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 rboonin@dykema.com.

 

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Auto-Deductions for Employee Meal Breaks Can Work for Hospitals, But Be Careful!

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).

Conclusion

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

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

Trifecta! DOL Issues Proposed “Employer-Friendly” Joint Employer Rule

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

rboonin@dykema.com

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.

Salary Threshold

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.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

DOL Finally Proposes New White Collar Exemption Regulations

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.   

We Accidentally Overpaid an Employee—We Can Just Take It Out of the Next Paycheck, Right?

It seems that common sense would dictate that if an employee receives a windfall of unearned and unexpected money, that an employer could recover that amount from the employee’s next paycheck.  But as those familiar with legal issues know, the law and common sense do not always overlap.  And unfortunately, a number of employers are unaware of restrictions that various states have put in effect regarding deductions from paychecks generally, as well as deductions from paychecks for overpayments and advances.

Take New York, which has some of the most stringent restrictions on paycheck deductions in the country.  If you overpay an employee, you may be able to recover the money by payroll deduction—it’s not automatic.  For example:

  • You must notify the employee within eight weeks of the overpayment about your intent to deduct the overpayment.  If you discover the overpayment more than eight weeks later—sorry.  You’re out of luck.
  • If the overpayment is less than an employee’s net wages in the employee’s next paycheck, you can deduct the total amount from the employee’s next paycheck, but you have to give at least three days’ notice before the payment is due.
  • If the overpayment exceeds the employee’s net wages in the employee’s next paycheck, then it will take some time and effort to get it back: (1) you have to inform employees three weeks before the first deduction, (2) the deduction cannot exceed 12.5% of the gross wages for that wage payment, and (3) the deduction cannot reduce the employee’s effective hourly rate below the state minimum.  That means that the earliest you can recover a large overpayment amount through payroll deductions is eight pay periods—and if you have an employee at or near the minimum wage, it could take years to recover the overpayment through payroll deduction.

And that’s just overpayments.  New York has likewise enacted laws and regulations regarding making advances to employees that are so onerous, few employers opt to provide such advances—unfortunately, to the detriment of employees. Bottom line, anytime you are considering making a deduction from employee’s pay, whether for overpayments, advances, or other money that may be owed to you by the employee, it is highly advisable to check your state-specific requirements.

The FLSA Administrative Exemption For the Financial Services Industry in the Areas of Tax and Financial Consulting: Current State and Recommendations for Review

© February 8, 2019.  By Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Senior Fellow, Wage and Hour Defense Institute.

It is an understatement to say that the financial services industry has been in a quandary over how to classify its employees since the decision in Perez v. Mortgage Bankers Association, 135 S.Ct. 1199 (2015).  This decision upheld the novel and confusing Department of Labor (“DOL”) Administrative Interpretation (“AI”) 2010-1, finding that mortgage loan officers were not exempt and must be paid overtime.  This was confusing because it added a new dividing line for which financial services professionals could potentially be exempt based solely upon who they were advising.  If such employees advised businesses of any size, they could be exempt.  But, if they advised individuals, DOL suggested in AI 2010-1 that they could not be exempt.  In response to this, many courts that have considered this outlier of a rule have rejected it.  In locales other than California, where different rules apply, courts have rejected it because it is inconsistent with both prior DOL opinions and judicial precedent.  It is also clear that such an arbitrary distinction makes little practical sense in today’s world, especially as it concerns tax and financial consultants.

When we speak of the financial services industry, it is important to remember that the DOL regulations carve out a specific exemption for “tax experts and financial consultants.”  29 CFR § 541.201(c).  These types of advisors are most often regulated and licensed, exercise varying levels of discretion, and make decisions on a daily basis that may affect the financial well-being of their clients.  The employees that challenge the administrative exempt status in this context often either seek to downplay their professional contribution or criticize employer incentives that such employees say eliminate their discretion.  For these reasons, if an employer uses incentives or disincentives, it is important to tie and support such to an employee’s fiduciary and other duties to the client so that the administrative exemption can be preserved.  In this article, we explain where we are in this area of the law and, hopefully, where we may be headed in the resolution of this quandary.

Introduction

The Fair Labor Standards Act (“FLSA”) mandates that covered employers pay overtime compensation for non-exempt employees.  Rainey v. McWane, Inc., 314 Fed. Appx. 693, 694 (5th Cir. Mar. 12, 2009), citing 29 U.S.C. § 207 (a).  The FLSA generally requires an employer to pay employees who work more than forty (40) hours per seven (7)-day workweek at a rate not less than one and one-half (1½) times the employee’s regular rate for that overtime work.  29 U.S.C. § 207(a) (1); Allen v. Coil Tubing Servs., LLC, Civ. A. No. H-08-3370, 2011 WL 4916003, at *5 (S.D. Tex. Oct. 17, 2011); Vela v. City of Houston, 276 F.3d 659, 666 (5th Cir. 2001); Thibodeaux v. Executive, Tet Intern., Inc., 328 F.3d 742, 749 (5th Cir. 2003).

Certain employees, however, are exempt from FLSA’s overtime requirements.  Whether an employee is exempt or not exempt under FLSA is mainly a fact issue determined by his salary and duties and application of the factors in 29 C.F.R. § 541.200(a), but the ultimate decision is a question of law.  Ford v. Hous. Indep. Sch. Dist., 97 F.Supp.3d 866, 874 (S.D. Tex. 2015)(citing Lott v. Howard Wilson Chrysler–Plymouth, Inc., 203 F.3d 326, 330–31 (5th Cir.2000); McKee v. CBF Corp., 299 Fed.Appx. 426, 429 (5th Cir. 2008).

The FLSA’s overtime provisions do not apply with respect to any employee working in a bona fide executive, administrative, or professional capacity.  29 U.S.C. § 213(a)(1); see also Cheatham v. Allstate Ins. Co., 465 F.3d 578, 584 (5th Cir. 2006).  To qualify for the administrative employee exemption, the following criteria must be met:

  1. The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
  2. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the    employer or the employer’s customers; and,
  3. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

29 C.F.R. § 541.200(a).  Moreover, as demonstrated below, DOL’s regulations have specific carve-outs for “tax and financial consultants” that must be properly understood and applied.

