The Story Thus Far

As outlined in a previous blog article, the decision in Dynamex Operations v. Superior Court will be extremely important for all companies that use independent contractors, especially those in the emerging “gig economy.” Misclassifying workers can have painful consequences, involving not only liability for unpaid wages and employee benefits but also statutory penalties for each violation considered “willful.”

The Issue

In agreeing to review the case, the California Supreme Court defined the issue on appeal as whether, in a misclassification case, a class may be certified based on the expansive definition of employee as outlined in the California Wage Order language construed in Martinez v. Combs (2010), or on the basis of the common law test for employment set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989). In short, the California Supreme Court focused on whether to continue using the Borello test and on what test, if any, to apply instead.

The definition of employment identified in the California Wage Orders is broader than the prior common law test. California’s Wage Orders define “employ” broadly to mean “to engage, suffer or permit to work.” In contrast, Borello focuses instead on a multi-factor balancing test that depends on the unique facts of each situation and that is more likely to recognize the existence of an independent contracting relationship.

Oral Argument

Dynamex Operations Goes First

In its opening argument, Dynamex praised the Borello test as a tried and true California rule and warned against the danger that uncertainty in the classification of workers would pose to California’s booming “gig economy.” Dynamex raised concerns with any judicial adjustment to the definition of employment that would usurp the legislature role.

Justice Kruger, however, wondered whether judicial adoption of a bright-line rule would not be more instructive for employers, and suggested, as a possibility, adopting the ABC test followed in such jurisdictions as New Jersey and Massachusetts. The ABC test says that three conditions must all concur for a worker to be an independent contractor: (1) freedom from actual control over the work, (2) work beyond the usual course of business and off company premises, and (3) engaging in an independent trade. Unless A, B, and C all concur, then the worker is an employee.

Chief Justice Cantil-Sakauye raised an additional response to Dyanamex’s plea to leave this issue to the Legislature: if the ABC test is a stricter version of the Borello test, then why should the Supreme Court be precluded from adopting a new version of the test to ensure clarity in enforcement when, after all, it was the Supreme Court that had adopted the Borello test in the first place? Finally, Justice Kruger and Dynamex had a robust discussion about adopting a modified rule, where the ABC test would govern for some Labor Code provisions, but a different test may apply to others. Dynamex opined that this result would be confusing for employers and might result in individuals being employees for some purposes but independent contractors for others.

Aggrieved Independent Contractors Respond

In their responsive argument, the workers portrayed what they saw as the sorry plight of California independent contractors. The workers called independent contracts the new “serf-class”: people who work hard while receiving none of the California Labor Code’s basic employee benefits. They argued that the court should adopt a new, broader definition of employee to protect workers from harm. The workers seemed open to several outcomes, including (a) a broader definition for some California Labor Code provisions, (b) the definition outlined in the state’s Wage Orders, or (c) any other new employment test that the California Supreme Court might come to favor.

Justice Liu seemed skeptical about a broader test. He referred to an “Amazon Analogy.” Although most people know Amazon sells goods online, many people also view Amazon Prime (with its delivery services) as within Amazon’s usual course of business. Justice Liu then asked: if the Justices were to adopt a strict interpretation of the ABC test, at what point would Amazon be considered a shipping business, meaning that all drivers who ship Amazon Prime goods would be employees of Amazon under the second ABC prong? This analogy caught the attention of Justices Cuellar and Justice Chin, who both seemed to appreciate how complicated, and blurry, a new test could be.

Dynamex Makes A (Brief) Comeback

In its rebuttal, Dynamex took up Justice Liu’s “Amazon Analogy” to argue why a flexible test is needed to ensure just results. Two justices followed up. The first was Justice Liu, who asked whether other jurisdictions have applied the ABC prongs strictly. The second was Justice Chin, who closed oral argument with a pointed question that represents the concerns of many observers: which employment test best fits the modern economy? Dynamex responded that the body of developing case law as well as the uniformity of Borello’s application has suited California well and that it provides all of the factors needed to fully determine employment relationships.

Our Crystal Ball

Although one cannot read the minds of seven justices, we sense the court will likely reject the call to leave this matter for the legislature and will lean instead toward a judicially fashioned test that, in the view of most justices, will best fit the needs of the modern economy. The court’s decision is expected within the next 90 days.

As always, we will remain vigilant and on the scene. Look for more updates about this case as they come out and in the meantime do not hesitate to reach out to your friendly neighborhood Seyfarth attorney for guidance or with any questions you might have.

Authored by Robert Whitman

Seyfarth Synopsis: The Department of Labor has scrapped its 2010 Fact Sheet on internship status and adopted the more flexible and employer-friendly test devised by Second Circuit.

In a decision that surprised no one who has followed the litigation of wage hour claims by interns, the US Department of Labor has abandoned its ill-fated six-part test for intern status in for-profit companies and replaced it with a more nuanced set of factors first articulated by the Second Circuit in 2015. The move officially eliminates agency guidance that several appellate courts had explicitly rejected as inconsistent with the FLSA.

The DOL announced the move with little fanfare. In a brief statement posted on its website on January 5, it said:

On Dec. 19, 2017, the U.S. Court of Appeals for the Ninth Circuit became the fourth federal appellate court to expressly reject the U.S. Department of Labor’s six-part test for determining whether interns and students are employees under the Fair Labor Standards Act (FLSA).

The Department of Labor today clarified that going forward, the Department will conform to these appellate court rulings by using the same “primary beneficiary” test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.

The DOL rolled out the six-part test in 2010 in a Fact Sheet issued by the Wage and Hour Division. The test provided that an unpaid intern at a for-profit company would be deemed an employee under the FLSA unless all six factors—requiring in essence that the internship mirror the type of instruction received in a classroom setting and that the employer “derive[] no immediate advantage from the activities of the intern”—were met. The upshot of the test was that if the company received any economic benefit from the intern’s services, the intern was an employee and therefore entitled to minimum wage, overtime, and other protections of the FLSA.

