On July 29, the Department of Labor (DOL) announced a final rule rescinding the Trump Administration’s Joint Employer rule. This move clearly reestablishes the DOL’s quest to broaden the scope of potential liability for businesses under the Fair Labor Standards Act (FLSA) for the wrongs of their subcontractors, franchisees and other entities. This move is consistent with the Biden Administration’s trend to reinstate the measures taken under the FLSA by the Obama Administration, including those taken to broaden the scope of who could be deemed joint employers under the FLSA. The rule promulgated by the Trump Administration had replaced an Administrator’s Guidance issued by the Wage and Hour Administrator of the Obama Administration, David Weil. Consistent with this trend, David Weil has been nominated to serve the current administration in the same role he held during the Obama Administration.

Many members of the business community saw the Trump-era rule as providing clarity on whether an entity constitutes a joint employer under the FLSA. The Biden DOL, on the other hand, characterized the rescinded rule as “contrary to statutory language and Congressional intent,” and contrary to the Guidance issued during the Obama Administration. That Guidance though was highly criticized by the business community and the courts as being too broad. The objective of that guidance was to make it easier to hold contracting employers and franchisors liable for the wrongs of employers “lower on the ladder,” thereby finding “deeper pockets” liable and facilitating larger class actions.  

The Rescinded Rule Lived an Interesting Life

Under the rescinded rule, an employer would be deemed to be a joint employer with the “direct employer” if, with respect to the employees of the direct employer, it:

(i)     Hires or fires the workers;

(ii)    Supervises and controls the workers’ work schedules or conditions of employment to a substantial degree;

(iii)    Determines the employees’ rates and methods of pay; and

(iv)    Maintains the employees’ employment records.

The rescinded rule provided further clarity by eliminating from the analysis such factors as whether the relationship was due to a franchise agreement, whether the franchisor provided sample handbooks to franchisees, whether the contractor’s employees worked on the contracting entity’s premises, whether the employees participated in association health or retirement plans, or whether the business required contractors to conform to minimum wage, workplace safety, sexual harassment and other policies. The current DOL believes the prior administration’s focus on control was too narrow.

The prior rule went into effect in March 2020, but it was enjoined by a federal court in New York in September 2020 due to a belief that the rule was inconsistent with the statute. Under the prior administration, the DOL appealed that ruling to the Court of Appeals and filed its brief shortly before the current administration took office. Rather than being placed in the awkward position of arguing contrary to the position taken in January as the appeal progressed, the DOL asked the court to hold the case in abeyance as the new administration was contemplating a change or rescission to the rule before the court. The court declined to do so. Now that the DOL is formally rescinding the rule, though, it is likely that the DOL will seek to have the case dismissed. 

Employers Need to Evaluate their Potential Exposure as Joint Employers

Despite the DOL’s assertions that rescinding the rule will have minimal effect on businesses since it “was not adopted by most jurisdictions,” many employers will be affected by the rescission. 

The DOL’s return to an “economic realities” in lieu of a “control” analysis foreshadows an increased effort by the DOL and employees to bring actions for unpaid wages under the FLSA against entities not typically considered to be employers. Employers, especially those who operate under a franchise model or engage many contractors, should therefore review their contracts and employment structures to better position themselves for responding to the scrutiny likely to be undertaken by the DOL and plaintiffs’ attorneys in the coming years. Contracts and basic practices which have been in place for decades may need to be revisited and revised.

Finally, employers need to stay alert to further changes to joint employment. While the DOL has not announced any further rulemaking plans, it did leave that door open if it determines that “alternative regulatory or subregulatory guidance is appropriate.”  Will that be vis-à-vis new regulations or a restated Administrator’s Guidance? Time will tell, but for now, it appears that at best employers are required to hold their relationships up to the patch-work of standards varying by circuit court jurisdictions that are otherwise in place, but which the current administration arguably construes more broadly than the courts have typically done in the past. For these reasons, we should expect that the DOL will endeavor to tilt the scales more towards its current interpretations through some formal action.

The Problem

The Biden DOL is primed to aggressively pursue errors made with respect to the payment of overtime compensation as required by the Fair Labor Standards Act (FLSA). While doing so, it’s also primed to assert claims for liquidated damages whenever it finds errors, even for errors that were inadvertent, and even for those that may seem nominal. These liquidated damages are equal to the amount of unpaid overtime its investigators deem due.

Liquidated damages are also generally due if an employer is found liable for unpaid overtime in any FLSA lawsuit filed by employees on either an individual or a collective class basis. When such lawsuits are brought, the employer may also be liable for the plaintiffs’ attorneys’ fees. These fees are often much greater than the claim for unpaid overtime and serve to overshadow the merits of the case and interfere with the ability to settle.

The Means to Address This Exposure

Prudent employers can take action to either eliminate or greatly reduce their exposure to unpaid overtime and liquidated damages claims. How? The answer is one word: “audit.”

A skillfully done audit can identify areas that typically trigger these inadvertent errors. The audit can identify and even correct concerns with respect to errors in:

• identifying hours that are compensable under the Act (such as pre- and post-shift activities, rest and meal breaks, travel, and medical testing and treatment);
• determining the correct regular rate of pay for calculating overtime pay (such as properly accounting for bonuses, commissions, longevity premiums, shift premiums, call-in pay, etc.); and
• classifying employees as exempt from overtime or as independent contractors.

Importantly, a mere audit may not suffice. The audit must be done and documented in a way to establish that the employer took its obligations under the Act seriously, conformed to the findings of the audit, and did so in good faith. This is key because if such an audit is relied upon, but the DOL or a court concludes that a violation on the areas audited still exists, the employer may be able to assert a “good faith” defense and reduce or eliminate its exposure to liquidated damages, and even reduce a potential look-back period for liability for unpaid time from three to two years. Such a position can also greatly benefit employers as they try to settle FLSA claims, as a well-done audit can serve to greatly lower the potential value of the claim.

As stated above, the audit must be skillfully done; not all audits are created equal. Often, we recommend that the audit be overseen, if not done, by an attorney who is well-versed in the FLSA. The auditor can help assure that the audit serves to support the good faith defense, if needed, and a lot of that may depend on the auditor’s expertise and reputation. Further, the auditor can counsel as to suggested adjustments. Last, but not least, if the auditor is an attorney, or the audit is being conducted through counsel, attorneys can provide assistance in maintaining the confidentiality of the audit’s findings, if desired, or advising the company regarding the waiver of any attorney-client privilege, as may be feasible.

