey and New York).  While these laws were vulnerable to preemption by the Federal Arbitration Act, H.R. 4445, an amendment to the FAA, may undermine or eliminate the preemption defense for such claims.

The good news for employers is that H.R. 4445 does not undermine the main reason that many companies find arbitration agreements useful:  limiting potential class/collective action exposure from wage-hour claims.  Because H.R. 4445 applies only to claims concerning sexual harassment or sexual assault, and does not apply to wage and hour claims, employers can continue to maintain (or roll out) mandatory arbitration programs that cover wage-hour claims, which are often asserted on a putative class/collective action basis.  And employers can continue to include class and collective action waivers in their arbitration agreements for those claims.

Given these developments, now is a good time for employers to reconsider their arbitration programs, and the purposes behind those programs, to ensure that their arbitration policies continue to further the company’s objectives and comply with existing law.  One possibility, for example, would be for employers to scale back mandatory arbitration programs to cover only wage-hour and similar claims with a high probability of class/collective action treatment.  But such considerations should be made based on the nature of the employer’s business and the particular legal risks facing the company, and in consultation with all stakeholders, including the company’s attorneys.  At the same time, employers should also continue to monitor developments at the federal and state level.

The bottom line: rumors of the death of employment arbitration have been greatly exaggerated.  With respect to wage-hour claims—for many employers, the greatest hotbed of potential legal liability—arbitration agreements, including class/collective action waivers, remain alive and well.

 

 

 

By: Robert S. Whitman and Kyle D. Winnick

Seyfarth Synopsis: The Second Circuit held that dismissals without prejudice of FLSA claims are subject to the same judicial or agency scrutiny as dismissals with prejudice of FLSA claims.

Settling Fair Labor Standards Act claims in the Second Circuit just became harder.

In Cheeks v. Freeport Pancake House, the Second Circuit held that stipulated dismissals with prejudice of FLSA claims require approval of the district court.  The court reasoned that the requirement of judicial approval furthers the “remedial purpose” of the FLSA.  However, the court deferred, “for another day,” the issue of whether parties may settle such claims without court approval when the dismissal is without prejudice.

“Another day” has now arrived. In Samake v. Thunder Line, Inc., a split panel of the Second Circuit extended Cheeks and held that FLSA dismissals without prejudice require court approval.

The plaintiff in Samake sued for unpaid overtime wages under the FLSA and other statutes.  The employer moved to compel arbitration.  In response, the plaintiff filed a notice of voluntary dismissal without prejudice under Federal Rule of Civil Procedure 41(a)(1)(A), which provides that the plaintiff—without a court order—may dismiss an action without prejudice by filing a notice before the defendant answers or moves for summary judgment, or by filing a stipulation of dismissal signed by all parties who have appeared.

Instead of automatically dismissing the lawsuit, the district court entered an order inquiring whether the parties had entered into a settlement, adding that, if so, such an agreement was subject to judicial review under Cheeks.  The plaintiff subsequently withdrew his dismissal, and the district court granted the former employer’s motion to compel arbitration.

The plaintiff appealed and argued, among other things, that the district court lost jurisdiction the moment he filed his notice of voluntary dismissal, despite his subsequent change of heart.  In a 2-1 decision, the Second Circuit panel disagreed.  It held that the district court acted properly and that Cheeks applies to dismissals of FLSA claims with­out­ prejudice.

The two-judge majority reasoned that the holding of Cheeks did not depend on whether the dismissal was with or without prejudice.  Rather, it said that the holding of Cheeks was grounded in policy concerns—to remedy the disparate bargaining power between employer and employees—that apply regardless of whether a dismissal is with or without prejudice.  It supported its ruling with observations that litigants could circumvent Cheeks and mandatory court oversight merely by dismissing FLSA claims without prejudice.

In a separate opinion, Judge Steven Menashi concurred in the judgment (because he thought the district court’s order compelling arbitration was not appealable), but disagreed with the majority’s extension of Cheeks.  He offered two principal reasons: “[n]either the text of Rule 41 nor that of the FLSA provides any reason to take away a litigants’ usual right to dismiss his case without prejudice,” and there is a fundamental difference between dismissals with and without prejudice.  As to the latter, he noted that, while a dismissal with prejudice “is—literally—an agreement to waive the right to pursue a cause of action,” a dismissal without prejudice does not operate as an adjudication on the merits.  Thus, unlike the situation in Cheeks, the plaintiff in Samake would not have been foreclosed from re-asserting his FLSA claim.