Salary Basis

The first prong of the administrative exemption is met if the employer establishes that the employee was compensated on a salary or fee basis at a rate not less than $455 per week.  29 C.F.R. § 541.200(a)(1).  To be viewed as paid on a “salary basis,” an employee must “regularly receive[] each pay period on a weekly or on a less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of work performed.”  Miller v. Team Go Figure, LLP, 2014 WL 1909354, at *7 (N.D. Tex. May 13, 2014), quoting 29 C.F.R. § 541.602(a).

As set forth in Section 541.602(b)(1), an employer may make deductions from an exempt employee’s pay when the employee is absent from work for one (1) or more full days for personal reasons, other than sickness or disability.  In addition, an employer may deduct from an exempt employee’s pay when the employee is absent from work for one (1) or more full days occasioned by sickness or disability, if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by such sickness or disability.  29 C.F.R. § 541.602(b)(2).  Although the term “bona fide plan” is not defined by the regulation, the DOL’s Wage and Hour Division (“WHD) has brought clarity to the definition of a “bona fide plan” through several opinion letters.

In Opinion Letter FLSA2006-32, the WHD provided an opinion on whether a particular sick/vacation leave plan qualified as a bona fide plan under the regulations implementing section 13(a)(1) of the FLSA.  (See DE 635).  The WHD was also asked to provide an opinion on whether the sick/vacation plan at issue allowed the employer to make salary deductions for employees who have either:  (1) not qualified for leave, or (2) exhausted their leave allowance.  (Id., at p. 1).  As noted in the opinion letter, the sick/vacation plan at issue provides, in pertinent part:

     “One year after [the] start date the employee is eligible for 40 hours off with pay. After  two years the employee will receive 80 hours off with pay. After 10 years[, the employee will receive] 120 hours [off with] pay. All vacation must be taken in . . . full work day [increments,] not an hour at a time. [For e]xample some departments may work 10 hour days[, which means those employees would be entitled to 4 days off.] Also one sick day is paid per year. [Salespeople] must take vacation one week at a time.”

(Id.)

As to the inquiry regarding the requirements for a “bona fide plan,” WHD explained that, “a plan that has defined sick leave benefits that have been communicated to eligible employees, and that operates as described in the plan, will in general qualify as bona fide.”  (Id., at p. 2).  WHD further explained that, to qualify as bona fide, the plan must be administered impartially, and its design should not reflect an effort to evade the requirement that exempt employees be paid on a salary basis.  (Id. (citing to Wage and Hour Opinion Letters FLSA2005-7 (Jan. 7, 2005) and August 15, 1972.)).  Whether a particular plan is bona fide depends on the actual design of, and practices applicable under, the plan.  (Id.)

WHD further explained that, given the fact-specific nature of the inquiry, there is no bright-line test articulating how many days and how short a waiting period are required for a plan to be bona fide.  (Id., at p. 3).  With this said, WHD noted that it has previously approved leave plans that allow for at least five (5) days of sick leave per year as bona fide under the regulations.  (Id. (citing to Wage and Hour Opinion Letters July 21, 1997; November 20, 1995; April 14, 1992; and August 15, 1972.)).  WHD further explained that it has previously deemed a leave plan that required one (1) year of service prior to payment of sick pay benefits to be bona fide.  (Id. (citing to See Wage and Hour Opinion Letter March 1, 1982.)).

While DOL’s regulations recognize two (2) forms of compensation for exempt employees – predetermined weekly salary and additional compensation – the regulations only state an “employer who makes improper deductions from salary” may lose the exemption.  29 C.F.R. § 541.603(a).  Therefore, nothing in the FLSA or the Secretary’s regulations prohibits employers from deducting debits during the computation of an employee’s commissions, as opposed to base salary.  See, e.g., Bell v. Callaway Partners, LLC, 2010 WL 6231196, at *6 (N.D. Georgia Feb. 5, 2010) (applying similar logic to find Secretary’s regulations did not prohibit deductions from exempt employees’ bonuses).

Further, case law establishes that employers may permissibly deduct from exempt employees’ commissions without losing the exemption.  Accord Hicks v. Mercedes-Benz U.S. Intern., Inc., 877 F. Supp. 2d 1161, 1178–79 (N.D. Ala. 2012); see also Havey v. Homebound Mortgage, Inc., 547 F.3d 158, 165 (2d Cir. 2008) (“A two-part salary scheme in which employees receive a predetermined amount, plus, on a quarterly prospective basis, an additional portion subject to deductions for quality errors does not violate the salary basis test.”).

A final issue concerns whether an employer may lose the exemption for deducting sums owed from an employee’s final paycheck.  In the Preamble to 29 C.F.R. Part 541 (“Preamble”), the DOL specifically considered whether employers should be able to recover salary advances from an employee’s final pay.  69 Fed. Reg. 22122, 22178.  The DOL decided that in that situation, “recovery of salary advances would not affect an employee’s exempt status, because it is not a deduction based on variations in the quality or quantity of the work performed.”  Id.  This means employers may permissibly recover advances from an employee’s final pay without losing the exemption.  Id.  This is a somewhat controversial position, and there is little precedent on it.

In Blaize v. Concrete Strategies, L.L.C., for example, the District Court was asked to determine whether an employer lost the executive employee exemption as a result of the company’s failure to pay the employee for the final eight (8) days of work.  Id. 2009 WL 10679035 (E.D. La. Dec. 17, 2009).  In finding that the exemption was not lost, the District Court cited to Donavan v. Agnew, which held that, “where an executive employee is guaranteed a weekly salary, the employer’s failure to pay that employee during the final weeks of employment amounts to a breach of contract, but does not cause a previously exempt employee to become protected under the FLSA.”  Blaize v. Concrete Strategies, L.L.C., No. CV 09-3089, 2009 WL 10679035, at *3 (E.D. La. Dec. 17, 2009); Donavan v. Agnew, 712 F.2d 1509, 1517 (1st Cir. 1983); see Nicholson v. World Business Network, Inc., 105 F.3d 1361, 1365 (11th Cir. 1997) (refusing to turn a contract action for unpaid salary into an FLSA suit).  Accordingly, the court explained:

     Although Concrete Strategies has not paid Blaize for his last eight days of work, this, on its face, raises a claim of breach of contract, even if the reason behind its failure to pay was dissatisfaction the quality of Blaize’s work.