Next Steps

Undertaking the audit sooner versus later cannot be overemphasized. If the project is put off and a DOL audit or lawsuit is filed, the advantages discussed above will be lost. It will be too late, and, as a result, otherwise avoidable liability could be triggered, liquidated damages will likely be in the mix, and the cost of the other side’s attorneys will impair the ability to negotiate a reasonable resolution.

If you have any questions regarding these issues or want to discuss the possibility of conducting an audit, contact an attorney skilled in this area of the law, including any members of the WHDI.

On January 1, 2020, a number of new pay rules will become effective. While these changes may not directly impact many employees, they could cause pay compression under many compensation plans. Pay compression issues trigger employee morale issues, and adapting to those issues may mean that more than just those at the bottom of pay scales will need to have their pay adjusted. This ripple effect, of course, could be costly. Further, if the employees are covered by union contracts, how these new rates are rolled in, and whether pay compression concerns may be addressed, are mandatory subjects of bargaining. While a union contract cannot violate the law, the effects triggered by compliance are subjects of bargaining.

The following will briefly summarize what employers should be aware of and address in some form:

Federal law changes –

• The salary level for most exempt executive, administrative and professional employees under the Fair Labor Standards Act (“FLSA”) will increase from $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year). Thus, unless currently exempt employees paid below this new threshold are given salary increases, they will lose their FLSA exempt status.

• Some employees meet the FLSA’s exemption test if they are “highly compensated” and meet at least one of the duties criteria for being considered an exempt executive, administrative or professional employee. The current pay rules for these employees require that they receive at least $455 per week on a salary or fee basis and receive at least $100,000 on a non-discretionary basis. The rule, though, allows a short window to catch-up the pay to meet the $100,000 threshold if the employee falls short of the expected $100,000+ annual pay.

  On January 1, 2020, the new pay amounts applicable to these employees will be:
  – $684 per week to be paid on a salary or fee basis, and
  – Total compensation for the year must be at least $107,432.

• Employers should consider conducting an FLSA compliance audit to review their exempted classifications, as well as their time and attendance practices and pay practices, which could avoid or greatly reduce employer liability should they be found to have somehow—even inadvertently—violated the Act.

State law changes –

In addition to complying with Federal law, employers must also comply with the minimum wage and overtime requirements under state law.

• Many states have more stringent requirements for employees to be exempt from overtime than the FLSA, and the rules of whichever law is more favorable to employees will apply. A number of states have higher salary level thresholds for exempt status than those under the FLSA. Employees in those states must be paid per those state thresholds in order for them to considered exempt under state law.

• On January 1, 2020, the minimum wages in many states will increase, and many states have minimum wages greater than the $7.25 per hour Federal minimum wage. As with overtime rules, whichever law mandates the higher minimum rate, that higher rate will apply. Among the states increasing their regular minimum wage rates on January 1 are:
  – California (from $12.00 to $13.00 per hour);
  – Illinois (from $8.25 to $9.25 per hour);
  – Maryland (from $10.10 to $11.00 per hour);
  – Michigan (from $9.45 to 9.65 per hour); and
  – Minnesota (from $9.86 to $10.00 per hour).

• Employers should also be aware some local units of government have their own minimum and living wage requirements. In these local jurisdictions, the higher minimum wage will apply.

Next Steps: What should employers do?

Employers should evaluate whether they are in compliance with these new legal requirements by conducting an internal audit and, if an audit finds any areas of non-compliance, employers should make any necessary changes to their pay policies and practices. As mentioned above, as employers adjust to these changes, any audit should be conducted so as to survive judicial scrutiny if the pay program is ever challenged, particularly under federal law. Under federal law, employers can assert a “good faith” defense to an FLSA claim, and if successful, they may be able to avoid assessments of liquidated damages, damages that are usually an amount equal to the amount of unpaid wages or overtime at issue. To successfully assert this defense, courts usually expect employers to have their audits conducted a reputable wage and hour attorneys or sophisticated consultants.

For more information about compliance, contact any WHDI member.

By Abad Lopez and Robert Boonin, Dykema

The U.S. Department of Labor on Monday unveiled its first guidance under the current Administration on the hotly contested issue of employee-versus-independent contractor classification, saying workers for an unnamed technology platform that connects service providers with clients are independent contractors. The guidance was provided through an Administrator’s Opinion Letter, and as such it provides unique defenses to employers with similar situations and who rely on the letter.

The company referenced in the letter is a virtual marketplace company (“VMC”) which operates in the so-called “on-demand” or “sharing” economy. Generally, a VMC is an online and/or smartphone based referral service that connects service providers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services. The VMC business model uses a software platform that matches consumers to service providers.

In the Opinion Letter, the Wage and Hour Administrator analyzes the company’s business model using a six-factor test aimed at discerning the “economic realities” of whether workers are employees, who are subject to the Fair Labor Standards Act, versus independent contractors, who are not. This opinion may provide a useful roadmap for businesses that work with independent contractors, consultants, and similar non-employee workers.

The inquiry to the DOL was premised on a VMC whose business model is based on connecting workers with consumers. The workers/service providers underlying the DOL’s opinion were not provided with equipment, materials, or working space by the platform and could, in effect, immediately begin working for consumers who were paired with them on the platform after being activated. The platform provided the contractors with basic information about the customer’s service request (e.g., what was needed, time when it was needed) and allowed the workers to communicate directly with customers.

Under their written agreements with the company, service providers could: accept, reject, or ignore any service opportunity on the platform; select service opportunities by time and place; determine the tools, equipment, and materials needed to deliver the services; and hire assistants or personnel. The VMC did not monitor, supervise, or control the particulars of how the service providers’ work was performed, or inspect or rate the quality of the service provider’s work. Customers on the platform had the ability to rate service providers’ performance. Service providers were also at liberty to provide services to customers outside the company’s technology platform, including on competing platforms.

The Administrator reiterated the DOL’s position that the touchstone of employee versus independent contractor status has long been “economic dependence.” While the inability of an individual to work on his or her own terms often suggests dependence, the ability to simultaneously draw income through work for others, such as by working for a competitor, indicates “considerable independence.”

