Federal Court Issues Temporary Restraining Order Prohibiting Enforcement of California’s Anti-Arbitration Law
Today a federal court issued a temporary restraining order prohibiting the state of California from enforcing Assembly Bill 51, the state’s new anti-arbitration law, at least until another hearing scheduled for January 10, 2020. The new law was scheduled to take effect January 1, 2020.
The temporary restraining order was issued in the federal lawsuit filed earlier this month by the U.S. Chamber of Commerce and other pro-business organizations seeking a permanent injunction against enforcement of AB 51. The business groups argue that AB 51 is preempted by the Federal Arbitration Act (“FAA”).
In the order, the U.S. District Court for the Eastern District of California found the “plaintiffs have raised serious questions regarding whether the challenged statute is preempted by the Federal Arbitration Act” and that allowing the new law to take effect even temporarily could “cause disruption in the making of employment contracts” in California.
Today’s order means California employers can continue, at least until January 10, 2020, to require employees to sign mandatory arbitration agreements as a condition of employment. It also means the Court found the plaintiffs’ argument that AB 51 is preempted by the FAA to be persuasive.
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.
Sunday, October 13, 2019, was the last day for Governor Gavin Newsom to approve or veto bills passed by the state Legislature. This year’s approved employment-related bills generated quite a buzz, and for good reason. This e-Update surveys some of the most significant changes that will impact California employers. Paul, Plevin will review these and other new laws at the firm’s annual Employment Law Update on Friday, November 1st at the Hilton San Diego Resort & Spa on Mission Bay.
All new laws take effect January 1, 2020, except as indicated below.
Assembly Bill 5 – Employee versus Independent Contractor Status
Assembly Bill 5 codifies the “ABC” test adopted in Dynamex Operations v. Superior Court to determine whether a worker is an employee or independent contractor. The Dynamex decision was limited to only certain parts of the Labor Code, but Assembly Bill 5 extends the “ABC” test to virtually all California workers, excluding certain specifically enumerated industries and occupations (e.g. doctors, investment advisors, and hairdressers). In addition to various complete exceptions, this bill allows contracts of certain employers and industries to be governed by the more forgiving Borello multi-factor “economic realities” test, provided they meet a set of listed requirements.
Assembly Bill 9 – More Time To Bring Discrimination and Harassment Claims
The Stop Harassment and Reporting Extension Act extends the period for an aggrieved employee to file a complaint alleging harassment, discrimination, or other unlawful practices with the Department of Fair Employment and Housing (DFEH) from one year to three years. The new limitations period does not apply to claims that have already lapsed if a complaint was not filed with the DFEH.
Assembly Bill 51 – Prohibition on Mandatory Arbitration Agreements
This new law makes it a criminal misdemeanor for an employer to require an applicant or employee to enter into an agreement to arbitrate any claims under the Fair Employment and Housing Act or the California Labor Code. Arbitration agreements in place before January 1, 2020 will still be enforceable, as long as they are not extended or modified after that date. While the drafters of the bill attempted to avoid preemption by the Federal Arbitration Act, that question will likely be tested in the federal courts.
Assembly Bill 673 – Recovery of Civil Penalties
Employees will be able to obtain penalties as part of a Labor Commissioner hearing to recover unpaid wages. Under the current law, penalties must be paid to the State, but this new law allows workers to personally collect the penalty instead. An employee, however, still cannot “double dip”; he or she has to choose between recovering statutory penalties under these provisions or enforcing civil penalties under the Private Attorney General Act.
Assembly Bill 749 – “No Rehire” Provisions Prohibited in Settlement Agreements
This new law prohibits an agreement to settle an employment dispute from containing a provision that prohibits, prevents, or otherwise restricts the claimant from working for the employer against which the claimant filed a claim, or any affiliated entity. An employer and employee are permitted, however, to agree to end a current employment relationship or restrict the employee from obtaining future employment with the employer, if the employer made a good faith determination that the employee engaged in sexual harassment or sexual assault. Further, an employer is not required to continue to employ or rehire an employee if there is a legitimate, non-discriminatory or non-retaliatory reason for terminating or refusing to rehire the employee.
