On July 24, 2019, the Chicago City Council unanimously passed the most comprehensive “predictive scheduling” ordinance in the nation that includes significant notice, scheduling, and rest provisions for many employers in Chicago. Mayor Lori Lightfoot is expected to sign the measure that, beginning in July 2020, will add Chicago to the list of other major U.S. cities attempting to standardize work schedules and limit employers’ ability to make last-second changes.
WHO IS COVERED?
The Chicago Fair Workweek Ordinance is a culmination of two years of legislative wrangling about precisely which industries and employees should be governed by the ordinance. In its final form, the rules cover employers in eight major industries: day and temporary labor service agencies, hotels, restaurants, building services, health care, manufacturing, warehouse services, and retail.
Private employers maintaining a business facility in Chicago are covered when they are primarily engaged in one of the covered industries, have 100 or more employees (250 or more employees for nonprofit corporations), and if 50 or more of those are covered employees. The ordinance covers employees earning $26.00 per hour or less, as well as salaried employees earning $50,000 or less. These wage thresholds will increase annually based on the Consumer Price Index.
The law is tailored to avoid most small Chicago restaurants, applying only to those with 30 or more total locations (globally) and 250 or more combined employees. Franchisees who operate three or fewer locations are also exempted from the ordinance. The ordinance does not apply to most employees working in Chicago sports stadiums.
The ordinance does not affect any collective bargaining agreement in effect as of the July 1, 2020 effective date. That said, however, the ordinance dictates that it will apply to any CBAs that become effective after July 1, 2020, thus compelling an employer to negotiate with a labor union representing covered employees if it seeks the permitted “clear and unambiguous waiver” of the ordinance requirements.
Under the ordinance’s notice requirements, for newly hired employees, employers must provide a good-faith estimate of the employee’s work schedule during the first 90 days of employment. This notice includes the expected average number of hours per week and the days and times that the employee can expect to work, including on-call shifts. Later, employers must provide work schedules to their employees at least 10 days in advance, increasing to 14 days of minimum notice on July 1, 2022. Employers may post schedules at the workplace or electronically transmit the schedules to all employees. Should the employer fail to provide adequate notice, employees have the right to decline those hours.
Employers who change a worker’s schedule within the notice period (at first 10 days) must give the worker one hour of “predictability pay” at the employee’s regular rate for each changed shift. If the employer cancels or reduces and employee’s hours with less than a 24-hour notice, the employer would have to compensate the employee at half of their regular rate of pay per hour for any hours not worked as a result. Employers must post a notice of employees’ rights under the ordinance and to distribute a similar notice to each employee with his or her first paycheck.
The ordinance also includes a “right to rest” provision allowing employees to decline any hours within 10 hours of a previous shift. Unless the employee agrees in writing to work those hours, the employer must pay the employee 1.25 times their regular rate for any hours worked fewer than 10 following the end of their last shift.
Notice requirements do not apply under certain “exemptions,” such as if there is an act of nature that prevents operations from continuing, unforeseen circumstances, if an employer makes schedule changes for disciplinary reasons, or if employees mutually agree to trade shifts. Employers can also avoid predictability pay when an employee agrees to a proposed schedule change in writing.
FIRST REFUSAL FOR EXISTING EMPLOYEES
The ordinance attempts to move more employees to full-time schedules by creating a sort of right of first refusal for employees when an employer is looking to add more hours. Before hiring new employees or adding temporary workers, the ordinance first requires employers to offer additional hours to existing covered employees who are qualified to do the work. Only when a covered employee declines the shift may it be offered to a temporary or seasonal worker for the employer for at least two weeks. Importantly, the rule does not require employers to offer additional hours to employee when doing so would make the employees eligible for overtime pay. Employers may not otherwise change pay rates or schedules to avoid coverage by the ordinance.
RECORDKEEPING AND PENALTIES
Employers are expected to maintain comprehensive scheduling records under the new law including payment records, schedules, written offers to change schedules, consent to work forms, and employee written responses for three years. Employers must provide employees with a copy of their records upon reasonable request. All scheduling changes must be made in writing.
The city will have the authority to investigate workplaces for violations under the ordinance with resulting violations carrying a potentially steep penalty. Employers may be fined between $300 and $500 per day per employee for each violation. The ordinance also creates a process for employees to bring a private action within two years from the date of an alleged violation. If an employee pursues civil action and prevails, they will be entitled to damages sustained, withheld predictability pay, litigations costs, and attorney’s fees.
