|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.
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.
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.
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
As the last post illustrates, states are adopting disparate rules concerning meal and rest breaks, and so employers need to pay attention to the laws of the each relevant jurisdiction. Massachusetts is no exception, as a recent case demonstrates.
In Devito v. Longwood Security Services, Inc., a Massachusetts Superior Court judge held that, under state law, employers must pay their employees for meal breaks unless the employees are relieved of all work-related duties during that time. In so holding, the Court rejected the application of the federal “predominant test,” which provides that meal breaks need only be paid when the employee’s meal break time is spent predominantly for the benefit of the employer. The decision holds that the standard Massachusetts employers must meet to avoid paying employees for meal breaks is much stricter than the federal standard.
The Court based its conclusion on the language of the Massachusetts Department of Labor Standards’ regulations, which the Court held to be a source of authority for determining whether certain hours worked should be counted for the purpose of a Wage Act claim. Those regulations provide that “Working Time” does not include “meal times during which an employee is relieved of all work-related duties.” Further, they state that all on-call time is compensable unless the employee is not required to be on work premises and is “effectively free to use his or her time for his or her own purposes.” Taken together, the Court found that meal breaks are compensable hours worked under the Wage Act unless employees are relieved of all work-related duties during the meal breaks.
The Court rejected authorities that applied the “predominant test” used under the federal Fair Labor Standards Act. It ruled that there was no reason to look to interpretations of the FLSA for guidance in interpreting the governing Massachusetts law and regulations because the law and regulations are unambiguous.
While this trial court decision is not binding on other courts, the decision demonstrates the risks that employers face when providing meal breaks to employees without relieving them of all duties. Prudent Massachusetts employers should review their meal break policies and pay employees for any meal breaks during which employees are expected to be available for work-related matters. Only if an employee is truly relieved of all work responsibilities during the meal break can a Massachusetts employer avoid paying employees for break time without risking a potential Wage Act claim.
Jonathan Keselenko, Foley Hoag LLP, Boston, MA
On August 1, 2016, Massachusetts Governor Charlie Baker signed a new pay equity act (the “Act”) into law. The Act, which goes into effect on July 1, 2018, is designed to close the wage gap between men and women. Although Massachusetts already had a pay parity law that prohibits wage discrimination, the Act provides greater clarity on what constitutes unlawful pay discrimination and imposes new rules and restrictions on employers.
First, the Act clarifies what it means to discriminate against workers who perform “comparable work” to others. While the current statute prohibits pay discrimination where workers perform “comparable work,” it does not define that term. Under the Act, comparable work is defined to be work that requires “substantially similar skill, effort and responsibility and is performed under similar working conditions.” The Act, however, does not define “substantially similar,” so that term will still be subject to interpretation by either the Attorney General’s Office or courts.
Second, whereas seniority was the only stated basis for paying variable wages under the old law, the Act recognizes six justifications for pay disparities where workers perform comparable work. Variations in pay are permissible under the Act if based upon: (1) a seniority system, provided that job-protected leave does not reduce seniority; (2) a merit system; (3) a system measuring quality or quantity of production, sales or revenue; (4) geographic location of where the job is performed; (5) education, training, or experience to the extent these factors reasonably relate to the job at issue; and (6) travel, if travel is a regular and necessary condition of the job.
Third, Massachusetts becomes the first state in the country to constrict what employers may ask prospective employees about their wage history. Under the new law, employers may not seek the wage or salary history of a prospective employee from the prospective employee or a current or former employer or require that applicants meet certain salary criteria to be eligible for a job. This provision, however, includes an important caveat: prospective employees may authorize a prospective employer to verify salary history, and prospective employers may confirm salary history after an offer with compensation has been negotiated and made to a prospective employee.
Fourth, the Act makes it unlawful for employers to prohibit employees from discussing or disclosing information about their own wages, or the wages of other employees.
Fifth, the Act establishes an affirmative defense for employers who have audited their pay practices within the prior three years. Specifically, employers who voluntarily evaluate their pay practices and “demonstrate that reasonable progress has been made towards eliminating wage differentials based on gender for comparable work,” have an affirmative defense to pay discrimination claims, so long as the evaluations were reasonable in detail and scope. At the same time, the law prohibits courts from drawing an adverse inference against employers who have not done a voluntary audit.
Sixth, the Act enhances the enforcement scheme of the previous law. The statute of limitations has been extended from one year to three years. The new law also allows employees to go directly to court with their pay discrimination claims without first bringing a complaint to the Massachusetts Commission Against Discrimination or the Attorney General’s Office.
