Earlier this week, the U.S. House of Representatives passed, by a 229-197 margin, passed the Working Families Flexibility Act (HR 1180). The Act, if passed by the Senate and signed by the President, will introduce the concept of “compensatory time” (a/k/a “comp-time”) to the private sector workplace. Under the Fair Labor Standards Act, comp-time has existed in the public sector for many decades, but absent the passage of this Act, it is not permissible in the private sector.
The Comp-Time Concept
The concept of “comp-time” is essentially a way for employees to earn time off with pay in lieu of being paid time and one-half their regular hourly rates for hours worked over 40 during a workweek. This time off is earned at the rate of one and one-half hours for each hour of overtime worked. In the public sector, the FLSA allows employees to accrue 240 hours of comp-time (or 480 hours for public safety employees), to be used or paid per specific federal regulations. The system envisioned by this Act for the private sector is similar to its public sector counterpart, but different in some significant ways. These differences if they survive the passage of the bill may lessen the attractiveness of comp-time programs for private sector employers.
The Comp-Time Structure under the Working Families Flexibility Act
Under the Act as passed by the House, private sector employees could accrue up to 160 hours of comp-time.
- Only employees who have worked at least 1,000 hours during the 12-months preceding the beginning of the comp-time arrangement will be eligible to participate in a comp-time arrangement.
- Participation in a comp-time arrangement must be voluntary (i.e., the employer may not directly or indirectly intimidate, threaten or coerce employees to work under the comp-time arrangement) and initiated only pursuant a collective bargaining agreement, written agreement with the employee or other verifiable record maintained by the employer.
- Any accrued comp-time not used within a designated year must be cashed-out to the employee within 31 days after the year-end at the rate the employee is earning at the time of the payment or when the hours were earned, whichever is higher.
- During the year, the employee also may cash-out any accrued time, at the employee’s discretion.
- During the year, the employee must be allowed to use the comp-time accrued as requested, unless the time-off would unduly disrupt the employer’s operations.
- The employee may also opt-out of the comp-time arrangement at any time by giving the employer written notice. The employer may terminate the comp-time arrangement only by giving the employee 30 days’ prior written notice.
Good News or Bad News?
So is the good for business? It depends. Over the years – beginning in the Clinton era – similar bills have been introduced by both parties in Congress. The premise of the bills has been that allowing employees to earn and use comp-time may be more desirable than earning overtime pay, since the quid pro quo for losing some time with one’s family would be earning the ability to take off even more time at a later date, with pay, to be with one’s family.
To those against the bill, there’s a fear that employees will be coerced to accept comp-time as a condition for working overtime, or that the payment of earned overtime pay will be unfairly deferred. These fears do not appear to be very realistic given the structure of the Act.
Due to the employee’s right to cash-out accrued time at any time and rescind the comp-time arrangement, the advantages of employees working overtime for comp-time in lieu of being paid overtime pay are less clear for employers. Employers like comp-time because they can avoid the out-of-pocket cost of overtime while allowing employees to take off more time during slower times of the year. Under the Act, while these advantages still exist, they can readily lost based on the employee’s whim to cash-out their time and terminated the relationship. Also, by forcing employers to cash-out accrued time not used by the year-end, much of financial savings will be lost to employers while the employees will also lose their ability to bank time for use at later time.
These disadvantages do not exist in the public sector, and it’s unclear as to why the model for the private sector needs to differ than that used in the public sector. Nonetheless, this is the course currently being taken by Congress.
Prospects for Passage?
While the President has endorsed the bill as passed by the House, its future in the Senate is unclear. If the bill moves through committee and to the floor, it is likely that some changes will be made to gather the 60 vote margin needed to avoid a filibuster. If this happens, then what will be shaped in Conference Committee is even more unclear. Time will tell.
Impact on Other Comp-Time Plans
Employers should realize, though, that the concept only applies to overtime worked by non-exempt employees. Under the FLSA, the Act would not apply to permissible comp-time arrangements which may be in place with respect to hours worked beyond a normal workweek of 35 or 37.5 hours, but less than 40, for example, nor does it impact comp-time arrangements in place with respect to exempt employees. Further, as currently drafted, the Act would not apply to public sector employers in any respect.
Late Tuesday afternoon, the United States District Court for the Eastern District of Texas granted a motion brought on behalf of 21 states and supported by business groups led by the United States Chamber of Commerce to preliminarily enjoin the new overtime exemption regulations set to go into effect on December 1, 2016. Those new regulations were announced in May by the United States Department of Labor (“DOL”) and, if they had gone into effect, would have increased the minimum salary threshold for most executive, administrative and professional employees from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year). The new rules would have jeopardized the exempt status of 4.6 million employees.
The Elements for Preliminary Relief Were Satisfied by the States
At the outset, the court had to determine if the states will “likely succeed on the merits” as the case is further litigated, and if a permanent injunction is on the horizon. The states’ case was premised on both constitutional and statutory grounds. The court concluded that while the states’ constitutional claims were unlikely to succeed, their statutory arguments appeared strong and likely to succeed.
