By: Scott Hecker and Ariel Fenster

On this episode of the Policy Matters Podcast, Seyfarth attorneys Scott Hecker and Ariel Fenster discuss the U.S. DOL Wage and Hour Division’s (“WHD”) resource limitations, and how those are impacting WHD priorities, like child labor law investigations and various significant rulemakings. The low number of investigators leads to high stress and low morale for those remaining, and WHD workers may feel overburdened and under-resourced. Join Scott and Ariel as they share their thoughts on these developments, including how employers may be affected.

Click here to listen to the full episode.

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By: Andrew McKinley, Kyle Winnick & Alex Simon

Seyfarth Synopsis: This latest installment in our series on the Department of Labor’s proposed independent contractor rule under the Fair Labor Standards Act focuses on proposed changes to the profit-or-loss analysis as it relates to workers’ investments in their businesses.

A hallmark of independent contractor status is the ability to exercise entrepreneurial opportunity to effectuate a profit (or loss).  Independent contractors do this by making capital investments in their businesses, including through marketing, hiring others, purchasing equipment (or software), expanding capacity, or any number of things to increase their competitiveness.  If these investments fail to attract new customers or to reduce inefficiencies, they may lead to a loss.  In other words, independent contractors can increase their profits, or risk a loss, through investments.

It may seem odd, therefore, that some courts analyze a workers’ opportunity for profit-or-loss separately from their investments when determining if a worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”).  But others, such as the Second Circuit and D.C. Circuit, recognize that the profit-or-loss and investment inquiries are inherently intertwined and best analyzed together.  As the Second Circuit explained in Saleem v. Corporation Transp. Group, Ltd., “[e]conomic investment, by definition, creates the opportunity for loss, [and] investors take such a risk with an eye to profit.” 

In 2021, the DOL under the Trump Administration promulgated an interpretive regulation defining employee versus independent contractor status under the FLSA (the “2021 Rule”), which would have adopted the approach of the Second and D.C. Circuits. More specifically, as part of the profit or loss inquiry, the 2021 Rule considered the “management of [a worker’s] investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”

The DOL has now reversed course.  In its most recent notice of proposed rulemaking (“NPRM”), the DOL seeks to return to analyzing investments separately from profit or loss.  The DOL justifies doing so by citing cases that have historically analyzed the two inquiries separately, which according to the DOL, “have found both opportunity for profit or loss and investment to be independently probative.”  For example, the DOL cites Fifth Circuit authority finding workers did not have any meaningful investment but did have an opportunity for profit or loss.

But the very cases that the DOL cites highlight the dangers of unmooring the investments inquiry from the profit or loss inquiry.  The Fifth Circuit and other courts, for example, consider the “relative” investment made by the worker compared to the investments made by the putative employer.  The NPRM adopts this approach.  But this type of comparison will almost always result in the investment prong favoring employee status: businesses tend to be much larger than the contractors they engage.  This begs the question why a factor which will almost invariably tilt in favor of employee status should be used to determine employee status.  Such a standard will either improperly tilt the analysis in favor of employee status or be ignored.  Indeed, in the very Fifth Circuit case the DOL cites, the Court gave the investment factor “little weight” because the plaintiffs were small businesspersons who necessarily worked for much larger companies.  It therefore did not help the ultimate inquiry of ascertaining whether the workers were economically independent of or dependent on the putative employer. 

There is the added problem of the DOL’s lack of guidance on how to calibrate the relative investments inquiry.  Consider an independent contractor with multiple clients.  Is a court supposed to compare the relative investments between the contractor and each client?  Or should it do so on a pro rata basis?  Or should it compare the contractor’s investments with the collective investments of his or her clients?  In the case of an employer with multiple product service lines (PSLs), do investments in all PSLs count?  Or does just the one to which the putative employee provides services?  These unaddressed questions are likely to add confusion, not clarity, to the analysis.

Assessing investments apart from profit or loss also risks overlooking that many independent contractors have made minimal capital investments.  As Judge Easterbrook remarked decades ago, “possess[ing] little or no physical capital . . . is true of many workers we would call independent contractors.  Think of lawyers, many of whom do not even own books.  The bar sells human capital rather than physical capital, but this does not imply that lawyers are ‘employers’ of their clients under the FLSA.”   This statement is doubly true today, where freelancers and “gig” workers often invest in themselves—their training, skills, and experience—as opposed to physical capital.   

