Fair Labor Standards Act

Co-authored by Christopher Truxler and Coby Turner

Seyfarth Synopsis: Earlier this month, a California federal court dismissed the misclassification claims of 7-Eleven franchisees on the pleadings, finding they did not and could not plead facts sufficient to show that they were employees of their franchisor.

All is well with one of America’s most beloved convenience stores. In October 2017, four 7-Eleven franchisees filed a class action lawsuit alleging the company misclassified franchise owners in California as independent contractors instead of employees. The plaintiff-franchisees sought hundreds of thousands of dollars in overtime pay and business expenses for each franchisee. But on March 14, 2018, the presiding judge put the plaintiffs’ Big Gulp gamble to rest, ruling that the franchisees are, in fact, independent contractor franchisees, and not employees, under California law or the FLSA.

As with most misclassification lawsuits, the heart of the dispute concerned the right to control. The plaintiff-franchisees claimed that 7-Eleven’s franchise agreement created an employment relationship because, they alleged, the company exerts control over certain details of store operations, such as temperature, operating hours, and other matters. The plaintiffs also focused on franchisees’ time spent in initial training.

The court was unmoved. Finding the alleged facts “wholly insufficient” to create an employment relationship under the Martinez v. Combs test, District Judge John Walter ruled that the plaintiffs failed to show that 7-Eleven exerted control over their day-to-day operations. Instead, 7-Eleven and the franchisees entered a “business format” franchising relationship—similar to that which the California Supreme Court ruled on in Patterson v. Domino’s Pizza—which permitted 7-Eleven to exercise the control necessary to protect its trademarks, brand, and goodwill.

Not only did the plaintiffs’ allegations regarding improper control all relate to 7-Eleven’s right to protect and control its brand, service standards, merchandise selection, and hours of operation, but, the court found, such uniformity ultimately benefitted the franchisees because of the increased goodwill it brought to the brand.

Of particular note, the court looked to factors under Martinez to conclude the franchisees were properly classified as independent contractors. The court noted that franchisees were generally entrepreneurial people, willing to commit time and money and assume a risk of loss in order to own and profit from their investment. Some operated multiple locations. The court found it significant that there was no cap on how much plaintiffs could earn on their investment, that they had complete discretion to do things like hire and fire employees, and that they had complete control over the day-to-day operation of their store(s). The fact that franchisees could terminate their agreement with 72 hours’ notice, while 7-Eleven could only terminate “for cause,” further weighed against a common-law employment relationship.

The court thus took a Big Bite out of potential liability for franchisor companies in holding that even standards and guidelines that require a franchisee to follow a list of marketing, production, operational, and administrative tasks is not enough to transform a franchisor into an employer. Other companies engaging independent contractors should also take note. Even though this case was analyzed with regard to a franchisee-franchisor relationship, the court took a view of “control” over independent contractors that is, “thank heaven,” quite practical and positive.

Authored by Cheryl Luce

Seyfarth Synopsis:  If it becomes law, a new bill will expand the FLSA’s tip provisions into areas traditionally regulated by state law and create new areas of ambiguity that could be a breeding ground for yet more wage-hour litigation.

We have been covering the saga of a controversial 2011 DOL regulation that gave employees the right to receive tips even when they were paid the federal minimum wage of $7.25 per hour. As courts agreed again and again, the rule was contrary to the FLSA’s plain language and inconsistent with its remedies. In late 2017, the DOL proposed to rescind the rule, noting concerns about its scope. But that proposal has been highly politicized and labeled an attack on workers, authorizing employers to pocket employees’ tips (even though federal law never regulated an employee’s right to receipt of tips, even before the rule).

Ultimately, the fallout around the DOL’s 2017 proposal has resulted in a proposed law amending the FLSA called the Tip Income Protection Act of 2018, announced in principle on March 6, 2018 and receiving bipartisan support in Congress as well as from Secretary of Labor Alex Acosta. The bill has been added to the omnibus budget spending bill that the House passed yesterday and the Senate passed this morning. (The Tip Income Protection Act’s text begins on page 2,025 of the bill.) Barring a presidential veto, the bill will become law.

The Tip Income Protection Act amends the FLSA by adding a provision to 29 U.S.C. § 203(m) that states:

An employer may not keep tips received by its employees for any purpose, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.

The Act further creates a remedy for violating this provision “in the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and an additional equal amount in damages” and imposes a civil penalty of up to $1,000 for each violation.