Blaize, 2009 WL 10679035, at *4.  Now, we move to the second prong of the test.

Management of General Business Operations

The second prong of the administrative exemption is met if the employer establishes that the employee’s primary duty is the performance of office or non-manual work that is directly related to the management of general business operations of the employer or the employer’s customers.  29 C.F.R. § 541.200(a).  To determine whether an employee meets this prong as a matter of fact and law, a court must make findings concerning the “historical facts” of the case, including the determination of an employee’s “day-to-day duties” that would constitute an employee’s “primary duty.”  Dalheim v. KDFW-TV, 918 F.2d 1220, 1226 (5th Cir. 1990).

The regulations define “primary duty” as “the principal, main, major, or most important duty that the employee performs” in view of all the facts and “with the major emphasis on the character of the employee’s job as a whole.”  29 C.F.R. § 541.700(a).  Generally, the employee’s primary duty is “what she does that is of principal value to the employer, not the collateral tasks she may also perform even if they consume more than half her time.”  Dalheim, 918 F.2d at 1227.  Some factors to be considered in determining the primary duty of an employee are:  (1) the relative importance of the exempt duties as compared with other types of duties; (2) the amount of time spent performing exempt work; (3) the employee’s relative freedom from direct supervision; and (4) the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.  Miller, 2014 WL 1909354, at *7, quoting 29 C.F.R. § 541.700(a).  Section 541.700(b) provides that, “[e]mployees who do not spend more than 50 percent (50%) of their time performing exempt duties may nonetheless meet the primary duty requirement if the other factors support such a conclusion.” 29 C.F.R. § 541.700(b).

As noted above, 29 CFR § 541.201(c) directly provides an exemption for “employees acting as advisors or consultants to their employer’s clients or customers (as tax experts or financial consultants, for example).”  As addressed in detail below, agents for personal insurance customers have been determined to be exempt.  Hogan v. Allstate Ins. Co., 361 F.3d 621 (11th Cir. 2004) (cited in Preamble to 2004 FLSA Regulations).  Similarly, registered representatives for individual investors, who also had to pass a test and become licensed, have been found by DOL to be exempt.  Accord WHD Opinion Letter FLSA2006-43 (Nov. 27, 2006).  What is important in context is that tax and financial consultants are in a special area where DOL has carved out a specific exemption in the regulations.

While there is a dearth of cases on this, the issue of the tax and financial consultant exemption in the context of Section 201(c) was addressed in Hein v. PNC Financial Services Group, Inc., 511 F.Supp.2d 563 (E.D. Penn. 2007).  In that case, Mr. Hein was a licensed financial consultant who did not sell the services at issue and did not participate in traditional management activities for the business.  Id., at 569.  As a financial consultant, he was primarily involved in collecting client information (business and individual clients), analyzing the information, and advising the client on the best course with their money.  Id.  Because of this, the Court determined that Mr. Hein’s work is “directly related to the management or general business operations of Defendants and Defendants’ customers.”  Id. at 572 (citing 29 C.F.R. 541.200(a)(2)).

The phrase “directly related to the management or general business operations” refers to the type of work performed by the employee.  29 CFR § 541.201(a).  To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.  Id.  Section 541.201(b) provides that, work “directly related to management or general business operations” includes, but is not limited to:

work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.

When an employee is primarily involved in producing the product of the company rather than servicing the company, the administrative exception does not apply. Miller, 2014 WL 1909354, at *11, quoting Villegas v. Dependable Constr. Servs., Inc., Civ. No. 4:07-cv-2165, 2008 WL 5137321, at *7 (S.D. Tex. Dec. 8, 2008); Foster v. Nationwide Mut. Ins. Co., 710 F.3d 640, 644 (6th Cir. 2013) (citing Schaefer v. Indiana Mich. Power Co., 358 F.3d 39 4, 402 (6th Cir. 2004)); Reich v. John Alden Life Ins. Co., 126 F.3d 1, 9 (1st Cir. 1997).  The Fifth Circuit has described this distinction as between “employees whose primary duty is administering the business affairs of the enterprise” and “those whose primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce or market.” Dalheim, 918 F.2d at 1230.

In the Preamble to it 2004 FLSA Regulations, the DOL explained that in the “modern workplace” the administrative/production dichotomy was still “a relevant and useful tool in appropriate cases,” but that it should not be used as “a dispositive test for exemption.” 69 Fed. Reg. 22122, 22141 [Emphasis added].  The DOL further explained that its view that the ‘‘production versus staff’’ dichotomy has always been illustrative—but not dispositive—of exempt status is supported by federal case law.  Citing to Bothell v. Phase Metrics, Inc., 299 F.3d 1120 (9th Cir. 2002), the DOL explained that the administrative/production dichotomy is “but one piece of the larger inquiry” and should be used “only to the extent that it clarifies the analysis.”  Id.  “Only when work falls ‘squarely on the production side of the line,’ has the administration/production dichotomy been determinative.”  Id.  (quoting Bothell, 299 F.3d at 1127; see also Proposed Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 68 Fed. Reg. 15560, 15566 (March 31, 2003) (stating that “[t]he ‘production versus staff dichotomy’ … is difficult to apply uniformly in the 21st century workplace” and “[t]he proposed rule would … reduce the emphasis on the so-called ‘production versus staff’ dichotomy in distinguishing between exempt and non-exempt workers”).

