Massachusetts SJC Limits Wage Act Liability for Board Members and Investors

In late December 2017, the Massachusetts Supreme Judicial Court (SJC) issued an important decision limiting the scope of personal liability under the Massachusetts Wage Act. In Andrew Segal vs. Genitrix, LLC, the SJC held that personal liability under Wage Act violations extends only to a company’s president, treasurer and “officers or agents having the management” of the company. As such, the Wage Act does not impose personal liability on board members acting only in their capacity as board members and investors engaged in ordinary investment activities.

The Segal case arose out of an arrangement between an inventor and investors. The plaintiff assigned all of his intellectual property to a new limited liability company (LLC) and in exchange became president and CEO of the LLC. Eventually, the LLC began to have serious difficulties, leading the plaintiff to decide to stop taking a paycheck from the LLC. Ultimately, proceedings for judicial dissolution of the LLC were instituted, and the plaintiff continued to work for the company through this period without pay. Near the end of the dissolution process, the plaintiff demanded payment for his work from the company’s board and investors. When they declined, the plaintiff brought a lawsuit against the LLC (now dissolved) and against several board members and investors under the Wage Act.

Looking at the language of the Wage Act, the SJC held that the defendants could only be personally liable if they fell within one of the express categories of corporate actors identified in the statute: the president, treasurer, or “officers or agents having the management” of the company. Because neither of the defendants had served as president or treasurer of the company and, and were not officers of the company, they could be held personally liable under the Wage Act only if they were “agents having the management of the corporation.”

Interpreting this statutory language for the first time, the SJC applied the common law of agency and concluded that, although they exercise some control of the business, investors and board members exercising their ordinary duties do not act as “agents” of the company. The SJC did not foreclose the possibility that a board member or investor could face personal liability as an agent of the company. However, for investors or board members to be “agents,” they must be appointed as agents separately and distinctly from their ordinary duties as a board member or investor. In Segal, the LLC agreement expressly stated that investors did not have agency authority, and while one investor had the right to enforce the President and CEO’s employment agreement by insisting on his termination after two years, the SJC held that this power alone did not make him an agent for Wage Act purposes.

The SJC further found that board members and investors did not have “management” of the company. Ultimately, the plaintiff made the decision whether to pay employees, including himself. The board and investors played no role in that process. The court emphasized that investors’ and board members’ ordinary oversight of finances and high-level corporate matters did not constitute control over management of the company. Because the plaintiff could not demonstrate any unusual involvement in corporate finance and payroll decisions, he could not hold the investors and board members liable under the Wage Act.

The Segal decision provides board members and investors in Massachusetts the comfort of knowing that they will not face personal liability for unpaid wages – and the automatic trebling of damages that comes with Wage Act violations – so long as they are acting in their ordinary capacities as board members and investors. Still, employers should review their corporate organizational documents and agreements to ensure that these individuals have not been delegated management or agency powers that could qualify them as “employers” under the Wage Act. In addition, board members and investors should carefully consider taking on roles within an organization apart from their capacities as board members or investors, as such roles could expose them to potential Wage Act liability.

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The DOL’s Wage & Hour Division “Dusts-Off” Shelved Opinion Letters

By Robert A. Boonin, Dykema Gossett PLLC, rboonin@dykema.com

In 2009, shortly after the prior administration first took office, it pulled-back 17 Wage & Hour Opinion Letters that were finalized near the end of the Bush Administration. On January 5, 2018, the DOL republished all of those Opinion Letters, and by doing so, the DOL has firmly gotten back into the Opinion Letter business.

THE USE AND HISTORY OF WAGE AND HOUR OPINION LETTERS

The FLSA provides that opinions issued by the Wage and Hour Administrator, if relied upon by employers and if directly applicable to the employers’ circumstances, are absolute defenses to claims for back pay and liquidated damages for overtime violations.   In other words, if the Opinion Letter applies AND was relied upon, the employer can get a “free pass” even if the DOL is later found by a court to have reached the wrong opinion. Thus, for decades, the availability and use of Opinion Letters had been widely used and served to not only limit liability, but perhaps more importantly, allowed employers to be assured that – at least in the DOL’s opinion – a pay plan being used or considered was consistent with the FLSA’s often-times nuanced provisions.