The court noted that the Fair Labor Standards Act (“FLSA”) provides that “‘any employee employed in a bona fide executive, administrative, or professional capacity… as such terms are defined and delimited from time to time by regulations of the Secretary, shall be exempt from minimum wage and overtime requirements.” According to the court, the issue boiled down to what Congress meant by “executive, administrative and professional.” The court concluded that Congress’ focus when the FLSA was enacted was on what these employees actually do, i.e., what are their duties, which, the court concluded, “does not include a minimum salary level.” That is, while the law generally grants administrative agencies great deference as they interpret statutes, “nothing… indicates that Congress intended the Department to define and delimit a salary level.”
Consequently, the court held that the DOL exceeded its authority by imposing a salary level requirement in the tests for these white collar exemptions. Further, the court stated: “Congress did not intend salary to categorically exclude an employee with [exempt] duties from the exemption,” but such an outcome, the court stressed, would happen under the new regulations. Indeed, this outcome was expressly admitted to by the DOL in the preamble to the new regulations, i.e., that the significant salary level increase would, in and of itself, make otherwise exempt employees non-exempt.
The court also held that absent an injunction, the states would be irreparably harmed. That harm would not only include the cost of paying higher salaries, but it would also entail the cost spent on compliance and the redirection of resources from other critical services of the state governments.
Finally, the court found that the public interest would be best served by it issuing an injunction. On this point, the court noted that more time would be needed for it to make a final ruling on the case, and that by issuing an injunction, the only harm to the DOL would be a delay in the implementation of the new regulation. Thus, the court concluded that preserving the status quo while the case continues on the merits is appropriate.
The Injunction’s Scope Is National
In light of the above, the court determined that an injunction was appropriate. The remaining issue regarded its scope. The DOL argued that it should only apply to those states that participated in the case, and established the potential of irreparable harm. The states argued that the injunction should apply nationwide. After noting that injunctions are dictated by the nature of the violation at issue and not its geographical scope, the court agreed with the states and applied its injunction nationwide.
Consequently, the court granted the motion of the preliminary injunction and enjoined the DOL from implementing and enforcing the new salary level regulations on December 1, 2016.
At this time, the new regulations are essentially on hold, subject to further litigation. The current regulations are not enjoined in the meantime. Those may later become an issue as the litigation proceeds, but for now, employers must continue to comply with the regulations currently in effect. Employers operating in states with their own laws and regulations must continue to comply with their states’ laws; nothing in Tuesday’s injunction affects state laws.
To be sure, many employers have already made or announced changes to conform to the regulations set to go into effect in just over one week. Those employers may consider cancelling those changes or retaining some of them. How to proceed will depend on the circumstances and each employer’s assessment of the likelihood that the injunction will become permanent. Another unknown factor is the stance the Trump Administration will take on this matter. The incoming administration could continue to fight for the new DOL regulations, or could simply let the injunction stand so that it can chart its own path in 2017. Time will tell.
Over the course of the last year, the U.S. Department of Labor promulgated two controversial regulations triggering court challenges. One rule – known as the “Persuader Rule” – was set to require employer consultants and lawyers to file disclosure reports of any union avoidance activities they engage in, even if that activity was purely advisory in nature and did not involve direct contact with employees. The other rule regards the changes to the overtime exemption regulations, which are set to increase the salary threshold for exempt status from $455 per week to $913 per week, and then to automatically adjust that threshold every three years.
THE PERSUADER RULE
This past spring a Texas court issued a preliminary injunction on the eve of “persuader” rules’ effective date. If not enjoined, the new persuader rules would have substantially broadened the definition of “persuader” activity and required greater disclosure by law firms regarding their relationships with their clients. Under the current rules, lawyers may give advice to employers regarding union avoidance issues and, so long as they don’t meet with employees directly, their work is not disclosable. The new rules would have made the mere giving of advice reportable. This week, the court made the preliminary injunction enjoining the implementation of the new rules permanent. The only option for the DOL at this point is for it to appeal that ruling to the Court of Appeals. Given the outcome of last week’s election, even if it does appeal the case, the conventional wisdom is that the Trump Administration will abandon the rule and the appeal.
THE STATUS OF THE OVERTIME REGULATIONS
The new FLSA exemption regulations are set to go into effect on December 1, 2016. A few months ago, two lawsuits were filed in another Texas federal court, one by 21 state attorneys general, and the other by a coalition of business groups spearheaded by the U.S. Chamber of Commerce (of which Dykema is a member and serves on its Labor and Employment Committee). The claims in the cases are not identical, but they do overlap and basically contain two themes.
One theme is that the dramatic increase to the salary level jeopardizes the exempt status of 4.6 million workers, employees on November 30 considered to be exempt, but on December 1 would no longer be exempt despite their duties remaining the same. The magnitude of this change is unprecedented and is claimed to run afoul of the statute making these employees exempt based on their duties and not their salaries.
The second theme regards the triennial indexing of the salary level threshold. Both lawsuits assert that the DOL cannot create automatic adjustments to the regulations because the FLSA states that the DOL is only empowered to issue regulations on this matter “from time to time.” The automatic indexing, the plaintiffs claim, serves to change the rules without the “notice and comments” required before administrative agencies may change a rule.