Some courts have also questioned whether this dichotomy is useful at all in the service context.  In Kohl v. Woodlands Fire Dept., 440 F.Supp.2d 626, 636 (S.D. Tex. 2005), the Court stated:

     The analytic difficulty of applying the production/administration distinction has led some courts to question whether the dichotomy is analytically helpful in the context of the modern service industries and to emphasize that the analogy applies in a particular case only to the extent that it ‘elucidates the phrase ‘work business operations.’ ” . . . The revised 2004 Department of Labor regulations have moved away from this dichotomy in the context of service related industries. “Only when the work falls ‘squarely on the ‘production’ side of the line,’ has the administration/production dichotomy been determinative.

Id, citing Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 1126, 1127 (9th Cir. 2002); Id. at 20-21, n. 8; see also 69 Fed Reg. 22141.  What is relevant to the determination of this exemption is an employee’s “actual day-to-day job activities,” not the labels or job title the employer places on those duties.  29 CFR § 541.2; Kohl v. Woodlands Fire Dep’t., 440 F. Supp. 2d 626, 634 (S.D. Tex. 2006); see Dalheim, 918 F.2d at 1226.

For example, in Hamby v. Associated Centers for Therapy, the Tenth Circuit affirmed a grant of summary judgment for the employer after it found that a “family advocate” working for an employer that primarily provided services for clients with mental health problems was an exempt employee under the administrative exemption.  230 Fed. App’x 772, 773, 2007 WL 458011, at 1 (10th Cir. Feb. 13, 2007).  As a family advocate, the employee’s day-to-day activities were to provide “targeted” support services to children by implementing a system of care that was child-centered and assisting in the prevention of an out-of-home child placement.  Id.  Employee’s day-to-day activities included:

“(1) [s]upport for the child and his/her family; (2) [b]e active member of the local teams; (3) [b]e a member of the family team to assist in the strengths and the assessment and care plan development; (4) [t]o mediate between the families and the professionals; (5) [a]t times provide transportation; (6) [t]o fill out and submit ‘flex forms’ for the families as needed; (7) [t]o attend or speak at conferences as needed and assigned by the Project Director; and, (8) [o]ther duties as assigned by the Project Director.”

Hamby, 230 Fed.Appx. at 783-84.  Hamby argued that she produced a commodity for Associated Centers for Therapy by carrying out the day-to-day operations of ACT.  Id. at 10.  In disagreeing with Hamby, the court explained:

“All of [Hamby’s] duties are the type of work that is directly related to assisting with the running or servicing of ACT. Hamby’s job required her to assist client families by advising and counseling them regarding their problems and by advocating for them in order to promote ACT’s goal of helping families of mentally ill children.  In providing support to these families, Hamby’s job duties cannot be likened to the type of work performed on a manufacturing production line or in selling a product in a retail or service establishment. Hamby’s work in providing services to the client families was not akin to production or sale of a commodity; rather, her work was directly related to the general business operations of ACT.”

230 Fed.Appx. at 783-84.

The result in Hamby for a social worker makes clear that the distinction between helping businesses or individuals is a meaningless distinction in the services context, especially where matters of such importance are at issue.  It is also meaningless in the financial services industry, particularly tax and financial consulting, where the decisions made by financial advisors are often for a company’s individual clients and can often impact an individual’s relative wealth even more than some business advice.  Consequently, the second prong of the administrative exemption can also be met if the employer establishes that the “employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers.”  29 C.F.R. § 541.201(c).  [Emphasis added].  For example, employees acting as advisers or consultants to their employer’s clients or customers (e.g., as tax experts or financial consultants) may be exempt.  Id.

In Zannikos v. Oil Inspections (USA), Inc., the Fifth Circuit made clear that any analysis that only considers whether the employee’s duties are related to the management of the employer is inappropriate, because such an approach “necessarily conflict[s] with 29 C.F.R. § 541.201(c)” and leads to an incomplete analysis.  Zannikos v. Oil Inspections (U.S.A.), Inc., 605 Fed.Appx. 349, 353 (5th Cir. 2015).  Section 541.201(c), which was designed to clarify the second element of the administrative exemption, “demonstrates that the performance of functions directly related to the management of an employer’s customers is sufficient, rather than merely necessary, to satisfy the second element of the exemption.”  Id., at 354.

The employees in Zannikos argued that the district court erred in concluding that they performed non-manual work that directly related to the general business operations of Oil Inspections’ customers.  Id., at 354.  The employees argued that, “employees who produce the precise service offered to customers by their employers are engaged in production.”  Id.  The employees claimed that their functions necessarily constitute production; because they were hired to produce the very product their employer sells and markets – oversight.  Id.  In rejecting the employees’ argument, the court noted:

“In effect, the plaintiffs are arguing that, even if their services do not constitute production in relation to Oil Inspections’ customers, it is sufficient that they constitute production in relation to Oil Inspections. The district court disagreed, noting that, in Cotten, ‘the court only considered whether [the employee’s] duties were related to the management of the employer, not the customer.’ The court concluded that this approach ‘necessarily conflict[s] with 29 C.F.R. § 541.201(c) ’ and leads to an incomplete analysis. We agree.”

Id.  The Fifth Circuit emphasized that the employees’ interpretation would render the administrative exemption largely meaningless, saying:

Many—perhaps most—employees whose primary duties directly relate to the management of customers perform the precise services offered by their employers. For example, tax experts, financial consultants, and management consultants, perform the precise services offered to customers by the accounting and consulting firms for which they work. Thus, under the plaintiffs’ interpretation, these employees should not fall under the administrative exemption. This result, however, conflicts with Section 541.201(c), which explicitly states that such employees satisfy the second element of the exemption. Likewise, the plaintiffs’ interpretation would insulate employees who perform work in the “functional areas” described in Section 541.201(b) from the exemption so long as the employer is in the business of providing those services. This result is also contrary to the regulatory text.

Id. at 354.