Unless the majority’s decision in Samake is reversed on en banc review or by the Supreme Court, all dismissals of FLSA claims under Rule 41 will now be subject to judicial scrutiny in the Second Circuit.  It therefore appears that the only route to avoid court review of such settlements is a Rule 68 Offer of Judgment, which the court held does not require or permit judicial review.

The volume of FLSA case filings in the district courts of the Second Circuit remains extremely high.  Although the courts encourage prompt settlement of such claims, those settlements face a significant roadblock with the requirement of court review under Cheeks, which not only imposes a requirement of court approval but significantly restricts the provisions that parties may include in their settlements. With Samake now extending that rule to dismissals without prejudice, parties must be mindful of how they structure their agreements if they wish to resolve FLSA cases with finality.

 

Seyfarth Shaw does it again with the 21st Edition of its annual publication Litigating California Wage & Hour Class And PAGA Actions. This latest iteration continues to be a valuable resource for employers who are navigating the nuances of wage and hour class and PAGA actions in California. As in past editions, the 21st edition covers top legal developments and wage and hour trends in the Golden State, including updates devoted to strategies for defeating class certification, defending against PAGA representative actions, issues affecting classification of workers as independent contractors and much, much more.

To request your eBook copy of the 21st Edition, click here.

By: Alison Silveira and Barry Miller

Massachusetts Supreme Judicial Court - WikipediaSeyfarth Synopsis: The Massachusetts Supreme Judicial Court answered longstanding questions about which entities may be jointly responsible for wage violations under Massachusetts law, and in so doing, highlighted the perils for employees of joining a federal collective action and failing to assert any related state law claims in that proceeding.  The Court aligned the Massachusetts standard for joint employment with federal law and held that employees who join a federal case may not later bring state law claims against their employer in a separate action.

Joint Employment

In Jinks v. Credico (USA) LLC, the plaintiffs argued that they were employees of not only the direct sales company that hired and paid them but also a third-party sales broker that facilitated their work selling products or services for nationally recognized brands.  Plaintiffs argued that the expansive and stringent ABC test found in the Commonwealth’s Independent Contractor statute, G.L. c. 149, § 148B, also determined whether a third-party can be liable for wage-related violations.  The result of that theory would have made an entity the joint employer of any and every individual in Massachusetts who performed work within the entity’s “usual course of business” (Prong B of the test), regardless of whether the entity had any direct contact with or control over those employees.

The SJC, in a December 13, 2021 decision which can be found here, rejected plaintiffs’ theory, finding that the ABC test answers only the question of “who, if anyone, controls the work” performed by a worker and holding that joint employer status turns on who controls a given employee.  In order to determine who controls an employee – and is therefore a joint employer – the Court adopted the four-prong “totality of the circumstances” test applicable to joint employment claims under the federal Fair Labor Standards Act.  That test looks to “whether the alleged employer (1) had the power to hire and fire the employees; (2) supervised and controlled employee work schedules or conditions of employment; (3) determined the rate and method of payment; and (4) maintained employment records.”  The SJC reasoned that application of this framework “will capture both the nature and structure of the working relationship as well as the putative employer’s control over the economic aspects of the working relationship.”  Because Credico, which Seyfarth represented in this case, performed none of these functions in relation to the plaintiffs at issue in the Jinks case, the Court found that Credico was not their joint employer under the Massachusetts wage laws and had no liability for any violations by its corporate business partners relating to their Massachusetts-based employees.

In addition to aligning Massachusetts with federal law, the Jinks opinion provides helpful guidance, which could be used in defending against joint employment claims under both state and federal law, as to what companies may do to ensure that quality control standards and other commercial expectations are met, without being deemed to control the workers who will be expected to comply with those standards or expectations.  The Court noted that measures such as requiring workers to comply with regulatory requirements, mandating that workers receive proper training, monitoring to prevent fraudulent activity, providing workers with hardware or access to software for purposes of processing transactions, or maintaining records of workers’ background checks and drug test are insufficient to establish joint employment.