The DOL reiterated the “non-exclusive” six factors it—along with numerous courts—considers while determining economic dependence:

1. The nature and degree of the potential employer’s control;
2. The permanency of the worker’s relationship with the potential employer;
3. The amount of the worker’s investment in facilities, equipment, or helpers;
4. The amount of skill, initiative, judgment, or foresight required for the worker’s services;
5. The worker’s opportunities for profit or loss; and
6. The extent of integration of the worker’s services into the potential employer’s business.

On the “control” factor, the DOL noted that “[a] business may have control where it, for example, requires a worker to work exclusively for the business; disavow working for or interacting with competitors during the working relationship; work against the interests of a competitor; work inflexible shifts, achieve large quotas, or work long hours, so that it is impracticable to work elsewhere; or otherwise face restrictions on or sanctions for external economic conduct…”

Regarding the “permanence” factor, the DOL observed that arises where “a business… requires a worker to agree to a fixed term of work; disavow working for or interacting with competitors after the working relationship ends; or otherwise, face restrictions on or sanctions for leaving the job in order to pursue external economic opportunities…”

On the “extent of integration” factor, the DOL noted that a worker’s services are integrated into a business if they form the “primary purpose” of that business.

The DOL concluded that the VMC is essentially a referral platform and that the service providers at issue are independent contractors. The VMC receives no services from the service providers. Rather, it simply allows them to provide services to end-market consumers through the company’s technology platform. In other words, the workers only use that platform to acquire service opportunities. The DOL stated that the VMCs offer a finished product to its service providers. As such, the service providers are not an integral part of the company’s referral service; but rather they are consumers of that service.

The Opinion Letter provides welcome flexibility to businesses who seek to utilize independent contractors. In particular, it may apply to many other types of independent contractor versus employee analyses. For this reason, and with this Opinion Letter in hand, it may be a perfect time for many employers to reevaluate their independent contractors’ classifications and if they believe that the contractors have been properly classified, document how they reached that conclusion.

This documentation may be critical to lessen or even eliminate liability should a court later find that the workers were misclassified or the Administrator’s Opinion was wrong. This protection derives under two defenses made available by the Act in very narrow circumstances. One defense is “good faith reliance” on an Administrator’s Opinion. In those cases, the employer will not owe any overtime pay or other damages even if the Opinion is ultimately held to be contrary to the law. The second is establishing the employer’s good faith effort to comply with the law. When an employer is found to have acted in good faith, the court may, in its sound discretion, reduce or eliminate the potential damages award. As such, the Administrator’s Opinion may provide employers with potential “good faith” defenses to avoid paying double the amount of unpaid overtime wages as statutory liquidated damages or, in some instances, some amount less than the amount of unpaid overtime.

For assistance in determining how this Opinion Letter may be applicable to your operations and how it may serve as a means to reduce, if not eliminate, your exposure under the FLSA for misclassifying contractors, counsel from an experienced wage and hour defense attorney should be sought.

This past summer, two voter initiatives were headed to the November ballot for consideration. One initiative was to increase the state minimum wage, and the other was to create a state law requiring most employers to provide employees with paid sick leave. However, before such initiatives could appear on the ballot for voter consideration, in September 2018 the Michigan Legislature seized its constitutional right to enact those initiatives on its own, thereby keeping the initiatives off the ballot. Now, the Michigan Supreme Court will have the last word on whether the initiatives were properly enacted in their current form.

As legislatively enacted laws (as opposed to laws adopted via voter referendum), future amendments would only require a simple majority vote of each house. If the laws had been adopted by the voters, however, then a super-majority vote of 75% in each house would have been required to amend the laws. Thus, by adopting the initiatives as legislation, the Legislature intended to retain its traditional control over the laws’ futures.

Shortly after the November election, the lame-duck Legislature took advantage of the opportunity to amend before a change in Governor. In doing so, the Legislature comprehensively modified both laws – the Improved Workforce Opportunity Wage Act and the Paid Medical Leave Act. Those amended laws went into effect on March 29, 2019. Normally, that would be the end of the story.

A state constitutional challenge has been raised, though, questioning whether the Legislature may amend an adopted initiative in the same legislative session as the adoption. The challenge may trigger yet another hurdle should it prevail since employers have already conformed to the amended versions of the laws. Thus, it is at least theoretically possible that the original versions of the laws will resurface and employers will have to scramble to comply.

To resolve the legal issues, the Legislature is seeking a ruling from the Michigan Supreme Court as to constitutionality of the December iterations of the laws. Last week the Supreme Court has announced that it will hear oral arguments on issue on July 17, 2019. In the meantime, employers should stay the course and comply with the Act as amended, at least until a ruling from the court dictates otherwise.

For more information, contact Robert Boonin of Dykema at rboonin@dykema.com.

Under the Fair Labor Standards Act, all employees must be paid overtime for all hours worked over 40 in a workweek. The law also requires employers to keep accurate records of all time worked. Many employers, though – particularly hospitals – often automatically deduct 30 minutes from their employees’ 8.5 workdays assuming that all employees take their regular 30 minute meal breaks. But what happens when an employee is interrupted during the employee’s meal break to answer a call, attend to a code or other emergency, and the like? This scenario has been fodder for lawsuits against hospitals, most recently in an Ohio federal court – Myers v. Marietta Memorial Hospital, No. 2:15-CV-2956 (S.D. Ohio March 27, 2019).

A Good Exceptions Reporting Policy and an Employer’s Lack of Knowledge of ”Off the Clock” Work are Key to Minimizing Liability

Under the law, meal breaks of at least 30 minutes are not considered work time, but shorter meal breaks do count as time worked. In Myers, nurses brought a collective action lawsuit claiming that they were regularly interrupted during their 30 minute meal breaks and therefore should have been paid overtime for those missed periods, i.e., 2.5 hours of overtime per week for the prior three years. They acknowledged that they never recorded the periods as missed despite being provided with an opportunity to do so. Some periods were missed, plaintiffs claimed, because the hospital discouraged them from leaving their floors to take their breaks, and that managers often asked them to engage in some work during those breaks, i.e., “off the clock.” They also claimed that the hospital discouraged them from reporting their time even after some of them complained about the practice.