As currently written, § 203(m) only regulates tips when the employer has taken a tip credit against its minimum wage obligations, and the FLSA only provides a remedy for the unpaid minimum wage (not for the amount of the tips retained). The Tip Income Protection Act thus expands the FLSA’s tipping provisions from ensuring tipped employees are properly notified of any tip credits and paid minimum wage to guaranteeing that employees are paid the tips they receive in full.

The proposed Tip Income Protection Act is a major deviation from the FLSA’s core purpose. Since its enactment in 1936, that purpose has been to: (i) ensure that all employees are paid at least the federal minimum wage, (ii) ensure that employees are paid at a rate of at least 1.5 times their regular rate of pay for all hours worked over 40 in a workweek, unless an exemption applies, and (iii) prohibit unlawful child labor. Never has it been the FLSA’s aim to ensure that employees are paid all of their wages. That historically has been left to the states. Indeed, if an employee makes at least the minimum wage and overtime according to the FLSA’s requirements, the FLSA can provide no further relief. The FLSA’s monetary remedies are currently limited to “unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.” 29 U.S.C. § 216(b). By allowing employees to recover the full amount of tips, the Tip Income Protection Act represents a major departure from the purposes of the FLSA.

Perhaps the bigger concern with the Tip Income Protection Act as written is that it is vague and will leave employers scrambling to understand how the new law applies to them. First, the bill states “managers and supervisors” are prohibited from sharing any portion of employees’ tips and thus cannot participate in a tip pool. But the bill does not define “managers and supervisors,” and there are various ways in which these terms are interpreted in different contexts: does a lead bartender who can’t hire or fire employees, but serves as a manager-on-duty when the owner is not around and who also primarily serves customers, get to share in the tip pool? when he is acting as a manager? or never? Additionally, the bill selects the ambiguous word “to keep” as the operative commanding verb. Restaurants and their agents are not allowed “to keep” employees’ tips. Is “keeping” tips limited to circumstances in which the employer actually uses the tips for its own purposes? Or would it also apply to the distribution of tips to other employees, as appears to be the case for tips distributed to “managers and supervisors”? Would “improper” tip pools be subject to the new standard or the old one?

The Tip Income Protection Act appears to respond to fears that no federal regulation of tips opens the floodgate to pocketing employee tips. But tips have and will continue to be regulated by state law; indeed, federal law has never regulated wage payment generally and the source of that protection has been state laws. Although its sponsors are characterizing the bill as restoring a right for employees that was created by the Obama DOL, that right never existed in federal law (and apparently has not needed to exist in federal law until now). It only existed in the form of an administrative rule that exceeded agency authority and was largely rejected by courts.

Finally, the bill appears not to disturb the DOL regulations’ definition of a tip and guidance that “a compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip.” 29 C.F.R. § 531.55. No new definition of “tip” would be added to the FLSA as a result of the bill, and service charges should be spared from the bill’s new rules.

Co-authored by Alex Passantino and Kevin Young

On Tuesday, the Wage & Hour Division announced a new program for resolving violations of the FLSA without the need for litigation. The Payroll Audit Independent Determination program—or “PAID”—is intended to facilitate the efficient resolution of overtime and minimum wage claims under the FLSA. The program will be conducted for a six-month pilot period, after which time WHD will review the results and determine how best to proceed.

PAID should be welcome news for compliance-minded employers. In the vast majority of cases, FLSA claims must be resolved through litigation or under WHD’s supervision. Given the proliferation of FLSA litigation, many employers have, in recent years, conducted proactive audits with legal counsel to ensure compliance with the Act. Oftentimes, employers who identified past issues through those efforts were reluctant to approach an enforcement-happy WHD to request supervision of back wage payments due to concern that doing so would trigger litigation. Employers were stuck between a rock and a hard place.

By providing a mechanism for proactively resolving wage-hour issues without the need for litigation, the PAID program should increase the incentive for employers to conduct formal audits of their wage-hour practices.

While we expect details on the PAID program, including an official launch date, to crystallize in the weeks to come, the WHD has already provided guidance on the contours of the program. According to WHD, an eligible employer who wishes to participate in the program must:

  • Specifically identify the potential violations,
  • Identify which employees were affected,
  • Identify the timeframes in which each employee was affected, and
  • Calculate the amount of back wages the employer believes are owed to each employee.