In 2009, as the Bush Administration was winding down, the Wage and Hour Administrator announced that it was publishing a number of Opinions, Opinions that had been pent-up in the process for being finalized. Almost immediately after taking office, though, the Obama administration put a hold on or withdrew many of those Opinions, and its “hold” was never released. The DOL did not issue any FLSA Opinion Letters thereafter, and in March 2010, the new Wage and Hour Administrator announced that Opinion Letters would no longer be provided. Instead, the DOL announced, it would only periodically issue Administrator Interpretations (AIs) on the FLSA, and these AIs would be more generic in form than the fact-specific Opinions previously issued.

THE OPINION LETTER CONCEPT IS RESTORED BY SECRETARY ACOSTA

Soon after taking office last year, Labor Secretary Acosta announced that he would be restoring the use of Opinion Letters. This announcement was welcomed by many in the employer, and even some in the employee, community since these letters do provide a level of certainty needed as play plans are developed, particularly pay plans that are creative or being adjusted to reflect the realities of the modern economy. On January 5, 2018, the DOL delivered on the Secretary’s promise and activated all 17 Opinions put on hold in 2009.

Among the new Opinions are:

  • A clarification that deductions are permissible to salaries of a salaried/exempt employee, in that if the employee is absent for a full-day but only has a partial day of paid leave available to cover the absence, the employee can be docked for the balance of the day (FLSA2018-14);
  • If job bonuses are provided for a day’s work, that bonus must be rolled into the employees’ regular rates of pay for overtime pay calculation purposes (FLSA2018-11);
  • When calculating a year-end bonus as a percentage of all straight time and overtime earned over the year, the employer can exclude previous payments made that are otherwise excludable from the regular rate of pay (FLSA2018-9);
  • School athletic coaches who are volunteers or are not otherwise employed by the school in an non-teaching capacity, may be treated as exempt from the Act’s pay requirements since they are effectively still exempt “teachers” under the Act (FLSA2018-6);
  • On call time spent by ambulance personnel who work 30 hours per week, but who may be on call for another 40 hours, is not compensable in light of the frequency of calls and the time needed to take the calls, and that conclusion is not changed by the fact that the personnel have to appear when called within 5 minutes and in uniform, in light of the totality of the facts presented (FLSA2018-1); and
  • Based on the facts present, the follow employees were viewed as being exempt from overtime pay: construction project superintendents (FLSA 2018-4), client service managers for an insurance company (FLSA2018-8), and consultants, clinical coordinators, coordinators and business development managers employed by a medical staffing company (FLSA2018-12), but helicopter pilots were found to be nonexempt (FLSA2018-3).

It is anticipated that new Opinion Letters will be published in the near future, particularly once a new Wage and Hour Administrator is confirmed by Congress.

U.S. Department of Labor Revision of Intern Test Provides Clarity for Employers

On Friday, January 5, 2018, the U.S. Department of Labor (“DOL”) adopted a revised view of what constitutes an “intern” for private sector employers. In short, this revised guidance makes it much easier for employers to take on unpaid interns without incurring substantial risk that the DOL will later find those supposed interns actually were employees who are entitled to back pay. Going forward, the DOL will use the “primary beneficiary” test, which was adopted by several appellate courts to determine whether interns are employees under the FLSA.

Prior to the January 2018 revision, the DOL took the position that internships in the “for profit” private sector most often constitute employment for which compensation is due under the Fair Labor Standards Act. A narrow exception existed if an employer could show that:

  1. The internship, even though it included actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer providing the training derives no immediate advantage from the activities of the intern; on occasion the employer’s operations actually may be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Under this prior set of criteria, it was the employer’s burden to prove all six criteria existed for any supposed interns. And, if the employer was unable to do so, it subjected itself to potential significant back pay liabilities. The net result of the rule was that internships became nearly impossible to find in the for-profit private sector; as such, employers simply were not willing to subject themselves to potential liability in order to have internships available.