Spurred by the DOL’s guidance, plaintiffs filed a flurry of lawsuits, especially in the Southern and Eastern Districts of New York. But despite some initial success, their claims were not well received. The critical blow came in 2015 from the Second Circuit, which in Glatt v. Fox Searchlight Picture Searchlight emphatically rejected the DOL’s test, stating, “[W]e do not find it persuasive, and we will not defer to it.” Instead, it said, courts should examine the internship relationship as a whole and determine the “primary beneficiary.” It crafted its own list of seven non-exhaustive factors designed to answer that question. Other courts soon followed the Second Circuit’s lead, capped off by the Ninth Circuit’s ruling in late December.

For the new leadership at the DOL, that was the final blow. In the wake of the Ninth Circuit’s decision, the agency not only scrapped the six-factor test entirely, but adopted the seven-factor Glatt test verbatim in a new Fact Sheet.

While the DOL’s action marks the official end of the short-lived six factors, the history books will note that the Glatt decision itself was the more significant event in the brief shelf-life of internship litigation. As we have noted previously in this space, the Glatt court not only adopted a more employer-friendly test than the DOL and the plaintiffs’ bar had advocated; it also expressed grave doubts about whether lawsuits by interns would be suitable for class or collective action treatment. The DOL’s new Fact Sheet reiterates those doubts, stating, “Courts have described the ‘primary beneficiary test’ as a flexible test, and no single factor is determinative. Accordingly, whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

That aspect of the ruling, more than its resolution of the merits, was likely the beginning of the end for internship lawsuits. In the months and years since Glatt was decided, the number of internship lawsuits has dropped precipitously.

At this point, only the college student depicted recently in The Onion  seems to be holding out hope. But as we’ve advised many times, employers should not get complacent. Unpaid interns, no matter how willing they are to work for free, are not a substitute for paid employees and should not be treated as glorified volunteer coffee-fetchers. As the new DOL factors make clear, internship experiences still must be predominantly educational in character. If not, it will be the interns (and their lawyers) giving employers a harsh lesson in wage and hour compliance.

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.

Co-authored by Steve Shardonofsky and Kevin A. Fritz

Seyfarth Synopsis: As employers begin to pick up the pieces following Hurricane Harvey, management will likely encounter questions about employee pay, benefits, and leaves of absence during and after this disaster, and may also have questions about how to help their workers get by during this difficult time. After making sure your workers are safe, and as you start to rebuild and repair, read on for practical guidance on these pressing issues.

This past weekend Hurricane Harvey made land fall, causing unprecedented and catastrophic flooding in southeastern Texas. Our thoughts go out to our colleagues, clients, and friends affected by this natural disaster. We are thinking of you during this difficult and trying time.

Pay for Non-Exempt Employees

The General Rule

Under the Fair Labor Standards Act (FLSA), an employer is only required to pay non-exempt employees for hours actually worked. In other words, businesses are not required to pay non-exempt employees if they are not working, including times when the employer closes its doors or reduces hours of operation, whether or not forced to do so by inclement weather. Moreover, while some states require some minimum “reporting” or “show up” pay for employees who show up for work and are either turned away at the door or dismissed before the end of their scheduled shifts, Texas is not one of those states.

An important exception to this general rule exists for non-exempt employees who receive fixed salaries for fluctuating hours from week to week. Because these employees must be paid a “fixed” salary, employers must pay these workers their full weekly salary for any week in which any work was performed and may not dock their pay for days when the office is closed due to inclement weather.

Even if your business is not open during inclement weather days, you always are free to pay employees for that time, and may also permit them to use their paid leave time, if applicable.

Inclement Weather Delays and Traffic

Flooding and severe weather often cause unpredictable traffic delays, and may even result in employees becoming stranded on the road. Employees who perform work while stranded—for example, by taking phone calls or answering e-mails on their way to work—must be compensated for that time even if done away from the office. Similarly, an employee who is stranded in an employer’s vehicle on their way to work and instructed to safeguard the vehicle or other property is generally entitled to pay for time beyond their ordinary home-to-work commute (i.e., once their scheduled shift begins).

With respect to inclement weather, the general and most practical advice is to pay for any extra time spent getting to work during a scheduled shift, particularly when employees are stranded for reasons outside their control. It is likely that the Department of Labor or even a court would find that all of the time the employee was stranded within their regular shift is compensable time. Even where reasonable minds could differ on these questions, since the costs of defending these claims often exceed the underlying payroll costs, it often makes sense to pay employees for this time in the first place.

Pay for Exempt Employees

The General Rule

Exempt employees under the FLSA must be paid on a “salary basis” and earn a full day’s pay when they work any part of the day, regardless of the quality or quantity of the work performed. Thus, if a business is closed because of inclement weather and an exempt employee is ready, willing, and able to work, she must be paid for that day. On the other hand, if the exempt employee does not work for an entire workweek (for personal reasons or because the business is closed), the exempt employee need not be paid for that time—that is, the employer may “dock” her salary for the full workweek.

If the business is open and an exempt employee elects to stay home to make repairs or volunteer at a local shelter, the employer may “dock” their salary in full day increments (but perhaps consider not doing so to encourage volunteerism and aid in recovery efforts). In these instances, and including situations when exempt employees elect to arrive late or leave early for personal reasons, employers may also deduct accrued leave time in full or partial day increments as long as the employee receives his or her full pay for the week. In the event that the employee does not have any accrued time, an employer may also simply pay him or her for the day or allow the employee to take an advance on accrued paid leave and make it up at a later time. This practice is not allowed for non-exempt employees, who must be paid overtime for all hours worked over 40 in a work week. See here for more information on the FLSA salary basis rules.