On Wednesday, November 16, 2016, the court heard arguments on the states’ motion for an injunction to stop the December 1 implementation of the new regulations. During the arguments, the court stressed that it would not base its decision on the prospects of the incoming Trump Administration’s disfavoring the new regulations. Rather, the court said it would limit its review to the merits of the new regulations as they currently stand. In that regard, though, the court’s exchanges with counsel from both sides revealed some skepticism on the court’s part, mostly pertaining to the unprecedented loss of exempt status by so many employees and whether the DOL has the right to preclude exempt status as to employees who clearly meet the duties tests for their exemptions. That said, the DOL strongly argued that its right to set a salary level test has been unchallenged in the courts or by Congress for 70 years, and that defining the exemption as it has done was therefore well within its authority.
The court concluded the hearing by stating that it will issue its decision by November 22, 2016. The conventional wisdom is still that there is a high likelihood that the regulations will not be enjoined. Further, if enjoined, the injunction may only apply to state (and local) governments. More importantly, given the perceived skepticism of the court (which may be encouraging to employers), employers should not “take their foot of the pedal” towards complying with the new regulations, but instead, should continue to act with the assumption that the regulations will go into effect on December 1.
Should the court deny the injunction, though, on November 28th the court will hear arguments on the pending motion for summary judgment brought by the business groups. The prospects of success by the business groups on that motion may be better assessed after reading the court’s decision on the injunction.
Dykema and other WHDI firms will continue to monitor these cases and related developments.
On March 14th, the Department of Labor sent its final draft of the new regulations governing the white collar exemptions to overtime pay to the Office of Management and Budget. The OMB’s review is the final step required for a regulation to be published and implemented. Consequently, though the details are still “top secret,” the regulations’ release is more imminent. The OMB’s review may take as long as 90 days, but the review period typically lasts between 30 to 60 days, and sometimes even less.
Once released, the regulations will likely go into effect 60 days thereafter. Some pundits believe that the DOL is targeting Labor Day for an effective date, in which case, they will be published in final form before July 4th. In order for the Administration to foreclose a rare but possible congressional override vis-à-vis the Congressional Review Act, they must be published by early July. Though no one can accurately predict when they will actually be rolled out, based on this latest development it appears that they could be rolled-out as early as late April through early July.
The anticipated impact these regulations will have on employers will be widespread. The DOL appears primed to double the salary threshold for being exempt from overtime, and it may also redefine the types of duties employees may perform to qualify for the exemption. For details, click here. Employers may have to redesign their pay structures and reclassify employees from being exempt, to non-exempt.
Bottom line, employers should plan now to avoid being caught “flat-footed” by waiting and then only having 60 days to react. Experienced counsel should be consulted to weigh options and to make sure all bases are covered.
For months, crystal balls have been working on overdrive trying to predict when the Department of Labor will roll-out the final version of the new white collar overtime pay exemption regulations and what will be in those regulations. While there is no way to accurately make these predictions, there have been some official comments a recently made about what could be expected, and it’s also not too late for employers to prepare for the new regulations even though the details are still uncertain.
First, as to when – the Secretary of Labor is on record saying that “late Spring” is the goal. During a meeting of the American Bar Association’s Federal Labor Standards Legislation Committee mid-winter meeting held this week, Patricia Smith, the Department of Labor’s Solicitor of Labor, suggested that if one is loose as to what constitutes “late Spring,” a realistic roll-out could be made “around late June or early July.”
What is a “roll-out,” though, is subject to some interpretation and a few procedural steps. First, before the final regulations are published, they must be reviewed by the Office of Regulatory Review. The public will know when the DOL submits them to the ORR. The ORR will then undertake its review, which usually takes about 30 days, and in the process, it may make final edits or even substantive changes. During this period, interest groups will aggressively lobby the White House to urge that certain items be included or excluded in the rules they’ve yet to see. If the early July roll-out is a good prediction, we should know that it’s before the ORR by late May or early June. In any event, at that same ABA meeting, the Solicitor of Labor told the audience that the “final rule will not be identical to the proposed rule [of last July].”
Second, after the final regulations are rolled out, i.e., made public, there will have to be some time allowed before they become effective. The conventional wisdom is that the window for these rules will be 60 days. Longer periods have occurred as to some new regulations in the past, and employers are urging for more time to be allowed in this instance. Given the political context, however, more time is not likely. Specifically, new regulations are always vulnerable to congressional overrides vis-a-vis the Congressional Review Act. Under the CRA, Congress has a 90-day period during which it may trump a regulation, subject to presidential signature or veto overrides. Even though such congressional action has been rarely undertaken, let alone successful, to insulate against such a tactic needing presidential action after a new administration takes office in January, the Solicitor implied that the DOL will make sure that this period will close before the end of the year.
As proposed, the regulations would increase the minimum salary level required for salaried employees to be exempt, if they also satisfy one of the “duties tests,” from $455 per week (or $23,660 per year) to $970 per week (or $50,440 per year). In addition, that salary level amount is proposed to annually adjust, but whether it will be indexed to the CPI or some other factor won’t be known until the regulations are finalized.