This has changed under the new rule. Under revised Fact Sheet #71 (which governs the rules that will be applied by the DOL in examining internship programs), the “primary beneficiary test” applied by many federal courts has been expressly adopted. Under the primary beneficiary test, the question is what the “economic reality” of the internship is so that a determination can be made about who enjoys the primary benefit of an internship. In making that determination, seven factors are considered:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee, and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

This is a more flexible test, in which no one factor is determinative. Rather, the DOL and the courts will consider the facts and circumstances of each internship independently to determine whether it is a disguised employment relationship.

Importantly, the new test should not be interpreted to give employers carte blanche to classify all students working over a summer as interns. That is clearly not the intent, and doing so will likely result in significant liabilities to the overreaching employer. However, the new test clarifies substantially the factors that an employer must consider in making the decision about how to classify an intern and makes intern status much easier for employers to achieve.

In any event, we strongly recommend that any unpaid internship program be reviewed by counsel; they are not without risk. Of course, the risk can be avoided if the “interns” are paid at least the minimum wage, and IF they work overtime, they’re paid the required overtime premium.

Prepared by Jim Hermon of Dykema, jhermon@dykema.com

California Agency Issues New Guidance Stating Employers May Not Require Employees to Remain On-Site During Rest Breaks

California’s Division of Labor Standards Enforcement (DLSE) recently updated its guidance on paid 10-minute rest breaks.  In its new guidance the DLSE maintains, for the first time, that an employer may not require its employees to remain on the employer’s premises during rest breaks.

In November 2017 the DLSE posted on its website new Frequently Asked Questions (FAQs) addressing requirements for rest breaks and lactation accommodation.  That new guidance includes the following:

5. Q. Can my employer require that I stay on the work premises during my rest period?

A: No, your employer cannot impose any restraints not inherent in the rest period requirement itself.  In Augustus v. ABM Security Services, Inc., (2016) 5 [sic] Cal.5th 257, 269, the California Supreme Court held that the rest period requirement “obligates employers to permit—and authorizes employees to take—off-duty rest periods.  That is, during rest periods employers must relieve employees of all duties and relinquish control over how employees spend their time.” (citation omitted)  As a practical matter, however, if an employee is provided a ten minute rest period, the employee can only travel five minutes from a work post before heading back to return in time.

The new DLSE FAQs in their entirety can be found here.  In the Augustus v. ABM Security Services case cited by the DLSE, the California Supreme Court held that employees cannot be required to remain on-call during rest breaks, but did not expressly say employers must allow their employees to leave the employer’s premises during rest breaks.  For more information on the Augustus case see our December 27, 2016 blog post.

Prior to the DLSE’s new FAQs, it was widely understood that employers may require their employees to remain on-site during rest breaks.  While the DLSE has no authority to make law, it is empowered to enforce California wage orders and labor statutes, and courts often find the DLSE’s opinions on enforcement issues persuasive.  For this reason California employers should take the DLSE’s new guidance seriously.

As the DLSE pointed out in its new FAQs, the realities of time and distance are likely to discourage many employees from leaving their employer’s premises during 10-minute rest breaks, even when allowed to do so.  However, an employer’s policy that purports to prohibit employees from leaving the employer’s premises during rest breaks could, under the DLSE’s new interpretation, potentially support a conclusion that the employer failed to relieve its employees of all duty during rest breaks, and subject the employer to liability.  California employers should therefore review their policies and practices to ensure they are not requiring employees to remain on the employer’s premises during rest breaks.

New California Law Makes Contractors Liable for Subcontractors’ Unpaid Wages

On October 14, 2017, California Governor Jerry Brown signed into law Assembly Bill 1701, which will make general contractors on private construction projects liable for their subcontractors’ failure to pay wages due to the subcontractors’ employees.  The new law applies to contracts entered into on or after January 1, 2018.

Assembly Bill 1701 adds Section 218.7 to the California Labor Code.  Subdivision (a)(1) provides:

For contracts entered into on or after January 1, 2018, a direct contractor making or taking a contract in the state for the erection, construction, alteration, or repair of a building, structure, or other private work, shall assume, and is liable for, any debt owed to a wage claimant or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the direct contractor for the wage claimant’s performance of labor included in the subject of the contract between the direct contractor and the owner.