The court held that the claim that hospital knew of the nurses’ alleged “off the clock” work was perhaps the most significant issue it could not resolve without a trial, and as a result it denied cross-motions for summary judgment and required a trial. The court noted that minor, incidental interruptions did not necessarily make an otherwise unpaid meal period compensable work time, but the extent of those interruptions – and more critically, whether the hospital had knowledge that missed meal periods were not being recorded as work time – proved fatal to the hospital’s effort to dismiss the case before trial.

The court in Myers applied precedent established by the Sixth Circuit of Appeals (i.e., the federal appellate court covering Michigan, Ohio, Kentucky and Tennessee) in the 2012 case of White v. Baptist Memorial Hospital, 699 F.3d 869 (6^th Cir. 2012). In White, the court held that auto-deduct systems were permissible under the FLSA so long as there were a system in place to capture time worked during those otherwise docked meal periods. The employer in White had such a system. Any nurse who was called off of lunch and did not make up for the missed break was required to record the break as missed and was therefore compensated. Critically, there was no evidence that employees were discouraged for so recording their exceptions to the auto-deduct practice. And even more critically, while some managers may have known that the nurses meals had been interrupted, there was no evidence to suggest that the managers knew that the nurses had not found a way to take their meal breaks at a later time, leave early, etc.

Actions Employers Should Undertake to Make their Auto-Deduction Policies Work

White and Myers provide guidance as to how auto-deductions for meal breaks can work, and how they can fall apart. Having a policy and culture that mandates accurate timekeeping is key to the system’s success. Both employees and managers must be trained as to their respective expectations and roles. But the policy should do more. The policy should require employees who are discouraged from accurately reporting their time to immediately notify human resources without fear of reprisal. In addition, and just as importantly, the policy should require employees who believe that they have not been paid for all time worked (including overtime) to report their concerns to human resources by no later than the end of the following pay period. The key here is that courts are permitting employers to have employees bear some responsibility for making sure that all of their work time is recorded, to raise any concerns promptly, and to not wait for a few years to first raise them to the employer. The courts – at least within the Sixth Circuit – will not penalize employers for not paying employees for meal breaks the employers did not reasonably know was missed. As held in White, “if an employer establishes a reasonable process for an employee to report uncompensated work time the employer is not liable for no-payment if the employee fails to follow the established procedures.” Id. at 876.

And finally, the White court, as recognized by the Myers court, held that not every interruption converts an unpaid lunch to work time. White also stands for the principle that the interruption must still be so significant that the employee cannot “‘pursue…her mealtime adequately and comfortably, is not engaged in the performance of any substantial duties, and does not spend time predominantly for the employer’s benefit.’” Myers (quoting Hill v. U.S., 751 F.2d 810 (6^th Cir. 1984).

Conclusion

Hospitals often use an auto-deduct model for payroll for its nurses and other staff, and many of these staff are subject to working through their normal meal breaks or having them interrupted. These cases emphasize the need for those hospitals to not only have strong policies in place requiring the recording of exceptions to auto-deducted meal breaks, but also policies requiring payroll errors to be promptly reported. Every overtime policy should include such a requirement, and all staff – including managers – should be trained in conforming to it. Managers who discourage compliance only serve to expose the hospital to liability that could be easily avoided.

Hospitals should therefore review their policies and even have them reviewed by counsel well versed in the FLSA and its requirements. They should already also have safe-harbor policies in place specifying the limits on when exempt salaried employees may have their salaries docked, and how employees should bring deductions not consistent with the salary basis requirement to the hospital’s attention. These policies should be more broadly written to cover any payroll concerns. And finally, it appears that, at least at the appellate level, only the Sixth Circuit Court of Appeals has weighed-in on this issue. Therefore, employers outside of the Sixth Circuit should also check with counsel to see if other courts have chimed-in, and all employers should also make sure that their policies align with any state-specific requirements.

Earlier this month, the DOL published a Notice of Proposed Rulemaking (“NPRM”) to increase the minimum salary level most exempt employees must be paid in order for them to be deemed exempt from the FLSA’s overtime pay requirements. For a summary of that proposal, click here. The comment period for the proposed changes will close in late May, and it is anticipated that the salary level rules will be finalized and implemented in early 2020. This NPRM was “big news,” particularly in light of the 2016 national injunction barring the implementation of the Obama Administration’s attempted changes to the regulations.

The NPRM Addressing the “Regular Rate of Pay”

The DOL has just announced a development that may be even bigger news, or least one that may be even more significant for employers. On March 28^th it announced that is publishing another NPRM, but on an entirely different issue; it seeks to clarify what types of payments to non-exempt employees must be included in the employees’ regular rates of pay for the purpose of calculating their overtime rates of pay. Under the current rules, one’s regular rate of pay is not limited to the employee’s base rate of pay; it also includes certain additional amounts such as non-discretionary production bonuses, longevity bonuses, commissions, lead premiums, and shift premiums.

The regulations requiring these amounts to be rolled-into a non-exempt employee’s pay have been in place and unchanged for over 50 years. Compensation systems, though, have evolved since then, and as they have evolved, the DOL, courts and employers have struggled with the issue of whether these new types of payments must also be rolled-into employees’ regular rates. Specifically, the confusion regarding what amounts should be included in the calculation of the regular rate of pay has generated a great deal of litigation and often conflicting judicial decisions. Through this NPRM, the DOL is endeavoring to draw a clearer and brighter line as to what types of payments must be rolled-into regular rates of pay, and what types do not require such a recalculation. By doing so, the DOL hopes to lessen the volume and cost of litigation over regular rate of pay issues.

Highlight of the “Regular Rate of Pay” Rule Changes

As explained by the DOL, the proposed regulations, if adopted, will establish that the following payments and costs may be excluded from an employee’s regular rate of pay for overtime calculation purposes:

• The cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods;
• Cash-outs of unused PTO and sick leave;
• Reimbursed expenses that are not incurred “solely” for the employer’s benefit;
• Reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System and meet other regulatory requirements;

The new rules would also:

• Clarify the fact that employers do not need a prior formal contract or agreement with employees to exclude certain overtime premiums provided for working over 8 hours in a day, holidays, weekends and the like, per Sections 7(e)(5) and (6) of the FLSA, 29 USC §§ 207(e)(5) and (6);
• Clarify that time paid that would otherwise not be regarded as “hours worked” (such as bona fide meal periods) also may be excluded from an employee’s regular rate unless an agreement or established practice indicates that the parties have treated the time as hours worked; and
• Provide additional examples of benefit plans, including accident, unemployment, and legal services, that may be excluded from an employee’s regular rate of pay.

