By Jonathan Keselenko, Chris Feudo, and Emily Nash
Foley Hoag LLP
Massachusetts law requires that non-exempt employees be paid at least 1.5 times their hourly rate for hours worked beyond the first 40 hours per week, and that certain employees be paid at least 1.5 times their hourly rate for all hours worked on Sundays. However, there has been confusion as to how these laws apply to employees who are paid exclusively by commissions. Late last week, the Massachusetts Supreme Judicial Court ruled in Sullivan v. Sleepy’s LLC that non-exempt employees paid entirely on commissions or advances are eligible for overtime and Sunday pay, regardless of how much they make in commissions. Thus, even if employees make the equivalent of or more than 1.5 times the minimum wage in commissions, non-exempt employees are still entitled to overtime pay for hours worked over 40 in a work week and, if eligible, Sunday premium pay for hours worked on Sundays.
The plaintiffs in the case, sales employees at Sleepy’s mattress stores, were paid a $125.00 daily draw plus any commissions they earned in excess of the draw. When the employees worked more than 40 hours in a work week or on Sunday, they were not paid any additional compensation. However, their compensation always equaled or exceeded the minimum wage for the employee’s first 40 hours worked plus 1.5 times the minimum wage for all hours worked over 40 hours and on Sundays. In 2017, the plaintiffs sued in state court for unpaid overtime and Sunday pay. The defendants claimed that the employees were not entitled to any additional compensation beyond what they had received, because their commissions and advances always equaled or exceeded the minimum wage for the first 40 hours worked plus 1.5 times the minimum wage for hours worked in excess of 40 and on Sundays.
The defendants removed the case to federal court, where the judge subsequently stayed the proceedings and certified two questions of first impression under Massachusetts law to the SJC:
- Is an employee paid on commission entitled to additional compensation for overtime hours if the employee’s draws and commissions are equal to or greater than 1.5 times the employee’s regular rate or at least 1.5 times the minimum wage for all hours worked over 40 hours in a work week?
- Is a commission retail employee who works on a Sunday entitled to any additional compensation for Sunday premium pay when the employee’s draws and commissions compensate the employee in an amount equal to or greater than 1.5 times the employee’s regular rate or at least 1.5 times the minimum wage for all Sunday hours worked?
The SJC answered both questions in the affirmative. While the Court agreed that the minimum wage constitutes a commission-only employee’s “regular rate” for the purposes of calculating his or her overtime or Sunday pay, the Court explained that commission-based compensation cannot be retroactively allocated as hourly and overtime compensation, even if that compensation equaled or exceeded the minimum wage for the first 40 hours worked and 1.5 times the minimum wage for all hours worked over 40 hours and on Sundays. Instead, employees are entitled to separate and additional payments of 1.5 times the minimum wage for every hour worked over 40 hours in a week and on Sundays.
To the extent employers have maintained policies by which they did not pay overtime rates or, if applicable, Sunday rates for their non-exempt commission-only employees when their commissions equaled or exceeded the overtime compensation, these policies must now change. These employees must be compensated for their overtime or Sunday hours worked, regardless of their weekly draws and/or commissions.
By Jonathan Keselenko, Foley Hoag LLP, Boston, MA
The Massachusetts Attorney General Maura Healey (the “AG”) recently released her long-awaited guidance regarding the 2016 overhaul of the Massachusetts Equal Pay Act (the “Act”), which takes effect on July 1, 2018. The Act, which, among other things, prohibits employers from paying employees of different genders differently for comparable work, has left employers with many questions as to how its provisions would be interpreted and enforced. While the AG’s guidance does not provide the concrete interpretation of the Act many employers were hoping for, it does give employers greater clarity on many of the Act’s more ambiguous provisions. In particular, the guidance shows that the AG will interpret the terms of the Act broadly and highlights the important role employer self-evaluations of pay practices will play in defending against claims under the Act.
While the Act provides that employees who have a “primary place of work” in Massachusetts are subject to the Act, it was unclear at the time of the Act’s passage how that statutory term would apply to employees with non-traditional working arrangements, such as employees who travel extensively, telecommute, or work in multiple locations. The guidance provides further explanation as to how the AG will apply the law in these scenarios, offering an expansive view of what it means to have a “primary place of work” in Massachusetts.
According to the AG, an employee who travels for work has a “primary place of work” in Massachusetts if he or she returns regularly to a Massachusetts “base of operations” before resuming his or her business travel. Similarly, a telecommuting employee whose work arrangements are made through a Massachusetts work site will be covered by the Act, even if the employee is not physically present in Massachusetts while telecommuting. The guidance also explains that an employee will be covered if he or she spends a plurality of his or her time in the Commonwealth; Massachusetts does not need to be the place where the employee does a majority of his or her work for the Act to apply. Finally, the AG will deem employees who permanently relocate to Massachusetts to have a primary place of work in Massachusetts on their first day of actual work in Massachusetts.