Assembly Bill 1554 – Flexible Spending Accounts
This new law requires employers to notify, in a prescribed manner, an employee who participates in a flexible spending account of any deadline to withdraw funds before the end of the plan year. “Flexible spending accounts” include but are not limited to: (1) dependent care flexible spending accounts; (2) health flexible spending accounts; and (3) adoption assistance flexible spending accounts. The required notice shall be provided by two different forms, one of which may be electronic.
Senate Bill 142 – Lactation Accommodations
This new law, largely based on the San Francisco ordinance for lactation accommodations passed in 2017, further expands protections for lactating workers by requiring employers to provide a lactation room, other than a bathroom, that shall be “in close proximity to the employee’s work area, shielded from view, and free from intrusion.” The lactation room must also (1) be safe, clean, and free from toxic or hazardous materials; (2) contain a surface to place a breast pump and personal items; (3) contain a place to sit; and (4) have electricity. Employers must also provide access to a sink with running water and a refrigerator in close proximity to the employee’s workspace. This law also requires employers to develop and implement a lactation accommodation policy, include it in employee handbooks, and provide it to new employees or when an employee raises parental leave. Employers with fewer than 50 employees may seek an exemption to these new requirements if they can demonstrate undue hardship.
Senate Bill 778 – Sexual Harassment Training Deadline Extension
This bill is emergency legislation, and therefore took effect immediately upon signing on August 30, 2019. This new law delays the deadline to complete supervisor and non-supervisor sexual harassment training under the FEHA from January 1, 2020 to January 1, 2021. However, new non-supervisory employees must still be provided at least one hour of sex harassment training within six months of hire, and new supervisory employees must be provided training within six months of the assumption of a supervisory position.
Senate Bill 83 – Expansion of Paid Family Leave
This new law extends the maximum duration of paid family leave (PFL) benefits from six weeks to eight weeks beginning July 1, 2020. Workers paying into the California State Disability Insurance (SDI) program may receive such PFL benefits to (1) care for a seriously ill child, spouse, parent, grandparent, grandchild, sibling, or domestic partner, or (2) to bond with a minor child within one year of the birth or placement of the child through foster care or adoption. Additionally, this new law allows state government employees that pay into the Nonindustrial Disability Insurance (NDI) program to receive six weeks of paid leave. Further, this law requires the governor to propose by November further benefit increases—in terms of duration and amount—and job protections for individuals receiving PFL benefits.
Senate Bill 188 – Hairstyle Discrimination
The Creating a Respectful and Open Workplace for Natural Hair (CROWN) Act, expands the definition of “race” under the FEHA and the Education Code to include both hair texture and protective hairstyles that are closely associated with race. The Act bans not only general employment discrimination, but also dress codes and grooming policies that prohibit “natural hair, including afros, braids, twists, and locks,” which would have a disparate impact on black applicants and black employees. FEHA exceptions for bona fide occupational qualifications and security regulations still may apply. California is the first state to codify this rule.
Paul, Plevin, Sullivan & Connaughton LLP
The Department of Labor issued, on September 24, 2019, its final rule revising the salary requirements for exemption from the Fair Labor Standards Act’s mandate to pay overtime for hours worked over 40 in a workweek. The new rule increases the salary required to meet the executive, professional and administrative exemptions to $684 per week (the equivalent of $35,568 per year). The required compensation for highly compensated employees is raised to $107,432.
Effective Date: The effective date of the new rule is January 1, 2020.
Bonus and Incentives: The new rule allows nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the required salary. This provision applies only to the standard exemption, not the highly compensated exemption. To bring an employee up to the required level, an employer may make a final catch-up payment (not more than 10 percent of the required salary) at the end of the year. The final payment must be made within one pay period or one month of the end of the year. An employer may elect to use any 52-week period as its measuring year.
No other changes: The new rule does not change the duties tests for the exemption. It does not commit the DOL to any timetable for increasing the salary level in the future, although the DOL states that it intends to update these levels, which had not been updated since 2004, “more regularly in the future through notice-and-comment rulemaking.”
Legal Challenges: The new salary test is much lower than the rule adopted by the Obama administration in 2016, which was enjoined by a federal court in Texas. The new test may be challenged by worker advocates, but such challenges are not likely to prevail.
Impact: The new rule was set to allow most salaried exempt employees to remain exempt, but will have some impact, especially on assistant managers in retail, restaurants, non-profit and service industries, especially in rural areas. Employees paid less than the salary requirement must either be paid overtime or have their salaries raised to the required level. Raising wages may, of course, have a ripple effect to avoid wage compression. On the other hand, in some areas (California, New York City, Washington D.C.) the new salary test is not much higher than the applicable minimum wage. The hourly equivalent of $684 per week is $17.10 per hour.