The employer must then contact WHD to discuss the issue(s) for which it seeks resolution. Following that discussion, WHD will inform the employer of the manner in which the employer must provide required information, including:

  • Each of the calculations described above—accompanied by evidence and explanation;
  • A concise explanation of the scope of the potential violations for possible inclusion in a release of liability;
  • A certification that the employer reviewed all of the information, terms, and compliance assistance materials;
  • A certification that the employer is not litigating the compensation practices at issue in court, arbitration, or otherwise, and likewise has not received any communications from an employee’s representative or counsel expressing interest in litigating or settling the same issues; and
  • A certification that the employer will adjust its practices to avoid the same potential violations in the future.

At the conclusion of the process, the employer must make back wage payments. That process may look similar to the end of a WHD investigation in which violations are found. If an employee accepts the back wages, she will waive her rights to a private cause of action under the FLSA for the identified issues and timeframe. An employee who chooses not to accept the back wages will not be impacted.

We will share more as additional information becomes available. If you have any questions about the PAID program, the planning or execution of a proactive wage-hour audit, or any related issues, please do not hesitate to contact us.

Co-authored by Kevin Young and Kara Goodwin

Even as FLSA litigation has surged to historic highs, it is rare to see a nefarious violation of the Act by a manager or supervisor. Far more prevalent, it seems, are stories of managers who, while intending to afford employees freedom and flexibility, instead trip over one of many hurdles scattered across the 1938 legislation. At a time when plaintiffs’ attorneys are more regularly naming individual managers, not just corporations, as FLSA defendants, preventing these stories is important as ever.

In our experience, managers across the corporate landscape grasp broad wage-hour ground rules and concepts, such as requiring employees to clock in before they start work and paying employees at least minimum wage. Training is important in these areas, but it is not quite where the rubber meets the road.

Far more important a topic, in our experience, are the ways in which a manager’s well-intentioned decisions can result in potential violations of the FLSA. Here, in honor of the Act’s upcoming 80th birthday, we offer eight hypothetical examples of this. (Eighty was a bridge too far for this post.) While far from exhaustive, these are the types of examples that can provide a basis for meaningful conversations with managers and supervisors about the relevant—and sometimes hidden—contours of the FLSA.

  1. You had a great January, but let’s have an even better in February. Whoever makes 50 sales will get a $150 bonus. This isn’t the company’s thing, it’s my thing.” In a vacuum, incentivizing employees to perform isn’t just okay—it is good management. Unfortunately, the nature of the incentive can have serious wage-hour implications. First, if the incentive is non-discretionary, it must be included in the “regular rate” of pay, upon which overtime pay is based. It makes no difference if the incentive is offered company-wide or only on a small team. As a distant second, occasionally production bonuses can have an unintended effect of encouraging after-hours work, which could be an issue if those hours aren’t recorded and paid. Supervisors should take care to ensure that any incentive payment is: (i) accounted for, if necessary, in the overtime calculation; and (ii) not interpreted as a relaxation of standing policies, such as those prohibiting off-the-clock work.
  2. Of course you can take it home!” It’s 5 pm and an hourly employee scheduled until 6:00 asks his supervisor if he may leave early to pick up his kid—he promises to finish his work at home later that night. Wanting to promote balance and flexibility, the supervisor agrees. While there is nothing illegal about this, the supervisor must understand potential wage-hour ramifications. An employer must pay for work it knows about or reasonably should know about, regardless of when or where the work occurs. If a supervisor is going to authorize after-hours remote work, it is essential that he or she also enforce timekeeping practices that prevent that work from going unrecorded and unpaid.
  3. Have a minute to help me out? You can take the remaining 20 minutes of your 30-minute lunch break after we’re done.” It seems harmless enough—after all, the employee will end up getting a full 30 minutes either way. But if the employer treats meal breaks, including this one, as unpaid, this could create an issue. The FLSA generally requires that an unpaid meal break like this one be uninterrupted and contiguous. Here, the supervisor should know that the employee must either (a) be paid for the whole break, or (b) be permitted to take his or her full break at a later time.
  4. Rather than recording overtime this week, why don’t you take off a few hours early next Friday and spend the afternoon with your kid?” If an employee works over 40 hours in a workweek, the FLSA requires that the employee be paid overtime. Private-sector employers should not offer or allow compensatory time off in future workweeks in lieu of overtime, even if an employee requests it.
  5. Jim volunteered an additional hour last night because he wants to prove he’s worth the promotion. I respect that sort of drive…heck, I did the same thing.” In nearly every context, the fact that an employee “volunteers” his or her work time is not a sound reason for failing to pay the employee for the associated work.
  6. Our team party starts at 3 pm. You can work through it, but I’d certainly prefer to see you there—it’s important to our team culture.” Social gatherings during the workday should typically be paid. Even if scheduled after hours, the time needs to be paid for nonexempt employees required to attend. The grey area, of course, lies between mandatory and purely voluntary attendance. Proof that attendance was strongly encouraged could support a finding that attendance was not purely voluntary and that the time should be paid.
  7. My team knows that if they ask for OT, I will always approve it. The only reason I didn’t pay Alexa’s overtime last week is that she forgot to seek preapproval—I can’t allow that to happen, and Alexa realizes that.” It is certainly permissible to require employees to seek approval prior to working overtime. It is not permissible, however, to condition payment of overtime hours worked on an employee’s compliance with that requirement. As a general rule, once the overtime is worked, the employer must pay for the time.
  8. We actually don’t need you today. And didn’t you tell me your daughter is home from college today? This works out perfectly—why don’t you head home and spend the day with her.” A growing number of states require employers to pay for “show up” or “reporting” time. This refers to a minimum amount of pay—for instance, 3 or 4 hours at the applicable minimum wage—if an employee scheduled to work longer is sent home after reporting to work for the day. There are exceptions, of course, but these rules can create traps for the unwary.