Pay equity has been a topic of significant interest of late both locally and nationally. Massachusetts Attorney General Maura Healey in particular has made pay equity a priority of her office and has been using her enforcement powers to audit employer pay practices to detect and address discrimination. Accordingly, employers should expect that the Attorney General’s scrutiny of discriminatory pay disparities will only increase when the Act goes into effect. Now more than ever, employers should take time to review and evaluate their compensation practices to identify and remedy discriminatory pay disparities, and to take advantage of the new affirmative defense discussed above. They should also review hiring practices to ensure that they are not making impermissible inquiries into the pay histories of prospective employees. They also should review employee handbooks and other policies to ensure that they do not inhibit employees from discussing their compensation, as such a prohibition not only violates the Act, but also federal labor law.
Foley Hoag LLP
The comment period for the United States Department of Labor’s proposed new regulations regarding the white collar exemptions closed on Friday, September 4. For more detail on the proposal, please see the excellent piece by our colleague Jason Reisman.
The WHDI submitted a comment regarding the proposed new regulations, which can be found here.
In short, we believe that the proposed new regulations are a bad idea. Contrary to DOL’s rationale, the regulations do not simplify the interpretation of the FLSA, are seriously flawed, will lead to more (not less) litigation, have significant hidden administrative and employee morale costs, and, contrary to impression created by publicity, do not obligate employers to increase an employee’s total compensation under the FLSA when converting from exempt to non-exempt status.
U.S. Department of Labor WHD Issues Administrator’s Interpretation on Independent Contractors and Asserts that “Most Workers are Employees”
As promised earlier this summer, on July 15, 2015, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued an “Administrator’s Interpretation” (AI) regarding when individuals are misclassified as independent contractors under the Fair Labor Standards Act (FLSA). The AI sends a signal to employers that the WHD has set a demanding standard for establishing when an individual is properly classified as an independent contractor and indicates that the agency views the issue as an enforcement priority. The AI states that, in the view of the WHD, “most workers are employees under the FLSA’s broad definitions.”
As background, unlike regulations, AIs are not subject to the rulemaking process such as that which is now underway for the proposed amendments to the white collar overtime rules. Rather, the AI provides the WHD’s view of the law, and that view is very unfriendly to those attempting to classify workers as independent contractors. In media interviews this week, the WHD’s Administrator David Weil stated that the AI was designed to give employer’s “fair notice” that they will run into the agency’s crosshairs if they misclassify individuals.
According to the AI, in order to determine whether an individual is an employee or independent contractor, the “economic realities” need to be examined to determine the true relationship. This test is to determine “whether an individual is economically dependent on the [putative] employer (and thus an employee) or is really in business for him or herself (and thus is an independent contractor).”
The AI uses a six-factor test commonly used by courts in determining status under the FLSA. The factors are (1) whether the work performed is integral to the employer’s business; (2) whether the worker has an opportunity for profit and loss based on his/her skills; (3) the relative investments of the employer and the worker; (4) whether the work requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. The AI emphasizes that no one factor is determinative.
While the factors discussed above are not new, the WHD’s application of them is more expansive than ever articulated by the federal government. In weighing the factors in the AI, the WHD clearly puts its thumb on the scale in favor of employee status. For example, in discussing the “control” factor — which many have viewed as the most indicative factor in determining status — the AI emphasizes that “it should not play an oversized role in the analysis” and states that an employer’s “lack of control over workers is not particularly telling if the workers work from home or offsite.” It also states that “workers’ control over the hours when they work is not indicative of independent contractor status.”
Importantly, the AI states it will give no weight to the parties’ understanding or agreement concerning the relationship. The AI states that “an agreement between an employer and a worker designating or labeling the worker as an independent contractor … is not relevant to the analysis of the worker’s status.”
Notably, the FLSA is only one of many laws governing worker classification. Many states, including Massachusetts, have set a high bar for establishing that an individual is an independent contractor. Given these trends, we expect to see litigation and enforcement action to increase.
Massachusetts Highest Court Rules that Taxicab Drivers Are Independent Contractors Under the Wage Act
The Massachusetts Independent Contractor statute is among the strictest in the country, and employers face an uphill battle in proving that individuals satisfy the three-prong test for correctly being classified as independent contractors. The test, however, is not impossible to surmount, as demonstrated by a decision issued earlier this week.
On April 21, 2015, the Massachusetts Supreme Judicial Court (SJC) held in Sebago, et al. v. Boston Cab Dispatch, Inc., et al., that taxicab companies may classify taxicab drivers as independent contractors. The plaintiffs in this case were taxicab drivers that leased taxis and medallions at a flat-rate from taxicab and medallion owners. The plaintiffs brought suit against three groups of defendants: taxicab and medallion owners, dispatch service companies and a taxicab garage. They claimed that the defendants jointly misclassified them as contractors rather than employees, entitling them to relief under Massachusetts’ minimum-wage and overtime laws.