There is also the related problem of what specific investments are probative of independent contractor status.  Tying investment to profit or loss would sharpen the inquiry by focusing on those investments—and only those investments—which are designed to return a profit (or risk a loss), which will generally be probative of contractor or employee status.  Indeed, it is hard to imagine a relevant investment that will not affect profit or loss.  The NPRM appears to take the position that only those investments which further the independent contractor’s work for the putative employer are relevant.  But that is just another way of saying investments which relate to profit or loss within the relevant line of business.  At best, then, the NPRM creates a duplicative inquiry.  At worst, it opens the door for consideration of investments that have nothing to do with whether or not a worker is economically dependent on a particular business. One of the NPRM’s stated goals is to bring clarity to determining employee status under the FLSA.  But by returning to a standard which analyzes investments separate and apart from profit or loss, it risks the opposite.

By: A. Scott Hecker and Noah A. Finkel

Seyfarth Synopsis: On June 13, 2023, the Biden Administration announced the release of its Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions (the 2022 Fall Agenda was issued in January 2023). In connection with the Administration’s new regulatory agenda, the U.S. Department of Labor’s Wage and Hour Division continues to pursue a number of significant rulemakings, many of which have experienced delays to their target publication dates. These include a potential increase in the minimum salary level for the white-collar exemptions, the proposal for which is now scheduled for August 2023.

Even though the judiciary seems primed to continue chipping away at the authority of what some call the “administrative state” — is Chevron still a thing? — the Biden Administration’s executive agencies remain focused on rulemaking. When we posted on the 2022 fall agenda, we noted the Department of Labor’s Wage and Hour Division (“WHD”) had a number of impactful standards on its plate. That remains the case, as none of the rules we discussed have issued in the meantime.

DOL’s most recent deadline to issue a Notice of Proposed Rulemaking (“NPRM”) on “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” had been May 2023, and “we anticipate[d] WHD will strive to timely meet its goal” after a number of delays. We’re sure there was plenty of striving, but WHD has — again — pushed its NPRM target, this time to August 2023. If we were betting men, we might take the over. But the NPRM has to issue someday, right? We may see changes to other parts of the rule, but one likely change we should all bet on is an increase in the minimum salary for exempt status — currently $684 per week, which annualizes to $35,568.

Given the interest in this rule, DOL will likely receive a ton of input once the NPRM is issued, so a final rule could be months (or even years) away. At this point, the Administration needs to worry about potential Congressional Review Act implications, an upcoming presidential election, and legal challenges if and when WHD publishes a final rule.

WHD’s “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” has moved from the proposed to final rule stage. After receiving more than 54,000 comments to its NPRM, DOL also pushed its target for this rule from May to August. On June 9, the U.S. Court of Appeals for the Fifth Circuit granted DOL’s unopposed motion for a 120-day stay to allow the Department to complete this rulemaking, making it more likely DOL will publish the rule by fall. The parties must submit a status report within 60 days, so further movement on publication remains possible. For more information on what to expect when you’re independent contracting, see our prior blog.

Government contractors should also stay mindful of the following WHD activities:

  1. WHD is still working on regulations to implement Executive Order 14055, “Nondisplacement of Qualified Workers Under Service Contracts,” requiring contractors and their subcontractors awarded Federal Government service contracts “to offer jobs to qualified employees who worked for the previous contractor and performed their jobs well.” The regulatory agenda now suggests a final rule should issue this month.
  2. WHD’s rule “Updating the Davis-Bacon and Related Acts Regulations,” designed “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,” remains with the White House’s Office of Information and Regulatory Affairs (“OIRA”). While OIRA has had the rule since mid-December 2022, before the 2022 fall agenda came out, the 2023 spring agenda suggests DOL could publish a final rule this month. We previously blogged and podcasted on the issuance and impacts of this proposed rule, so we commend you to the preceding resources for more on how the rulemaking may change DOL’s Davis-Bacon prevailing wage processes. You’re probably already aware the proposed revisions are likely to increase prevailing wage rates.

Why so many delays? First, that’s the nature of rulemaking. The targets in regulatory agendas aren’t binding, i.e., they are not deadlines, but estimates. Various factors impact timing, including how many comments the Department receives on any given rule. As noted above, WHD’s independent control NPRM received 54,000+ comments.

Second, the Office of Information and Regulatory Affairs (“OIRA”) seems to be reviewing rules, e.g., the Davis-Bacon rule, longer than it has in the past, and rules need OIRA clearance before final publication.