Safe Harbor

Remember, improper or inadvertent deductions from pay will not typically result in the loss of exemption status if the employer reimburses the employees for the improper deductions, has a clearly communicated safe harbor policy prohibiting improper deductions, and a complaint mechanism for exempt employees to use if improper deductions are made.

Telework or Working from Home

Allowing employees to work from home during this time will aid recovery efforts and help families recover faster. Regardless of exemption status, employees who work from home during inclement weather, even if only a few hours per week, must be paid for that time. Thus, employers who will keep their businesses up and running during the aftermath of Hurricane Harvey should clearly communicate to employees who is and who is not permitted to work from home, when that work can be done, whether overtime is permitted, and how to record time worked outside of the company’s premises. It is also important to remind employees to record all hours worked, even when the work is done away from the employer’s premises. Employers should be sensitive to the fact that not all employees will be able to work remotely, and therefore should consider alternative arrangements like temporary or shared offices.

On-Call and Waiting Time

Power outages are common during natural disasters, and many employers will require their employees to wait out or work through such power failures. In most cases, any employee who is required to remain at the employer’s premises or close by and therefore unable to use that time for his own benefit (even if not working) must be compensated for that time. For example, employees who are onsite to perform emergency repairs and who are not free to leave the company’s premises must be compensated for time even if they do not ultimately perform any work. Similarly, if an employee is onsite and required to wait through a power outage, the time waiting for the power to resume is typically considered time worked and is therefore compensable.

Volunteer Time for Company Repairs

Employers should generally be cautious about having employees “volunteer” to assist during an emergency, particularly if those duties benefit the company and are regularly performed by employees. Exempt employees who volunteer to help will not be entitled to any additional compensation. But remember that too much time spent on manual tasks or other tasks unrelated to their regular job duties could invalidate their exempt status and allow them to claim overtime compensation. Conversely, non-exempt employees must be paid for all time worked, even if they offer to work and help make repairs for “free,” with one exception:  Employers may accept free work from employees of government or non-profit agencies who volunteer out of public-spiritedness to perform work that is not at all similar to their regular duties.

Leaves of Absence After a Natural Disaster

Otherwise eligible employees affected by a natural disaster may elect to take leave under the Family and Medical Leave Act (FMLA) for a serious health condition caused by the disaster. Additionally, employees affected by a natural disaster who must care for a child, spouse, or parent with a serious health condition may also be entitled to leave. This includes job-protected leave to care for a family member who is a current service member with a serious injury or illness. FMLA leave for this purpose is called “military caregiver leave.”

Adding to the difficulty, employers may encounter uncommon FMLA issues during and after severe storms, including absences caused by an employee’s need to care for a family member who requires refrigerated medicine or medical equipment that is not operating properly because of a power outage. What’s more, under the Americans with Disabilities Act, an employee who is physically or emotionally injured as a result of a disaster may be entitled to leave as a reasonable accommodation, so long as it would not place undue hardship on the operation of the employer’s business.

Employees who are part of an emergency services organization may also have rights under the Uniformed Services Employment and Reemployment Rights Act (USERRA). Under certain conditions, USERRA provides job-protected leave for U.S. service-members. Although USERRA does require advance notice of military service, there are no strict time limits for notice after a natural disaster as long as it is reasonably “timely.” Employers should be prepared to receive and assist employees giving notice under USERRA and other laws allowing for job-protected leave.

Many counties in Texas have been declared in a state of emergency following Hurricane Harvey. While this does not provide pay or other protections for Texas employees, the Texas Workforce Commission advices that “absences due to closure of the business based on bad weather or other similar disaster or emergency condition should not count toward whatever absence limit a business has” —particularly for nonessential employees. On the other hand, if other employees are able to make it in to work (including workers from similar areas), absences for personal reasons may count toward an absence limit. On balance, however, it is always advisable to discourage the discipline of any nonessential employees who are unable to report to work during a state of emergency.

Weathering the Storm Together

While legal compliance is important, there are other practical ways employers can help workers weather the storm and get back on track. Business owners should consider relaxing the usual telecommuting rules to allow affected employees to work from home as much as possible. To minimize financial hardship, employers should continue to process payroll in a timely manner. Consider providing pay advances, loans, or even advances for paid time off/vacation time to help employees offset unanticipated expenses for repairs and insurance deductibles.

To the extent possible, employers may consider offering employees paid leave for time spent volunteering to assist with disaster relief efforts. Employers can also implement a leave donation/sharing policy to allow employees to donate paid leave to employees who will use it to volunteer in relief services or for those otherwise affected by this terrible disaster.

For more information on this topic, please contact the authors, your Seyfarth Attorney, or any member of Seyfarth Shaw’s Wage and Hour Team.

Co-authored by John Giovannone, Kyle Petersen, and Noah Finkel

Seyfarth Synopsis: Earlier this month, the Ninth Circuit chose to side with the Second Circuit, and not the Sixth Circuit, to opine that mortgage underwriters fail to meet the FLSA’s administrative exemption from overtime test because underwriting duties “go to the heart of… marketplace offerings, not to the internal administration of” the mortgage banking “business.” That is, their duties were found to fall on the “production side” of the tortuous, judicially created “administrative/production” dichotomy.

Selling loans is not a duty that satisfies the FLSA’s administrative exemption test. But loan underwriters do not sell or even drive sales of loans. If anything, they apply the brakes after a loan officer has made the pitch and obtained a loan application from a prospective borrower.

Underwriters perform a distinct back-office role. They apply a multitude of factors to decide whether their employers should extend credit—after the application has been completed and the loan has been sold pending approval. We only have to look back about a decade to this country’s housing credit crisis to appreciate the central importance to a lender of a high-functioning and discerning underwriting team.