The SJC ruled against the taxicab drivers. In reaching this conclusion, the court first addressed the issue of whether the defendants were joint employers. It held that the defendants should not be considered “as a single employer exercising monolithic control over the taxicab industry.” Instead, entities can formulate legitimate business-to-business arrangements to secure services, and this, on its own, does not render the entities joint employers. Thus, when analyzing claims under the independent contractor statute, the SJC explained that courts must look separately at each defendant’s relationship with the plaintiffs to assess potential liability.
Before determining whether the taxicab drivers were employees, the court assessed the threshold question of whether the taxicab drivers provided services to the defendants. The court held that the drivers provided no services to the garage, but that the drivers did provide services to the dispatch companies and the taxicab and medallion owners.
Next, the court turned its analysis to whether the dispatch companies and taxicab and medallion owners could lawfully classify the drivers as independent contractors under Massachusetts’ independent contractor statute. The SJC explained that all three of the following elements must be met in order for the defendants to prevail: (1) the drivers must be “free from control and direction in connection with the performance of the service,” both under their contracts and in fact; (2) the service being performed must be “outside the usual course of the business of the employer”; and (3) the drivers must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”
Under the first prong, freedom from direction and control, the SJC determined that the drivers were mostly independent. The drivers selected their own shifts and which passengers to pick up or refuse. The court also found that the defendants satisfied the second prong because the drivers’ services were outside the usual course of the defendants’ businesses. The court reasoned that the medallion owners’ leasing businesses were not dependent on the success of the drivers’ operations. Rather, a driver paid a daily flat-rate to lease a taxicab, and the taxicab and medallion owner retained this fee regardless of how much money the driver earned on a given day. The court similarly found that the dispatch companies were not in the business of giving rides; instead, they were in the business of selling dispatch services to medallion owners.
Finally, under the last prong, the court found that the drivers engaged in an independent trade or business. Specifically, the drivers had the freedom to lease from whomever they wanted on whatever days they wanted. The drivers were not tied to particular medallion owners, and they were free to advertise their services as they wished. Because the defendants carried their burdens under all three prongs of the statute, the SJC ruled that the drivers were properly classified as independent contractors. A significant component of the court’s rationale was that regulations governing the taxicab industry recognized that drivers could be independent contractors as well as employees. Under this regulatory scheme, the entities–be it the taxicab and medallion owners, dispatch companies or the drivers themselves–are free to plan an arrangement that provides for either result.
Sebago is important because it reiterates that legitimate business-to-business relationships are outside of the stringent Massachusetts independent contractor statute. The plaintiffs’ bar will likely claim that the unique regulatory scheme covering the taxicab industry makes this case inapposite to misclassification disputes arising in other industries. However, the decision suggests that businesses in any industry will not be treated as employers for purposes of state wage laws when the services they provide are legitimately different from those provided by a contractor.
First Circuit Holds that Variable “Per Diem” Payments May be Part of an Employee’s Regular Rate of Pay for Calculating Overtime
The U.S. Court of Appeals for the First Circuit held recently in Newman v. Advanced Technology Innovation Corp., that a per diem payment that is based on the number of hours worked by an employee must be considered part of the regular rate of pay for calculating overtime. In Newman, two former employees claimed they were owed additional overtime pay under the Fair Labor Standards Act (FLSA), because their employer failed to include per diem payments when calculating their regular rate of pay. The per diem payments were intended to reimburse the employees for travel expenses incurred, and the employer had a practice of reducing the per diem payment depending on the number of hours worked by the employee. The district court for Massachusetts granted summary judgment for the defendant, explaining that per diems generally are excluded from the calculation of an employee’s regular rate for overtime purposes.
On appeal, the First Circuit reversed and ordered that judgment be granted in favor of the plaintiffs. Although the FLSA states that an employee’s regular rate of pay does not include, “reasonable payments for traveling expenses” incurred by employees, the Department of Labor had taken the position in a handbook that a per diem payment is part of the regular rate of pay when it is calculated based on hours worked. The First Circuit accepted this position, and because the employer had adjusted the per diem payments based on hours worked, the Court concluded that the per diems should have been included in the plaintiffs’ regular rate of pay for overtime purposes.
The decision in Newman is a reminder that in order to properly treat a per diem as a non-wage, the method of calculating the per diem should not be based on hours worked. A per diem can be partially discounted and still not be considered a wage, but the discount must not be hours-based. The Newman decision also warns that courts will “pierce the labels parties affix to the payments” and consider the realities of how employees are being compensated. To be safe, employers should carefully examine how their per diem policies are written and enforced in order to ensure that they do not incur unanticipated overtime liability.