Claim Preclusion for Collective Action Participants

Another, more subtle feature of the Jinks decision may be helpful in defending a variety of wage-related claims that relate to the subject matter of an FLSA collective action.  One of the Jinks plaintiffs had participated in an earlier FLSA collective action in New York against the defendant before joining the Massachusetts state law class action.  The SJC held that this plaintiff’s claims were separately doomed by the doctrine of claim preclusion based on his participation in the earlier case.  In other words, the SJC concluded that FLSA opt-ins who do not assert their Massachusetts claims in a federal collective action forfeit their state law claims relating to the same subject matter.  Notably, while the SJC performed its analysis under a claim preclusion analysis because the federal action had been fully litigated, it also recognized that the doctrine of claim splitting may result in the same outcome even where the federal action remains pending.  In reaching this conclusion, the Court was not swayed by arguments from the plaintiffs’ attorney that such a rule would require plaintiffs’ counsel to engage in burdensome diligence with respect to the potential claims of every individual who joins a collective action.  This holding thus protects employers from serial litigation by aggressive plaintiffs’ attorneys and may provide support for arguments that opt-in notices in collective actions should include warning language regarding the potentially preclusive effect of joining a collective action.

By Kevin Young, Noah Finkel, and Brett C. Bartlett

Seyfarth Synopsis: On December 10, 2021, the White House and U.S. Department of Labor confirmed their plan to propose new rules to increase the salary threshold for exempt employees under the FLSA and “modernize” the prevailing wage rules that apply to many federal government contractors and subcontractors. The rulemaking process will be a relevant focus for virtually all employers in 2022.

The announcement comes by way of the Biden-Harris Administration’s semi-annual agenda, which lists regulatory actions under “active consideration” by the USDOL for the coming year. Such actions, the Administration explained, are meant to “advance our mission to foster, promote and develop the welfare of the wage earners, job seekers and retirees….”

As reflected in the agenda, the new overtime rule would increase the salary level requirement for overtime-exempt employees under Section 13(a)(1) of the FLSA. Increase to what? It’s not clear yet, but it’ll be something more than $684 per week, which is the current threshold for salaried-exempt administrative, executive, and professional employees.

Based on the agenda, we also expect modifications to the “highly compensated employee” exemption, which is currently available for employees who satisfy a relaxed duties test and earn at least $107,432 in annual compensation, inclusive of the minimum weekly salary of $684.

While clearly impactful, these developments are not surprising. This summer, USDOL Secretary Marty Walsh told a Congressional committee that the current salary threshold is “definitely” too low. And much further back, when President Biden was Vice President Biden, the DOL rolled out an even higher (and automatically increasing) threshold, though that rule was ultimately invalidated by a federal court in Texas before it took effect.

The DOL, per its regulatory agenda, also intends to “update and modernize the regulations implementing the Davis-Bacon and Related Acts to provide greater clarity and enhance their usefulness in the modern economy.” It is unclear what changes the DOL has in store for these laws, which generally require contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 (for the construction, alteration, or repair of public buildings or public works to pay laborers and mechanics) no less than a local prevailing wage that the USDOL sets.

So what happens next? The USDOL still needs to propose new rules, provide an opportunity for notice and comment, and ultimately publish a final rule. That process could easily take 9 months or more. Employers should continue to follow the current rules until they are changed. Beyond that, however, now may be a good time for employers to consider whether the new rules provide a good opportunity to audit “close call” jobs in their exempt workforce to ensure they remain properly classified (and, if need be, to sync any necessary changes with the implementation of a new rule).

Additionally, employers should remain attuned to the regulatory process. The notice-and-comment period will provide an opportunity for interested employers and their advocates to communicate with the DOL about the impact of the DOL’s proposals, a process that Seyfarth has been involved with in numerous prior DOL rulemakings.

By: Robert Whitman and John Phillips

As we previously reported, arbitration agreements have come under increasing scrutiny in recent years, especially with regard to claims for sexual harassment/assault arising during employment.

A number of states have already attempted to limit employers’ ability to require arbitration of such claims.  For example, state legislatures in California, Maryland, New Jersey, New York, Vermont, and Washington have passed statutes in recent years limiting employers’ ability to require arbitration of sexual harassment and (depending on the state) other claims.

However, most states’ efforts in this regard have conflicted with the Federal Arbitration Act (“FAA”) and are preempted by the federal statute.  For example, one federal district court earlier this year held that the New York law prohibiting arbitration of harassment claims is preempted by the FAA.  While preemption is not necessarily a sure-thing—the Ninth Circuit earlier this year appeared to limit the FAA’s preemptive reach—the prevailing view among federal courts, including the Supreme Court, has been that state laws seeking to restrict arbitration agreements are impermissible in the face of the strong federal policy promoting arbitration under the FAA.