HOW DOES AN EMPLOYER PREPARE? With just under a year to prepare, Chicago employers should act now to determine whether the new law will cover them in whole or in part, then determine which employees are covered so that notices and communication plans can be put in place. Affected employers should revisit procedures and ensure scheduling software complies with the law. Employers with unionized workforces should plan to negotiate a waiver or otherwise address ordinance requirements in any upcoming contract negotiations that may conclude after July 1, 2020. Finally, employers should watch for additional guidance from Chicago Department of Business Affirms and Consumer Protection expected before the effective date.
By Jonathan Keselenko, Chris Feudo, and Emily Nash
Foley Hoag LLP
Massachusetts law requires that non-exempt employees be paid at least 1.5 times their hourly rate for hours worked beyond the first 40 hours per week, and that certain employees be paid at least 1.5 times their hourly rate for all hours worked on Sundays. However, there has been confusion as to how these laws apply to employees who are paid exclusively by commissions. Late last week, the Massachusetts Supreme Judicial Court ruled in Sullivan v. Sleepy’s LLC that non-exempt employees paid entirely on commissions or advances are eligible for overtime and Sunday pay, regardless of how much they make in commissions. Thus, even if employees make the equivalent of or more than 1.5 times the minimum wage in commissions, non-exempt employees are still entitled to overtime pay for hours worked over 40 in a work week and, if eligible, Sunday premium pay for hours worked on Sundays.
The plaintiffs in the case, sales employees at Sleepy’s mattress stores, were paid a $125.00 daily draw plus any commissions they earned in excess of the draw. When the employees worked more than 40 hours in a work week or on Sunday, they were not paid any additional compensation. However, their compensation always equaled or exceeded the minimum wage for the employee’s first 40 hours worked plus 1.5 times the minimum wage for all hours worked over 40 hours and on Sundays. In 2017, the plaintiffs sued in state court for unpaid overtime and Sunday pay. The defendants claimed that the employees were not entitled to any additional compensation beyond what they had received, because their commissions and advances always equaled or exceeded the minimum wage for the first 40 hours worked plus 1.5 times the minimum wage for hours worked in excess of 40 and on Sundays.
The defendants removed the case to federal court, where the judge subsequently stayed the proceedings and certified two questions of first impression under Massachusetts law to the SJC:
- Is an employee paid on commission entitled to additional compensation for overtime hours if the employee’s draws and commissions are equal to or greater than 1.5 times the employee’s regular rate or at least 1.5 times the minimum wage for all hours worked over 40 hours in a work week?
- Is a commission retail employee who works on a Sunday entitled to any additional compensation for Sunday premium pay when the employee’s draws and commissions compensate the employee in an amount equal to or greater than 1.5 times the employee’s regular rate or at least 1.5 times the minimum wage for all Sunday hours worked?
The SJC answered both questions in the affirmative. While the Court agreed that the minimum wage constitutes a commission-only employee’s “regular rate” for the purposes of calculating his or her overtime or Sunday pay, the Court explained that commission-based compensation cannot be retroactively allocated as hourly and overtime compensation, even if that compensation equaled or exceeded the minimum wage for the first 40 hours worked and 1.5 times the minimum wage for all hours worked over 40 hours and on Sundays. Instead, employees are entitled to separate and additional payments of 1.5 times the minimum wage for every hour worked over 40 hours in a week and on Sundays.
To the extent employers have maintained policies by which they did not pay overtime rates or, if applicable, Sunday rates for their non-exempt commission-only employees when their commissions equaled or exceeded the overtime compensation, these policies must now change. These employees must be compensated for their overtime or Sunday hours worked, regardless of their weekly draws and/or commissions.
Freedom to Gig: New Department of Labor Opinion Bolsters Employers’ Ability to Classify “Virtual Workers” as Independent Contractors
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:
- The nature and degree of the potential employer’s control;
- The permanency of the worker’s relationship with the potential employer;
- The amount of the worker’s investment in facilities, equipment, or helpers;
- The amount of skill, initiative, judgment, or foresight required for the worker’s services;
- The worker’s opportunities for profit or loss; and
- 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.
The Michigan Saga Continues: The Constitutional Validity of the New Michigan Paid Medical Leave Act and New Minimum Wage Law Heads to the Michigan Supreme Court
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 email@example.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 (6th 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 (6th Cir. 1984).
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.