Don’t forget: Under the new test, the no-docking rule will continue to apply. Subject to a number of specific exceptions, the no-docking rule requires exempt employees to receive their full salary for every week in which they perform any work. Full day absences for personal reasons may be docked. Full day absences for sickness and disability may be docked in accordance with a sick or disability leave plan, and FMLA leave may be docked.
Also, under the new test, the existing duties tests for the administrative, executive and professional exemptions will continue to apply. Each of these tests contain language, such as “primary duty” or “discretion and independent judgment” that generates disputes. Plaintiffs’ lawyers are on the lookout for possible misclassification claims.
Today the California Supreme Court ruled that employees cannot recover unpaid wages in actions brought under the California Labor Code Private Attorneys General Act (PAGA). As a result of today’s decision, unpaid wages can only be recovered in actions brought under other Labor Code provisions that, unlike PAGA, can be subjected to mandatory employment arbitration agreements, including agreements that require employees to waive the right to bring claims on a class or collective basis.
Since 2004, the PAGA law has allowed employees to act as “private attorneys general” by bringing claims in court to recover “civil penalties” for violations of California Labor Code provisions. PAGA allows employees to bring claims on behalf of themselves and on behalf of other “aggrieved employees.” Before PAGA took effect, these “civil penalties” were recoverable only by the state’s labor law enforcement agencies.
In the fifteen years since the PAGA law took effect, the United States Supreme Court has issued a series of decisions upholding the enforcement of arbitration agreements, including agreements between employers and employees. The U.S. Supreme Court has also repeatedly held that employment arbitration agreements may include provisions prohibiting employees from arbitrating claims on a class or collective basis, effectively requiring employees to arbitrate only individual claims. As a result of these court decisions, many employers now encourage or require their employees to enter into arbitration agreements that include class and collective action waivers.
However, in 2014 the California Supreme Court ruled that employment arbitration agreements cannot prohibit employees from bringing PAGA claims in court on behalf of themselves and other “aggrieved employees.” As a result, even where an employee subject to an employment arbitration agreement is barred from bringing claims on a class or collective basis in court or in arbitration, the employee may still bring a “PAGA-only” claim in court, forcing the employer to litigate claims for alleged violations affecting not only the plaintiff-employee, but other “aggrieved employees” as well.
Most of the Labor Code provisions providing for civil penalties recoverable under the PAGA law assess penalty amounts (typically $50 or $100) for each aggrieved employee affected by the violation, for each pay period in which a violation occurs. But Labor Code section 558, which provides for civil penalties when an employer violates provisions of the Labor Code requiring employers to provide meal periods and overtime pay, is different. Section 558 provides for a civil penalty of $50 for each underpaid employee for each pay period in which the employee was underpaid for an initial violation, and $100 for each under paid employee for each pay period in which the employee was underpaid for a subsequent violation, “in addition to an amount sufficient to recover underpaid wages.”
In recent years different districts of the California Court of Appeal have reached different conclusions about how to interpret Section 558’s language, with one district concluding that claims for underpaid wages under Section 558 are subject to arbitration, and other districts concluding they are not. Despite their disagreements, however, all districts agreed that under the language of Section 558, the “underpaid wages” sought under Section 558 are part of a “civil penalty” recoverable under the PAGA law.
But today the California Supreme Court reached a different conclusion, confirming that the $50/$100 for each underpaid employee for each pay period is a civil penalty recoverable under the PAGA law, but holding that an employee’s underpaid wages are not part of that civil penalty, and are therefore not recoverable under the PAGA law.
As a result of today’s decision, plaintiff-employees cannot recover unpaid wages in PAGA-only cases. Although employees may bring claims for unpaid wages under other, non-PAGA Labor Code provisions, those non-PAGA claims are subject to employment arbitration agreements that may require employees to arbitrate claims on an individual basis only.
This means employment arbitration agreements that include class and collective action waivers now provide more protection to employers than they did before today’s decision. Employers that already make use of arbitration agreements should consult with counsel about whether their existing agreements are sufficient, or should be revised. Employers that do not have arbitration agreements with their employees should consult with counsel about whether to adopt an arbitration program.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
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.