Because the FAA preempts only state laws, not other federal statutes, there have been occasional efforts in Congress by opponents of arbitration to enact a federal law limiting or outright prohibiting arbitration in the employment setting.  These efforts have not previously advanced very far.  But some recent bills have bipartisan support and may have a chance at passage.

First, Senators Kirsten Gillibrand (D-NY) and Lindsey Graham (R-SC) jointly sponsored the Ending Forced Arbitration of Sexual Assault & Sexual Harassment Act of 2021 (S. 2342).  A companion bill has been introduced in the House (H.R. 4445).  The Senate bill has 17 other cosponsors, including 10 Democrats and 7 Republicans, while the House bill—introduced by Representatives Cheri Bustos (D-IL) and Morgan Griffith (R-VA)—has 13 Democrats and 4 Republicans as additional co-sponsors.  The Act would amend the FAA to prohibit pre-dispute arbitration agreements, including agreements with class- or collective-action waivers, for claims involving sexual assault or sexual harassment.  The Senate bill was recently approved unanimously by the Senate Judiciary Committee and “reported out” for consideration by the full Senate.  The House bill was similarly approved by the House Judiciary Committee on a bipartisan vote of 27-14.  Thus, the Act is now ready for consideration by the full Senate and House.

Second, the Resolving Sexual Assault and Harassment Disputes Act of 2021 (S. 3143) was recently introduced by Senator Joni Ernst (R-IA).  The bill would amend the FAA to (1) prohibit arbitration of sexual assault claims and (2) permit arbitration of sexual harassment claims provided that the agreement does not contain a confidentiality provision unless the parties agree otherwise after the claim has arisen, along with other procedural fairness requirements.  The prospects for this bill are uncertain.

Third, and much less certain of passage, is the more well-known Build Back Better Act (H.R. 5376).  Among the many provision in the Act is language to overrule the Supreme Court’s decision in Epic Systems Corp v. Lewis by banning collective action waivers in arbitration agreements.  This bill passed the House but faces unanimous Republican opposition, and it’s passage in the Senate is uncertain.

These federal developments demonstrate that some version of an arbitration bill tailored to sexual assault and harassment claims has a very good chance at becoming law.  Employers with arbitration programs should monitor events in Washington (as well as statehouses) and be prepared to amend their arbitration agreements should one of the federal bills under consideration become law.

By: Andrew McKinley & Kyle Winnick

Seyfarth Synopsis: On November 9, 2021, the Tenth Circuit issued a ruling beneficial to alleged joint employers in wage and hour lawsuits.  The Court held that a customer of staffing agencies could compel arbitration pursuant to arbitration agreements entered into between the plaintiffs and the staffing agencies, even though the customer was not a signatory to the agreements.  While the ruling only explicitly addressed Oklahoma law, it is indicative of a clear trend toward courts in a number of states permitting non-signatory enforcement of arbitration agreements within the joint employer context.

The proliferation of wage and hour class and collective lawsuits has forced an increasing number of staffing agencies to enter into arbitration agreements containing class-and-collective-action waivers with their employees.  In an effort to circumvent those agreements, plaintiffs’ attorneys have strategically chosen to forego bringing suit against the staffing agencies that directly contract with or employ them, instead suing only the customers of the staffing agencies, claiming that the customers are the direct or at least joint employers of the workers employed by the staffing agencies and thus are the one liable for any alleged wage-hour violations.  Because the staffing agency was not named in the lawsuit, the arbitration agreement between the plaintiff and staffing company is inapplicable—or so the argument goes.  Joining an increasing number of other courts addressing other states’ laws, the Tenth Circuit recently rejected such efforts to plead around arbitration agreements and class waivers under Oklahoma law.

In Reeves v. Enterprise Products Partners, LP, the plaintiffs worked for an energy company through third-party staffing companies that paid them for their work.  The plaintiffs and their respective staffing companies entered into employment agreements containing arbitration clauses whereby they agreed to “resolve by arbitration all past, present, or future claims or controversies, including but not limited to, claims arising out of or related to my . . . employment.”

The plaintiffs subsequently brought a proposed collective action under the Fair Labor Standards Act (FLSA) against the energy company, but not their staffing companies, claiming the energy company was their actual employer and that it unlawfully denied them overtime.  The energy company then moved to compel arbitration based on the agreements the plaintiffs had signed with their respective staffing companies.  The plaintiffs responded by contending that as a non-signatory to the arbitration agreements, the energy company could not compel arbitration.