In the Preamble to 2004 FLSA Regulations, the DOL addressed commenters’ requests that it change the language of the then proposed Section 541.201(c).  69 Fed. Reg. 22122, 22142.  Specifically, the DOL noted that, commenter Karen Dulaney Smith urged the Department to “insert the word ‘business’ to clarify that the exemption does not apply to ‘individuals whose “business” is purely personal.’”  Id.  The Department did not make this change, explaining:

Nothing in the existing or final regulations precludes the exemption because the customer is an individual, rather than a business, as long as the work relates to management or general business operations.

Id.  Clearly, DOL had the opportunity to “clarify” the regulation as requested by the commenter, but it elected not to do so.

In AI 2010-1, the DOL attempts to use a restatement of Karen Dulaney Smith’s comments as a basis for adding the “purely personal” limitation to Section 541.201(c).  AI 2010-1, at p. 7.  The DOL noted –

As stated by commenter Smith, the exemption does not apply when the individual’s ‘business’ is purely personal, but providing expert advice to a small business owner or a sole proprietor regarding management and general business operations, for example, is an administrative function.

Id.  This commentary, however, should be given as much weight as it was given by the DOL when it was deciding on the final language for the regulation – which is to say, none.  The DOL received commenter Smith’s request, acknowledged the request, and then did nothing with the request.  As discussed above, a plain reading Section 541.201(c) demonstrates that there is no business/personal distinction regarding the nature of the “management . . . of the employer’s customers.”  See 29 C.F.R. §541.201(c).  As such, it is inappropriate to give any deference to the DOL’s post hoc attempt to limit the scope of the regulation in a manner that is inconsistent with both the plain language of the regulation and the regulation’s legislative history.

DOL also claimed in AI 2010-1 that its interpretation of Section 504.201(c) is supported by a “thorough review of the case law that has continued to develop on the exemption.”  Id. at p. 1.  Evidently, DOL’s review may not have been that thorough, as the DOL failed to include both Hogan v. Allstate Ins. Co. and Henry v. Quicken Loans, Inc. in its analysis of Section 504.201(c).  Instead, the DOL cites to two (2) cases (Talbot v. Lakeview Center, Inc., 2008 WL 4525012 (N.D. Fla. Sept. 30, 2008 and Bratt v. County of Los Angeles, 912 F.2d 1066 (9th Cir. 1990)) and three (3) opinion letters (FLSA2005-21, FLSA2005-30, and FLSA 2007-7) that fail to provide analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

In Hogan, the Eleventh Circuit was asked to review the lower court’s ruling that Allstate insurance agents were “administrative employees,” exempt from the FLSA’s overtime requirements.  Hogan v. Allstate Ins. Co., 361 F.3d 621 (11th Cir. 2004).  Allstate would create and provide to customers a variety of insurance products, including car, home, property, boat, commercial, renter’s, life, and comprehensive personal liability insurance.  Id., at 624.  The employees were Neighborhood Office Agents (“NOA”), whose chief duties were to promote and to sell Allstate’s insurance products, to advise and to service customers and potential customers, and to oversee the operation of their office and staff.  Id., at 624.

In affirming the district court’s ruling, the court held that the employees’ primary duty was office or non-manual work directly related to management policies or general business operations of Allstate or its customers.  Id., at 627.  The court explained:

Construing the evidence and inferences therefrom in the light most favorable to plaintiffs, test plaintiffs spent the majority of their time servicing existing customers. Their duties included promoting sales, advising customers, adapting policies to customer’s needs, deciding on advertising budget and techniques, hiring and training staff, determining staff’s pay, and delegating routine matters and sales to said staff. These duties are similar to administrative, rather than production, tasks. See Reich v. John Alden Life Ins. Co., 126 F.3d 1, 9–10 (1st Cir.1997) (deciding that “production” duties involve the development of an insurance policy, not the sale of the policy itself); Wilshin v. Allstate Ins. Co., 212 F.Supp.2d 1360 (M.D.Ga.2002) (finding Allstate insurance agents to be administrative employees).”

Hogan, 361 F.3d at 627.  [Emphasis added].  The holding in Hogan stands in the face of AI 2010-1’s “purely personal” limitation, as the fact that the NOA’s were providing services to Allstate’s customers for personal matters did not prevent the court from finding that employees were exempt.

In Henry, the Sixth Circuit affirmed a jury verdict that “mortgage bankers” were bona fide administrative exempt employees.  Henry v. Quicken Loans, Inc., 698 F.3d 897 (6th Cir. 2012).  According to Quicken, mortgage bankers performed a variety of roles:  (1) “collecting and analyzing the relevant information from our Clients concerning their financial status”; (2) “understanding our Clients’ objectives, goals and needs”; (3) “educating and advising our Clients on the entire financing process”; and (4) closing loans.  Id., at 898.  The mortgage bankers, by contrast, insisted they were glorified salesmen.  Id., at 899.  The mortgage bankers pointed to letters and internal memos that identify the mortgage bankers as a “sales force” and encourage them to “SELL SELL SELL.”  Id.  According to the mortgage bankers, their daily routines were largely prescribed by a two (2)-page document that outlines a ten (10)-step process for developing business.  Id.

In determining whether the mortgage bankers were exempt, the court first looked to whether the jury’s findings on the second element of the administrative exemption were “seriously erroneous.”  Id., at 899-900.  The court noted that to satisfy the “management-related prong” the employee’s “primary duty” must involve “work directly related to the management or general business operations” of the company or its customers.  29 C.F.R. 541.200(a)(2).  Id., at 899.  The court then cited to Section 541.201(b)’s guidance for determining whether a financial-services employee fits within the exemption –

Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing, or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

Id., at 899–900 (quoting 29 C.F.R. § 541.201(b))

The court held that the jury acted “well within its bounds” in finding that the employees’ duties met the requirements of the administrative exemption’s second prong.  This holding stands in the face of AI 2010-1, as the court determined that the result was not “seriously erroneous” even though employees’ duties clearly include advising Quicken’s customers on purely personal matters.  See also Hein v. PNC Fin. Servs. Grp., Inc., 511 F. Supp. 2d 563, 569 (E.D. Pa. 2007) (court found that employee’s primary duty, which included advising the company’s clients on personal financial matters, met the second element of the administrative exemption).