The direct contractor’s liability under Section 218.7 will extend only to any unpaid wages, fringe or other benefit payments or contributions, including interest, but will not extend to penalties or liquidated damages.

Employees will not have standing to enforce the new law.  Only the California Labor Commissioner, a third party owed fringe or other benefit payments or contributions on a wage claimant’s behalf (such as a union trust fund), or a joint labor-management cooperation committee may bring a civil action against a direct contractor for the unpaid wages.   A joint labor-management committee must provide the direct contractor with at least 30 days’ notice by first-class mail before filing the action.

A prevailing plaintiff in any such action is entitled to recover its reasonable attorneys’ fees and costs, including expert witness fees.  The property of a direct contractor that has a judgment entered against it may be attached to satisfy the judgment.

The new law authorizes a direct contractor to request from its subcontractors their employees’ wage statements and payroll records required to be maintained under Labor Code section 1174.  The payroll records must contain information “sufficient to apprise the requesting party of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.”   Direct contractors and subcontractors also have the right to request from any lower tier subcontractors “award information that includes the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project.”   A direct contractor may withhold as “disputed” all sums owed if a subcontractor does not timely provide the requested information, until such time as that information is provided.

Given this new law, general contractors operating in California should be even more careful than before about the subcontractors they hire, and pay particular attention to the subcontractors’ ability and willingness to comply with all applicable wage and hour laws.  This includes requirements to provide timely meal and rest periods, because meal and rest period premiums qualify as wages.  General contractors should also ensure their subcontractor agreements require the subcontractors to indemnify the general contractor for any liability arising from the new law.  Once a project is underway, general contractors should closely monitor their subcontractors’ compliance with wage and hour laws and fringe benefit payments, and where necessary exercise their right to request payroll records from subcontractors to ensure they are timely paying all required wages and fringe benefits.

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

FLSA Regulations Dealt a Knock-Out Blow

This past November, a federal court issued a preliminary injunction halting the implementation of the proposed changes to the FLSA’s overtime exemptions just before they were to take effect on December 1. On August 31, 2017, the same court issued another decision definitively holding that the Department of Labor exceeded its authority in issuing those regulations and thereby permanently enjoining them. In doing so, the court clarified its prior holding and gave the new Administration a clear license to go back to the drawing board and draft new regulations consistent with the underlying law.

The November preliminary injunction was in response to a case brought by 21 states. At that time, a companion case also challenging the legality of the new regulations was pending before the same court. That case was brought by a variety of business groups and chambers of commerce from across the nation, spearheaded by the U.S. Chamber of Commerce. The business groups had filed a motion for summary judgment in its case last year, but the court did not rule on that motion until last week. The states joined in that motion, and therefore the ruling applies to both cases before that court.

While granting the business groups’ motion for summary judgment, the court concluded that the Department of Labor had exceeded its authority. The primary basis for its holding is that the new salary level (i.e., $47,476)—which was more than double the salary level in the existing regulations (i.e., $23,660)—served to make the salary level the primary determiner of exempt status. This outcome violated the FLSA, the court held, because it supplanted the duties tests for executive, administrative and professional status, and Congress intended that those performing the duties of those classifications were to be exempt. The salary level in the new regulations would have converted more than 4.2 million employees from exempt to nonexempt, despite the Department’s admission that, but for the new salary level, they would otherwise be exempt. The court also held that a salary level could be legally used by the Department in defining who may be considered exempt, but not if it is so high that it essentially becomes the sole test for the exemption. Thus, the court concluded that, while a salary level could be incorporated in regulations defining the exemption, the salary level in the new regulations was excessively high.

The earlier preliminary injunction was appealed by the former Administration to the Fifth Circuit Court of Appeals. In that appeal, the new Administration asked the court to recognize that a salary level is a permissible component of the exemption tests, but still strike down the regulations because of the amount. Concurrently, the new Administration has announced its intent to revisit the use and magnitude of the salary level test, and has asked for comments with respect to how it can be better tailored going forward.