Finally, Acting Secretary of Labor Julie Su is in the middle of a bruising confirmation process to ascend to the permanent Secretary role. It’s been suggested that the Department does not want to negatively impact her already-tenuous nomination status by issuing controversial rules before she receives Senate approval.

Whatever the case, the regulated community should remain aware of these rulemakings to ensure ongoing compliance.

By: Andrew McKinley, Kyle Winnick & Alex Simon

On October 11, 2022, the Department of Labor (DOL) issued a notice of proposed rulemaking (“NPRM”) defining employee versus independent contractor status under the Fair Labor Standards Act.  We previously discussed the way in which the NPRM proposes to shift the analysis of the control factor, particularly as related to legal, safety, contractual, and other similar requirements, while simultaneously putting a thumb on the scale in favor of employee status. This post looks at the manner in which the NPRM similarly shifts considerations related to scheduling and worker flexibility.

Flexible scheduling is—and has always been—one of the main draws for independent contractors. Particularly with the growth of the gig economy, independent contractors have enjoyed an ability to accept, reject, and structure work opportunities as they see fit; to reserve the ability to pick between projects that are the most lucrative for them; and ultimately to determine when and how they perform their work. Indeed, it is this independence in structuring their work that is a core element of independent contractor status.

At odds with this defining characteristic of independent contractor status, citing a “totality-of-the-circumstances” approach, the NPRM announces a new standard that “scheduling flexibility is not necessarily indicative of independent contractor status where other aspects of control are present.” That, however, conflates what is indicative with what is dispositive. True enough, scheduling flexibility alone cannot establish independent contractor status, and other individualized facts may limit the weight attached in the overall analysis. But the suggestion that scheduling flexibility may be afforded no weight simply because other indicia of control are present fundamentally misunderstands the purpose of a balancing test—i.e., to balance all relevant facts.

Although the NPRM overreaches in its characterization of scheduling flexibility generally, the underlying concern appears to be with “sham” flexibility—i.e., claims of flexibility that, in reality, give a worker no true autonomy. The NPRM indicates that it would not be impressed by a putative independent contractor’s ability to dictate his or her own hours if:

  • The ability to pick one’s shift is offset by the limited hours provided by the employer;
  • The employer exerts so much control over the amount or pace of the work as to negate any meaningful scheduling flexibility;
  • The work is arranged in a way that makes finding other clients impossible; or
  • The worker can be disciplined for turning down work.

This thin veneer of “examples,” however, gives little in the way of  guidance as to when any why these scenarios are truly evidence of a lack of choice. For example, a homeowner who tells his electrician that she may perform the work only between the hours of 12-3 p.m. in a day might be said to have offered the electrician only “limited hours.” But the reality is that the electrician is still able to either accept or decline this job, choose the days on which she works, and schedule the rest of her assignments in a way that optimizes for her own interests in maximizing profit and setting her own schedule.

Similarly, the NPRM provides no guidance as to when an employer has too much control over the “amount or pace” of work. Business-to-business agreements, after all, regularly dictate a scope of work and deadlines for the same, which a contractor is free to accept or reject. The NPRM provides no guidance as to what would be an arrangement of work that “makes finding other clients impossible.” And it wholly fails to account for when that arrangement is a consequence of the worker’s exercise of his own business initiative.

These examples indicate that the Department of Labor is currently proposing to evaluate “employment” from the perspective of the employer, rather than the worker. That is, it limits inquiry into whether the worker is acting in a manner that is consistent with her own economic independence.

In the end, the NPRM attempts to minimize the well-established importance of flexible scheduling to independent contractors status, while providing little in the way of useful guidance as to when, how, and why that minimization should occur. Thus, courts will be left to fill the gaps, while businesses face increased uncertainty as to their independent contractor workforce.

By: Christina Jaremus and Noah Finkel

Seyfarth Synopsis:  A federal district court held that “boot-up” and “shut-down” time in a call-center environment is de minimis and therefore not compensable.

It has been hornbook law since the early days of the FLSA that disregarding small increments of otherwise compensable time does not give rise to back overtime liability under the de minimis doctrine. Indeed, the Supreme Court held as far back as 1946 in its Anderson v. Mt. Clemens Pottery Co. decision that “[w]hen the matter in issue concerns only a few seconds or minutes of work beyond the scheduled working hours, such trifles may be disregarded” and that “[i]t is only when an employee is required to give up a substantial measure of his time and effort that compensable working time is involved.”