As these examples help to demonstrate, the FLSA is too thorny a place to entrust compliance to managers’ and supervisors’ intentions alone. Even top-notch, employee-first managers can find themselves trapped in one of the FLSA’s various pitfalls, potentially exposing the employer—and possibly even the supervisor herself—to potential liability.

Given these realities, employers are well served by considering the subtle ways in which FLSA issues may arise in their workplace and taking a proactive approach to training supervisors to address those issues. If we can be of assistance in that effort, please do not hesitate to reach out to us.

Authored by Robert Whitman

Seyfarth Synopsis: The Second Circuit has upheld summary judgment against magazine interns seeking payment as “employees” under the FLSA.

In an end-of-semester decision that may represent the final grade for unpaid interns seeking minimum wage and overtime pay under the FLSA, the Second Circuit has firmly rejected claims by Hearst magazine interns challenging their unpaid status.

The interns served on an unpaid basis for various magazines published by Hearst Corporation, either during college or for a few months between college and graduate school. They sued, claiming they were employees because they provided work of value to Hearst and received little professional benefit in return.

Following discovery, District Judge J. Paul Oetken rejected the interns’ claim of employee status and granted summary judgment to Hearst. On appeal, the Second Circuit framed the question succinctly: “whether Hearst furnishes bona fide for‐credit internships or whether it exploits student‐interns to avoid hiring and compensating entry‐level employees.” If the former were true, the interns would be deemed trainees, who could permissibly be unpaid; if the latter were true, the interns would be entitled to minimum wage and overtime pay.

In support of their appeal, the interns argued that many of the tasks they performed were “menial and repetitive,” that they received “little formal training,” and that they “mastered their tasks within a couple weeks, but did the same work for the duration of the internship.” These points, they contended, outweighed their receipt of college credit and other indicia of an academic flavor to their experience.

The appeals court, in Wang v. Hearst Corp., appeared to have little trouble upholding the grant of summary judgment in favor of Hearst. Applying its test for assessing whether interns are employees or trainees, the court held that the factual record favored non-employee status on six of the seven pertinent factors, enough to sustain the judgment in the company’s favor.

Those seven factors, as loyal blog readers will recall from prior posts, first appeared in the court’s 2016 decision in Glatt v. Fox Searchlight, in which the court held that the “primary beneficiary” test governed whether interns were considered employees or trainees. The Glatt court rejected the Department of Labor’s multi-factor test and devised its own:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa;
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands‐on training provided by educational institutions;
  3. The extent to which the internship is tied to the internʹs formal education program by integrated coursework or the receipt of academic credit;
  4. The extent to which the internship accommodates the internʹs academic commitments by corresponding to the academic calendar;
  5. The extent to which the internshipʹs duration is limited to the period in which the internship provides the intern with beneficial learning;
  6. The extent to which the internʹs work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern;
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The factors are non-exhaustive, and as the Second Circuit reiterated in the current case, need not all point in the same direction to support a conclusion of non-employee status.