Historically, Underwriters Have Been Found Exempt Under The Administrative Exemption

Particularly now, given the odor that still wafts from the bursting of the housing bubble, one would think the modern judiciary would readily view underwriters as primarily providing a centrally important variety of “office or non-manual work related to the management or general operations of the employer” lender—work that thus satisfies this requirement of the administrative exemption test.

And in 2015, consistent with this common-sensical assessment of underwriting, the Sixth Circuit in Lutz v. Huntington Bank concluded that mortgage underwriters were administrative exempt precisely because they “assist in the running and servicing of the Bank’s business by making decisions about when [the Bank] should take on certain kinds of credit risk, something that is ancillary to the Bank’s principal production of selling loans.”

Ninth Circuit Denies Underwriters’ Administrative Exemption

Earlier this month, the Ninth Circuit, in McKeen-Chaplin v. Provident Bank deviated from the Sixth Circuit’s sound decision in Lutz. In assessing whether mortgage underwriters’ work is “related to the management or general operations” of the bank, examined a judicially created “framework for understanding whether employees satisfy [this] requirement [called] the ‘administrative-production dichotomy.’”

The dichotomy’s purpose, Provident Bank explained, “is to distinguish between the goods and services which constitute the business’ marketplace offerings” (so-called non-exempt production work), “and work which contributes to ‘running the business itself’” (so-called exempt administrative work).

          Provident Bank’s Labored Discussion of The Administrative/Production Dichotomy And The Circuit Split.  Provident Bank applied its strained view of administrative/production dichotomy by first observing that, “in the last decade, two of our sister Circuits have assessed whether mortgage underwriters qualify for the FLSA’s administrative exemption and have come to opposite conclusions. The Second Circuit held in Davis v. J.P. Morgan Chase [in] 2009.. that ‘the job of an underwriter… falls into the category of production rather than administrative work.’ … In contrast, the Sixth Circuit held recently that mortgage underwriters are exempt administrators, explaining that they ‘perform work that services the Bank’s business, something ancillary to [the Bank’s] principal production activity’… . [W]e conclude the Second Circuit’s analysis in Davis should apply.”

Having voiced a preference for the Second Circuit’s more restrictive application of the administrative/production dichotomy (which had, perhaps erroneously, assumed that underwriters were involved in the sale of mortgages), Provident Bank applied the dichotomy to hold that the mortgage underwriters were production workers, even while conceding a number of non-production components of mortgage underwriter work.

Provident Bank observed, for example, that mortgage underwriters “do review factual information and evaluate the loan product and information and … assess liability in the form of risk,” but then immediately dismissed this important role by concluding that the bank’s promulgation of underwriter “guidelines that [the underwriters] do not formulate,” somehow reduced the administrative quality of the work.

Provident Bank even went on to acknowledge the existence of significant differentiation between non-exempt “loan offers in the mortgage production process [and mortgage underwriters]—most significantly [the distinguishing fact that underwriters’] primary duty is not making sales on Provident’s behalf.”

          A “Not So Distinct From Production” Standard?  Despite these factual findings, the Provident Bank court still applied the administrative/production dichotomy to invalidate the bank’s determination of exempt status. To accomplish this goal, Provident Bank articulated a “not so distinct from production” standard, explaining that the mortgage underwriters were still not administrative exempt because their duties “are not so distinct” from loan officers’ role in the “mortgage production process” so “as to be lifted from the production side [of the dichotomy] to the ranks of administrators.” The Ninth Circuit then ratcheted the standard up by explaining that “the question is not whether an employee is essential to the business, but rather whether her primary duty goes to the heart of internal administration — rather than marketplace offerings” (emphasis added).

This “not so distinct from production” standard highlights the limitations of the administrative/production dichotomy and runs afoul of its intended purpose. For example, the Department of Labor’s 2004 regulations, and case law, have made clear that this “dichotomy has always been illustrative – but not dispositive – of exempt status.” The dichotomy “is only determinative if the work ‘falls squarely’ on the production side of the line.”

Certainly, work that “is not so distinct” from the production side of the line is a far cry from work that “falls squarely” on the production side of the line. But a finding that work is not so distinct from production, though virtually meaningless, is all that Provident Bank seems to require.

The Administrative-Production Dichotomy Has Been Stretched Beyond Its Utility, Resulting In A Circuit Split And Confusion

Provident Bank’s finding that underwriting work “is not so distinct from production” work has little to do with the test for administrative exemption or the Department of Labor’s explanation of the limitations of the administrative/production dichotomy. Yet Provident Bank threatens to flip the dichotomy on its head, as it could be read to require an employer to show that that the work “falls squarely” off “the production side of the line” rather than establishing merely what the FLSA requires: that the employee performed office or non-manual work related to the management or general operations of the employer.

Sometimes, work such as underwriting does not obviously fall squarely on one side of the administrative/production dichotomy line or the other. That is why, for example, even the historically exemption-resistant California Supreme Court in Harris v. Superior Court (2011) observed “the limitations of the administrative/production worker dichotomy itself as an analytical tool” and thus reversed a decision that “improperly applied the administrative/production worker dichotomy as a dispositive test” with respect to insurance claims adjusters.  Harris explained that since “the dichotomy suggests a distinction between the administration of a business on the one hand, and the ‘production’ end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940’s’” when they should not force a strained application of the dichotomy, which is just an illustrative tool. Indeed, the Seventh Circuit of Appeals similarly reasoned in Roe-Midgett v. CC Services, Inc., (7th Cir. 2008) that the “typical example” of the dichotomy is a factory setting, an analogy that is “not terribly useful” in the service context.

Two Circuits have now built the administrative/production dichotomy into something larger than it was ever intended to be. The focus on the administrative/production dichotomy has overshadowed and confused focus on the actual rules and regulations intended to be assessed in considering the administrative exemption.