The Tenth Circuit disagreed.  Relying on an equitable estoppel theory under Oklahoma law, which governed the arbitration agreements, the Tenth Circuit held the energy company could compel arbitration, despite being a non-signatory to the agreements.  The Tenth Circuit explained that equitable estoppel allows a non-signatory to enforce an arbitration agreement where a complaint raises allegations of “substantially interdependent and concerned misconduct by both the nonsignatory and the signatory to the contract.”

The Reeves court then explained why this standard was met on the facts before it.  Because the staffing companies were the ones who paid the plaintiffs, their allegations necessarily implicated the staffing companies’ conduct, making them “in essence” parties. The Tenth Circuit found that the doctrine of equitable estoppel precluded the plaintiffs from “simply plead[ing] around” their arbitration agreements, which covered “any concern arising” out of the plaintiffs’ employments, and the court had little doubt that a claim against a customer concerning payment was one such “concern.”  As a result, the court held that the customer was entitled to enforce the arbitration agreements under Oklahoma law.

The Tenth Circuit’s holding dovetails with how other courts have treated similar scenarios.  In Noye v. Johnson & Johnson Servs. Inc., 765 F. App’x 742 (3d Cir. 2019), for example, the plaintiff brought statutory claims against the staffing company that directly employed him and the staffing company’s customer for whom he had worked.  The plaintiff had signed an arbitration agreement with the staffing company, but not with the co-defendant.  The Third Circuit, construing Pennsylvania law, held the customer could compel arbitration, despite being a non-signatory to the arbitration agreement, because the plaintiff’s employment and arbitration agreements “were the vehicles” that placed him with the customer.

The upshot of Reeves, and similar cases, is that carefully drafted arbitration agreements can not only preclude class and collective actions for staffing companies, but can help shield their customers as well who may be sued on a joint employer theory.  While Reeves only explicitly addressed Oklahoma law, it is indicative of a clear trend toward courts in a number of states permitting non-signatory enforcement of arbitration agreements.  Nonetheless, a non-signatory’s ability to enforce an agreement will inevitably turn on the language of the particular agreement at issue and the particular state law governing that agreement.

By: Ariel Fenster, Noah Finkel, Christina Jaremus, and Kevin Young

Seyfarth Synopsis: Last week, the U.S. DOL issued a final rule limiting use of the FLSA’s tip credit for tipped employees who sometimes perform non-tipped work. Declining a more flexible approach advocated by many employers in response to the proposed rule, the final rule reinstates a weekly 20% limitation on non-tipped work and adds a daily 30-minute constraint, as well. The rule, which takes effect on December 28, 2021, commands attention from hospitality employers utilizing the tip credit.

A Dive Into the New Menu: 80/20 Rule

In December of 2020, the DOL under the Trump administration took the so-called “80/20” rule off the menu. That rule provided that employers were required to pay employees minimum wage if more than 20% of their time in a workweek was spent performing non-tip producing work. This was viewed as a positive development by many employers, who viewed the 20% limitation as an impractical rubric in the context of a fast-paced restaurant or other traditional hospitality settings.

The employer community’s relief was short-lived.

Pursuant to a final rule published last week and effective by year end, a new 80/20 rule is back in full force and this time with modification. The new rule effectively requires employers to examine  a tip-credit employee’s daily job duties into three buckets:

Bucket 1 (tip credit is acceptable): Duties that directly produce tips (e.g., serving, bartending, bussing);

Bucket 2 (tip credit may be acceptable depending on time): Duties that directly support tip-producing work (e.g., for servers, clearing the table; for bartenders, slicing fruit garnishments for drinks; for bussers, pre/post-table service prep work); and

Bucket 3 (tip credit is not acceptable): A catch-all bucket of any other duties.

An employer, the new rule provides, may take a tip credit for work that falls into bucket #1, but not bucket #3. Examples of work in the latter group include: for servers, preparing food and cleaning the kitchen or bathrooms; for bartenders and service bartenders, cleaning the dining room or bathroom; for bussers, cleaning the kitchen or bathrooms.

So, where does all of that leave bucket #2, i.e., job duties that support tip-producing work? Here, the new rule provides that an employer may take a tip credit if the employee’s work “is not performed for a substantial amount of time.” A “substantial amount of time” is defined as: (a) work that exceeds 20% of the employee’s workweek; or (b) work that is performed “for a continuous period of time exceeding 30 minutes.”