Another major issue the Department is hoping to clarify through the new rule regards what constitutes a “discretionary bonus,” i.e., a bonus which does not need to be rolled-into the regular rate of pay for overtime calculation period. Stressing that labeling a bonus as “discretionary” is not enough to trigger the exclusion, the proposed rule provides:

[R]egardless of the label or name assigned to bonuses, bonuses are discretionary and excludable if both the fact that the bonuses are to be paid and the amounts are determined at the sole discretion of the employer at or near the end of the periods to which the bonuses correspond and they are not paid pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly. Examples of bonuses that may be discretionary include bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation. Such bonuses are usually not promised in advance and the fact and amount of payment is in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.

In addition to clarifying the current rules, the new rules will eliminate the current restriction excluding “call-back” pay and other payments similar to call-back pay from the regular rate of pay only to instances that are “infrequent and sporadic”, but still stating if such payments are so regular that they are essentially prearranged they are to be included in the regular rate of pay.

Impact of the New Rule, if Adopted and Next Steps

If the regular rates of pay rule changes are implemented, they will narrow the gray area of uncertainty significantly. Employers will have 60 days to submit comments on these proposed rules once officially published in the Federal Register, and therefore comments will be due in late May. The NPRM also seeks input from stakeholders on the issue of when payments made pursuant to various types of tuition programs should or should not be excluded from employees’ regular rates of pay. Given the significance and scope of the rules, it is anticipated that there will a large volume of comments. Consequently, it is doubtful that the regulations will be finalized until sometime in 2020, but likely months before the election.

Another item on this issue that should be on most employers’ radars is state law rules regarding calculating the regular rate of pay for overtime. Many states adopt the federal standards, but some may not. If these new rules are promulgated, employers should still determine if they satisfy state rules.

Robert A. Boonin, Dykema Gossett, PLLC

rboonin@dykema.com

The much awaited revised new regulations governing who qualifies for the FLSA white collar exemption has finally been revealed by the Department of Labor. It did so on March 8 by publishing an NPRM (“Notice of Proposed Rule Making”).  In December of 2016, a Texas federal court entered a nationwide injunction halting the implementation of new regulations which would have dramatically increased the salary threshold for exempting most white collar employees from overtime.  Since then, the White House changed occupants and the Department has been deliberating on how to respond to the injunction. After considering responses to information requests from stakeholders on possible directions to take, and a round of “listening sessions” held across the country, the Department has finally spoken.

THE NEW PROPOSAL AND WHAT LIES AHEAD

The result: the Department is now proposing to –

• Increase the salary level requirement from its current $455 per week ($23,660 per year) to $679 per week ($35,308 per year);
• Allow 10% of the required threshold to include non-discretionary bonuses and commissions (i.e., $3,531 per year) which are paid at least annually, and allow a final “catch-up” payment to be made, if necessary, to make up for shortfalls to the 90% of the weekly minimum level paid over the course of a year;
• Increase the “highly compensated employee” alternative level and standard from $100,000 per year to $147,414 per year; and
• Establish a process under which it will consider the need and feasibility of making further salary level adjustments every four years.

The next step in this rulemaking process is a 60 day period (i.e., until May 7) for the public to submit comments about the proposed regulations. These comments may support the proposal or suggest refinements. After the comment period closes, the Department must consider all comments submitted and then issue a final rule. The Department anticipates that a final rule will go into effect by early 2020, hopefully giving employers enough lead time to adapt to the new requirements.

HOW WE GOT HERE

This proposed rule, according to the Department, is designed to conform to the criticisms raised by a Texas court when it enjoined the changes set to go into effect in December 2016.  Those regulations, among other things, would have doubled the current weekly salary level minimum requirement to $913 ($47,476 per year), which would have resulted in 4.2 million employees losing their exempt status.  This outcome, the court held, would have effectively wiped out the duty tests and made one’s salary the primary factor in determining exempt status, an outcome not consistent with the express language of the FLSA.  Under the proposed new $679 per week threshold, a threshold reached by applying the same principles which supported the 2004 increase to the current $455 per week level, the Department estimates that about 1.1 million employees will lose their exempt status solely due to this salary level adjustment.  Consequently, the Department believes that the proposed new level is consistent with the FLSA’s framework. The Department is proposing to replace these regulations with those published in 2016, and thereby mooting the appeal of the Texas court’s injunction which has been pending, but stayed, before the Fifth Circuit Court of Appeals since December 2016.

THE LEGAL AND POLITICAL LANDSCAPE FOR THE PROPOSED NEW RULE

Time will tell, but it’s clear the that Department hopes to have the new regulations in place before the coming election year.  It also seems plausible that the Department abandoned some other contemplated modifications to the regulations to lessen their controversy and perhaps avoid further legal challenges.  Among these tabled modifications were provisions to periodically adjust the salary level vis-à-vis some established indexing formula, provide different salary levels for specific sectors (e.g., small businesses, governments, educational institutions), and provide different salary levels for different regions (e.g., rural vs. urban regions).

Despite abandoning these types of refinements for at least the time being, the new rule – which is still subject to modification after the comment period – may still face legal challenges and perhaps congressional intervention.  Some in the business community, for example, may still contend that the salary level at issue is too high or that the Department lacks the statutory authority to have any sort of controlling salary level test.  Some may also contend that the Department was obligated to pursue implementating the enjoined 2016 regulations. T here are many, though who, while agreeing that the salary level test has long been a key part of the exemption standard and therefore should remain, acknowledge that it was past due for an adjustment, but just not an adjustment as high as that adopted (but enjoined) in 2016.  Thus, the ultimate issue is whether the Department has landed on a number that no one may really like, but is still palatable.

WHAT SHOULD EMPLOYERS DO NOW?