The “heart of the dispute on appeal” was factor two — whether the interns received “training that would be similar to that which would be given in an educational environment.” The plaintiffs argued that, in order for this factor to weigh in favor of non-employee status, the internships would have to provide “education that resembles university pedagogy to the exclusion of tasks that apply specific skills to the professional environment.”

The court was not convinced. It recognized that the Hearst internships varied in many respects from classroom learning. But as it had said earlier in Glatt, this was precisely the point. “The [plaintiffs’] tacit assumption is that professions, trades, and arts are or should be just like school; but many useful internships are designed to correct that impression…. [P]ractical skill may entail practice, and an intern gains familiarity with an industry by day to day professional experience.”

Perhaps the most significant part of the ruling comes at the end, where the court discusses the propriety of summary judgment. The interns, and various amici curiae (unions, advocacy groups, and professors) who advocated on their behalf, argued strenuously that various “mixed inferences” on the seven internship factors precluded a grant of summary judgment. While acknowledging that application of the factors required some weighing of evidence, the court nonetheless said this did not mean the case required a trial.

“Status as an ‘employee’ for the purposes of the FLSA is a matter of law,” the court said, “and under our summary judgment standard, a district court can strike a balance on the totality of the circumstances to rule for one side or the other.” It continued: “Many of our FLSA tests that are fact‐sensitive and require the judge to assign weight are routinely disposed of on summary judgment [citing cases]. The amici contend that summary judgment is inapposite in all unpaid intern cases that turn on competing factors. Such a rule would foreclose weighing of undisputed facts in this commonplace fashion.”

In many ways, the Wang decision may be the epilogue to a textbook that has already been written. After the Glatt decision in 2016, the number of lawsuits filed by interns seeking unpaid compensation dropped precipitously. That may have been due to Glatt’s highly-employer-friendly resolution, both as to the merits of the employee-or-intern question and its pronouncements on the high threshold for collective/class certification on the question. Or perhaps it was due to the decisions by employers, reacting to the onslaught of intern lawsuits seeking pay under the FLSA and state law, to curtail or limit their internship programs or to pay interns compensation at or above minimum wage. Whatever the reason, the Wang decision cannot be heartening for plaintiffs’ lawyers, and the days of widespread lawsuits by interns are likely over.

Still, companies who remain interested in sponsoring unpaid interns should not get complacent. Paying minimum wage, of course, remains a fail proof antidote to the possibility of FLSA claims by these individuals. But if that is not an option, companies should take care to ensure that their programs have primarily educational aims and coordinate wherever possible with the interns’ educational institutions to ensure they meet the factors articulated by the court. Otherwise, the interns may be the ones teaching them a lesson.

Co-authored by Noah Finkel and Cheryl Luce

Seyfarth Synopsis: On Monday, the DOL issued a Notice of Proposed Rulemaking announcing rescission of a rule that regulates tip pooling by employers who do not take the tip credit.

The DOL has issued a Notice of Proposed Rulemaking regarding the tip pooling regulations of the Fair Labor Standards Act. The FLSA allows employers to take a tip credit toward their minimum wage obligations, and employee tips may be pooled together, but pooling of tips is allowed only “among employees who customarily and regularly receive tips.” 29 U.S.C. § 203(m). The DOL took the tip pooling law a step further in 2011 when it promulgated a regulation that prohibits employers from operating tip pools even when they do not take the tip credit. The regulation states: “Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.” 29 C.F.R. § 531.52.

The DOL’s tip pooling rule has been unpopular with courts—and for good reason, as we have previously noted. Indeed, several federal courts have found that it is overbroad and invalid, excluding the Ninth Circuit. In the Notice of Proposed Rulemaking, the DOL agrees with the holdings of most courts and, while not outright stamping the rule as “overbroad” or beyond the DOL’s authority, states that the DOL is concerned “about the scope of its current tip regulations” and “is also seriously concerned that it incorrectly construed the statute in promulgating the tip regulations that apply to” employers who do not take the tip credit. The DOL’s about-face is also motivated by policy concerns. The Notice explains that removing the rule “provides such employers and employees greater flexibility in determining the pay policies for tipped and non-tipped workers [and] allows them to reduce wage disparities among employees who all contribute to the customers’ experience and to incentivize all employees to improve that experience regardless of their position.” Finally, the DOL notes that the increase in state laws prohibiting tip credits and the volume of litigation over this issue contributed to its decision to put the rule on the chopping block.