By Bernie Siebert
On May 6, 2014 Judge Richard P. Matsch of the United States District Court for the District of Colorado ruled that the plaintiffs from a Greeley, Colorado meat processing plant did not prove that they were entitled to additional pay for donning and doffing, walk time and an unpaid meal period. The case spanned nearly six years and involved two trial proceedings, one trial to determine liability and a second to determine damages. The decision is attached here.
In 2011, following a weeklong trial, the Court ruled that there was a question as to when the workday begins and ends and a question as to whether employees were receiving a full 30 minute unpaid meal period. He ordered that a second trial concerning the issue of damages be held. That trial was held in 2013 with final arguments in January, 2014.
In its May 6th Opinion and Order, the Judge ruled that he was incorrect in believing that the 30 minute meal period was required by law or regulation. Rather, the Court found that the 30 minute unpaid meal period was a product of the collective bargaining agreement between the company and the United Food and Commercial Workers Union. The Court specifically ruled that there was no legal requirement that a meal period be 30 minutes. Because the Union never pursued a grievance claiming that employees were not receiving a full thirty minute meal period (which included the time required for donning and doffing), the Court found that the Union had accepted the 30 minute provision knowing that employees were not in fact receiving a full 30 minutes. The Court then turned to the issue of the compensability of the donning and doffing and walk time.
In 2000 the Company and Union agreed to certain amounts of time for performing donning and doffing, walk to wash and washing tasks. In 2007, the Company and Union agreed to certain amount of time for walk time at the beginning of the shift. That agreement was incorporated into the parties’ 2009 agreement. As part of that agreement, the company paid two years of back walk time to then current employees. The Union opposed making the same payments to former employees. At the trial on damages, each side presented expert time study witnesses. Naturally, the Plaintiffs’ expert testified that employees were substantially underpaid for donning and doffing and walk activities. The company’s expert testified that employees were being properly compensated for all such activities. The Court had previously ruled that Section 203(o) of the Fair Labor Standards Act applied thus excluding the donning and doffing time at the beginning and end of each shift, primarily leaving open the issues of donning and doffing at the meal period and walk time. The Court noted that the substantial differences in the amounts calculated by the two experts reflect the difficulty in determining “the realities of the workplace by these methods.” Ultimately, the Court adopted the findings of the company’s expert. The Court stated that “…the adversarial process of civil litigation is not designed for adjudicating this dispute and judges are ill-equipped to evaluate the work of industrial engineers doing time studies.” The Court found because of the conflicting views, that it could not say “with a reasonable probability that Plaintiffs have met their burden of proving their entitlement to additional compensation.”
Finally, the Court stated “It must be admitted that the result now reached is contrary to the expectations generated by the previous Order. It is, however, the result of careful reflection on the evidence in this case and the court opinions cited above.” The Court also noted that the Company’s attorney had stated that the company would, to the extent profitable, make the walk time payments to those former employees that did not receive such in 2009. The Court stated that it took the representation as a pledge to do so. The case was dismissed with costs awarded to the company.
Yesterday, the Massachusetts Supreme Judicial Court held that managers of limited liability companies can be individually liable under the Massachusetts Wage Act for unpaid wages due to employees. Historically, the Wage Act has been interpreted to impose individual liability on officers of corporations, but not on managers of LLCs. In Cook v. Patient Edu, the SJC dramatically departed from past interpretations of the Act and determined that managers of LLCs may have to personally pay the price for wage and hour violations affecting employees.
The decision arises out of a lawsuit originally brought in Massachusetts Superior Court, against Patient Edu, LLC and two of its managers by Cook, a former employee, for unpaid wages. Cook claimed that he accepted a position as Patient Edu’s business development director, for which he was to be paid a sizable base salary and bonuses, but was not paid during the first six months of his employment and then only sporadically thereafter. The Superior Court dismissed the claim against the two managers, concluding that the Wage Act “does not, by its plain language, impose individual liability on the managers of an LLC.”
On appeal, the SJC reversed the lower court, holding that “a manager who ‘controls, directs, and participates to a substantial degree in formulating and determining’ the financial policy of a business entity . . . may be a ‘person having employees in his service’ . . . and thus may be subject to liability for violations of the Wage Act.” The court recognized that the Wage Act does not, by its plain language, impose liability on managers at LLC’s (but rather only on individuals involved in the management of a “corporation”), but explained that this was in part because when the individual liability language was added to the statute, limited liability companies did not exist as a form of business association. The court concluded that a more expansive interpretation of the Wage Act was justified because “the legislative intent of the Wage Act, to hold individual managers liable for violations, is clear.”
The SJC’s decision greatly expands the potential liability of managers of LLCs, making clear that they cannot use that form of business entity to avoid personal liability. In a civil action under the Wage Act, a successful plaintiff is entitled to treble damages as well as attorneys’ fees. Massachusetts-based LLCs, as well as other LLCs with employees working in Massachusetts, should be aware of the expanded potential liability.