In AI 2010-1, the DOL inaccurately cites to Talbott as the supporting authority for the “purely personal” limitation.  AI 2010-1, at p. 7.  First, Talbott does not include a meaningful analysis of Section 541.201(c).  Moreover, Talbott fails to recognize that the plain language of Section 541.201(c) does not require that the employee assist the employer’s customer on business-related matters.

In Talbott, the court found that the administrative exemption did not apply to the employees. Talbott, 2008 WL 4525012.  With regard to its analysis of the second prong of the exemption, the court focused only on Sections 541.201(a) and (b), concluding that, “defendant has not met its burden of showing . . . that plaintiffs have assumed duties that are directly related to… management or general business operations.”  [Emphasis added].  Id. at *4-6.  The court’s discussion of 541.201(c) was limited to dicta in footnote 5 –

The regulation also provides that the employee’s work may be directly related to the general business operations of “the employer’s customers.” 29 C.F.R. § 541.200(a)(2). The court does not find this provision relevant because even if Lakeview’s foster clients are “customers,” they do not have “general business operations.”

 Id., at n. 5.  Even if this comment were accepted as an analysis of Section 541.201(c), it is a conclusory and incomplete analysis.  Moreover, the court’s dicta fails to recognize that the plain language of Section 541.201(c) does not require that the employee assist the employer’s customer on business related matters.  Indeed, it refuses to consider the situation where the business operations at issue are those of the employer, as well, in implementing its—and each employee’s—fiduciary or contractual duties to the clients.  As such, Talbott fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Bratt is also misplaced, as Bratt does not address the questions raised by an analysis of Section 541.201(c).  In Bratt, six (6) of the employees at issue were employed by the County’s Probation Department as Deputy Probation Officers II (“DPO II”).  Bratt, 912 F.2d at 1067.  The DPO II’s would, “conduct factual investigations for, and make recommendations to, County courts, either to aid in sentencing an adult offender or to determine whether and how to detain a minor who has been arrested.”  Id.  The County argued that, employees’ duties were “more akin to those of advisory specialists or consultants such as stock brokers or insurance claim agents and adjusters,” thus, servicing the business of the courts by advising the management.  Id. at 1069-1070.  The Ninth Circuit disagreed, stating:

Accordingly, to the extent that probation activities can be analogized to a business, the work of the DPO II Employees primarily involves the day-to-day carrying out of the business’ affairs, rather than running the business itself or determining its overall course or policies.

 Id. at 1070.

As to the County’s argument that the employees were servicing the business of the court, the Ninth Circuit also disagreed.  The court explained:

The use of stock brokers and insurance claims agents and adjusters in § 541.205(c)(5) as examples of employees who are “servicing” a business is not inconsistent with the language of the regulations. To the extent that these employees primarily serve as general financial advisors or as consultants on the proper way to conduct a business, e.g., advising businesses how to increase financial productivity or reduce insured risks, these employees properly would qualify for exemption under this regulation. Here, although probation officers provide recommendations to the courts, these recommendations do not involve advice on the proper way to conduct the business of the court, but merely provide information which the court uses in the course of its daily production activities.

 Id.  The foregoing discussion focuses only on whether the employers established that the requirements of Section 541.201(a) were met.  The Ninth Circuit apparently did not have cause to analyze the question of whether the employee’s “primary duty was the performance of work directly related to the management or general business operations of the employer’s customers.”  See 29 C.F.R. §541.201(c).  As such, Bratt fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Opinion Letter FLSA2005-21 is also misplaced, as the letter does not address the questions raised by an analysis of Section 541.201(c).  WHD Opinion Letter FLSA2005-21.  In FLSA2005-21, WHD was asked to provide an opinion “concerning the applicability of the administrative exemption  . . . to background investigators . . .”  Id.  Although WHD quotes Section 541.201(c) in its entirety, the WHD’s analysis was focused on Section 541.201(a).  Id.  After applying the facts presented to Section 541.201(a), the DOL concludes as follows:

“We believe that the activities performed by Investigators employed by your client are more related to providing the ongoing, day-to-day investigative services, rather than performing administrative functions directly related to managing your client’s business.  From the information provided in your letter, it appears that the primary duty of the Investigator is diligent and accurate fact-finding, according to DSS guidelines, the results of which are turned over to DSS who then makes a decision as to whether to grant or deny security clearances. Such activities, while important, do not directly relate to the management or general business operations of the employer within the meaning of the regulations.”

Id., at p. 4.  As the Ninth Circuit did in Bratt, the WHD’s analysis only answers whether the employee’s primary duty is directly related to the management or general business operations of the employer.  As such, FLSA2005-21 fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Opinion Letter FLSA2005-30 is also misplaced as the letter’s analysis is focused on the employee’s duties, and not on the identity of the employee.  WHD Opinion Letter FLSA2005-30.  In FLSA2005-30, WHD was asked to provide an opinion on whether a “Regional Advocate” can be considered an exempt administrative employee.  Id., at p. 1.  The following is a description of the Regional Advocate’s duties:

The Regional Advocate is responsible for advocating for services for people with disabilities.  The Regional Advocate represents the wishes and desires of a client and must do so in accordance with national protection and advocacy standards.  The Regional Advocate’s duties include keeping informed of changes in federal/state laws, regulations, policies, and court orders affecting persons with disabilities. The Regional Advocate maintains full and accurate documentation of all clients assigned, and prepares and provides regular monthly reports of assigned cases to the Data Report Specialist and other management personnel.  The Regional Advocate is also responsible for investigating and acting upon complaints of abuse or neglect, directly advises the Lead Advocate on matters relating to the client’s concerns, and participates in client case reviews.  Furthermore, the Regional Advocate is responsible for representing the employer in outside forums, committees, and work groups as assigned by the Program Director.  The Regional Advocate does not supervise other employees.

Id.