The end of the rule does not come as a surprise as both the DOL and courts have sounded the death knell this year. On July 20, 2017, the DOL issued a nonenforcement policy to not enforce the rule with respect to employees who are paid at least minimum wage. Additionally, the National Restaurant Association filed a petition for certiorari with the Supreme Court asking for review of the Ninth Circuit’s decision, which is still pending.

The DOL announced that if the rule is finalized as proposed, the rule would qualify as an “EO 13771 deregulatory action” under the Trump administration’s “two-for-one” executive order that requires federal agencies to cut two existing regulations for every new regulation they implement. Once the proposal is published in the Federal Register, interested parties will have the opportunity to provide comments regarding the Department’s proposal within 30 days. Only after these steps is the rule made final.

Co-authored by: Steve Shardonofsky and John P. Phillips

Seyfarth Synopsis: On November 7, 2017, the U.S. House of Representatives passed the Save Local Businesses Act. If passed by the Senate, the bill would overturn Obama-era decisions and agency guidance broadly defining and holding separate, unrelated companies liable as “joint employers” under federal wage & hour and labor law. Perhaps more importantly, the bill signifies a broader trend to provide more clear guidance and roll-back various Obama-era rules on wage & hour issues.

The Broad Approach to “Joint Employment” Under the Obama Administration

Under the prior Administration, and particularly during the later years, employers who had traditionally relied on contract labor, temporary workers, staffing agencies, subcontractors, and franchise arrangements found themselves in the crosshairs of federal agencies and regulators. Traditionally, joint employer status was found where separate, unrelated entities shared responsibility and exercised direct control over the employment relationship, including decisions affecting the terms and conditions of employment. In that case, both entities could be held jointly liable for violations of wage & hour and other employment laws. The Obama Administration upended this traditional test, however.

In August 2015, the NLRB issued its much-discussed Browning-Ferris decision (addressed here), where the Board adopted an expansive definition of joint employment focusing on the right to control the terms and conditions of employment and the indirect exercise of those rights. (Seyfarth Shaw LLP is leading the appeal of Browning-Ferris to the D.C. Circuit Court of Appeals.) In 2015 and 2016, then-WHD Administrator Dr. David Weil issued two separate Administrator’s Interpretations (“AIs”) concerning independent contractors and joint employment. In 2015, in an effort to reduce the classification of workers as independent contractors and increase the number of workers subject to the FLSA’s minimum wage and overtime requirements, Dr. Weil issued guidance espousing a broad interpretation of who qualifies as an “employee” under the FLSA and highlighting the DOL’s position that almost all workers are employees. In 2016, Dr. Weil followed-up with guidance emphasizing the DOL’s position that joint employment must be determined based on the economic realities instead of (in their view) artificial corporate or contractual arrangements, including situations involving “horizontal” and “vertical” joint employment (discussed here). This guidance focused on the economic realities of a business’s relationship with a given worker, especially noting that indirect control (e.g., control excised solely through a staffing company) can be sufficient for a finding of joint employment. While the AIs were not entitled to judicial deference, we anticipated that some judges would treat Dr. Weil’s words as gospel.

As we previously reported, the broader tests espoused by the NLRB and the WHD exposed employers to a myriad of new wage and hour liabilities, investigations, and enforcement actions, and were especially relevant to companies that outsource work, utilize staffing agencies and contractors, or employ a franchisor/franchisee business model. If recent activity by Trump’s DOL and Congress is any indication, a shift in regulatory enforcement and focus is well underway.

The Winds of “Joint Employment” Are Shifting

As we reported here and here, this summer the DOL withdrew its AIs on joint employment and independent contractors. More recently, on November 7, 2017, the U.S. House of Representatives passed the Save Local Businesses Act by a vote of 242-181, including yes votes from eight Democrats. The bill clarifies the standard for “joint employer” status under the FLSA and the NLRA, and returns to a traditional test that requires “direct, actual, immediate,” and “significant” control over the essential terms and conditions of employment, such as hiring, discharging employees, determining rates of pay and benefits, day-to-day supervision, and administering employee discipline.

Implications for Employers

The DOL’s decision to withdraw its AIs and the passage of the Save Local Businesses Act are welcome changes for employers who faced significant liability and uncertainty under the Obama-era rules. Although the bill itself still faces a tough road in the Senate—where it will require Democratic support to reach 60 votes and avoid a filibuster—it would represent a significant shift in the federal government’s focus. Even if the bill stalls, it nevertheless solidifies a broader regulatory and enforcement trend that may prompt federal courts to return to the traditional and more predictable joint employer test under the FLSA.