Under any of these scenarios, employers must now begin (or reactivate) reviews of their pay plans and determine the extent to which they may have to make adjustments once the anticipated new regulations are finalized and become effective.  This is also a good time to do comprehensive FLSA compliance audits.  Many have already done this in anticipation of the changes announced in 2016, but others held off on making adjustments at that time due to the injunction.  Employers should not sit back and do nothing while waiting for how this round will conclude; planning must start soon to avoid being left with too little time to make adjustments to comply.  Compliance options include: a) allowing some employees to lose their exempt status, pay them overtime if overtime is worked, and try to limit the amount of overtime they may work; and b) raising salaries (and perhaps adjust their pay structures) to protect the exempt status of employees, particularly those who regularly over 40 hours per workweek.

Significantly, some states already require or are primed to require higher salary levels for employees to be exempt under state law. Among these states with higher thresholds are California and New York; and Pennsylvania and Washington are considering similar major adjustments to their salary level tests. Obviously, employers in those states likely will not be dramatically impacted by the new proposed federal salary level. The fact that states do address these issues on their own may also support the view that major increases at the federal level are not necessary, but when the federal levels are not adequate for given region or market, enhancements via state law should come into play.

Employers with issues or concerns about the proposed regulations should take advantage of the comment period and submit comments to the Department. The WHDI’s members can assist in that regard, as well as assist with audits and provide options for how to conform to the new regulations when they are finalized.

By Robert A. Boonin, James Hermon and Andrea Frailey of Dykema Gossett, PLLC

On December 4, 2018, the Michigan Legislature pared back the minimum wage and paid sick leave laws it passed last September in an effort to preclude those issues from being on the November ballot. Had the Legislature not adopted the language of the ballot initiatives legislation, the measures would have been on the November ballot and it would have needed a vote of three-fourths of each house to amend the law if adopted by the voters. By enacting the proposals directly, it only needed a simple majority to amend those laws. The strategy of using a lame-duck legislative session to amend the laws by a simple majority it passed just two months earlier has been viewed as controversial, but the outcome is welcomed by many in the business community.

These bills have just been signed by the Governor Snyder, who said in his signing message: “I look at legislation presented to me through a policy lens – is it the right policy for the state of Michigan and Michiganders as a whole? . . . That’s what I did with these bills and have now signed them into law. I looked at what the potential impacts and benefits of the changes would be and decided that signing these bills was the appropriate action.”

These revised minimum wage and paid sick leave laws will go into effect around March 21, 2019 (depending on the exact date the current legislative session ends). All Michigan employers must familiarize themselves with these new laws.

THE IMPROVED WORKFORCE OPPORTUNITY WAGE ACT

The changes to the Improved Workforce Opportunity Act—the Act controlling Michigan’s minimum wage and overtime rules—relate to increases to the minimum wages paid to all workers, including those who receive tips.

For non-tipped employees, the minimum wage will gradually increase from the current rate of $9.25 per hour to $12.05 in 2030, as opposed to $12.00 in 2022 as previously enacted. In addition, the amendments also eliminate the automatic increases to the minimum wage after 2022 based on increases to the CPI that was part of the previously adopted ballot initiative language.

Under the current law, tipped employees need to be paid a wage of at least $3.52 per hour, provided the employees make up the difference between that rate and the regular minimum wage in tips. This offset is commonly known as the “tip credit.” Under the original law passed last September, the tip credit would have been phased out in its entirety by 2024 and tipped employees would have been entitled to the same minimum wage that all other employees receive from that date onwards. That change was eliminated by the new law. Instead, the tipped minimum wage will be 38 percent of the minimum wage. (Click here for a table comparing the September version to the December version of the Act.)

THE PAID MEDICAL LEAVE ACT

The Legislature also passed the “Earned Sick Time Act” in September 2018, by adopting voter initiative petition language. This Act, for the first time, mandated the accrual of paid sick time for employers with more than 10 employees, and paid and unpaid sick time for smaller employers. The recent amendments significantly changed the amount of time eligible employees may accrue, which employees and employers are to be subject to the Act, how the time may be used and carried over, and how the Act may be enforced. The Legislature also changed the Act’s name to the “Paid Medical Leave Act.” A summary of the changes and obligations are provided below. (Click here for a table comparing the original version of the Act to the version as amended in December.)

Who is Covered?

The recent amendments changed both which employers are covered by the Act, and which employers are eligible for leave.

• Instead of having virtually all Michigan employers subject to the Act as in the September legislation, the amended Act only applies to employers with 50 or more employees. Smaller employers will no longer be covered by the Act.
• Instead of making leave under the Act available to virtually all employees in the state, the amended Act applies to employees from whom the employer is required to withhold for federal income tax purposes. In addition, the amendments add several exemptions to the Act that were not in the September version. Most significant in this regard are:
  • White-collar employees who are exempt under the Fair Labor Standards Act;
  • Private sector employees covered by collective bargaining agreements; and
  • Employees working fewer than 25 weeks in a calendar year, or fewer than an average of 25 hours per week in the preceding calendar year.

How much leave must be provided and what are the other major requirements?

Under the Act as passed in September, employees of large employers (10+ employees) were to earn 1 hour of time off for every 30 hours worked, and employees of small employers would earn 1 hour of time off for every 40 hours worked. The new law significantly reduces the rate at which leave accrues. Now, employees of covered employers (i.e., those employing 50 or more employees), only, may earn paid time off under the Act and at the rate of at least 1 hour for every 35 hours worked. An employer may, however, limit the accrual to 1 hour for every calendar week worked, and further may limit total accrual to 40 hours for any benefit year. Employers also may limit the carryover of any accrued but unused hours to 40 hours, and employers may limit the total hours to be used in any benefit year to 40.

Further, the amendments more clearly provide for the right for employers to grant at least 40 hours of paid medical leave at the beginning of the year instead of using the accrual method. If the employer does so, there is no obligation to allow any of the hours to carryover from one year to the next.

Employers with paid leave plans, such as PTO, sick leave or vacation which provide for at least 40 hours of paid time off per benefit year, may count those days towards the hours required by the Act. Also, the amount to be paid to employees using paid hours under the Act need not include overtime, tips, commissions, bonuses, supplemental pay, or the like; only base pay is to be paid.

Leave accrued under the Act has no cash value upon termination unless otherwise provided by the employer.

Records regarding the administration of the Act will have to be retained for one year under the amended Act, versus the three years required by the September version. Posters will be required as well, but with less detail than those required under the September version. The requirement for providing a written notice of the employees’ rights under the Act per the September version was removed in the December version.