At a time when so many hospitality businesses are struggling to survive the pandemic’s fast-shifting currents, reintroduction of the 80/20 rule is likely not welcome news by many employers who view it as an arbitrary and impractical standard that effectively asks them to monitor, assess, and categorize each tipped employee’s tasks on a minute-to-minute, day-to-day basis.

The 30-Minute Recipe

If the 80/20 rule does not cause employers heartburn, the new 30-minute standard may do the trick. That said,  the Department’s clarification of the 30-minute rule in its final standard (as compared to the proposed rule) helps to soften the rule’s impact and clarify its application.

As explained above, an employer may not take the tip credit for time spent on “directly supporting” work that exceeds (a) 20% of the employee’s hours in a workweek (excluding any hours for which the employer doesn’t take the tip credit); or (b) a continuous period of 30 minutes. If an employer assigns an employee to perform “directly supporting” work for more than 30 minutes, it must pay a direct cash wage equal to the full federal minimum wage for the time exceeding 30 minutes. Time excluded from the tip credit under this rule is omitted when calculating the 20% threshold referenced in (a), above.

As Seyfarth noted in its commentary to the DOL, “[o]ver time, and multiplied by hundreds of employees,” such “inadvertent violations” of the 30-minute tolerance “by just a minute or two” might “yield substantial liability.” The DOL acknowledged Seyfarth’s comments, as well as comments by others in the employer community, that the 30-minute limitation would impose immense compliance and monitoring challenges.  The DOL noted that, “in light of these concerns,” it decided to soften the 30-minute rule so that it acts as a “tolerance for the first 30 minutes of non-tipped, directly supporting work.”

Further, after considering comments about the vagueness of what is “tip-producing work,” the DOL clarified in the final rule that the definition of tip-producing work is work that provides service to customers—including all aspects of that service—for which the tipped employee receives tips, and directly supporting work is performed in preparation for that work. By way of example, the Department agreed with Seyfarth’s comment that:

[I]n the hospitality industry, tip-producing work for servers, bartenders, and nail technicians is broader than simply serving food and drinks, or performing manicures. Thus, the Department agrees with the assessment that a bartender’s tip-producing work of preparing drinks may include generally talking to the customer seated at the bar and ensuring that a patron’s favorite game is shown on the bar television, [and] a servers’ tip-producing work includes bringing a highchair and coloring book for an infant seated at their table…

What’s Left For Employers to Digest

The rule introduces compliance challenges that command time and attention. Employers will need to consider what steps they can take to ensure that tip credit employees are not performing non-tipped work, or at least to ensure a clear process for tracking and recording time on such work. Here are a few tips to consider:

  • Due to the 30-minute rule, employers may want to avoid having a tip credit employees come in more than 30 minutes before opening or stay more than 30 minutes after closing. If employers cannot practically run the business without having tip credit employees do so, they will need to establish a system to ensure that these employees are paid directly at the full minimum wage for time exceeding 30 minutes.
  • Alternatively, to the extent an employer schedules tipped employees to work before the establishment opens or after it closes, it should consider paying them at full minimum wage for the pre-opening and post-closing time. This will be required if the employees are not performing tip-producing or tip-supporting work during that time.
  • Employers should carefully document their compliance efforts. Managers should be trained, and those efforts should be documented. Employers should also notify employees and instruct them to inform management if they work outside of their tipped role that they did not record properly in the timekeeping system.
  • To that end, employers should also evaluate their timekeeping system. Ideally, such systems should be equipped to separately track employees’ tip-producing (and non-tipped work, if applicable) in multiple jobs, assign the right rates to each, and combine hours for overtime purposes. Employers should also ensure that their staff members are aware of how to use the software.
  • If there are certain tasks that employers feel clearly constitute non-tipped work, they may direct employees not to perform them, or ensure that they are performed only while clocked in under an appropriate, non-tipped job code. Again, these efforts and communications should be documented.

There’s no one-size-fits-all approach for complying with the new rules. Best practices will vary by business depending on the nature of the enterprise, its personnel, its time-tracking capabilities, and the like.

With an effective date of December 28, 2021, the new rules require hospitality employers to act quickly. Unfortunately, they will need to do so during the holiday period, in the face of a labor shortage, and while continuing to navigate the COVID-19 pandemic. As always, please do not hesitate to reach out to the blog authors or your favorite Seyfarth lawyer if you would like to discuss these important issues.