Full passage of the Save Local Businesses Act in Congress and signature by the President, however, will not be a panacea for these thorny joint-employer issues. Many states, such as California, still have broad joint-employer tests under their respective wage-hour laws. Courts will also continue to grapple with the proper application and interpretation of these rules, as evidenced by a recent decision from the Fourth Circuit Court of Appeals purporting to define joint employment even more broadly than the Obama Administration. Furthermore, the plaintiffs’ bar will continue to push the outer contours of the law in their search to apply joint employer principles more broadly and thereby reach the “deep pockets” of franchisors and other principals. Regardless of what happens to the Save Local Businesses Act, we foresee continued potential exposure and litigation in this arena. Employers—and particularly those in industries that make heavy use of franchises, subcontractors, and staffing agencies—should remain engaged and focused on these issues, and continue to scrutinize their independent contractor relationships, staffing arrangements with third parties, and related contracts.

Co-authored by Cheryl Luce, Kyla Miller, and Noah Finkel

Seyfarth Synopsis: A recent decision highlights why the FLSA is not always the remedial statute created to protect low-income workers by holding that four commission-based sales representatives, each earning six figures, were not exempt from the overtime requirements because they were not paid on a salary basis.

Our readers are well aware that under the FLSA, employers are required to pay employees overtime equal to time and one-half the regular rate for all hours worked over 40 hours in a workweek unless an exemption applies. When making exempt classification decisions, the focus tends to be on whether employees are doing the kind of work that would satisfy the applicable duties test and whether employees are making enough to satisfy the income thresholds. But the FLSA exemptions don’t concern only how much employees are paid, but also how they are paid. Though sometimes overlooked, technical requirements about how employees are paid can carry the day in a misclassification lawsuit, leaving a trail of decisions that often seem contrary to the purpose set out by the creators of the FLSA. This was one such decision.

This decision illustrates how the FLSA often is applied in a way that is a far cry from what it was originally intended to be: an Act passed during the Great Depression to ensure a living wage for working Americans. In this case, the U.S. District Court for the Eastern District of Tennessee denied the defendants’ motion for summary judgment, finding that four highly compensated sales representatives, who were paid on a commission basis, were not exempt from FLSA’s overtime provisions despite the fact that the plaintiffs each earned well over $100,000 per year. In fact, one sales representative topped out at over $900,000 per year. Across the relevant period, the plaintiffs’ compensation averaged about $470,00 per year.

The defendants argued that the plaintiffs were exempt from overtime wages under the highly compensated employee exception. Under this exemption, the employee must perform office or non-manual work and be paid a total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) and must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee. The defendants argued that even though the plaintiffs were paid by commissions on sales, the highly compensated employee exemption applies because the commissions are “fees,” so they were paid on a fee basis. The plaintiffs argued that the highly compensated employee exemption applies only when employees are paid on a salary basis and that the commissions they received were not “fees.” The court agreed with the plaintiffs, holding that the plaintiffs’ compensation did not meet the highly compensated employee exemption’s salary basis test.

We previously have discussed courts’ construction of the FLSA as “remedial and humanitarian in purpose and must not be interpreted or applied in a narrow, grudging manner.” We have argued that courts apply this construction inconsistently and often illogically. And this case serves as one more challenge to the unsupported dicta that we find in many cases stating that, because the FLSA is “remedial and humanitarian,” its exemptions must be “narrowly construed.” Here, we have employees who are very high earners, with two employees making close to one million dollars in a single year, and whose employer is now forced to pay them additional compensation and liquidated damages (and a fee petition for their lawyers is sure to come next). The court construed the FLSA exemptions against these employees narrowly, and we can discern no remedial or humanitarian purpose that the FLSA is serving here. Rather, this decision reflects the FLSA as a statue riddled with technical traps and rigid rules that do not necessarily serve to ensure a living wage for working Americans.

Authored By Alex Passantino

As we’ve reported previously, among the items the Department of Labor identified earlier this year in its Regulatory Agenda was a Notice of Proposed Rulemaking (NPRM) seeking to rescind portions of a 2011 rule that restricted tip pooling for employers who do not use the tip credit to satisfy their minimum wage obligations. On October 24, 2017, that NPRM was sent to the White House Office of Information and Regulatory Affairs (OIRA) for review and approval. One of the cases challenging the validity of the 2011 rulemaking may be on its way to the Supreme Court, with the Administration’s response to a cert petition due on November 7. With that deadline looming, it’s possible that the Administration is seeking to moot the issue before the Supreme Court has the chance to address some of the issues related to agency deference.