By: Jason E. Reisman, Blank Rome LLP
Yesterday, the U.S. Department of Labor (“DOL”) completed the wage and hour trifecta, issuing the third of its critically acclaimed proposed rules—this one redefines (or clarifies, if you prefer) the regulations addressing the concept of “joint employment.” Joint employment under the Fair Labor Standards Act (“FLSA”) is an important concept as it often is used to hold multiple entities liable for the minimum wage and overtime violations relating to a group of employees. The existing regulations have not been materially updated in more than 60 years—needless to say, the nature and scope of business interactions have changed materially over that time.
Remember, in the last few weeks, the DOL issued (1) its long-awaited proposed rule to increase the salary threshold for the white collar exemptions (an effort to finally supersede the proposed $47,476 threshold suggested by the Obama administration) and (2) its “out of the blue” proposed rule to update the “regular rate of pay” rules.
Now, the DOL has offered proposed additional guidance to help employers navigate the murky-at-best waters of joint employment. On its website (here), the DOL has provided a great deal of material and insight—including multiple detailed examples –to summarize the key features addressed. This latest proposed rule will impact, among others, staffing company arrangements, subcontractor relationships, business association membership benefits, and franchisor/franchisee agreements. Essentially, the DOL is working to narrow, and likely reduce, the circumstances in which businesses will be considered joint employers, thereby lessening the risk of sharing joint and several liability. The DOL’s release states that the DOL has proposed “a clear, four-factor test—based on well-established precedent—that would consider whether the potential joint employer actually exercises the power to:
• hire or fire the employee;
• supervise and control the employee’s work schedules or conditions of employment;
• determine the employee’s rate and method of payment; and
• maintain the employee’s employment records.”
Stay tuned as this proposed new rule winds its way through the administrative process, triggering a 60-day public comment period and ultimately the issuance of a final rule, which we expect by sometime early in 2020.
Interestingly, please don’t forget that our other “favorite” agency—the National Labor Relations Board—is also hard at work with its own proposed “joint employer” rule, which is expected to be tremendously employer-friendly! Let’s go government—keep the “good” rules coming!
DOL Proposes Another Major FLSA Rule Change: This Time on Calculating the “Regular Rate of Pay” for Overtime
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 28th 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
California Employers Should Remember the Federal and California White Collar Exemptions Are Different
In Rob Boonin’s post below, he summarizes the U.S. Department of Labor’s proposal to change the regulations governing the so-called “white collar” overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA).
As Rob mentioned, the proposed changes are expected to have little impact in California and some other states, because some of the salary thresholds for white collar exemptions under state law are higher than the proposed new FLSA salary threshold, and to be exempt from overtime under both the FLSA and state law an employee must satisfy both the federal and state exemption requirements in full.
Employers with California employees should be aware that the California white collar exemptions differ in other important respects. Below is a summary of the most important ways in which the FLSA and California white collar exemptions differ.
California’s salary threshold for white collar exempt employees is set at twice the state minimum wage for a 40-hour work week. Under the current $12 state minimum wage for employers with 26 or more employees, California’s salary threshold is $960 per week ($49,920 per year). California’s minimum wage for employers with 26 or more employees is set to increase according to the following schedule, and by doing so cause corresponding increases in the salary threshold for white collar exempt employees:
Effective Date Minimum Wage Salary Threshold
January 1, 2019 $12.00 per hour $960 per week / $49,920 per year
January 1, 2020 $13.00 per hour $1,040 per week / $54,080 per year
January 1, 2021 $14.00 per hour $1,120 per week / $58,240 per year
January 1, 2022 $15.00 per hour $1,200 per week / $62,400 per year
No Use of Incentive Pay
Unlike the proposed new FLSA exemption rules recently announced by the DOL, California does not allow employers to include bonuses or commissions to satisfy the salary threshold.
No Exemption for Highly Compensated Employees
California does not have a separate threshold for “highly compensated employees.”
More Stringent “Duties” Test
Unlike the FLSA, California’s “duties” test requires exempt employees to spend a majority of their working time performing exempt (as opposed to nonexempt) work consistent with the exemption under which they are classified.
To avoid liability for unpaid overtime arising from employee misclassification, employers should ensure their white collar exempt employees satisfy all the exemption requirements under both federal and state law.
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
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.
DOL Releases New(ish) Guidance on Non-Tipped Duties Performed by Tipped Employees and Subminimum Wages on Government Contract Work
On February 15, 2019, the DOL published new guidance on two wage and hour topics. The first is on tipped employees performing non-tipped duties, the second on subminimum wages for workers with disabilities for work performed under certain types of government contracts. The new guidance on each of these subjects is summarized below.