With this decision, the case before the Court of Appeals is likely moot and the future of the regulations will hinge on whether or not the new Administration will appeal that decision. In fact, the Department of Labor today asked the Court of Appeals for permission to withdraw its appeal. Further, given that the district’s court new decision aligns with the Administration’s position before the Court of Appeals, the conventional wisdom is that an appeal is unlikely. Instead, the Department will likely simply proceed with the process for revisiting the salary level question and eventually promulgate new regulations. Secretary Acosta has indicated a view that the new rate would be more reasonable and appropriate if it hovered near $33,000, but that given the request for comments recently issued by the Department, other factors may come into play for small business, non-profits, rural business, and other employers who would be hard hit by a greatly increased salary level. Another issue “on the table” is whether any new salary level should somehow be indexed to automatically increase without having to exhaust the regulatory process.

Much is still up in the air, but the decision should bring a sigh of relief to employers. It appears that the enjoined regulations are officially dead, but there are still a few procedural and regulatory issues technically in play.

Importantly, though, this case does not affect wage and hour laws at the state level. Employers in states with higher minimum wages or exemption thresholds, such as California (currently $10.50 per hour with an exempt salary threshold of $3,640 per month or $43,680 per year for employers with 26 or more employees, but scheduled to increase to $11.00 per hour with exempt thresholds of $3,813.33 per month or $45,760 per year effective January 1, 2018), must continue to follow the higher applicable rates, as well as observe the stricter “duties tests” imposed in their particular states.

For more information, contact Robert Boonin at Dykema Gossett, rboonin@dykema.com or (313) 568-6707

California Supreme Court Rules PAGA Plaintiffs Are Presumptively Entitled to Contact Information of Defendant’s Employees Statewide

Last week in a unanimous decision, the California Supreme Court ruled that representative plaintiffs in Private Attorneys General Act (PAGA) cases are presumptively entitled to discover the names and contact information of other allegedly “aggrieved employees” statewide at the outset of litigation, without the need to show good cause.

Enacted in 2004, PAGA allows allegedly “aggrieved employees” to sue employers on behalf of the state of California to recover civil penalties on behalf of the state for violations of the state Labor Code, and to keep for themselves and other aggrieved employees 25 percent of any civil penalties recovered, with the remaining 75 percent going to the state.  PAGA also provides for the recovery of attorneys’ fees.

Michael Williams was employed by Marshalls of CA, LLC, at the company’s store in Costa Mesa, California.  He sued Marshalls under PAGA, asserting various wage and hour violations.  Early in the case, Williams sought to discover the names and contact information of fellow Marshalls employees throughout California, and offered to use a so-called “Belaire-West notice,” a discovery mechanism whereby non-party employees are notified of a plaintiff’s request to discover their names and contact information, and are given an opportunity to opt out of having their information produced.  Marshalls objected on several grounds, including burdensomeness and the privacy rights of its employees.  The trial court granted Williams’ motion to compel Marshalls to produce employee contact information, but only as to employees who worked at the Costa Mesa store where Williams worked.

The Court of Appeal affirmed, holding discovery of contact information for employees statewide was premature, and that Williams had failed to show good cause for the production of contact information statewide, given that he had not shown knowledge of unlawful practices at any store other than the Costa Mesa location, or facts putting any uniform statewide practice at issue.

The California Supreme Court reversed, finding the trial court abused its discretion in denying Williams’ motion to discover statewide contact information because the California Code of Civil Procedure does not include a “good cause” standard for discovery, and discovery rules for PAGA actions are no different from the rules governing discovery in putative class actions.  Although defendants may object to discovery requests on various grounds (as did Marshalls) and trial courts retain broad discretion to manage discovery, when it opposed the motion the company presented no evidence showing the production of statewide contact information would be unduly burdensome, and the well-established Belaire-West notice procedure provided sufficient privacy protections.

This decision confirms that in a class, collective or PAGA action litigated in a   California state court, the names and contact information of non-party employees are presumptively discoverable simply upon the filing of a complaint.  Instead of placing the burden on plaintiffs to show good cause for the discovery, the burden is on defendants to show why discovery should be limited.  The court found Marshalls failed to do so, but the opinion leaves open the possibility that other employers may be able to limit discovery under the right circumstances.