But wage-hour practitioners also are well aware of the recent challenges in arguing for application of the de minimis doctrine. Citing Justice Scalia’s passage in Sandifer v. U.S. Steel Corp. (2014) that the “de minimis doctrine does not fit comfortably within the statute at issue here, which, it can fairly be said, is all about trifles,” some courts have curtailed the de minimis doctrine considerably, reasoning that small increments of time nevertheless can be compensable when they are performed regularly, involve larger amounts of time when aggregated, and/or can be tracked by technological tools with little administrative burden. This especially has been the case under California wage-hour law. 

The curtailing of the de minimis doctrine has been one cause of a rash of wage-hour lawsuits filed in call center environments. The typical claim is that employees need to turn on (or at least wake up) their computers, then log in to the employer’s system, and then log into a timekeeping application to clock in, but that they are not paid for the activities before they actually clock in.

Such a claim for the time spent on computers before clocking in was filed against a call-center operator in the District of Nevada in 2018. The case worked its way up to the Ninth Circuit, which held that because the booting up of a computer and logging in to an employer’s system is integral and indispensable to the principal activities of employees who use their computers to do their jobs, such time can be compensable. In so holding, the Ninth Circuit declined to take up the employer’s argument that, even if the time is integral and indispensable, it nevertheless is de minimis and cited and quoted Justice Scalia’s qualms over the de minimis doctrine. 

This decision in Cadena v. Customer Connexx LLC, which followed a similar decision by the Tenth Circuit in 2021 in Peterson v. Nelnet Diversified Solutions, LLC, caused some to lament the demise of the de minimis doctrine and conclude that it no longer provided a defense to off-the-clock claims.

But the Cadena decision by the district court on remand last week demonstrates that, like the Dread Pirate Roberts (Westley) after enduring the Pit of Despair, the de minimis doctrine is only “mostly dead.” And as Miracle Max has explained, “there’s a big difference between all dead and mostly dead.  Mostly dead is slightly alive.”

District Judge Andrew P. Gordon may very well be a Princess Bride fan. In that decision, he granted summary judgment to the employer holding that the undisputed materials facts showed that the vast majority of the time employees spent booting up and shutting down their computers was not compensable under the de minimis doctrine. The court also found that in rare events where the time spent took longer than normal – and thus was compensable – the employees’ time was adjusted appropriately at their request. 

Noting that “[s]plit-second absurdities” are not justified by the policy of the FLSA in finding that the vast majority of the time at issue in the case was non-compensable, Miracle Max, er, Judge Gordon relied on the fact that most of the employees testified it took mere seconds or a couple of minutes to turn their computer on or off. As he observed, it isconsistent with common sense that pushing or clicking a button or opening a computer program typically takes little time and “the aggregate amount of compensable time to turn a computer on and off each day even over the course of many months” is “negligible.”

Although the plaintiffs suggested that the employer should have used the employees’ badge swipes in and out of the building to capture their hours worked (employees were permitted to access the building up to 30 minutes before their scheduled shift), Judge Gordon shut down this argument, explaining that the time an employee badges into the building does not necessarily reflect the time the employee started working. Employees might be doing other non-work things pre-shift such as visiting the break room or socializing prior to actually logging on to their computers and commencing work. There also was evidence that some employees swiped in and out of the building multiple times before or after the same shift, sometimes for unexplained lengthy periods of time.  In addition, the employer would have to investigate each instance where the badge swipes and timekeeping program varied by more than a minute or so to verify whether the time was spent on compensable activities. Judge Gordon found that cross-referencing numerous badge swipes per day with the login times on the timekeeping system and investigating discrepancies was precisely the type of burdensome task the Ninth Circuit previously concluded an employer need not undertake. 

Lastly, Judge Gordon noted that in unique situations when the time spent booting up or shutting down was not de minimis employees could and did request adjustments to their time. Employees thus already had been compensated for such anomalies, so that claim was given the boot. In doing, so, the Cadena decision placed stock in the employer’s explicit timekeeping policies. It prohibited off-the-clock work and demonstrated that it communicated the policy to its employees. Employees were directed to log into the timekeeping system on the computer as their first task and to close out all other programs before logging out of the timekeeping system at the end of their shifts. The employer also had a means for employees to adjust their time to report off-the-clock work by filling out a “punch” form for supervisors to correct their time. The Cadena plaintiffs testified they were aware of this procedure and many of them testified that they used it to report off-the-clock work when they could not log in quickly. Punch and payroll forms largely corroborated that the time was adjusted appropriately. 