Further, while the proposed regulations do not include changes to the “duties tests” for exempt status, when it published the proposed regulations the DOL asked for comments on a few ways the duties tests also could be changed. For instance, the DOL invited comments as to whether the “California rule” should be adopted and applied to exempt employees, and thereby require them to solely perform their exempt duties for more than 50 percent of their workweeks, as opposed to the current rule that their exempt duties merely constitute their primary duties even if performed simultaneously with non-exempt duties. On this point, the Solicitor of Labor said that some sort of change to the duties test, whether it be the adoption of the California rule or some other test, should not be ruled out as a potential outcome to the rulemaking process. If this actually occurs, an uproar will likely occur, but the DOL is confident that its legal footing to do so is sound.
WHAT TO DO NOW
Employers should not take a “wait and see attitude.” Instead, they should engage in some serious planning in anticipation of the new rules. For instance:
- Positions should be reviewed to identify which employees or positions are vulnerable to being reclassified as non-exempt due to the new standards;
- Options to increase salaries to retain their exempt status should be weighed;
- If salaries are not to be increased, employers should consider the various ways as to how wages will be set and if schedules can or will be modified, to mitigate against the exposure to paying overtime premiums;
- Communication plans should be developed to explain to employees why they are losing their exempt status and how to address the potential morale problems these changes may cause;
- Plans for training employees being reclassified will need to be developed to make sure these former exempt employees will properly track their work time, not engage in pre- or post-shift work without authorization, not work during lunch, not use their smart phones while not scheduled to work, properly track their travel time, etc.;
- Decisions will have to be made regarding whether employees who lose their exempt status will be impacted in terms of bonus plans, paid time off, and other benefits;
- If employees impacted by the new regulations are covered by collective bargaining agreements are covered by collective bargaining agreements, strategies for either increasing their salaries to retain their exempt status, or converting them to non-exempt, may require negotiations;
- Supervisors will have to be trained as to how to manage the schedules and timekeeping obligations of these reclassified employees; and
- Plans for dealing with budgeting issues as triggered by the new rules, for not only the immediate roll-out, but also future years due to anticipated annual indexing, can be undertaken.
Waiting until the new regulations are finalized may not leave enough time to implement new structures and procedures during the short period anticipated before the regulations become finalized. The regulations, when finalized, could have significant impact on many employers and employees, and the more preparation done now, the better employers will be able to respond. Options exist with respect to many of the areas discussed above, and experienced wage and counsel should be consulted to assist in this planning process.
Sixth Circuit Affirms Limits on Employees’ Ability to be Paid for Minor Impositions Made During Meal Breaks
This past week, the Sixth Circuit Court of Appeals decided two cases affirming that under the Fair Labor Standards Act, employees seeking compensation for work related activities performed during lunch breaks have the burden to show that they spent their meal time predominantly for the employer’s benefit, and that employees are precluded from recovering when they do not follow an established reporting procedure. These cases clearly establish that minor burdens during meal breaks, such as monitoring radios or being available for emergencies, are not significant enough to convert the breaks to compensable work time. Consequently, the Sixth Circuit further clarified its stance that, so long as the break is still primarily for the employees’ benefit, the time need not be counted for overtime pay calculation purposes.
Case No. 1: EMTs Need Not be Compensated for Breaks On-Call or for Breaks Missed But Not Reported
In the first case, Jones-Turner v. Yellow Enterprise Systems, LLC, EMTs were allowed to request a lunch break whenever their schedules permitted, but they were required to stay within a mile of their assigned location and to promptly answer their radios if called. Dispatch was supposed to record in their logs whether the EMTs took a lunch break, but did not do so consistently. The employer automatically deducted a 30-minute lunch break from each employee’s shift unless the employee submitted a “missed-lunch slip.” The plaintiffs claimed that they often missed lunch breaks but did not always fill out missed lunch slips.
The Sixth Circuit confirmed its “predominant benefit” test, articulated in its 1964 Hill v. United States decision, under which an “employee bears the burden of establishing that she performs substantial duties and spends her meal time predominantly for the employer’s benefit” in order for the break to be compensable. Applying this test, the Sixth Circuit found that the EMTs did not meet their burden because they were not required to perform any duties beyond responding to radio calls and were not frequently interrupted.
The Sixth Circuit also applied its 2012 holding in White v. Baptist Memorial and found that plaintiffs were precluded from recovering pay for missed meal periods for which they did not submit a missed-lunch slip, as the employer had established a reasonable process to report missed lunches, and there was no evidence that the employer had actual knowledge that the employees were not being compensated for time worked. The court specifically rejected the employees’ argument that the employer should have known about the missed lunches based on dispatch logs, as there was no evidence that the managers regularly reviewed them, since they relied on the missed-lunch slips.
Case No. 2: Security Guards’ Meal Breaks are not Compensable Even Though They Must Monitor Radios During Those Breaks
Two days later after issuing its Jones-Turner decision, the Sixth Circuit decided Ruffin v. MotorCity Casino, a case in which security guards were required during their meal breaks to remain on the property, monitor their radios, and respond to emergencies, and were not permitted to receive visitors or have food delivered, but otherwise they were able to spend their mealtimes as they pleased. The guards claimed that, though emergencies rarely interrupted their meal breaks, monitoring the radios exposed them to constant, work-related chatter that they had to pay attention to in order to know if an emergency required their attention. Nonetheless, they testified that they were able to eat, socialize, make phone calls, surf the internet, and watch television during their meal periods.