Tipped Employees Performing Non-Tipped Duties
First, the DOL updated its Field Operations Handbook (“FOH”)—the manual that provides guidance on interpretation and enforcement of the FLSA to the Wage and Hour Division’s (“WHD”) investigators and staff—to be consistent with an opinion letter published by the DOL last November. In the November 2018 opinion letter (which reissued verbatim a 2009 opinion letter), the DOL had announced that WHD would no longer prohibit employers from taking a tip credit based on the amount of time an employee spends performing duties related to a tip-producing occupation that are performed contemporaneously with, or for a reasonable time immediately before or after performing, direct customer service duties.
If the tipped employee works in both tipped and non-tipped positions—for example, a server job and a maintenance job—the tip credit is only available for the hours during which the employee worked in the tipped position. However, even in tipped positions, such as a server job, most employees spend time performing duties that are not directed toward producing tips, such as making coffee or rolling silverware. WHD had previously excluded from the tip credit any time spent performing these “non-tipped duties” in excess of 20 percent of the workweek. But WHD rescinded this position in a November 2018 Opinion Letter FLSA2018-27, explaining that the prior interpretation “created confusion for the public.”
The FLSA generally allows employers to pay employees who customarily and regularly receive more than $30 per month (“tipped employees”) a lower hourly wage and count a limited amount of the employee’s tips as a partial credit toward minimum wage. This credit is called the “tip credit.”
Under the WHD’s current guidance, employers may take a tip credit for any duties that an employee performs in a tipped occupation that are related to that occupation and either performed contemporaneously with, or within a reasonable time immediately before or after, the tip-producing activities. In its newsletter and the recent update to the FOH, WHD referred employers to examples of non-tipped duties that will be considered “related to” tipped jobs, some of which are in 29 CFR § 531.56(e) and others are found in the Tasks section of the details report in the Occupational Information Network (O*NET) at https://www.onetonline.org. WHD reminded employers that they remain prohibited from keeping employees’ tips, even when not taking advantage of the tip credit.
Subminimum Wages for Employees with Disabilities Performing Work on Government Contracts
The second wage and hour guidance published last week addresses limitations imposed by the Workforce Innovation and Opportunity Act (WIOA) on the payment of subminimum wages under section 14(c) of the FLSA. Section 14(c) authorizes employers to pay subminimum wages (generally, wages that are less than the federal minimum wage but commensurate with individual productivity) to certain workers who have disabilities. As a prerequisite, employers must receive a certificate from WHD authorizing the use of a subminimum wage, referred to as a “section 14(c) certificate.”
The ability to pay employees with disabilities subminimum wages—which originates in the FLSA, a law passed in 1938—has come under political fire over the last several years. Indeed, the WIOA, which became effective on July 22, 2016, limits the ability of employers to pay these subminimum wages. The WIOA imposes additional vocational rehabilitation and training requirements on employers that pay a subminimum wage to people with disabilities and prohibits employers from hiring workers with disabilities who are 24 or younger without verified documentation proving that they have received services designed to improve their access to competitive integrated employment.
WHD issued Field Assistance Bulletin 2019-1 to clarify that the obligations imposed by WIOA do not apply to employees who are paid commensurate wages under the McNamara O’Hara Service Contract Act (“SCA”) that are above the federal minimum wage or to any commensurate wages paid pursuant to Executive Order 13658.
The SCA is a federal labor law that applies to contracts in excess of $2,500 entered into by the United States or the District of Columbia to provide services using service employees. The SCA includes a wage determination that specifies the minimum monetary wage and required fringe benefits that must be paid to such service employees performing any of the contract work. The SCA also specifically allows employers who hold a section 14(c) certificate to pay service employees with disabilities based on the prevailing wage required by that wage determination. WHD determined that because the WIOA requirements “apply only to employees who are paid less than the Federal minimum wage,” individuals who are paid more than that are not subject to WIOA’s requirements, “even if they are paid less than the SCA wage determination.”
Similarly, Executive Order 13685 establishes a minimum wage for work performed on or in connection with a covered contract with the federal government. Employers with section 14(c) certificates must calculate a commensurate wage rate for a worker with disabilities employed on or in connection with a contract covered by this Executive Order. However, because all wages paid on such contract work must be higher than the federal minimum wage, WHD has determined that the WIOA restrictions do not apply to any workers on these contracts.
The Bigger Picture Take-Away
Albeit slowly (presumably due, at least in part, to the number of positions within the agency that remain unfilled), WHD has been releasing guidance that conveys a very different enforcement approach from that of the previous administration. Most of the agency’s publications communicate a return to interpretations of employers’ wage and hour obligations as they existed under previous Republican administrations and/or that curtail more recent expansions of those obligations.