For What Reasons and How Can an Employee Take Paid Medical Leave?

While the Michigan Legislature did not make substantial changes to the reasons an employee can cite for taking leave, it is worth reiterating what those reasons are. An eligible employee can take paid leave under the amended Act for: (1) their own mental or physical illness; (2) the mental or physical illness of their family member; (3) medical care, counseling, relocation, or court appearances relating to domestic violence or sexual assault against the employee or a family member; and (4) the closure of the employee’s place of work or the employee’s child’s school due to a public health emergency. Notably, the only change the Michigan Legislature made here was to delete the provision that allowed an employee to take leave for a meeting at the employee’s child’s school regarding the child’s health, disability, or effects of domestic violence or sexual assault on the child.

The Legislature also changed the definition of “family member” which will narrow the scope of what an employee can use leave for. “Family member” no longer includes an employee’s domestic partner or an employee’s domestic partner’s children or parents.

Under the amended version, leaves must be taken in hourly increments, unless other increments are required or allowed in a handbook or other written benefit document, instead of increments of an hour or less, if allowed per the employer’s payroll system. Special documentation requirements apply to leaves related to domestic violence and sexual assaults.

And finally, under the September Act, employers could require no more than seven days’ notice of an employee’s desire to use paid sick time, if feasible. Under the amended law, employers may apply its usual notice, procedural and documentation requirements support paid leave requests.

Remedies

The new version of the Act removed the anti-retaliation and discrimination provisions of the September version. It also removed the right to a civil action to enforce the Act. Under the new Act, enforcement is accomplished vis-à-vis an employee filing a complaint with the Department of Licensing and Regulatory Affairs within six months of the alleged violation. That is substantially different from the Act that was passed in September which allowed for civil actions and had a statute of limitations of three years. Further, if the Department determines that the Act has been violated, it can award the employee payment of their paid medical leave that was improperly withheld as well as assess a $1,000 administrative fine against the employer. No other damages are available.

THE LEGAL LANDSCAPE

The fact that these Acts are being amended during the same legislative session in which they were first enacted, questions have been raised (at least in some political camps) about the Legislature’s authority to make these amendments in light of the Constitutional process underlying their initial adoption, i.e., keeping the initiatives off last November’s ballot. The Michigan Legislature has never taken a similar action under these circumstances, and the Michigan Constitution does not explicitly address the issue of the Legislature’s authority to do so. Until December 4, 2018, the only legal authority suggesting that the Legislature may have lacked the authority to act as it did is a 1964 opinion of the Michigan Attorney General (Frank Kelley, D) that states “the legislature enacting an initiative petition proposal cannot amend the law so enacted at the same legislative session without violation of the spirit and letter” of the Michigan Constitution. That statement arguably was beyond the scope of the questions presented to the Attorney General at that time, and the opinion never has been tested in court. On December 4, the current Attorney General (Bill Schuette, R) issued his own opinion discrediting the 1964 opinion and concluding that there is no constitutional basis proscribing the Legislature from amending a law enacted earlier during the same legislative session per the ballot initiative process or otherwise. It is too early to tell whether legal action testing these opinions will occur in an effort to void the December bills.

TAKEAWAYS

For now, employers should begin preparing for the Acts to take effect in March. Employers who pay the minimum wage (including the modified minimum for tipped employees) should familiarize themselves with the new minimum wages and what the scheduled increases are, and consider if their pay structures need adjusting in light of any wage compression at stake. In addition, all employers with 50 or more employees should evaluate whether or not their current paid leave polices comply with the paid sick/medical leave act, and modify their policies to conform to the Act’s requirements. In this regard, it is anticipated that most employers will have to go to the policy drafting table and, in the process, they are advised to consult with counsel to address the nuances of the law.

On December 4, 2018, the Michigan Legislature pared back the minimum wage and paid sick leave laws it passed last September in an effort to preclude those issues from being on the November ballot. Had the Legislature not adopted the language of the ballot initiatives legislation, the measures would have been on the November ballot and it would have needed a vote of three-fourths of each house to amend the law if adopted by the voters. By enacting the proposals directly, it only needed a simple majority to amend those laws. The strategy of using a lame-duck legislative session to amend the laws by a simple majority it passed just two months earlier has been viewed as controversial, but the outcome is welcomed by many in the business community.

These bills have just been signed by the Governor Snyder, who said in his signing message: “I look at legislation presented to me through a policy lens – is it the right policy for the state of Michigan and Michiganders as a whole? . . . That’s what I did with these bills and have now signed them into law. I looked at what the potential impacts and benefits of the changes would be and decided that signing these bills was the appropriate action.”

These revised minimum wage and paid sick leave laws will go into effect around March 21, 2019 (depending on the exact date the current legislative session ends). All Michigan employers must familiarize themselves with these new laws.

THE IMPROVED WORKFORCE OPPORTUNITY WAGE ACT

The changes to the Improved Workforce Opportunity Act—the Act controlling Michigan’s minimum wage and overtime rules—relate to increases to the minimum wages paid to all workers, including those who receive tips.

For non-tipped employees, the minimum wage will gradually increase from the current rate of $9.25 per hour to $12.05 in 2030, as opposed to $12.00 in 2022 as previously enacted. In addition, the amendments also eliminate the automatic increases to the minimum wage after 2022 based on increases to the CPI that was part of the previously adopted ballot initiative language.

Under the current law, tipped employees need to be paid a wage of at least $3.52 per hour, provided the employees make up the difference between that rate and the regular minimum wage in tips. This offset is commonly known as the “tip credit.” Under the original law passed last September, the tip credit would have been phased out in its entirety by 2024 and tipped employees would have been entitled to the same minimum wage that all other employees receive from that date onwards. That change was eliminated by the new law. Instead, the tipped minimum wage will be 38 percent of the minimum wage. (Click here for a table comparing the September version to the December version of the Act.)

THE PAID MEDICAL LEAVE ACT

The Legislature also passed the “Earned Sick Time Act” in September 2018, by adopting voter initiative petition language. This Act, for the first time, mandated the accrual of paid sick time for employers with more than 10 employees, and paid and unpaid sick time for smaller employers. The recent amendments significantly changed the amount of time eligible employees may accrue, which employees and employers are to be subject to the Act, how the time may be used and carried over, and how the Act may be enforced. The Legislature also changed the Act’s name to the “Paid Medical Leave Act.” A summary of the changes and obligations are provided below. (Click here for a table comparing the original version of the Act to the version as amended in December.)