Moreover, plaintiffs claimed that they were entitled to overtime. The employees worked five eight-hour shifts every week, including 30 minute daily meal breaks. However, the employer also required the guards to attend an unpaid fifteen-minute meeting before every shift began, and thus the employees claimed that they were required to work 41.25 hours every week.
As to the meal break issue, the court applied the Hill three-factor test to determine whether the employees’ meal times were spent predominantly for the employer’s or employee’s benefit: (1) whether the employee was engaged in the performance of substantial duties; (2) whether the employer’s business regularly interrupted the employee’s meal period; and (3) the employee’s inability to leave the employer’s property. The Sixth Circuit held that the mealtimes were not compensable because they did not primarily benefit the employer, and specifically found that merely monitoring a radio and being able to respond if called is not a substantial duty; that interruptions were rare; and that although the employees were not free to leave the casino, the employer did not take advantage of their presence by making them work.
Because the mealtimes were paid but not compensable under the FLSA, the court ruled that the employer could off-set the time paid for those meal periods against the compensable meetings, such the plaintiffs only actually worked 38.75 hours per week. As a result, the unpaid meal breaks did not serve to trigger an overtime obligations, and therefore plaintiffs were not entitled to any relief.
Impact of Holdings
These cases are another blow to claims for overtime pay relating to meal breaks. If an employee is on a meal break, minor interruptions or other burdens will not convert the break from non-work to work time, and de minimis interruptions can be disregarded. The cases also teach that well written time recording policies can be particularly helpful in defeating these claims, but employers must also review the extent they impose conditions on otherwise non-compensable break time. Most circuits adhere to the views of the Sixth Circuit on these points, but these decisions are particularly clean and to the point. Further, for those employers providing paid meal periods, Ruffin provides an additional defense to FLSA overtime claims (at least within the Sixth Circuit) by allowing employers to offset the meal periods against additional time worked by employees.
By Robert A. Boonin and Elisa Lindemuth, Dykema Gossett, PLLC
On Tuesday, December 9, 2014, the U.S. Supreme Court issued a unanimous decision providing clear guidance as to what constitutes compensable work under the Fair Labor Standards Act, as amended by the Portal-to-Portal Act.
The case, Integrity Solutions, Inc. v. Busk, involved a contractor to Amazon.com whose employees retrieved products from the shelves in Amazon’s warehouses and packaged them for delivery to Amazon’s customers. At the end of each shift the employees were required to undergo a security screening before leaving the warehouses. The employees claimed that the time spent waiting for and undergoing the screenings entailed about 25 minutes per day, and through the lawsuit, they were seeking overtime compensation for that time. They also claimed that the time could have been significantly shortened to a de minimis period if the shifts were staggered or more screening stations were available. Consequently, they claimed, the time devoted to the screening was for the benefit of the employer or its customer Amazon.com, and therefore should have counted as part of their compensable workweeks.
The Supreme Court disagreed. Reversing the holding of the Ninth Circuit Court of Appeals, the Supreme Court held that the time spent for the screening was not compensable time. Applying precedent, the Court noted that the compensable period during a workday stops once the last activity that is “integral and indispensable” to the job’s “principal activity” is performed. In this case, the principal activity for which the employees were employed were retrieving and packaging goods in the warehouse.
In the opinion written by Justice Thomas, the Court concluded that the screenings at issue did not relate to that principal activity, rather they were only incidental to the job. Under the Act, such activities – i.e., preliminary or postliminary activities – are not compensable. Thus, the Court held that the court of appeals applied the wrong test, i.e., whether the screenings were required by and for the benefit of the employer to prevent theft, and instead it should have inquired as to whether the activity was tied to the productive work that the employees were employed to perform.
Consequently, the Court rejected any notion that all time spent for the employer’s benefit is compensable, and specifically held that such a construct is overly broad and improper. The Court also rejected the argument that the time spent in the screenings could have been lessened and thereby a source of liability since that fact did not alter the finding that the time was unrelated to the principal activity at issue.
Explaining that the time spent on security screenings in this context was postliminary and therefore not compensable, the Court noted that “Integrity Staffing did not employ its workers to undergo security screenings, but to retrieve products from warehouse shelves and package those products for shipment to Amazon customers.” The screenings were not “integral and indispensable” to that work, the Court continued, because they were not “an intrinsic element of those [principal] activities and one with which the employee cannot dispense if he is to perform those activities.” In this regard, the Court noted, the employer “could have eliminated the screenings altogether without impairing the employees’ ability to complete their work.”
With this elaboration on the definition of what is a compensable activity, one can only hope that courts will be able to evaluate pre- and post-shift activity cases with more confidence and avoid the recent trend of conflicting holdings on this issue. Such clear guidance is also of value to employers as they try to make sure that all time that is legally compensable is paid. Importantly, though, and as expressed by Justices Kagan in her concurring opinion joined by Justice Sotomayer, some pre- and post-shift activities remain compensable since they are integral and indispensable to the job, such donning and doffing certain protective gear for the performance of an employee’s job.
Dykema Gossett PLLC
Over the past few years, there has been considerable litigation over whether employees may contractually waive their right to bring class or collective actions against their employers.
For example, the NLRB in its D.R. Horton line of cases believes that arbitration agreements limiting employees in their right to bring collective or class actions are not enforceable since they arguably waive an employee’s Section 7 right to engage in concerted activities. The courts have not agreed with the NLRB, and applying the Supreme Court’s recent line of cases upholding arbitration agreements proscribing class relief, have held that the congressional support for arbitration vis-à-vis the Federal Arbitration Act is a stronger policy than other rights relating to the ability to seek class relief. Further, the courts have construed the FAA to hold that unless an arbitration agreement clearly permits the seeking of class relief through arbitration, such relief is not available – through arbitration or otherwise. See generally Owen v. Bristol Care, Inc., 702 F.3d 1050, 1054-55 (8th Cir. 2013)(arbitration agreement containing class action waiver is enforceable in claim brought under FLSA); Sutherland v. Ernst & Young LLP, 726 F.3d 290,295-96 (class action waiver must be enforced pursuant to the U.S. Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013)); Parisi v. Goldman, Sachs & Co., 710 F.3d 483, 486 (2d Cir. 2013) (undisputed that arbitration agreement did not provide for arbitration agreement on class-wide basis); Walthour v. Chipio Windshield Repair, LLC, 745 F.3d 1326, 1134-36 (11th Cir. 2014) (arbitration agreement which waives collective claims is enforceable); D.R. Horton, Inc. v. NLRB, 737 F.3d 344, 558-61 (5th Cir. 2013) (class and collective action waivers are not inconsistent with the NLRA’s Section 7 concerted activity protections, and therefore such waivers in arbitration agreements between employers and employees are enforceable); Reed Elsevier, Inc. v. Crockett, 734 F. 3d 594, 600 (6th Cir. 2013) (where agreement is silent on the availability of class relief through arbitration, class relief is not available). See also Huffman v. The Hilltop Companies, LLC, 747 F.3d 391, 398 (6th Cir. 2014) (contract silent on right for bringing class claim in arbitration precludes the arbitration of class claims).
Recently, though, the Sixth Circuit Court of Appeals (i.e., the federal appellate court over the judicial districts in Michigan, Ohio, Kentucky and Tennessee) has held that agreements which limit rights under the FLSA which are not covered by the FAA may not be enforceable. That is, while such agreements may be enforceable if they are in the context of an FAA covered arbitration agreement, if the agreement is just an ordinary employment or separation agreement – and not an arbitration agreement – such agreements may not be enforceable.
The first of this line of cases was Boaz v. FedEx Customer Information Services, Inc., 725 F.3d 603 (6th Cir. 2013). In Boaz the employee signed an employment agreement requiring the bringing of claims within six months notwithstanding longer statutes of limitations. In the FLSA context, the court held, this waiver amounted to a waiver of a substantive right to wages under the FLSA, and since waivers of rights under the FLSA are not enforceable, the court refused to enforce this waiver. The court also inferred that its decision may have been otherwise if the case arose under an arbitration agreement “due to the strong federal presumption in favor of arbitration.” Id. at 606-07.
On July 30th, the Court of Appeals more formally articulated its view that waivers in arbitration agreements are different than waivers in other agreements. In Killon v. KeHE Distributors, LLC¸ Case Nos. 13-3357/4340 (6th Cir. July 30, 2014), the court for the first time addressed whether waivers to bring class or collective claims in non-arbitration agreements are enforceable. The waivers in this case were specified in employment separation/severance agreements. The employees signed those agreements and later attempted to join a collective action for unpaid overtime. The district court held that such waivers were enforceable, but the Sixth Circuit reversed the trial court. The Sixth Circuit equated the right to participate in a class action with the right to sue within the full limitations period allowed by the FLSA, i.e., a right deemed non-waivable under Boaz. The court reiterated, though, that its holding may have been otherwise if the case entailed an arbitration agreement. Outside of that context, however, that Killon waivers were declared void. The court concluded: “Because no arbitration agreement is present in the case before us, we find no countervailing federal policy that outweighs the policy articulated in the FLSA.” Id. at *23.
While few other courts have been presented with the precise issue as to whether the existence of an arbitration agreements is a distinction which makes a difference, the Sixth Circuit’s holdings bring into jeopardy the ability to enforce agreements which shorten limitation periods or waive class relief in the context of FLSA disputes. Such agreements may be enforceable in other contexts, but drafting carve-outs in such waivers may be cumbersome, particularly if they are tailored to only apply within the Sixth Circuit.
To be sure, the merits of the court’s holdings in these cases will likely be subject to further debate and review by courts in other circuits since there is contrary authority suggesting that these “rights” are procedural and not substantive, and are therefore waivable. At this time, though, such is not the rule in Sixth Circuit and that will likely remain the case until the Supreme Court weighs-in, if ever. Consequently, employers – particularly those within the Sixth Circuit – should avoid using such waivers unless they are part of arbitration agreements.
It took only 5.5 years, but the Obama Administration has finally filled the position of the DOL’s Wage and Hour Administrator. Past nominees never made it through the confirmation process, but due to a compromise on the filibuster rule and other political factors, yesterday the Senate confirmed the nomination of David Weil to be the new Wage and Hour Administrator.
With this appointment, and for the first time since the President was first elected, the seats for all top DOL executives dealing with wage and hour matters are now filled, i.e., the Secretary of Labor, the Solicitor of Labor, and the Wage and Hour Administrator. The Wage and Hour Administrator oversees the division of the Department of Labor responsible for enforcing the Fair Labor Standards Act, the Family and Medical Leave Act, the Service Contract and Davis Bacon Acts, and various laws dealing with migrant farmworkers and immigrants. With this latest appointment, the President is clear as to the direction he wishes for the Department of Labor to take; the Administration is to focus on enforcement. In fact, “enforcement” may be an understatement; the direction given is more along the lines of “aggressive enforcement.” In other words: “Take no hostages!”
Each of these appointments have been given to officials with strong enforcement backgrounds. Secretary Perez came out of the Civil Rights Division of the Justice Department, and prior to that made his mark as an aggressive enforcer of Maryland’s wage and hour laws as its Secretary of Labor, Licensing and Regulation. Similarly, Solicitor Patricia Smith had a reputation for aggressive and punitive enforcement actions in her prior role as the State of New York’s Commissioner of Labor and Chief of its Labor Bureau. As with Secretary Perez, she focused much of her attention on employees misclassified as contractors.
The latest appointee is similarly inclined, but has asserted his views from his role as an academic and as a non-attorney. From his academic podium, he has advocated for more vigorous enforcement actions against employers, with a focus on lower paid jobs and employers in fissured industries (i.e., franchises, those which use staffing companies and subcontractors, and the like). Targeted industries, according to Administrator Weil, include: janitorial, construction, grocers, landscapers, restaurants, home health care, hospitality, moving, retail and agriculture. He also believes that what he terms to be the “top employer” in the hierarchy of fissured relationships, should be held liable for the wrongs of the lower level employers, and thereby allow actions to be brought against groups of alleged employers in singular cases. Further, and as has been also advocated by the Solicitor, the new Administrator also believes that full liquidated damages should be assessed for any FLSA violations claimed in the course of DOL investigations, even though the statute only mandates liquidated damages in the context of actual lawsuits.
The President has echoed some of these initiatives by recently advocating changes to the white collar exemption regulations through a reexamination of the duties tests currently used, as well as the salary level test. These initiatives are designed to make more employees eligible for overtime compensation than under the current regulations.
These appointments and trends almost appear to be blanket indictments on employers. In fact, the DOL estimates that 70% of employers are somehow violating the FLSA, and that too many, in the words of the DOL, have a “‘catch me if you can’ attitude.” These views appear extreme and questionable. To the contrary, employers have been frustrated at the Division’s 2010 decision to no longer provide Administrator Opinions which provide employers with compliance advice as to wage and hour matters. In a recent GAO report, the GAO was also critical of the Division’s lack of transparency and systematic means for obtaining compliance over recent years.
In light of this, and while compliance with the law should always be endorsed, there are means for obtaining compliance through more cooperative and instructive means, as opposed to purely punitive and adversarial means. That is to say, carrots sometimes work, but sticks are also needed at times. It is hoped that the Administration will endeavor to obtain better compliance by using both techniques, but there has been little indication that in the foreseeable future the DOL will resist just using its stick. Unfortunately, this only suggests that employers should view the DOL with suspect, and in the meantime be even more vigilant in auditing their pay practices and employee classifications, and documenting their good faith efforts to comply with the nuances inherent in the FLSA.
Three court decisions from the first nine days of August bring to light some reasons for employers to be concerned. Two of the cases bring into question the viability of agreements employers often enter into with employees to shorten the limitation period for employees to bring lawsuits against their employers. The third case reminds employers that executives may be held personally liable for an employer’s failure to pay overtime under the Fair Labor Standards Act.
LIMITATION PERIOD WAIVERS HELD INAPPLICABLE TO FLSA AND SOME OTHER CLAIMS
Employers in many parts of the country have contracts with employees which, at least in part, shorten the period employment-related claims may be brought in court. Often these shortened periods are for six months, which is much shorter than the 2 or 3 years claims under the FLSA’s statute of limitations may be brought, or other claims such as those for discrimination under federal or state law or wrongful termination may be brought. Until recently, with the exception of just a few jurisdictions these agreements have been enforced by the courts. The key to many of these decisions is that six month limitation periods are common to many laws (such as Title VII), and therefore periods of at least that duration are not inconsistent with public policy. Thus, the shortening of the period is a waiver of procedural right, and so long as the period is still reasonable, it can be waived. The employee still has recourse to vindicate his or her rights under the law. Waivers of jury trials are also commonly enforced by the courts for the same reason.
On August 6, 2013, the Sixth Circuit Court of Appeals, in a case of first impression, held that the enforceability of such provisions is much more limited than previously assumed. In Boaz v. FedEx Customer Information Services, Inc., the waiver agreed to by the employee was as to limitation periods exceeding six months. The employee sued for unpaid overtime pay under the FLSA and for discrimination under the Equal Pay Act. The lawsuit was brought within the two limitation periods under those laws, but after the running of the six month period under the agreement. The district court dismissed the case as being barred by the contractual limitation period.
Reversing the lower court, the Court of Appeals held that the limitation period waiver of FLSA and EPA claims amounted to waivers of the employee’s statutory rights and therefore was impermissible. The Court rejected FedEx’s claims that the waivers were not with respect to the substantive rights under those laws, but rather were merely procedural in nature and therefore waivable. Unlike waivers permitted in the context of discrimination claims under Title VII, the Court reasoned that waivers of pay rights could give employers a competitive advantage over employers who comply with the law. This rationale was based on the Court’s application of the Supreme Court’s 1945 holding that an employee cannot waive his or her right to be paid the minimum wage or overtime pay as otherwise required by the FLSA. The Court distinguished cases under Title VII allowing such waivers because employers do not gain a competitive advantage by discriminating against employees on the base of race, sex or other protected factors.
A few days earlier, on August 2nd, the United States District Court for the Southern District of Texas refused to enforce a limitation period waiver under the Americans with Disabilities Act Amendments Act and the FLSA in Mazurkiewicz v. Clayton Homes, Inc. The waiver in that case was quite similar to that in Boaz. In that case, though, the six month limitation period expired before the EEOC completed its investigation and issued a right-to-sue letter, which is a prerequisite to filing a lawsuit under the ADAAA. Thus, the employee was in a “Catch 22” since he was unable to bring a suit within the timelines of the waiver. The waiver was also invalid as to the FLSA claim because the limitation period in the waiver could negate the employees’ claim for damages preceding the beginning of the period under the continuing violation theory. (The court did, however, enforce the contract’s waiver of the right to bring a collective action.)
Are these cases glimpses of a new trend and legal development, or are they aberrations? It is too early to tell, and whether these cases will be appealed is unknown at this time. In any event, it is likely that both employers and employees will be litigating over these points in the years to come. The logic of these decisions is certainly vulnerable to challenges. For instance, the competitive advantage that the Boaz court claimed employers would gain does not really exist since all employers can, if they choose, adopt waivers with their employees. In these situations, all employers are on the same playing field in that all employers still have to comply with the FLSA and employees must bring claims as they have agreed or under the law. Other flaws appear in the Court’s analysis, as well. As for the Mazurkiewicz decision, an argument could be made – and a waiver could be drafted to allow – for claims to still be regarded as timely after a right-to-sue letter is issued so long as the administrative charge was made in a timely manner.
Notwithstanding these flaws, at this time the Boaz ruling is the law at least in the Sixth Circuit (which covers Michigan, Ohio, Kentucky and Tennessee). Employers in most states – including those within the Sixth Circuit – may still have waivers, but employers must also understand that until this decision is reversed, those waivers may not work as to FLSA and EPA claims, and perhaps also ADEA and FMLA claims. Drafters should also review how these waivers are written and include provisions making them applicable to the extent permitted by law and applicable to claims after any applicable administrative process is exhausted. Waivers still have a value that should not be minimized, not only as to limitation periods, but also as to jury trials and collective and class actions.
MANAGERS MAY BE INDIVIDUALLY LIABLE FOR COMPANY’S WRONGS
On August 1, 2013, the First Circuit Court of Appeals in Manning v. Boston Medical Center reversed a lower court’s decision to grant a motion to dismiss claims for unpaid overtime under the FLSA as well as Massachusetts’ state law. The claims were brought against the hospital as well as two individuals – the hospital’s former President and CEO, and the hospital’s human resources director. While claims against individual agents of employers are atypical in overtime pay cases under the FLSA, the FLSA specifically recognizes that such claims are viable to the extent the employee or agent exerts substantial authority over corporate policy relating to employee wages. Who controls corporate policies regarding wages and day-to-day operations are often key.
The Court held that the pleadings were sufficient to state a claim against the former President and CEO but that they were not sufficient as to the human resources director. Under the precedent in the First Circuit (which covers most of the New England states), the HR Director is not normally of a high enough position to control corporate policy, as is an officer or board member, particularly if the HR Director has no ownership interest in the enterprise. Further, the allegations plead in the complaint, the Court held, did not claim that he had significant control over the pay decisions and policies of the employer. Importantly, the HR Director’s dismissal was upheld in part due to the peculiarity of the Circuit’s precedent pertaining primarily to very senior managers, as well as to the failure of the plaintiff to plead sufficient allegations to hold the HR Director potentially personally liable for the violations asserted in the lawsuit. The lesson or reminder of this case is still significant; executives and other managers may be held personally liable for the FLSA wrongs of the employer.
These cases are also reminders that the law is ever evolving and it is important to review agreements and to audit pay practices to make sure that policies and practices are keeping up with new developments. Prior to these past few weeks, few would have questioned the viability of limitation period waivers and few appreciate the fact that individuals may be held personally liable for the FLSA violations of a business. Now, however, that norm exists no longer.