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

U.S. Department of Labor Reinstates Opinion Letters and Signals Coming Changes to Obama-Era Overtime Rule

On June 27, 2017, the U.S. Department of Labor (DOL) made two announcements that signal a change of direction for the new Administration.  First, the DOL announced in a press release that it would return to its decades-long practice of issuing “opinion letters,” which provide employers formal, written guidance on specific labor law issues.  Second, the DOL began the process for seeking public notice and comment on the Obama DOL’s rule increasing the salary threshold for overtime exemptions, indicating that the DOL is considering eliminating or changing the controversial rule.

Opinion Letters

For over 70 years, the DOL issued opinion letters, which were official administrative guidance that explained how the DOL would apply the FLSA, FMLA and a select few other laws in specific factual scenarios.  Employers could rely on the opinions and use them to defend actions taken in line with those opinions.  In 2010, however, the DOL stopped issuing opinion letters, opting instead for broader “Administrator Interpretations.”  These Interpretations were far fewer in number and offered more general guidance, and they were criticized by employers for their perceived pro-employee slant.  (The DOL under President Trump has since revoked two of these Interpretations.)

On June 27, the DOL announced that it would resume issuing opinion letters.  Labor Secretary Acosta explained that the policy shift was intended to benefit employees and employers by providing “a means by which both can develop a clearer understanding of the Fair Labor Standards Act and other statutes” and allowing employers to focus on “growing their businesses and creating jobs.”

The DOL has set up a webpage where the public can view existing guidance or request an opinion letter.  The website contains specific instructions about how to request an opinion letter, what to include in a request, and where to submit the request.

Overtime Rule

On the same day, the DOL also announced that it sent a Request for Information (RFI) to the Office of Management and Budget (OMB) related to the Obama DOL’s overtime rule, which, among other things, increased the minimum salary for the executive, administrative and professional worker exemptions.  Once the RFI is published, the public has an opportunity to comment.

The new overtime rule had been scheduled to take effect on December 1, 2016, but a federal court in Texas granted a preliminary injunction delaying implementation of rule while a legal challenge to it was pending.  The Department of Justice appealed the decision on December 1, and the case remains on appeal in the Fifth Circuit Court of Appeals.

While the RFI could be the first step towards the rule’s official demise, the DOL may be considering modifying the rule in some way.  In statements to a Senate subcommittee on June 27, Secretary Acosta noted that the request “would ask the public to comment on a number of questions that would inform our thinking,” and, while the rule’s salary threshold would be “just too high for many parts of the country,” he urged the public to show the DOL “how to write a good overtime regulation.”

Together, these changes show that the new DOL is moving in a more employer-friendly direction than the agency had during the prior Administration.

Jonathan Keselenko, Foley Hoag LLP, Boston, MA

DOL RESCINDS OBAMA GUIDANCE ON “INDEPENDENT CONTRACTORS” AND “JOINT EMPLOYERS”

On June 7, 2017, the U.S. Department of Labor withdrew the controversial Administrator Interpretations (“AIs”) issued in 2015 and 2016 regarding its guidance on “independent contractors” and “joint employers.” The announcement reads:

The Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors were withdrawn effective June 7, 2017.  Removal of the two administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act or Migrant and Seasonal Agricultural Worker Protection Act, as reflected in the Department’s long-standing regulations and case law. The Department will continue to fully and fairly enforce all laws within its jurisdiction including the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act.

While the post-election conventional wisdom has been that the new leaders of the DOL would review these Administrator Interpretations, no one was sure if the anticipated relief to the employer community would be via a rescission or modification, and it was also not expected for any change to occur until after a new Solicitor of Labor and Wage and Hour Administrator took office. (The President has yet to nominate anyone of either of these offices.) Thus, the timing of this announcement – while greatly welcomed by the business community – is also somewhat of a surprise. The two AIs limited the misclassification of workers through a stricter independent contractor test and also expanded the definition joint employer.