This decision serves as an important reminder to companies whose employees clock-in and out of work on their computers. As the Cardena court acknowledged, the de minimis doctrine is not a hard and fast rule that judges will apply in a reliably uniform manner. And defending a call center wage-hour claim, in many respects, still may be like having a paper cut with lemon juice poured on it. Answering the real question – whether an employee is required to give up a substantial measure of her time and effort to boot up or shut down such that the time should be considered compensable – is an ambiguous task, and one on which courts may not agree. Employers should examine their timekeeping policies to ensure that the policies explicitly provide that employees must be compensated for all hours worked and provide a mechanism to request that time is added in the event of a slow computer boot up – such as in the event of a software update, a bug, or some other obstacle – that takes the employee more than a mere few seconds or minutes. They also should institute training to ensure employees are aware of the policy and that supervisors document timekeeping adjustments and do not otherwise fail to enforce such policies. Further, employers also would be well served by assessing the applications and programs an employee must open before they can clock in on their computer to ensure they know how long the process takes in real time.

If they take these steps, and to paraphrase Miracle Max, they will put themselves in the best position possible to storm the castle of wage-hour litigation.

By: Phillip J. Ebsworth and Justin T. Curley

Seyfarth Synopsis: The Fourth District joined the Second District in issuing another published decision holding that plaintiffs do not lose representative standing once their individual PAGA claims are compelled to arbitration.

The Court did not provide any guidance on whether the representative claims should be stayed, stating only that, “We leave management of the superior court litigation during the pendency of arbitration to the trial court’s sound discretion.”

While California’s courts of appeal appear set that PAGA Plaintiffs bound to arbitrate their individual claims retain standing to bring a representative PAGA claim in state court, the question of whether the representative claim must be stayed pursuant to C.C.P. § 1281.4 or otherwise remains without direct precedential authority.

By: Phillip J. Ebsworth and Justin T. Curley

Seyfarth Synopsis: Another panel from the Second Appellate District issued an opinion, following Galarsa, Piplack, and Gregg, holding that a PAGA plaintiff compelled to individual arbitration retains standing to bring a representative PAGA claim in state court.

The Court did not consider whether the representative claims remaining in court should be stayed under C.C.P. § 1281.4, but instead remanded the question to the trial court to decide the issue, as having previously denied the motion to compel outright, it had not considered the question. Galarsa and Piplack did not address whether the representative claims in state court should be stayed, while Gregg ruled that the representative claims should be stayed but due to the language of the arbitration agreement at issue.

By: Andrew McKinley

Seyfarth Synopsis: Businesses with arbitration programs often oppose the issuance of notice in FLSA collective actions on the ground that many potential recipients have binding arbitration agreements precluding them from participating in a case. The majority of federal appellate courts have not yet addressed whether arbitration must be addressed before or after notice issues. The Sixth Circuit recently joined the Fifth and Seventh Circuits in requiring the question to be addressed pre-notice. Unlike the Fifth and Seventh Circuits, it went a step further and placed the burden of showing arbitration-related similarity squarely on plaintiffs.

In Hoffman-La Roche v. Sperling, the Supreme Court held that district courts have authority, in appropriate cases, to facilitate notice of an FLSA collective action to similarly situated potential plaintiffs. The Supreme Court made clear, however, that the notice process should not function as a claim solicitation tool. In the over thirty years since Hoffman-La Roche, there has been limited appellate-level guidance on when notice should issue, leading a number of district courts to uncritically grant conditional certification, authorize expansive notice, and reserve consideration of facts bearing on similarity until a later stage. This rubber-stamping has led to the exact result the Supreme Court intended to avoid: the broad solicitation of plaintiffs who have little to no chance of achieving a resolution in a single proceeding, but who by virtue of their numbers alone, place increased settlement pressure on the employer.

More recently, circuit courts have begun reconsidering the level of rigor that a district court should apply before authorizing the issuance of notice. As we detailed here, the Sixth Circuit, in Clark v. A&L Homecare and Training Center, LLC, has now joined the Fifth Circuit in rejecting the previously prevalent, seemingly foregone conclusion that early collective certification may be granted under a “lenient” standard. But Clark is significant for another reason: its discussion of the interplay between arbitration and notice. Although the Sixth Circuit—like the Fifth and Seventh Circuits before it—determined that the application of arbitration agreements to the putative collective must be addressed before notice issues, it held that the burden on that question rests with the plaintiff alone.