Who is Covered?

The recent amendments changed both which employers are covered by the Act, and which employers are eligible for leave.

• Instead of having virtually all Michigan employers subject to the Act as in the September legislation, the amended Act only applies to employers with 50 or more employees. Smaller employers will no longer be covered by the Act.
• Instead of making leave under the Act available to virtually all employees in the state, the amended Act applies to employees from whom the employer is required to withhold for federal income tax purposes. In addition, the amendments add several exemptions to the Act that were not in the September version. Most significant in this regard are:
  • White-collar employees who are exempt under the Fair Labor Standards Act;
  • Private sector employees covered by collective bargaining agreements; and
  • Employees working fewer than 25 weeks in a calendar year, or fewer than an average of 25 hours per week in the preceding calendar year.

How much leave must be provided and what are the other major requirements?

Under the Act as passed in September, employees of large employers (10+ employees) were to earn 1 hour of time off for every 30 hours worked, and employees of small employers would earn 1 hour of time off for every 40 hours worked. The new law significantly reduces the rate at which leave accrues. Now, employees of covered employers (i.e., those employing 50 or more employees), only, may earn paid time off under the Act and at the rate of at least 1 hour for every 35 hours worked. An employer may, however, limit the accrual to 1 hour for every calendar week worked, and further may limit total accrual to 40 hours for any benefit year. Employers also may limit the carryover of any accrued but unused hours to 40 hours, and employers may limit the total hours to be used in any benefit year to 40.

Further, the amendments more clearly provide for the right for employers to grant at least 40 hours of paid medical leave at the beginning of the year instead of using the accrual method. If the employer does so, there is no obligation to allow any of the hours to carryover from one year to the next.

Employers with paid leave plans, such as PTO, sick leave or vacation which provide for at least 40 hours of paid time off per benefit year, may count those days towards the hours required by the Act. Also, the amount to be paid to employees using paid hours under the Act need not include overtime, tips, commissions, bonuses, supplemental pay, or the like; only base pay is to be paid.

Leave accrued under the Act has no cash value upon termination unless otherwise provided by the employer.

Records regarding the administration of the Act will have to be retained for one year under the amended Act, versus the three years required by the September version. Posters will be required as well, but with less detail than those required under the September version. The requirement for providing a written notice of the employees’ rights under the Act per the September version was removed in the December version.

For What Reasons and How Can an Employee Take Paid Medical Leave?

While the Michigan Legislature did not make substantial changes to the reasons an employee can cite for taking leave, it is worth reiterating what those reasons are. An eligible employee can take paid leave under the amended Act for: (1) their own mental or physical illness; (2) the mental or physical illness of their family member; (3) medical care, counseling, relocation, or court appearances relating to domestic violence or sexual assault against the employee or a family member; and (4) the closure of the employee’s place of work or the employee’s child’s school due to a public health emergency. Notably, the only change the Michigan Legislature made here was to delete the provision that allowed an employee to take leave for a meeting at the employee’s child’s school regarding the child’s health, disability, or effects of domestic violence or sexual assault on the child.

The Legislature also changed the definition of “family member” which will narrow the scope of what an employee can use leave for. “Family member” no longer includes an employee’s domestic partner or an employee’s domestic partner’s children or parents.

Under the amended version, leaves must be taken in hourly increments, unless other increments are required or allowed in a handbook or other written benefit document, instead of increments of an hour or less, if allowed per the employer’s payroll system. Special documentation requirements apply to leaves related to domestic violence and sexual assaults.

And finally, under the September Act, employers could require no more than seven days’ notice of an employee’s desire to use paid sick time, if feasible. Under the amended law, employers may apply its usual notice, procedural and documentation requirements support paid leave requests.

Remedies

The new version of the Act removed the anti-retaliation and discrimination provisions of the September version. It also removed the right to a civil action to enforce the Act. Under the new Act, enforcement is accomplished vis-à-vis an employee filing a complaint with the Department of Licensing and Regulatory Affairs within six months of the alleged violation. That is substantially different from the Act that was passed in September which allowed for civil actions and had a statute of limitations of three years. Further, if the Department determines that the Act has been violated, it can award the employee payment of their paid medical leave that was improperly withheld as well as assess a $1,000 administrative fine against the employer. No other damages are available.

THE LEGAL LANDSCAPE

The fact that these Acts are being amended during the same legislative session in which they were first enacted, questions have been raised (at least in some political camps) about the Legislature’s authority to make these amendments in light of the Constitutional process underlying their initial adoption, i.e., keeping the initiatives off last November’s ballot. The Michigan Legislature has never taken a similar action under these circumstances, and the Michigan Constitution does not explicitly address the issue of the Legislature’s authority to do so. Until December 4, 2018, the only legal authority suggesting that the Legislature may have lacked the authority to act as it did is a 1964 opinion of the Michigan Attorney General (Frank Kelley, D) that states “the legislature enacting an initiative petition proposal cannot amend the law so enacted at the same legislative session without violation of the spirit and letter” of the Michigan Constitution. That statement arguably was beyond the scope of the questions presented to the Attorney General at that time, and the opinion never has been tested in court. On December 4, the current Attorney General (Bill Schuette, R) issued his own opinion discrediting the 1964 opinion and concluding that there is no constitutional basis proscribing the Legislature from amending a law enacted earlier during the same legislative session per the ballot initiative process or otherwise. It is too early to tell whether legal action testing these opinions will occur in an effort to void the December bills.

TAKEAWAYS

For now, employers should begin preparing for the Acts to take effect in March. Employers who pay the minimum wage (including the modified minimum for tipped employees) should familiarize themselves with the new minimum wages and what the scheduled increases are, and consider if their pay structures need adjusting in light of any wage compression at stake. In addition, all employers with 50 or more employees should evaluate whether or not their current paid leave polices comply with the paid sick/medical leave act, and modify their policies to conform to the Act’s requirements. In this regard, it is anticipated that most employers will have to go to the policy drafting table and, in the process, they are advised to consult with counsel to address the nuances of the law.