Provident Bank creates more questions than answers for employers seeking to classify their workforce, and calls out for Supreme Court review, or for Department of Labor clarification on how courts are supposed to apply the administrative-production dichotomy.

Authored by Alex Passantino

Seyfarth Synopsis: On July 26, 2017, the U.S. Department of Labor will publish its anticipated Request for Information on the White-Collar Overtime Exemption in the Federal Register. The RFI will give the regulated community 60 days to provide its comments in response.

The RFI seeks input on a wide variety of topics, many of which involve issues that have been raised since the Department published its final rule increasing the salary level over a year ago. With the salary level on hold, the Department has the opportunity to revisit the level–or at least to take the temperature of the regulated community.

The issues on which the Department seeks comment are:

  • Should the 2004 salary test be updated based on inflation? If so, which measure of inflation?
  • Would duties test changes be necessary if the increase was based on inflation?
  • Should there be multiple salary levels in the regulations? Would differences in salary level based on employer size or locality be useful and/or viable?
  • Should the Department return to its pre-2004 standard of having different salary levels based on whether the exemption asserted was the executive/administrative vs. the professional?
  • Is the appropriate salary level based on the pre-2004 short test, the pre-2004 long test, or something different? Regardless of answer, would changes to the duties test be necessary to properly “line up” the exemption with the salary level?
  • Was the salary level set in 2016 so high as to effectively supplant the duties test? At what level does that happen?
  • What was the impact of the 2016 rule? Did employers make changes in anticipation of the rule? Were there salary increases, hourly rate changes, reductions in schedule, changes in policy?  Did the injunction change that? Did employers revert back when the injunction was issued?
  • Would a duties-only test be preferable to the current model?
  • Were there specific industries/positions impacted? Which ones?
  • What about the 2016 provision that would permit up to 10% of the salary level to be satisfied with bonuses? Should the Department keep that? Is 10% the right amount?
  • Should the highly compensated employee exemption salary level be indexed/how? Should it differ based on locality/employer size?
  • Should the salary levels be automatically updated? If so, how?

Of course, the value of these responses ultimately is dependent on the Fifth Circuit’s decision on whether the salary test is permissible to begin with. Should the Fifth Circuit rule in the Department’s favor on that issue, the RFI responses will provide the Department with the information it needs to proceed on a new rulemaking adjusting the salary level…assuming the employer community responds.

For additional information on how to respond to the RFI, please contact OTRuleHelp@seyfarth.com or Alex Passantino at apassantino@seyfarth.com. We’ll continue to update you as additional information becomes available.

Co-authored by Robert J. Carty, Jr., John Phillips, and Alex Passantino

Seyfarth Synopsis: On June 30, the Department of Labor filed its reply brief to support its appeal from a preliminary injunction that enjoined the DOL from implementing its 2016 revisions to the salary-level tests for determining applicability of the FLSA’s executive, administrative, and professional exemptions. In its reply, the government argues it had the authority to make those revisions. How the Fifth Circuit handles the appeal, now that it is fully briefed, will affect what happens from here in the lower court in ways that are difficult to predict.

As we reported last week, the Department of Labor finally filed a reply brief in its appeal of the preliminary injunction prohibiting it from implementing or enforcing its 2016 “Final Rule”—that is, its revisions to the FLSA regulation governing the executive, administrative, and professional (“EAP”) exemptions.

Over the last few days, we’ve been fielding lots of questions about what might happen next. Let’s try to game it out.

But first, we should set the stage. The plaintiffs asserted three main challenges to the Final Rule:

  1. The plaintiffs contested the DOL’s very authority to implement the rule’s salary-level requirement in the first place. The district court accepted this argument—at least with respect to the 2016 Final Rule—and found it unlawful in its entirety.
  2. The plaintiffs argued that the Final Rule’s new “indexing” feature violates the Administrative Procedures Act (“APA”) because it would automatically adjust the minimum salary requirements without any notice or comment period. The district court found the indexing feature unlawful, but only because it had already struck down the entire Final Rule; it expressly bypassed the APA arguments.
  3. The plaintiffs asserted a Tenth Amendment challenge claiming that the Final Rule cannot apply to state governments. The district court rejected this position.

On appeal, the DOL initially defended the Final Rule in all respects, including its $913 weekly minimum salary. Now working under the new administration, the DOL has narrowed its approach in its reply. Rather than continuing a full-throated defense of the previous administration’s Final Rule, the DOL has now limited its argument to one (and only one) issue; it also announced its intention to revisit the $913 minimum:

The Department has decided not to advocate for the specific salary level ($913 per week) set in the final rule at this time and intends to undertake further rulemaking to determine what the salary level should be. Accordingly, the Department requests that the Fifth Circuit address only the threshold legal question of the DOL’s statutory authority to set a salary level, without addressing the specific salary level set by the 2016 final rule.

This is definitely a plot twist, and our readers understandably want to know how it might affect the outcome of this appeal.

We won’t try to predict how the Fifth Circuit will rule on the basic “authority” question. But if it agrees with the district court’s reasoning, the path forward is clear: It will affirm, and the DOL may seek rehearing and/or Supreme Court review if it believes it necessary to preserve its long-asserted authority to set a salary level.