JPMorgan and Bigger

In 2019, the Fifth Circuit’s decision in In re JPMorgan Chase & Co. marked the first appellate-level decision addressing whether a court should authorize the issuance of FLSA notice to individuals with binding arbitration agreements. In concluding that they should not, the Fifth Circuit, relying on Hoffman-La Roche, observed that a court’s role in an FLSA action is to facilitate notice to “potential plaintiffs” for the “efficient resolution in one proceeding of common issues.” Issuing notice to individuals with arbitration agreements, however, does precisely the opposite. Indeed, as the Fifth Circuit observed, it ultimately informs individuals who cannot participate in the collective action of a potential right to participate in a wholly separate proceeding—i.e., a potential arbitration—and thus “merely stirs up litigation.” Although it determined that arbitration should be addressed before the issuance of notice, the JPMorgan court placed the burden on the employer to show, by a preponderance of the evidence, the existence of valid arbitration agreements for the individuals sought to be excluded from the collective.

Almost a year after JPMorgan, the Seventh Circuit faced the same question in Bigger v. Facebook, Inc. Much as the Fifth Circuit had done, the Seventh Circuit began by noting that the unmanaged use of collective actions “present[s] dangers.” Chief among them is the possibility that the collective-action device could be abused by plaintiffs to increase settlement leverage by simply increasing the pool of plaintiffs. Given that reality, the Bigger court concluded that a court could not authorize notice to individuals for whom a court has been presented evidence of a binding arbitration agreement.

Citing to JPMorgan, the Bigger court held that, when an employer contends that proposed notice recipients entered into arbitration agreements, a court must first determine whether the plaintiffs contest the employer’s assertion that valid agreements exist. If no challenge is made, according to the Seventh Circuit, a court could not authorize notice to the individuals the employer contends have agreements. If, however, the plaintiff contests the employer’s assertions, the court must permit the presentation of additional evidence, with the employer bearing the burden of showing—by a preponderance of the evidence—that each individual it seeks to have excluded has a valid arbitration agreement.

The Sixth Circuit Weighs In

In Clark, the Sixth Circuit became the third federal appellate court to address the interplay between arbitration agreements and FLSA notice. At the outset of its analysis, the Sixth Circuit observed that any analysis of arbitration across a putative collective may impact a host of potential individualized issues, including consent, consideration, fraud, duress, mistake, and unconscionability. The Sixth Circuit, therefore, rejected the analytical standards outlined by JPMorgan and Bigger, noting the impracticability of conclusively resolving such issues for absent individuals on limited evidence.

At the same time, the Sixth Circuit expressly rejected the argument that arbitration should not be resolved before notice is authorized because it is a “merits” issue. Indeed, the court observed, “nearly every defense concerns the claim’s merits,” and the purpose of the similarly situated analysis is to determine whether the merits of the putative collective’s claims are similar to the merits of the plaintiff’s claims.

Thus, after rejecting JPMorgan and Bigger, the Sixth Circuit noted that arbitration, like any other defense, must be assessed by a district court as part of the determination of whether employees are similarly situated. And because the burden of showing similarity rests with the plaintiff, the Sixth Circuit held—unlike the Fifth and Seventh Circuits—that the burden of showing similarity as to presenting evidence on arbitration also rests with the plaintiff (not the employer).

What Does This Mean?

Alongside JPMorgan and Bigger, Clark is another arrow—and an even deadlier one—in the quiver of employers utilizing arbitration programs. Each of these decisions make clear that—contrary to the common refrain of the plaintiffs’ bar—arbitration is not a merits consideration that courts should reserve until after notice issues. And each confirms—as Hoffman-La Roche previously made clear—that any use of the collective action procedure as a claim solicitation tool should be viewed with skepticism. Three appellate courts have now held that arbitration must be addressed before notice may issue, and none have held otherwise. As a growing chorus of caselaw makes clear that certification not only should, but must, be more than a rubber stamp, Clark offers a powerful tool for employers with arbitration programs to oppose rushed motions for collective certification.

By: Phillip J. Ebsworth and Michael Afar

Seyfarth Synopsis: The Second Appellate District entered the fray and, like the Fourth and Fifth Districts in Galarsa and Piplack, held that an individual PAGA representative still maintains standing to pursue non-individual representative PAGA claims in court, even if the individual claims are compelled to arbitration.

In concluding that plaintiffs compelled to arbitrate their individual PAGA claims retain standing, the court reasoned that while the arbitration agreement required the plaintiff “to litigate a portion of his PAGA claim in an alternative forum governed by different procedures… PAGA does not require a plaintiff to resolve certain portions of his or her PAGA claim in a judicial—as opposed to an arbitral—forum.” Thus, the employee is not stripped of standing “simply because he or she has been compelled to arbitrate his or her individual PAGA claim.”