THE RESCINDED INTERPRETATIONS

Independent Contractors: The July 2015 AI regarded the issue of misclassifying employees as independent contractors. While claiming to merely summarize existing standards, many viewed the newly proclaimed standards as being based on case law that deviated from the legal mainstream and established an “economic reality” or “dependency” test which minimized the element of control held by the contracting party. The case law up until that point, while weighing economic realities, placed a premium on the extent to which a business controlled the contractor. In contrast, the AI gave the lowest weight to the control factor. The bottom line under this definition emphasizing “dependency”, according to the Wage and Hour Administrator at that time, was that few workers could be properly treated as contractors.

Joint Employers: Under the January 2016 AI, joint employment relationships under the Fair Labor Standards Act could arise under two scenarios: 1) horizontal joint employer relationships; and 2) vertical joint employer relationships. The concept regarding horizontal joint employment (i.e., essentially when related businesses share employees) did not significantly deviate from prior doctrine.   Regarding vertical joint employers, however, the DOL again selectively picked among judicial precedent to cobble a newly articulated standard, dramatically altering the doctrine from most courts’ application, , this time favoring emphasis on the “control” factor, e.g., the control a prime contractor may assert over subcontractors, a franchisor may assert over franchisees, and a business may assert over employees supplied by staffing companies. In essence, the AI made it easier for DOL to deem employers doing business together to be joint employers, and thereby make it easier to hold one of the “joint employers” liable for the alleged wrongs solely made by the other “joint employer.”

THE SIGNIFICANCE OF THE RESCISSIONS

After these AIs were published, only a handful of courts had adopted them as being the proper construction of the law. That has not stopped the plaintiffs’ bar from trying to leverage the AIs as support for their cases, nor has it stopped the DOL from applying them in the course of its audits and investigations.

With the rescission of these AIs, the common law as existed prior to 2015 on these issues is again clearly the law of the land. These AIs will no longer serve as a basis for finding liability, and critically, they will not drive the DOL in its investigations going forward. Thus, their rescission signifies is a return to the fairly stable and well established doctrines of the past, which should be welcomed by the business community, although it is likely that the plaintiffs’ bar will still use the arguments contained in the AIs. .

The remaining question is whether this also serves as “writing on the wall” with respect to how the EEOC and the NLRB will address these issues, because under their current composition, they have been heading in the direction now rejected by the DOL. This may also be a sign that other initiatives of the former administration may be rolled-back by the new DOL leadership, but some of those actions will likely await until the other leadership positions within the DOL are filled. For instance, it is anticipated that the new administration will reverse course by no longer issuing formal “Wage and Hour Administrator Opinion Letters,” as well as cease from engaging in the relatively new practice of routinely assessing liquidated damages when resolving pre-suit investigations..

In sum, this withdrawal is a good sign that some of the initiatives of the prior administration which appear hostile to employers may be rolled-back, in part or in whole.  However, many of those initiatives, depending on the agency, are still – at least according to those agencies – alive and well.  Even if the administration softens the government’s views on these issues, the arguments underlying the AIs and related positions of other agencies will continue to be made by plaintiffs’ counsel in the courts, and these issues will – in the end – be resolved in the courts.  Consequently, there is nothing in today’s development which should dramatically alter any employer’s operations in the immediate future.

California Supreme Court Clarifies Day of Rest Rules

Earlier this week, the California Supreme Court issued its opinion in Mendoza v. Nordstrom, clarifying California’s day of rest requirements. These requirements are set forth in California Labor Code sections 551 and 552. Section 551 provides that “every person employed in any occupation of labor is entitled to one day’s rest therefrom in seven,” and Section 552 prohibits employers from “causing their employees to work more than six days in seven.” However, Section 556 exempts employers from the duty to provide a day of rest “when the total hours of employment do not exceed 30 hours in any week or six hours in any one day thereof.” While these provisions do not appear too complicated or hard to follow at first blush, compliance has been challenged in wage and hour litigation, raising several questions of what these provisions technically mean. Questions that have arisen include the following:

What does it mean to “cause” an employee to work more than six days in seven? Is it enough to “allow” the employee to work seven days in a row, or must the employer require the employee to work more than six days in a row to be found in violation of the statute?
Is the day of rest required for any consecutive seven-day work period on a rolling basis, or is it measured based on the employer’s workweek (the definition of which varies from employer to employer and may not match a calendar week)?
Does the exemption from the day of rest requirement apply where the employee works 6 or less hours on at least one day during the workweek, or must the employee’s hours be 6 or less every day of the workweek (and no more than 30 for the entire week)?