Things will get much more complicated if the Fifth Circuit overrules the district court and finds that the DOL acted within its authority. Here are a few thoughts on what might happen in that case:

  • On the current record, it is unlikely that the court would reach the plaintiffs’ APA challenge to the new “indexing” feature, since the parties’ appellate briefs expressly avoided that issue. That said, the court could request additional briefing on the issue, or could remand the case and instruct the district court to perform an APA analysis.
  • This raises the possibility that the court could find a middle ground. That is, it could find that the DOL generally has the authority to impose a salary-level test, but that the Final Rule exceeded that authority. In that case, the court would affirm the result while disagreeing with the district court’s reasoning.
  • The court might also consider the plaintiffs’ alternative argument that the Final Rule cannot apply to state governments under the Tenth Amendment. A victory on this point, though, would apply only to the 21 State Attorneys General plaintiffs, not the other plaintiffs (a coalition of non-governmental business groups) whose case has been intermingled with that filed by the Attorneys General.
  • If the Fifth Circuit sides with the DOL on all issues, it will reverse. The question will then become whether any of the plaintiffs’ claims can survive in the wake of whatever legal conclusions the court reaches. Various stakeholders have asked us whether the Fifth Circuit would render a defense judgment if it sides entirely with DOL. We wouldn’t expect such an outcome here, because this appeal involves a preliminary injunction, and certain issues are likely to remain (thus requiring further action by the district court). For example, one of the issues raised below (but not in the appeal) is whether the Final Rule is arbitrary and capricious; the Fifth Circuit’s ruling may not resolve that question. (The business plaintiffs have raised the issue in a motion for summary judgment, which is pending in the district court.)
  • We should also note that the Texas AFL-CIO has filed a motion to intervene, which has yet to be decided. The union wants to more strenuously defend the Final Rule than it believes the Trump Administration will. This may present additional loose ends that will have to be resolved in a remand

As we ponder the possible scenarios, we should also consider a few wildcards:

  • In its reply, the DOL expresses its intention to revisit the Final Rule in a new rulemaking. Indeed, as we reported last month, the agency has announced a plan to issue a Request for Information—a “pre-rulemaking”—related to the EAP exemption. There are no guarantees on what the DOL would do with the information it receives. It might help DOL defend its authority to set a salary level; it may also help DOL develop the basis for a future rulemaking. Depending on what the DOL does, it is possible that the case could become moot altogether—for example, if it proposes and finalizes a new rule before the case concludes.
  • The Fifth Circuit may conduct oral argument and/or request additional briefing. If it does, expect us to refine our views based on what unfolds.
  • The plaintiffs could seek to file a surreply in light of the DOL’s new, more limited position. Such a brief, if filed, might be instructive.
  • A settlement may be possible. It is unclear, however, where the plaintiffs come down on the “no authority” argument versus the argument that DOL exceeded its authority in 2016. This would be a critical sticking point in any negotiated resolution.

As we try to read these tea leaves, we hasten to repeat what we said last week: “What is certain at this time is that the future of the 2016 revisions remains uncertain.” Rest assured, we’ll be watching this appeal closely. As more information comes in, we’ll continue to post updates here. Stay tuned.

iStock-513046321Authored by John P. Phillips

Seyfarth Synopsis: Recently the Ninth Circuit doubled down on its decision that service advisers at car dealerships are not exempt from the FLSA, despite being overturned once by the U.S. Supreme Court. This case gives the Supreme Court an excellent opportunity to address the proper construction of FLSA exemptions and allow the plain and common sense reading of the statute to govern.

A pending petition for writ of certiorari gives the U.S. Supreme Court a second opportunity to establish two important Fair Labor Standards Act issues: first, administrative agencies and courts should not lightly disregard decades of established practice when interpreting the FLSA, and second, the old canard that “exemptions should be narrowly construed against employers” should finally be put to bed. Employers across the country are hoping that the Supreme Court takes up Navarro, et al. v. Encino Motorcars, LLC  for the second time. And with the addition of Justice Gorsuch to the Court, the time may be ripe to address these issues.

Just as this case gives the Supreme Court a second chance to resolve important FLSA-related issues, this is our second opportunity to write about this case. In early 2016, we explained how the Supreme Court had the chance to address far-reaching implications on the interpretation of FLSA exemptions. Unfortunately, the Supreme Court did not do so, instead deciding only that the Ninth Circuit had improperly relied on faulty Department of Labor regulations, and remanding the case to the Ninth Circuit.

Case Background

In Navarro, et al. v. Encino Motorcars, LLC, a group of current and former car dealership employees who worked as service advisors brought a collective action under the FLSA in the Central District of California alleging that their dealership employer unlawfully failed to pay them overtime wages. As service advisors, the plaintiffs would meet and greet car owners as they entered the service area; evaluate customers’ service and repair needs; suggest services to be performed on the vehicle to address the customers’ complaints; solicit supplemental services to be performed (such as preventive maintenance); prepare price estimates for repairs and services; and inform the owner about the status of the vehicle. Service advisors did not receive an hourly wage or a salary but were instead paid by commission based on the services sold.

The district court dismissed the overtime claim and agreed with an unbroken line of authority from federal and state courts across the country. But the Ninth Circuit reversed, deferring to a DOL regulatory definition while acknowledging that its holding conflicted with every other court to have considered the question, and citing to the “rule” that FLSA “exemptions are narrowly construed against employers.”

The Supreme Court granted the dealership’s petition for a writ of certiorari and agreed to answer the question of “whether ‘service advisors’ at car dealerships are exempt.” Unfortunately, the Supreme Court did not answer the question. Instead, the Court analyzed the DOL regulations, found them to have been issued without a reasoned or adequate explanation and, accordingly, ruled that the Ninth Circuit should not have relied upon them. Having decided this, the Supreme Court remanded the case to the Ninth Circuit rather than answer the ultimate question of whether the service advisers were exempt.

Predictably, the Ninth Circuit doubled down on its earlier opinion, ruling that the service advisers were not exempt under the FLSA. In its ruling, the Ninth Circuit admitted that service advisers fit in the “literal” reading of the statute, but decided that the literal reading was not what Congress intended. In addition, the Ninth Circuit again cited to the “longstanding rule” that FLSA exemptions “are to be narrowly construed against the employers seeking to assert them.”