Unlike Galarsa and Piplack, the court expressly held that the representative claim in state court should be stayed pending the outcome of individual arbitration. This conclusion was based on the language of the arbitration agreement at issue: “To the extent that there are any claims to be litigated in a civil court of competent jurisdiction because a civil court of competent jurisdiction determines that the PAGA Waiver is unenforceable with respect to those claims, the [p]arties agree that litigation of those claims shall be stayed pending the outcome of any individual claims in arbitration.”

Gregg is the third of a series of recent appellate decisions disagreeing with the U.S. Supreme Court’s Viking River majority opinion to hold that plaintiffs do not lose representative standing once their individual PAGA claims are compelled to arbitration. However, the court enforced the language of the arbitration agreement which expressly provided that the representative claims were to remain stayed—a helpful tool to be considered in drafting arbitration agreements.

By: Kevin Young and Noah Finkel

Seyfarth Synopsis. Businesses familiar with FLSA litigation are aware of the frustrating ease with which some courts have turned single-plaintiff cases into large-scale collective action proceedings. But the tides are shifting, as the Sixth Circuit Court of Appeals has joined the Fifth Circuit in rejecting the “lenient standard” for collective action certification and demanding that plaintiffs do more to unlock the gears of mass litigation. The decision—which may be the most important wage-hour decision of the year—marks a critical development for all employers facing FLSA litigation.

Litigation under the Fair Labor Standards Act has soared for years. A leading factor driving this trend is the near-reflexive ease with which many courts have historically “conditionally certified” FLSA collective actions and authorized distribution of notices and invitations to join to their members. Simply stated, individual skirmishes have morphed early and easily into big lawsuits. And big lawsuits mean higher stakes; which means greater settlement pressure; which means more lawsuits.

For many years, district courts labored under the view that this approach is required. Many declined to consider well-founded arguments about whether it makes sense, whether it works, or even whether it is supported by the FLSA’s text. But the tides are changing, as evidenced most recently by the Sixth Circuit’s May 19, 2023 decision in Clark v. A&L Homecare and Training Center, et al.

The Low Bar of Lusardi

The concept of conditional certification was created by federal district courts to manage wage and hour litigation. And because there’s sparse appellate guidance on the issue—and even fewer Supreme Court decisions—the result is a hodgepodge of district court decisions that rely on shifting standards with diverse (and sometimes contradictory) outcomes.

A little history first. In 1989, in the seminal Hoffmann-La Roche, Inc. v. Sperling decision, the Supreme Court held that courts have discretion (within limits) to send notice of a collective action to potential opt-in plaintiffs. But the Court also cautioned that “intervention in the notice process” cannot devolve into “the solicitation of claims.” Further, the Court instructed district courts to “avoid even the appearance of judicial endorsement of the merits of the action.” Since Hoffmann-La Roche, the Supreme Court hasn’t provided further guidance on the issue.

Without guidance from the text of the FLSA or higher courts, district courts have searched for the right approach. Historically, most settled on the Lusardi ad hoc approach (from the District of New Jersey’s 1987 decision in Lusardi v. Xerox Corporation).

Under the Lusardi approach, courts apply a two-step “ad hoc” process to determine whether FLSA plaintiffs are “similarly situated” under the FLSA. At stage one—conditional certification—the court looks at whether the proposed collective members are sufficiently “similarly situated” to receive notice. This stage is often based solely on the pleadings and some affidavits. Some courts refuse to even consider the evidence a defendant-employer might present in the name of not diving into the “merits.” Those courts call it a “lenient standard” under which the plaintiff must make only a “modest showing” to clear the “low burden” necessary to send notice.

As a result, the vast majority of motions for conditional certification result in a collective action notice being issued to eligible current and former employees advising them of how they can join the case. Even when defendant-employers set forth persuasive, substantiated explanations on why those employees are not similarly situated, district courts often respond: “That may be a good argument about why this case ultimately should not be a collective action, but that’s appropriate for consideration after notice goes out, notice recipients ‘join ‘opt in’ to the case, and discovery takes place.” Of course, that later stage is often years down the line, after considerable expenditures of time and money.

In theory, stage two of the Lusardi approach—decertification—takes place after discovery has been completed. At that point, the defendant may move to “decertify” the collective, and the court applies a stricter test to assess whether the named and opt-in plaintiffs are sufficiently similarly situated to proceed together as a collective at trial. Many cases don’t reach decertification, however, because of the settlement pressure created by a conditional certification decision.