By Noah Finkel and Lennon Haas

Seyfarth Synopsis:  Plaintiffs asserting federal and state wage and hour claims in one action often pursue both class certification of state claims under Rule 23 and collective action certification under the FLSA.  In that hybrid environment, litigating FLSA collectives to judgment before addressing Rule 23 certification can saddle employers with the increased exposure of a class action without affording them the benefit of global peace upon resolution of the dispute.  Recognizing that unfairness, the Third Circuit admonished district courts to address class certification before trying FLSA claims.  In doing so, it may have provided employers with authority for an argument against class certification.

Plaintiffs claiming that their employers failed to properly compensate them usually have available both state and federal causes of action.  Asserting both types of claims in one action, and pursuing those claims on an aggregate basis, is not uncommon.  Because the FLSA contains its own unique aggregation mechanism, however, these “hybrid” cases proceed on two tracks—one for FLSA claims under that statute’s “collective action” provision, and another for state law claims under Rule 23.  The former includes only those who opt in to the case, but the latter, if certified, includes all those who don’t opt out of a case and thus an involve far greater exposure for an employer.

Those dual tracks normally follow a choreography where Plaintiffs move early for “conditional” certification of their proposed FLSA collective, discovery occurs, and then defense motions for collective action decertification and plaintiff motions for Rule 23 class certification are filed around the same time.  Sometimes, however, courts abandon that sequencing by focusing on FLSA claims first, often at the plaintiff’s urging.

Last week, the Third Circuit weighed in on how courts should order the affairs of hybrid actions, making clear that trying FLSA claims before deciding class certification may violate Rule 23.  In doing so, the court slowed plaintiffs’ pursuit of judgment and cast doubt on the superiority of the class device for litigating wage and hour cases.

Mortgage loan officers filed a complaint against their employer, a regional bank, that brought a collective action under the FLSA and parallel state law claims as a Rule 23 class action.  After the district court conditionally certified the FLSA collective, the plaintiffs moved for class certification of the state law claims and the employer moved to decertify the collective.  The court granted the former and denied the latter.  The employer appealed both decisions and succeeded in reversing class certification.

On remand, the district court refused to readdress certification and set the FLSA portion of the case for trial — even before considering class certification on the state law claim.  Out of alternative avenues for relief, the bank petitioned for mandamus, a stay pending a decision on its petition, and reassignment to a new district judge, arguing that it was improper to try the merits of the FLSA claim prior to class certification and an opportunity for class members to opt-out.  The Third Circuit granted the stay, but because the district judge joined the reassignment request it denied as moot the mandamus petition.

In doing so, however, it provided district courts guidance on the proper interaction between class certification under Rule 23 and merits decisions on FLSA collective actions.  A “trial-before-certification” approach, reasoned the court, ignores Rule 23’s mandate to decide certification “[a]t an early practicable time after a person sues.”  What’s more, that ordering invites proposed class members to wait for final judgment before deciding whether to opt-out, thus permitting them to “benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one.”

That “unfair upshot” is only “compounded when what is scheduled for trial [before certification] is a hybrid wage-and-hour case.”  Trial on the FLSA claims would have necessarily decided a merits issue for the class claims too and in doing so “may well have satisfied” Rule 23’s requirement that common questions predominate.  If the bank lost, then, members of the proposed class would have had no incentive to opt-out.  But if the bank won, the FLSA judgment would bind only the collective action participants, thus enabling the remaining putative class members to avoid the preclusive effect of an unfavorable decision.  In other words, trial-before-certification would expose employers to the full scope of class-wide liability but “would arbitrarily deprive [them] of the benefits of . . . the full preclusive effect of the class action judgment.”

For employers facing hybrid wage-and-hour actions, particularly those in the Third Circuit, this opinion provides support for a more deliberate and structured approach to sequencing the myriad decision points in these cases.  Fidelity to the court’s reasoning will mean that courts need to carefully coordinate FLSA collective action and Rule 23 proceedings to ensure that class certification receives attention before deciding FLSA merits issues that intertwine with state law claims and certification considerations.

The decision, in recognizing that an FLSA collective action trial likely disproves a class action’s superiority under Rule 23(b)(3), also provides possible ammunition for resisting class certification in a hybrid action.  If judgment on the merits of FLSA claims fatally undermines the class mechanism’s superiority, the mere availability of a collective action under the FLSA may as well.