WHD concluded that a Regional Advocate does not meet the criteria to qualify as an exempt administrative employee.  Id. at p. 2.  The WHD explained –

[T]he Regional Advocate is not primarily tasked with performing any of the management or general business operational areas described in 29 C.F.R. 541.201(b); nor is the Regional Advocate primarily tasked with providing administrative services to the employer’s customers as contemplated in 29 C.F.R. 541.201(c).  Based on this analysis, we conclude that a Regional Advocate’s job function does not satisfy the requirement that the primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.  See Opinion Letter dated March 5, 1999 (finding that employees in the positions of intake coordinator, program coordinator and assisted living coordinator for individuals with disabilities are engaged in production work and, therefore, do not qualify for the administrative exemption); Opinion Letter dated March 30, 1999 (finding social workers/counselors of a social service agency do not qualify for the administrative exemption).

Id.  As mentioned, the letter’s analysis is clearly focused on employee’s duties, and not – as the DOL suggests – on the identity of the employer’s customer.  After addressing the Regional Advocate’s duties, WHD lumps Section 541.201(b) and Section 541.201(c) together to explain that Regional Advocate does not perform the required administrative functions.  Id.  The analysis does not turn on the identity of the customer.

The DOL’s reliance on Opinion Letter FLSA2007-7 is also misplaced as the letter does not address the questions raised by an analysis of Section 541.201(c).  WHD Opinion Letter FLSA2005-21.  In FLSA2007-7, WHD was asked to provide an opinion on whether the administrative exemption applied to Case Managers.  Id.  WHD concluded that the described Case Managers did not qualify for the administrative exemption.  Id.  The DOL provided the following explanation:

After reviewing the information you provided, we believe that the activities performed by Case Managers employed by your client are more related to providing the Company’s ongoing, day to-day case management services for its consumers, which involves duties such as assessing costs of care, preparing a plan of care, and identifying and implementing services to meet the consumers’ needs, rather than performing administrative functions directly related to managing either your client’s business or any business of your client’s customers. A Case Manager is not primarily tasked with performing duties in any of the management or general business functional areas described in 29 C.F.R. § 541.201(b); nor is the Case Manager primarily tasked with providing administrative services to the employer’s customers as contemplated in 29 C.F.R. § 541.201(c).

 Id., at pp. 2-3.

In providing its opinion, however, the DOL failed to make clear what it was relying on, or referring to, when it alluded to the “contemplated” application of Section 541.201(c).  Presumably, the DOL is referring to the following quoted excerpt from Preamble:

With regard to the type of work performed, the preamble to the Department’s 2004 revisions to the Part 541 regulations explains that “the administrative exemption covers only employees performing a particular type of work—work related to assisting with the running or servicing of the business.”

Id. (citing to 69 Fed. Reg. 22,122, 22,141.)  The DOL, however, failed to accurately quote the preamble.  The full quote is as follows:

Based on these principles, the Department provided in proposed section 541.201(a) that the administrative exemption covers only employees performing a particular type of work—work related to assisting with the running or servicing of the business.

69 Fed. Reg. 22122, 22141.  [Emphasis added].  As such, the quoted excerpt only addresses the “contemplated” application of Section 541.201(a).  It does not address Section 541.201(c).   Moroever, if DOL was relying on the plain text of the regulation, then, as discussed above, such an interpretation is unsupported.

The foregoing discussion demonstrates that DOL failed to provide any authority containing a pertinent analysis that might support its post hoc attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.  Moreover, it makes little practical or business sense.  In the Preamble, the DOL provided guidance regarding the analytical focal point when determining whether the administrative exemption applies.  The DOL states, “[t]he final rule distinguishes the exempt and the nonexempt financial service employees based on the duties they perform, not on the identity of the customer they serve.”  69 Fed. Reg. 22122, 22146.  The DOL goes on to explain, “[f]or example, a financial services employee whose primary duty is gathering and analyzing facts and providing consulting advice to assist customers in choosing many complex financial products may be an exempt administrative employee.”  Id.  It is certainly no coincidence that the DOL used the “financial services” employee to illustrate the significance of focusing the analysis on the duties performed by the employee rather than the identity of customer served.  As explained by the DOL, financial services often require an employee to analyze complex matters, and often require an employee to make decisions or offer advice on matters of substantial significance to the customer.  Of course, the rendering of complex financial services (e.g. advice or consultation) that are of substantial significance can occur in either a personal or business context.  In either scenario, the complexity of the financial advice need not necessarily change.  This is why the Preamble to DOL’s 2004 FLSA Regulations instructs us to look at the employee’s duties and not at the identity of the customer.

Discretion and Independent Judgment On Matters of Significance

The third and last prong of the administrative exemption is met if the employer establishes that the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.  29 C.F.R. § 541.200(a)(3); 29 C.F.R. 541.202(a).  In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.  29 C.F.R. 541.202(a).  “The term ‘matters of significance’ refers to the level of importance or consequence of the work performed.”  Talbert v. American Risk Insurance Company, Inc., 405 Fed. Appx. 848, 853, quoting 29 C.F.R. § 541.202(a).

The phrase “discretion and independent judgment” must be applied in the light of all the facts involved in the particular employment situation in which the question arises.  29 C.F.R. § 541.202(b).  Factors to consider for this determination include, but are not limited to, whether an employee has authority to formulate, affect, interpret, or implement operating practices; whether an employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business; and whether the employee has authority to waive or deviate from established policies and procedures without prior approval.  Id.  However, a case-by-case analysis is required for this determination. See McKee v. CBF Corp., 299 Fed.Appx. at 429.  For example, in Haywood v. North American Van Lines, the Seventh Circuit upheld the administrative exemption where an employee could negotiate on behalf of the employer with some degree of settlement authority, conduct independent investigation, and had authority to deviate from established procedures without prior approval.  Haywood v. North American Van Lines, 121 F.3d 1066, 1071–73 (7th Cir. 1999).