Living With Lusardi

The onslaught of FLSA litigation has been fueled, in part, by the low standard for obtaining conditional certification under Lusardi. Unlike traditional “opt out” Rule 23 class actions, plaintiffs’ attorneys have been able to obtain conditional certification before much if any discovery takes place and without the need for expert witnesses. In 2020, for example, the plaintiffs’ bar won a staggering 84% of conditional certification motions (231 out of 274).

Once certification is granted, there are real consequences for employers. Court-sanctioned notice must be sent to past and current employees advising them of their right to join the case. In addition to potential business disruptions, this can create significant potential exposure. As a result, employers face enormous settlement pressure early in these cases.

But nothing in the FLSA requires any of this. Certification, conditional or otherwise, isn’t mentioned in the Act—the concept is judge-made. Rather, the FLSA permits employees to sue for unpaid minimum wage and overtime compensation, and it states that the lawsuit may be brought “by any one or more employees for and in behalf of himself or themselves and other employees similarly situated.” It also requires that each plaintiff who joins the case file a written consent to join.

Swales Enters the Chat

All of this started to change in January 2021, when the Fifth Circuit rejected Lusardi and announced a new approach Swales v. KLLM Transport Services, LLC.

In the first-ever appellate-level, head-on consideration of the Lusardi framework, the Fifth Circuit found that the two-step approach “frustrates, rather than facilitates, the notice process,” “has no universally understood meaning,” and, though reduced to common practice, was not based on valid precedent. Swales explained that refusing to consider the “merits” before the distribution of notice ignores the FLSA’s requirement that plaintiffs be “similarly situated.”

Accordingly, the Fifth Circuit rejected Lusardi and set out a new approach for handling FLSA collective actions. Under the Swales approach, a court must: (1) decide what facts and legal questions will be material to the “similarly situated” analysis early in the case; (2) authorize preliminary discovery directed toward these issues; and then (3) analyze all of the evidence available to determine whether the putative collective is similarly situated.

While Swales left some important questions open—e.g., how high is the bar that a plaintiff must clear—it marked a victory for employers. That is certainly true in the Fifth Circuit, where the Swales standard rejects rubber-stamping collective actions early in a case’s life without a balanced consideration of whether its members are in fact similarly situated. And Swales also has proven valuable outside the Fifth Circuit, as it has caused some other courts to take a closer look at whether Lusardi is appropriate.

The Sixth Circuit Joins In

In the first appellate level decision to directly confront the issue since Swales, the Sixth Circuit joined its sister circuit in rejecting Lusardi as unwarranted and improper. In fact, Clark rejects the Swales approach too, adopting yet a third approach.

In Clark, the Sixth Circuit endorsed a two-step process, like Lusardi, while raising the bar for the showing a plaintiff needs to make in order for notice to be issued. Gone is the “lenient standard,” “modest showing,” and “low burden” that Lusardi endorsed. Instead, within the Sixth Circuit, a plaintiff wishing to unlock the gears of collective litigation now must show a “strong likelihood” that those to whom they seek to send notice are similarly situated to the plaintiffs themselves. Doing so commonly will require discovery, acknowledged the court.

What Does This Mean?

Clark marks a welcome development for employers facing FLSA litigation in the Sixth Circuit, and a potential watershed moment even for those fighting in other jurisdictions.

In the Sixth Circuit, the impact is clear: individual plaintiffs seeking to pursue collective actions must first engage in discovery. Through that discovery, they must show a “strong likelihood” that they are similarly situated with the individuals they desire to round up for their litigation. The days of issuing notice without discovery or consideration of a defendant-employer’s evidence regarding the “similarly situated” question are seemingly over.

But we think that Clark, particularly when combined with Swales, could stand for something much greater. In the apt words of Swales, while the Lusardi approach “may be common practice[,] practice is not necessarily precedent.” In two recent federal appellate matters, defendants have now challenged the practice of Lusardi and won. The ground on which the “lenient standard” rests is shakier than ever before.

Simply stated, Clark provides employer-defendants in all FLSA litigation—not just in the Sixth Circuit—renewed motivation and increased ammunition to challenge application of the Lusardi approach and rushed attempts to convert individual cases into collective actions. The bar is rising, and the timing for an employer community facing a continued torrent of FLSA litigation and the settlement pressure it so often inflicts couldn’t be better.