Recently, Encino Motorcars appealed the Ninth Circuit’s ruling, filing a petition for writ of certiorari asking the Supreme Court to hear the case again. The Supreme Court has not yet decided whether it will take the case, but employers and attorneys (not to mention car dealerships) around the country are hoping the Court takes this opportunity to address the important FLSA issues at stake in this case.

Potential Implications for FLSA Collective Actions

First, this case demonstrates the willingness of federal agencies and some courts to upend years of established industry practice. Here, car dealerships have relied on settled precedent and practice to treat service advisors as exempt since the 1970s. Every court to have examined the issue had found that service advisors were properly exempt from the FLSA. However, the DOL first departed from this precedent in 2011, and the Ninth Circuit followed suit.

In recent years, the Supreme Court has taken legal theories that would upend years of long-settled industry practice with a large grain of salt. As the Court recently noted, “while it may be ‘possible for an entire industry to be in violation of the [FLSA] for a long time without the Labor Department noticing,’ the ‘more plausible hypothesis’ is that the Department did not think the industry’s practice was unlawful.” Encino Motorcars pointed this out in their petition for writ of certiorari, and hopefully the Supreme Court will provide succinct guidance to agencies and courts that long-standing industry practice should be considered before any ruling that upends such reliance.

Second, the Ninth Circuit—in both of its opinions—relied on the doctrine that the FLSA’s exemptions should be narrowly construed against employers. This maxim has been increasingly questioned by the Supreme Court. In its petition, Encino Motorcars highlighted the late-Justice Scalia’s words, where he stated that the goal of a court interpreting a statute “should be neither liberally to expand nor strictly to constrict its meaning, but rather to get the meaning precisely right.” In fact, Justice Thomas, joined by Justice Alito, even referred to it as a “made-up canon” in the Supreme Court’s decision, and stated that it rests on an “elemental misunderstanding of the legislative process.” Nor are Justices Thomas and Alito likely to be alone. Although it is still a little early to speculate on Justice Gorsuch’s views, the justice once famously stated that “when the statute is plain it simply isn’t our business to appeal to legislative intentions.”

If the Supreme Court accepts the case, it would provide the Court an excellent opportunity to address repeat problems in FLSA jurisprudence and help support a more just and statute-based approach to interpreting FLSA exemptions.

Co-authored by Rachel M. Hoffer and John Phillips

Seyfarth Synopsis: Vampire Weekend crassly and rhetorically asked us, “Who gives a f*** about an Oxford comma?” As it turns out, lots of people: First Circuit judges, dairy farmers in Maine, truck drivers, your authors—the list goes on.

And when lists go on—as a Maine dairy company recently learned the hard way in O’Connor v. Oakhurst Dairy—that little comma between the last item and the next-to-last item goes a long way in avoiding any ambiguity. In that case, a group of dairy delivery drivers sued Oakhurst, claiming the company failed to pay them overtime under Maine’s wage and hour laws.

Oakhurst argued that dairy delivery drivers are overtime-exempt under Maine’s “Exemption F.” Under Exemption F, Maine’s overtime law does not apply to:

The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.

Now, we can all agree that dairy products are “perishable foods,” and the parties agreed that the drivers were not involved in canning, processing, preserving, freezing, drying, marketing, storing, or packing any food. The case came down to whether the drivers engaged in “packing for shipment or distribution.”

The drivers argued that this phrase refers to a single activity of “packing,” whether the packing be for shipment or for distribution. As they did not pack food, the drivers reasoned, Exemption F did not apply to them. Oakhurst argued that the phrase actually refers to two different activities: “packing for shipment” and “distribution.” As the drivers clearly engaged in the distribution of food, Exemption F did apply to them.

The district court didn’t need a comma between “packing for shipment” and “or distribution” to be convinced that “packing for shipment” and “distribution” are each stand-alone exempt activities under the statute; it granted summary judgment in favor of Oakhurst. On appeal, the dairy company found a much tougher customer in the First Circuit.

The First Circuit set out to determine for itself what the contested phrase means. Because Maine’s high court had not interpreted Exemption F, the court looked to the plain language of the statute. Here, the court had an udder field day, parsing the language of the statute and applying rules of statutory construction. But, for want of an Oxford comma, the First Circuit found the statute ambiguous, no matter what rules or conventions it applied:

  • The Rule Against Surplusage: a court should give independent meaning to each word in a statute and treat no word as unnecessary. Oakhurst argued that “shipment” and “distribution” mean the same thing, so the Maine legislature could not have meant both to modify “packing.” The First Circuit disagreed, noting that Maine includes both “distribution” and “shipment” together in other lists in its statutes and finding that the words do not necessarily mean the same thing. Conclusion? Still ambiguous.
  • The Parallel Usage Convention: “every element of a parallel series must be a functional match of the others (word, phrase, clause, sentence) and serve the same grammatical function in the sentence (g., noun, verb, adjective, adverb.).” The drivers pointed out that every activity in Exemption F is a gerund—“canning,” “processing,” “preserving,” “packing,” etc.—but that both “shipment” and “distribution” are not. If the words “shipment” and “distribution” are read as the object of the preposition “for,” i.e., “packing for shipment” and “packing for distribution,” the statute doesn’t violate the convention—and “packing for shipment” and “distribution” do not constitute stand-alone exempt activity under the statute. But if “packing for shipment” and “distribution” are read as stand-alone activities, then we have gerunds and non-gerunds in a parallel series, which violates the convention and is an affront to grammarians everywhere. The First Circuit seemed to agree that the drivers’ construction wasn’t as messy grammatically but stopped short of saying that the parallel usage convention resolved the ambiguity. In other words, still ambiguous.
  • Maine’s Aversion to the Serial Comma: Maine’s legislative drafting manual instructs drafters of laws and rules not to use the Oxford comma. The dairy company argued that, because of this instruction, its construction must be right; we should just read the statute as if it included the prohibited comma. But, as the drivers pointed out, the manual isn’t “dogmatic on that point,” and it provides guidance on how “to avoid the ambiguity that a missing serial comma would otherwise create.” The court agreed that the missing serial comma—if indeed there was a missing serial comma—created ambiguity, casting doubt on whether this was a case of a missing serial comma at all. So, still ambiguous.
  • The Convention of Using Conjunctions: drafters typically use a conjunction like “and” or “or” to mark off the last item in a list. Oakhurst emphasized that there is no conjunction before “packing” in Exemption F, but there is a conjunction before “distribution.” While the First Circuit considered this “Oakhurst’s strongest textual rejoinder,” that wasn’t the final word on matter. The drivers fought back with asyndeton—a technique in which drafters make a list without using conjunctions, citing zero examples of Maine drafters using this technique—and Latin—specifically, the noscitur a sociis canon, which requires giving words grouped in a list “related meaning.” Like a glass of skim milk, the court found the drivers’ response “hardly fully satisfying,” but it was enough to keep their case alive. Yep. Still ambiguous.

With all this textual ambiguity, and “no comma in place to break the tie,” the First Circuit turned to the legislative history and statutory purpose to guide its interpretation of the statute. After churning out another five or so pages of analysis, the court concluded that these too were unhelpful in resolving the ambiguity.

Finding no other way to resolve the ambiguity, the First Circuit reverted to the default rule of construction under Maine law for ambiguous wage and hour laws: liberally construe the statute to further the purpose for which it was enacted. In other words, the court accepted the drivers’ narrower construction of the exemption and reversed the district court’s summary-judgment ruling.

Now, maybe you’re not an employer in a perishable food industry in Maine; chances are, you aren’t. But courts also narrowly construe the FLSA’s exemptions against employers. For that and other reasons, its always a good idea to periodically review whether the employees you’ve classified as exempt truly qualify for an exemption. Otherwise, like Oakhurst, you may find yourself crying over spilled milk.

Authored by Hillary J. Massey

Seyfarth Synopsis: It remains to be seen whether the Trump administration will redirect its enforcement priorities away from independent contractor misclassification issues or curtail the applicable standards in the coming years. Because states and plaintiffs’ attorneys likely will continue to aggressively pursue independent contractor matters, employers should consider auditing their independent contractor positions to identify and address potential exposure.

Employers are understandably optimistic about what the Trump administration will mean for many aspects of employment law, including the test for independent contractor (“IC”) status. While it remains to be seen what President Trump’s Department of Labor will do, federal enforcement priorities and guidance likely will make it easier to classify workers as independent contractors. Many employers, however, face more stringent tests and aggressive enforcement priorities at the state level as well as plaintiffs’ attorneys searching for their next class action. In light of these ongoing risks, employers should continue to monitor laws concerning IC misclassification and consider auditing their IC arrangements for potential misclassification.

IC Issues in Recent Past

Independent contractor misclassification has been in the forefront in recent years, due to the enforcement efforts of the Obama administration’s Department of Labor and IRS and the attention of plaintiffs’ attorneys.

First, we saw a barrage of class actions brought by workers seeking overtime pay, expense reimbursements, and pay for other benefits they did not receive as ICs. These cases were difficult to defend on the merits due to the uncertain legal standards. They were also difficult to defend on damages, as employers typically did not keep records of hours worked by ICs and often paid ICs more than they would have paid them on an hourly basis as employees with benefits (thus ratcheting up the damages).

Then, on July 15, 2015, then administrator of the DOL’s Wage and Hour Division David Weil issued Administrator’s Interpretation No. 2015-1, taking the position that the “economic realities test” should be applied when determining if a worker is properly classified as an independent contractor under the FLSA. In sum, AI 2015-1 provided that if a worker was “economically dependent” upon an employer, the worker typically would be regarded as an employee. It described the employment relationship as “very broad” and stated that “most workers are employees.” The AI left no doubt that, in DOL’s view, proper IC classification would be rare.

In the meantime, at the state level, legislatures passed laws that made it more difficult (by applying a stricter test) and riskier (by increasing penalties and creating task forces) to classify workers as independent contractors. States likely focused on IC issues because they were not receiving unemployment insurance contributions, workers’ compensation premiums, and employee income tax withholdings related to these workers.

Notably, other states moved in the opposite direction in order to attract businesses, by passing laws specific to certain industries (e.g., ride-hailing) that explicitly define workers (drivers) as independent contractors for certain purposes.

Likely Upcoming Developments

Many employers are optimistic that, once confirmed, the new Secretary of Labor will repeal or replace AI 2015-1. In fact, the House Freedom Caucus requested repeal of the AI and many other regulations during an initial meeting with President Trump.

Even if that occurs, however, employers will not be relieved of the risk of complex IC litigation. There can be no doubt that plaintiffs’ attorneys and some states will continue to aggressively pursue IC misclassification.

Also, as the workforce changes (see Seyfarth’s Future of Work initiative), businesses in emerging industries such as the on-demand economy may be particularly vulnerable to enforcement initiatives and class actions. While lawmakers are considering options to address the gig economy, including creating portable benefits that would move with a worker from job to job and creating a third classification of worker, employers must continue to apply old laws and guidance to nontraditional jobs.

Next Steps for Employers

In light of this uncertain environment, employers should consider:

  • Continuing to monitor legal developments, especially at the state level;
  • Reviewing internal practices for the classification of new workers as ICs;
  • Training managers and others involved in hiring decisions about IC issues; and
  • Working with counsel to audit IC relationships (especially if operating in states like Massachusetts with stringent IC standards).