While the exercise of discretion and independent judgment implies that the employee has the authority to make an independent choice, free from immediate direction, an employee may exercise discretion even if his decisions are reviewed, revised, or reversed at a higher level.  29 CFR § 541.202(c); Cheatham v. Allstate Ins. Co., 465 F.3d 578, 585 (5th Cir. 2006).  Thus, the term “discretion and independent judgment” does not require that the decisions made by an employee have a finality that goes with unlimited authority and a complete absence of review.  29 C.F.R. § 541.202(b); Lott, 203 F.3d at 331.  The decisions made as a result of the exercise of discretion and independent judgment may consist of recommendations for action rather than the actual taking of action.  29 C.F.R. § 541.202(c).  The fact that an employee’s decision may be subject to review and that upon occasion the decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment.   29 C.F.R. § 542.202(c).

The regulations also explain that the use manuals or guidelines do not preclude a finding that the employee exercised discretion and independent judgment.  29 C.F.R. §541.704; Cheatham, 465 F.3d at 585.  Section 541.704 provides as follows:

The use of manuals, guidelines or other established procedures containing or relating to highly technical, scientific, legal, financial or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills does not preclude exemption under section 13(a)(1) of the Act or the regulations in this part.  Such manuals and procedures provide guidance in addressing difficult or novel circumstances and thus use of such reference material would not affect an employee’s exempt status.  The section 13(a)(1) exemptions are not available, however, for employees who simply apply well-established techniques or procedures described in manuals or other sources within closely prescribed limits to determine the correct response to an inquiry or set of circumstances.

Id.  Further, the “fact that many employees perform identical work, or work of the same relative importance, does not mean that the work of each such employee does not involve the exercise of discretion and independent judgment.”  29 CFR § 541.202(d).

In Cheatham, the Court noted that “consult[ation] with manuals or guidelines does not preclude the[ ] exercise of discretion and independent judgment.”  Cheatham, 465 F.3d at 585 (citation omitted).  The Court then went on to enumerate the ways in which the insurance adjusters being considered exercised discretion, despite consulting claims manuals, including “determining coverage, conducting investigations, determining liability and assigning percentages of fault to parties, evaluating bodily injuries, negotiating a final settlement, setting and adjusting reserves based upon a preliminary evaluation of the case, investigating issues that relate to coverage and determining the steps necessary to complete a coverage investigation, and determining whether coverage should be approved or denied.”  Id. at 586; see also Id. at 585 n. 7.

Such investigatory and evaluative functions clearly extend beyond the observation of processes, enforcement of standards, and reporting of noncompliance.  Zannikos, 605 Fed.Appx at 359.  Indeed, while claims manuals may inform assignments of fault, injury evaluations, settlement negotiations, and other aspects of the claims process, they seldom dictate the results in absolute terms or obviate the need to evaluate possible courses of action.  Id.  (citing McAllister v. Transamerica Occidental Life Ins. Co., 325 F.3d 997, 1001 (8th Cir.2003)).  This type of discretion is what led DOL to recently find that Client Service Managers who are professional, licensed insurance agents and advisors are administratively exempt.  DOL Op. FLSA2018-8 (January 5, 2018).  An employer’s volume of business may also make it necessary to employ a number of employees to perform the same or similar work.  The fact that many employees perform identical work, or work of the same relative importance, does not mean that the work of each such employee does not involve the exercise of discretion and independent judgment with respect to matters of significance.  29 C.F.R. § 541.202(d).

Conclusion

As stated at the outset, the purpose of this article was to explain the current state of the FLSA administrative exemption in the context of tax and financial consultants, and recommend a framework for their review.  While we’ve tried to be thorough, it is always appropriate to consult a knowledgeable attorney in this complex and evolving area of the law, especially with respect to your company’s unique business model and employee policies.  The attorneys at the Wage and Hour Defense Institute have this expertise, are committed to the defense of employers, and can advise them on their rights and responsibilities in their wage and hour practices.

California Court Rules Employers That Require Employees to Call in Before Scheduled Shifts Must Pay Them

On February 4, 2019, the California Court of Appeal held employers that require employees to call in to work two hours before scheduled “on-call” shifts to find out whether they need to report to work trigger California’s “reporting time” pay requirements.

Clothing retailer Tilly’s, Inc. scheduled its retail store employees to work both regular and “on-call” shifts.  Employees were required to call their stores two hours before the start of their on-call shifts to determine whether they were needed to work those shifts.  Tilly’s told its employees to consider on-call shifts as “a definite thing” unless they were advised they did not need to come in to work.

A former Tilly’s employee filed a putative class action alleging Tilly’s owed her and other employees reporting time pay for on-call shifts.  The employee’s argument was based on Wage Order No. 7-2001, which applies to the retail industry.  That wage order requires employers to pay “reporting time pay” to employees for each workday “an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work.”  The reporting time pay requirement is “half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours.”

The trial court ruled in favor of Tilly’s, holding that calling in to ask whether to report for work did not constitute “reporting for work.”   But on Monday the Court of Appeal reversed, concluding that requiring employees to call in to work two hours before scheduled on-call shifts falls within the definition of “reporting to work” and therefore triggers the reporting time pay provisions.  Under this holding, the employer would be required to pay the employee for at least half of the on-call shift (up to four hours), even if the employee did not work that amount of time.

The Court reasoned that by scheduling employees for on-call shifts and not informing them whether they would be required to work until two hours before those shifts, Tilly’s effectively deprived the employees of the ability to schedule other work or make plans for personal activities, and this was “precisely the kind of abuse that reporting time pay was designed to discourage.”

Although this decision was limited to Wage Order No. 7-2001, which governs retail employees, similar reporting time pay provisions are found in other wage orders.  California employers who need employees to be on call should examine their practices.  The critical element in this case was Tilly’s practice of requiring all on-call employees to call in prior to their shifts, which the court held was effectively requiring the employees to report to work.  If Tilly’s did not require such an effort from its employees, but instead only called off the employees that it determined were not needed to work, the court’s result may well have been different.  Accordingly, if a California employer needs to have employees on call, but does not want to pay reporting time pay, it should not require any pre-shift action by employees, but instead should have supervisors contact only those employees who are not required to come to work.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP