DOL Issues Final Overtime Rule, Increasing Required Salary Level for Exempt Employees
The Department of Labor issued, on September 24, 2019, its final rule revising the salary requirements for exemption from the Fair Labor Standards Act’s mandate to pay overtime for hours worked over 40 in a workweek. The new rule increases the salary required to meet the executive, professional and administrative exemptions to $684 per week (the equivalent of $35,568 per year). The required compensation for highly compensated employees is raised to $107,432.
Effective Date: The effective date of the new rule is January 1, 2020.
Bonus and Incentives: The new rule allows nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the required salary. This provision applies only to the standard exemption, not the highly compensated exemption. To bring an employee up to the required level, an employer may make a final catch-up payment (not more than 10 percent of the required salary) at the end of the year. The final payment must be made within one pay period or one month of the end of the year. An employer may elect to use any 52-week period as its measuring year.
No other changes: The new rule does not change the duties tests for the exemption. It does not commit the DOL to any timetable for increasing the salary level in the future, although the DOL states that it intends to update these levels, which had not been updated since 2004, “more regularly in the future through notice-and-comment rulemaking.”
Legal Challenges: The new salary test is much lower than the rule adopted by the Obama administration in 2016, which was enjoined by a federal court in Texas. The new test may be challenged by worker advocates, but such challenges are not likely to prevail.
Impact: The new rule was set to allow most salaried exempt employees to remain exempt, but will have some impact, especially on assistant managers in retail, restaurants, non-profit and service industries, especially in rural areas. Employees paid less than the salary requirement must either be paid overtime or have their salaries raised to the required level. Raising wages may, of course, have a ripple effect to avoid wage compression. On the other hand, in some areas (California, New York City, Washington D.C.) the new salary test is not much higher than the applicable minimum wage. The hourly equivalent of $684 per week is $17.10 per hour.
Don’t forget: Under the new test, the no-docking rule will continue to apply. Subject to a number of specific exceptions, the no-docking rule requires exempt employees to receive their full salary for every week in which they perform any work. Full day absences for personal reasons may be docked. Full day absences for sickness and disability may be docked in accordance with a sick or disability leave plan, and FMLA leave may be docked.
Also, under the new test, the existing duties tests for the administrative, executive and professional exemptions will continue to apply. Each of these tests contain language, such as “primary duty” or “discretion and independent judgment” that generates disputes. Plaintiffs’ lawyers are on the lookout for possible misclassification claims.
Supreme Court to Decide if Offer of Judgment Moots Collective Action
The Supreme Court has agreed to decide whether a defendant in a Fair Labor Standards Act case can avoid a collective action by offering full relief to the plaintiff before other employees join the case.
The practice in FLSA cases is for plaintiffs’ lawyers to file a lawsuit on behalf of the original named plaintiff, and then seek to expand the case into a collective action by issuing notices of right to opt-in to other similarly situated employees. To avoid the prospect of a collective action, employers sometimes choose to make an offer of full relief to the named plaintiff early in the case. They then argue that the case should be dismissed as moot, leaving no pending lawsuit for other employees to join.
This approach has received a mixed reception in the federal courts of appeals. The Ninth and Eleventh Circuits held that a case should be dismissed when the named plaintiffs’ claims have been resolved. The Third and Fifth Circuits have held that a collective action, like a class action under a Rule 23, takes on a life of its own when the case is filed and does not become moot when the named plaintiff’s claim is resolved. The arguments involve some arcane issues involving the distinction between collective actions and class actions and the “case or controversy” requirement under Article III of the Constitution.
In the case that the Supreme Court agreed to hear, the defendant company operates over 200 nursing homes and other facilities. The plaintiff worked for one of those homes for only several months. She filed suit claiming that the company violated the FLSA by making automatic deductions for meal breaks. To make the case go away quickly, the company responded to the court complaint by making an offer of judgment for $7,500 in alleged unpaid wages and liquidated damages, plus attorneys’ fees, costs and expenses. The district court granted the company’s motion to dismiss the case as moot, but the Third Circuit reversed, holding that the company could not preempt a collective action by “picking off” the named plaintiff.
The Supreme Court will hear oral argument in the case, Genesis Healthcare Corporation v. Symczyk, in its term starting October 2012.
HOW TO (AND HOW NOT TO) CUT OFF ACCRUAL OF PLAINTIFFS’ ATTORNEYS’ FEES
It often happens that by the time the parties to a FLSA lawsuit discuss settlement, the claim for attorneys’ fees exceeds the backpay and liquidated damages that the plaintiff could recover if the claim prevailed. Knowing this, employers have tried to cut off accrual of plaintiffs’ attorneys’ fees by paying, or offering to pay, the amount the plaintiff could recover early in the case. Two recent decisions illustrate successful and unsuccessful ways of going about this.
In a case from Florida, the plaintiff filed a collective action complaint in federal court. The employer denied liability, but tendered full payment to the individual plaintiff of the amount it estimated as his backpay, liquidated damages and interest, totaling $638. The plaintiff opposed the tender, claiming that it underestimated the value of his claim, which he said was worth $3,000. Again denying liability, the employer tendered $3,000, split between backpay and liquidated damages. The plaintiff was forced to agree that his individual claim had become moot, but requested that the court award him attorney’s fees and costs, as a prevailing party.
The district court denied that request. The Eleventh Circuit affirmed that denial, holding that under the statutory language, attorney’s fees and costs are allowed “in addition to any judgment awarded to the plaintiff or plaintiffs.” “The FLSA plainly requires that the plaintiff receive a judgment in his favor to be entitled to attorney’s fees and costs,” the court wrote. It went on, however, to hedge its ruling with a confusing footnote that seeks to limit the holding to situations in which the employee concedes that his claim should be dismissed before trial as moot. What the footnote means may be fleshed out in future rulings. For now, the lesson from this case is that it may be possible to avoid paying attorney’s fees and costs in their entirety, if the employer tenders the most the plaintiff could recover early in the case. Dionne v. Floormasters Enterprise, 2012 WL 104906 (11th Cir. Jan. 13, 2012). Of course, a tender is not a settlement agreement, and there is no possibility, under this scenario, of obtaining a confidentiality agreement from the employee.
A case from North Carolina illustrates how to fail to cut off accrual of attorney’s fees. In that case, defense counsel sent plaintiffs’ counsel offers of full relief to all plaintiffs including costs and attorneys fees to date. (The defense was not trying to avoid paying attorneys fees and costs in their entirety, but to cut off their future accrual). The offer did not specify amounts, but said that amounts would be based on affidavits to be provided by each plaintiff. The letter further stated that the offer was to enter into a settlement agreement including a confidentiality clause. The purpose of the offer was not to avoid paying attorney’s fees and costs in their entirety, but to cut off their continuing accrual.
Based on this offer, the district court dismissed the lawsuit as moot, on the grounds that the defense had offered everything that plaintiffs could possibly recover. On appeal, the Fourth Circuit reversed on several grounds. First, the defense did not offer to permit entry of a judgment, but only a contractual settlement agreement, which is more difficult to enforce than a judgment. Second, the offer was deficient because it was conditional. Instead of offering a sum certain, it offered to permit calculation of backpay and liquidated damages based on affidavits. Third, the offer was deficient because it contained a confidentiality clause. A judgment, the court wrote, would not be confidential. Simmons v. United Mortgage and Loan Investment, 634 F.3d 754 (4th Cir. Jan. 21, 2011). One lesson from this case is that if an employer wants to put an end to litigation by making an offer of full relief, it must bite the bullet and tender what the plaintiffs would receive if they won, with no strings attached.
Neither of these decisions addresses the related concern whether an offer of full relief to the named plaintiff can make a case moot, and require dismissal before the court certifies a collective action. For a discussion of how offers of judgment affect motions for collective action notice, see the September 25, 2011 posting in this blog.
FOURTH CIRCUIT RULING ON CLOTHES CHANGING AND DE MINIMIS DISAPPOINTS EMPLOYERS; FAVORABLE RULING ON MEAL BREAK
The traditionally conservative Fourth Circuit made two disappointing rulings, and one favorable ruling, in a donning and doffing case against a Delaware poultry processor. Perez v. Mountaire Farms, Inc., decided June 7, 2011.1
First, the court unanimously held that donning and doffing smocks, bump caps, hair nets and other gear was not excluded from working time under the Portal-to-Portal Act, but came under the “integral and indispensable” exception to the Portal-to-Portal Act created by the Supreme Court in Steiner v. Mitchell.2 The court rejected the argument that the environment in a poultry plant is different from the environment in Steiner, which involved a battery plant with lethal amounts of lead and sulfuric acid. It adopted a two-part test for deciding whether donning and doffing is “integral and indispensable.” The test is: (1) whether the donning and doffing is necessary to the principal work performed, and (2) whether it primarily benefits the employer. This formulation appears to read the word “integral” out of the Supreme Court’s Steiner holding. While “necessary” and “indispensable” mean the same thing, “integral” conveys something different—that the activity is part of the principal activity, not part of the preparation for it. The Fourth Circuit’s ruling would not necessarily apply in a unionized facility, where donning and doffing may be excluded from compensation under Section 3(o) of the FLSA. Sepulveda v. Allen Family Foods.3
The decision widens a circuit split. The Sixth Circuit reached a similar conclusion in a case involving a frozen food plant. Franklin v. Kellogg Co.4 The Second Circuit, however, held that the Steiner exception is limited to lethal working environments. Gorman v. Consolidated Edison Corp.5 The Ninth Circuit held that donning and doffing the sort of gear worn in a poultry plant is “de minimis as a matter of law.” Alvarez v. IBP.6
Second, the Court ruled (2-1) that the donning and doffing was not excluded from compensation under the de minimis doctrine. In Anderson v. Mount Clemens Pottery7 the Supreme Court held that a few minutes a day of work beyond the scheduled shift can be disregarded. The case law has generally recognized an upper limit of 10 minutes per day. Although the compensable donning and doffing in Perez was found to take 10.204 minutes per day, the majority found that it was not de minimis. Their reasons were (1) the parties’ expert witnesses were able to measure the time (although they reached different figures); (2) the time, when aggregated, became significant; and (3) the additional work was performed on a regular basis.
Third, the court rejected (2-1) the employees’ claim that donning and doffing before and after the meal break was compensable time. It found that the time was part of the meal break, not working time. The court’s treatment of that issue illustrates how much depends on luck of the draw in FLSA cases. The majority stated that the court was required to follow its earlier decision in Sepulveda v. Allen Family Foods8, which held that donning and doffing at the meal break is not working time. However, the majority stated that Sepulveda was based on an assumption rather than facts, and that if it were up to them, they would have reached a different conclusion. The majority consisted of Court of Appeals Judge Barbara Milano Keenan and District Judge Irene C. Berger, from the Southern District of West Virginia, both Obama appointees. The third member of the panel, Circuit Judge J. Harvie Wilkinson, III, a Reagan appointee, wrote the Sepulveda decision criticized by the majority. He responded that the FLSA “does not require every controversy over ever smaller increments of time be litigated out to three decimal points.” For employers not exposed to donning and doffing claims, the chief significance of the decision may be the ruling on the de minimis doctrine. Many work practices apart from donning and doffing can give rise to small amounts of overtime. When many claims for such amounts are aggregated in a class or collective action, the exposure can become substantial. Additionally, even when the exposure is relatively small, plaintiffs’ counsel are tempted to litigate over de minimis claims by the prospect of recovering attorneys’ fees. The Fourth Circuit’s ruling may encourage one of the most distasteful kinds of lawsuits—those in which the plaintiffs’ claim for attorneys’ fees exceed the amount in controversy.
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1. 2011 WL 2207110.
2. 350 U.S. 247, 256 (1956).
3. 591 F.3d 209, 214 (4th Cir. 2009), cert. denied, 131 S. Ct. 187 (2010).
4. 619 F.3d 604 (6th Cir. 2010).
5. 488 F.3d 586, 593 (2d Cir. 2007).
6. 339 F.3d 894, 903-04 (9th Cir. 2003), aff’d, 546 U.S. 21 (2005).
7. 328 U.S. 680, 692 (1946).
8. 591 F.3d at 216.
FLSA Cases to Watch in 2011
In the area of labor and employment law, the case deservedly garnering the most attention is Dukes v. Wal-Mart, 603 F.3d 571 (9th Cir. 2010)(in banc), in which the Supreme Court granted certiorari to consider the propriety of a nationwide sex discrimination class action. Although the case does not directly involve wage-hour claims, employers hope that the Supreme Court will chill judicial enthusiasm for big cases that unfairly create enormous pressure on a defendant to settle.
The Supreme Court heard oral argument on October 13, 2010, in Kasten v. Saint Gobain Performance Plastics Corp., 570 F.3d 834 (7th Cir. 2009) in which the Seventh Circuit held that verbal complaints are not protected by the anti-retaliation provisions of the Fair Labor Standards Act. The Supreme Court has not granted certiorari in any wage-hour case thus far in the current term which started in October 2010. On January 10, 2011, the Supreme Court denied a petition for certiorari seeking review of the Seventh Circuit’s decision in Spoerle v. Kraft Foods, 614 F.3d 427 (7th Cir. 2010) which held that § 3(o) of the FLSA does not preempt state laws which lack a parallel provision. Kraft hoped to quash an emerging trend in which plaintiffs bring donning and doffing cases under state laws which do not incorporate the Portal-to-Portal or § 3(o) defenses.
Two pending petitions for certiorari are especially important. In In re Novartis Pharmaceuticals Corp., 611 F.3d 141 (2d Cir. 2010), the employer is seeking certiorari to review the Second Circuit’s decision holding that pharmaceutical representatives are not covered by the administrative or outside sales exemptions from the FLSA. In Kuzinski v. Schering Corp., 384 Fed. Appx. 17 (2d Cir. 2010), the employer is seeking certiorari to review of a companion Second Circuit decision, decided in tandem with Novartis, again holding that pharmaceutical representatives are not covered by the outside sales exemption. There is a circuit split on the administrative exemption issue. The Third Circuit held, in Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010) that pharmaceutical representatives are covered by the administrative exemption. Novartis and Schering also contend that the Second Circuit erred in deferring to a Department of Labor amicus brief. They argue that courts owe no deference to Department of Labor positions contrary to established industry practice and expressed for the first time in litigation.
Another petition for certiorari worth watching was filed in Urnikis-Negro v. American Family Property Services, 611 F.3d 665 (7th Cir. 2010). In that case, the plaintiff is seeking review of the Seventh Circuit’s ruling that in misclassification cases, backpay should be determined using the fluctuating workweek formula for computing overtime. The use of that formula is highly beneficial to employers: it reduces their exposure to roughly one-quarter of what it would be under the method of computing overtime for hourly employees. There is no circuit split on this issue, however, some lower courts, most notably the Northern District of California in Russell v. Wells-Fargo, 672 F. Supp.2d 1008 (C.D. Cal. 2009) have rejected use of the fluctuating workweek formula in misclassification cases.
At least two important cases are also pending in federal circuit courts. In DeLodder v. Aerotek, 08-cv-6044 (C.D. Cal. Aug. 16, 2010) the Ninth Circuit agreed to hear the plaintiffs’ interlocutory appeal of a district court order denying class certification of claims, brought under state law, that recruiters were misclassified under the administrative exemption. The district court denied class certification on the grounds that the case required individualized determinations concerning the exercise of discretion and independent judgment exercised by the recruiters. This issue comes up frequently in collective and class actions. The appeal was granted November 10, 2010, so it will be some time before an opinion can be expected.
On January 26, 2011, the Fourth Circuit will hear oral argument in Perez v. Mountaire Farms, 610 F. Supp. 499 (D. Md. 2009), which involves the application of the Portal-to-Portal Act and de minimis rule to donning and doffing in a non-unionized poultry plant. As in Novartis, the Department of Labor has filed an amicus brief supporting plaintiffs. In 2009, the Fourth Circuit ruled that donning and doffing claims in a unionized poultry plant are precluded by § 3(o) of the FLSA. Sepulveda v. Allen Family Foods, Inc., 591 F.3d 209 (4th Cir. 2009). Perez was decided by Judge Andre Davis, who has since been elevated to the Court of Appeals.
Eric Hemmendinger, Shawe & Rosenthal
Federal Defenses to Donning and Doffing Claims May Not Protect Against State Law Claims
The Seventh Circuit’s August 2, 2010 holding that § 3(o) of the Fair Labor Standards Act does not preempt state laws should not come as much of a surprise. Spoerle v. Kraft Foods Global, Inc., 2010 WL 2990830 (7th Cir. 2010). The FLSA specifically provides that it does not preclude states from passing more protective laws, such as higher minimum wages. State wage-hour laws are also an established exception to the labor law preemption doctrine. Thus, the worrisome thing about the Spoerle decision is not the preemption ruling but the potential exposure to donning and doffing claims under state law that it highlights. While federal law includes two important defenses to donning and doffing claims, the Portal-to-Portal Act and § 3(o), most state laws and regulations lack them.
The FLSA contains no definition of the term “work” or “working time.” After World War II, the Supreme Court held that work includes “all time during which an employee is necessarily required to be on the employer’s premises, on duty or at a prescribed work place.” Anderson v. Mount Clemons Pottery Co., 328 U.S. 680 (1946). That definition of work included time spent changing clothes and washing up that many employers excluded from paid time, in many instances pursuant to collective bargaining agreements. Outraged, Congress passed two amendments designed to override the holding that changing clothes at work (“donning and doffing”) is necessarily included in working time. The Portal-to-Portal Act of 1947 excluded preliminary and “postliminary” activities from working time, if there was an established practice of not paying for them. Two years later, Congress amended the FLSA by adding § 3(o), which provides that when employees are covered by a collective bargaining agreement, changing clothes and washing up are not work if there is an established practice of excluding them from working time. In 1956, the Supreme Court drove a hole in the Portal-to-Portal Act’s protection, holding that changing clothes must be counted as work if it is “integral and indispensable” to the employee’s primary activity. Steiner v. Mitchell, 350 U.S. 247 (1956). The Steiner case arose in a battery plant in which the employees were exposed to lead and acid. Many subsequent decisions limit Steiner to donning and doffing protective gear in extraordinarily hazardous situations.
In recent years, there has been a wave of donning and doffing cases, especially against meat packing and poultry plants. In Spoerle, the plaintiffs brought a collective action against an Oscar Mayer meat processing plant in Wisconsin, under federal and state law, claiming that time spent donning and doffing protective gear should have been included in working time. The Company asserted the Portal-to-Portal and § 3(o) defenses. The district court ruled that neither defense applied under federal law. It characterized as “truly bizarre” a solidly reasoned Second Circuit’s decision holding that Steiner is limited to extraordinarily dangerous workplaces. Instead, it read Steiner as applying to any company-required protective equipment, thus practically eliminating the Portal-to-Portal Act defense to donning and doffing cases. It further held that protective gear was not “clothes” within the meaning of § 3(o). 527 F. Supp.2d 860 (W.D. 2007). (The Department of Labor has flip-flopped on this issue. See the June 24 posting in this blog).
After the initial district court decision, the parties agreed to a stipulation, in which the company withdrew all but two defenses: (1) that the donning and doffing constituted changing clothes under § 3(o), and (2) that § 3(o) preempted the state law claims. The district court then issued a second decision. It recognized that a Seventh Circuit decision, issued since its original decision, supported the company’s argument that § 3(o) covers donning and doffing protective gear. However, the court found it unnecessary to decide the § 3(o) defense under federal law, because there was no comparable provision in Wisconsin state law. Thus, unless § 3(o) preempted state law, the plaintiffs would win. The district court found no preemption. The Company appealed to the Seventh Circuit.
On appeal, the plaintiffs continued to argue, as an alternative grounds for affirmance, that § 3(o) does not cover donning and doffing protective gear. The Court of Appeals said that argument “is a loser, for reasons given in Sepulveda v. Allen Family Foods, Inc., 591 F.3d 209 (4th Cir. 2009).” (Note: the author of this article was defense counsel in Sepulveda.) However, the Court of Appeals accepted the plaintiffs’ argument that § 3(o) does not preempt state law. The Company did not lose for lack of a good panel. The unanimous panel included Judges Easterbrook and Manion as well as Judge Evans. The Court of Appeals did not consider whether the Portal-to-Portal Act covers donning and doffing. That issue is presented in a case pending argument in the Fourth Circuit, Perez v. Mountaire Farms.
Many donning and doffing cases, particularly those concerning the poultry industry, arose in states which lack state overtime laws. Sepulveda, for example, concerned a plant in Delaware. In states which have overtime laws, the Spoerle decision highlights the need to determine whether there is any state law or regulation comparable to the Portal-to-Portal Act or § 3(o). A Westlaw search for terms used in § 3(o) (the search terms were “time /s spent /s “changing clothes”) returned only three states with comparable provisions, West Virginia, Idaho and Iowa. In other states, depending on how the state law and regulations are worded, an employer might argue that the state should not use the original definition of work articulated in Anderson v. Mount Clemons Pottery, which was modified twice by statute, and should instead follow the FLSA, as amended by the Portal-to-Portal Act and § 3(o). That, however, would be a complicated argument to make, especially in a state court. In view of the risk illustrated by the Spoerle decision, employers in states with overtime laws would be well advised to reevaluate their potential exposure to donning and doffing claims, taking into account whether the state law and regulations incorporates the Portal-to-Portal Act and § 3(o) defenses.
By Eric Hemmendinger, Shawe & Rosenthal, LLP, Baltimore Maryland
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