After OIRA clears the NPRM, it will be sent to the Federal Register for the public to provide comments in response to the Department’s proposal. At that time, we’ll know the specifics of the proposal and will be able to provide more guidance on what this means for employers. Stay tuned.

 

Authored By Robert Whitman

Seyfarth Synopsis: The Second Circuit will soon decide key issues for FLSA practitioners: whether settlements pursuant to an Offer of Judgment are subject to court review and approval, and whether the standards for final collective certification of FLSA claims are different from those for class certification of state law wage claims under Rule 23.

Two cases now before the Second Circuit, one involving a small Japanese restaurant, the other involving Mexican fast-casual chain Chipotle, offer the court the opportunity to experience the gustatory pleasures of two prime cuts of FLSA procedural law: enforceability of settlements and the standards for collective certification. It is a veritable feast for wage and hour geeks in the New York metropolitan area and beyond.

In Yu v. Hasaki, the court on October 23 accepted for interlocutory review the question of whether a district court must approve the settlement of FLSA claims when the settlement is procured through an Offer of Judgment under FRCP 68.

Yu involves FLSA and New York Labor Law claims by a sushi chef. To settle the case, the defendants made an offer of judgment, which the plaintiff accepted. After the parties advised the court, Judge Jesse Furman ordered them to submit their agreement for his approval, along with letters explaining why the settlement is fair and reasonable. The defendants objected, arguing that, under Rule 68, court approval of an accepted offer of judgment is mandatory, leaving no role for the judge in reviewing the agreement’s terms. They based their argument on the language in Rule 68 that, if a plaintiff accepts an offer, the clerk “must then enter judgment.”

In effect, the defendants contended that Rule 68 creates an exception to the Second Circuit’s decision in Cheeks v. Freeport Pancake House, in which the court held that judicial approval of settlement terms is mandatory for dismissal of FLSA claims with prejudice and that many otherwise-customary settlement provisions, such as confidentiality and general releases, are not permissible. The U.S. Department of Labor weighed in as an amicus curiae, arguing that judicial approval is required, even when the settlement arises out of an accepted Rule 68 offer.

Judge Furman agreed, holding that the concerns articulated in Cheeks apply equally under Rule 68 as they do in standard FLSA settlements. But because other district judges had held differently, he certified his order for interlocutory appeal under 28 U.S.C. § 1292(b), holding, among other things, that there was a substantial basis for disagreement on the issue. The Second Circuit accepted the case for review, stating that the decision “clearly merits interlocutory review under section 1292(b), as Judge Furman sensibly recognized.”

In Scott v. Chipotle, the appeals court is considering whether to address an issue that has long vexed FLSA litigators: whether the standard for final collective action certification under 29 U.S.C. § 216(b) differs from the standard for class certification under Rule 23.

The plaintiffs in Scott are apprentices – managerial trainees – at Chipotle restaurants in several states. They sued under the FLSA and state law, claiming they were misclassified as exempt managers because they spent most of their time filling orders and operating cash registers. District Judge Andrew Carter granted conditional FLSA certification, and 516 employees opted in. But after discovery, the court refused to grant final FLSA certification, and likewise denied Rule 23 class certification of the state law claims, holding that the responsibilities of the seven named plaintiffs did not match those of the putative class or collective.

The plaintiffs appealed the state law class certification decision as of right under Rule 23(f). They also sought permission from Judge Carter to take an interlocutory appeal of his FLSA final certification ruling, contending that the court’s twin rulings highlighted a “rift” between the certification standards for FLSA and non-FLSA wage and hour claims that the Second Circuit could resolve. While disagreeing with the plaintiffs’ argument, Judge Carter nonetheless observed that they had indeed “point[ed] to controlling questions of law which may have substantial grounds for a difference of opinion,” and granted permission.

It is now up to the Second Circuit whether to allow the interlocutory appeal. If it takes the case, it will have the opportunity to issue a combined opinion, addressing both Rule 23 and section 216(b), that clarifies the standards for final certification under both regimes.

Whether one’s preferences run to wasabi or jalapeno, these cases are sure to satisfy even the hungriest of wage and hour lawyers.