The California Supreme Court agreed to answer these questions at the request of the Ninth Circuit in Mendoza v. Nordstrom. Here’s how the Court ruled on these issues:

A day of rest is guaranteed for each workweek. Periods of more than six consecutive days of work that stretch across more than one workweek are not per se prohibited.
The exemption for employees working shifts of six hours or less applies only to those who never exceed six hours of work on any day of the workweek. If on any one day an employee works more than six hours, a day of rest must be provided during that workweek, subject to whatever other exceptions might apply.
An employer causes its employee to go without a day of rest when it induces the employee to forgo rest to which he or she is entitled. An employer is not, however, forbidden from permitting or allowing an employee, fully apprised of the entitlement to rest, independently to choose not to take a day of rest.

With respect to question (1), the Court held that the seven-day period is based on the workweek as defined by the employer. Thus, if the employer uses a calendar week, then the seven-day period (during which there should be one day of rest) is based on each calendar week. If the employer defines its workweek differently, then the seven-day period designated by the employer controls. However, the one-day-of-rest-in-seven provision does not apply on a rolling basis to every consecutive seven-day period.

With respect to question (2), the Court held that if an employee works more than 6 hours on any day of the workweek, the day of rest provision applies. The Court rejected an interpretation that would exempt employers from providing a day of rest to an employee who works 6 hours or less on just one day of the workweek. Thus, if an employee’s hours exceed 6 on any day of the workweek, the day of rest requirement will apply. You now ask, “What if the employee does not work more than 30 hours per week?” Unfortunately, the Court chose not to clarify whether the day of rest exception for employees working no more than 30 hours per week or 6 hours per day should be read in the conjunctive or disjunctive (because the Ninth Circuit did not expressly ask the Court to answer this particular question). Thus, left for another day (and more litigation) is the issue of whether the day of rest requirement applies to an employee who works more than 6 hours one or two days of the workweek, but whose total hours for the workweek do not exceed 30. The conservative approach of course, it to provide the opportunity for a day of rest to any employee who works more than 30 hours per week and/or more than 6 hours in any one workday.

Finally, with respect to question (3), the Court held that an employer “causes” an employee to work more than six days in seven if it motivates or induces the employee to do so. This does not mean that the employer is liable if it simply permits an employee to work more than six days in seven. “[A]n employer‘s obligation is to apprise employees of their entitlement to a day of rest and thereafter to maintain absolute neutrality as to the exercise of that right. An employer may not encourage its employees to forgo rest or conceal the entitlement to rest, but is not liable simply because an employee chooses to work a seventh day.” Based on this interpretation, an employer generally should not affirmatively schedule or require employees to work more than six days in seven, but it is okay to offer employees the opportunity to work more than six days in seven, so long as they are apprised of their entitlement to one day’s rest each workweek and notified that they will not be penalized for choosing to take a day of rest (nor rewarded, apart from being paid their earned wages, for not taking a day of rest).

While this opinion clarified some issues relating to California’s day of rest requirements, it also left an important one unanswered. Specifically, California Labor Code section 554 provides an exception from the day of rest requirement where the “nature of the employment reasonably requires that the employee work seven or more consecutive days, if in each calendar month the employee receives days of rest equivalent to one day’s rest in seven.” There is a lack of guidance on when the “nature of the employment reasonably requires” seven or more consecutive days of work so as to allow accumulated rest days to be taken at a different time during the month, and today’s opinion does not shed light on that subject.

California employers are advised to review their scheduling and pay practices to ensure compliance with California’s day of rest requirements, as clarified by the California Supreme Court today. Employers are further reminded that California has special overtime compensation rules that apply to work performed on the seventh consecutive day of a workweek (time and one half for the first 8 hours of work performed on the seventh consecutive day of the workweek, and double time for hours in excess of 8).