The concept of “comparable work” is the centerpiece of the Act, but the statute’s definition of the term as work that requires “substantially similar skill, effort, and responsibility” is far from precise. Accordingly, the AG’s guidance endeavors to provide more clarity as to what “comparable work” means.
According to the AG, “substantially similar” means “alike to a great or significant extent,” but does not mean “identical or alike in all respects.” As such, “[m]inor differences in skill, effort, or responsibility will not prevent two jobs from being considered comparable.”
“Skill,” the AG explains, includes the “experience, training, education, and ability required to perform the job.” For example, the AG opines that janitors and food service staff in a school setting may require comparable skills, even if the jobs are substantively different, because neither job requires prior experience or specialized training. Moreover, skill is measured only by skills that are necessary to the job, not the skills an individual employee happens to have.
“Effort” means the amount of physical and mental exertion required to perform the job. Thus, according to the AG, a job that requires standing all day and an office job where workers spend their day seated do not require substantially similar effort, but two jobs involving substantively different work, such as janitorial and food service jobs, may be comparable because they often require the same amount of physical exertion. Effort also looks to job factors that cause mental fatigue or stress.
“Responsibility,” the AG provides, is to be measured by the degree of discretion or accountability in a job, and includes factors such as how much supervision the employee receives or gives others and how much the employee is involved in decision-making. For example, a job that requires an employee to sign legal or financial documents may not be comparable to a job that merely requires employees to draft such documents without being personally accountable for errors contained in them.
When comparing working conditions, the AG advises that the physical surroundings to be considered include the elements regularly encountered by a worker while performing a job, such as extreme temperatures and noise, and the intensity or frequency of those elements. The AG also advises that an employer should consider the frequency with which workers come across workplace hazards such as chemicals, fumes, electricity, heights, dangerous equipment and other factors, and the severity of injuries that these hazards could cause. Importantly, the guidance affirms that shift differentials are permissible under the Act where they are based on meaningful differences between the days and times of scheduled shifts.
Permissible Variations in Pay
The AG’s guidance clarifies the six permissible bases for pay differentials that are set forth in the Act. According to the AG:
- A “system that rewards seniority with the employer” must recognize and compensate employees based on length of service with the employer.
- A “merit system” must provide for variations in pay based on legitimate, job-related criteria.
- A “system that measures earnings by quantity or quality of production, sales, or revenue” is a system that provides for variations in pay based upon the quantity or quality of the employee’s individual production (e.g. piecemeal pay or hours worked) or sales and other revenue generation (e.g., commissions) in a uniform, reasonably objective fashion.
- The geographic location of the job may constitute a valid reason for variation in pay if the cost of living or the relevant labor markets differ from one location to another.
- Employee travel will justify a pay differential if it is a regular and necessary condition for the job. Variations in pay based on travel are not permitted where there are alternatives to that travel, the travel is part of an employee’s regular commute, or the travel is based on the employee’s preference to travel.
- Education, training, and experience will justify variations in pay if they are reasonably related to the job in question and, at the time the employee’s wages were determined, a reasonable employer could have concluded the skills would be valuable in the particular job.
Further, the AG clarifies that a “system” is a “plan, policy or practice that is predetermined or predefined; used by managers or others to make compensation decisions; and uniformly applied in good faith without regarding to gender.” In other words, ad hoc explanations for pay differentials will not pass muster under the Act.
Importantly, the AG plainly states that changes within a labor market or other market forces will not justify unlawful pay differentials. Nor will the fact that the employer lacked the intent to discriminate based on sex be a defense to a claim that the Act has been violated.
Prohibition on Seeking Pay History
The AG’s guidance confirms that the Act’s prohibition on seeking the pay history of prospective employees will be broadly interpreted. Employers cannot avoid the prohibition by obtaining pay history information from an agent, such as a recruiter or staffing company, nor can they request that prospective employees “volunteer” information about their pay history. Moreover, multistate employers who search for employees nationally cannot ask about applicant pay history if there is a possibility that the individual will be chosen or assigned to work in Massachusetts.
However, the AG guidance indicates that certain compensation-related inquiries are still permissible. First, an employer may still ask a prospective employee about their salary requirements or expectations without violating the Act. Second, an employer may ask about the prior volume or quantity of previous sales by a prospective employee in a sales field, as long as the inquiry does not touch upon the individual’s earnings from the sales. Third, an employer may consult public sources to learn about an employee’s pay history.
Affirmative Defenses for Employers
Finally, the AG’s guidance provides some explanation of the affirmative defenses to liability available to employers. Under the Act, an employer has a complete defense to liability if it can show that it undertook a “good-faith self-evaluation of its pay practices” that was “reasonable in detail and scope” within the previous three years and before an action is filed and that it has made “reasonable progress” towards “eliminating unlawful pay disparities.” If the self-evaluation is not “reasonable in detail and scope” but meets all other requirements, the employer has a partial defense that allows it to escape liability for liquidated damages. Although still somewhat amorphous, the AG elaborates on the key statutory language:
- Good faith: To be in “good faith,” the self-evaluation must be conducted in a genuine attempt to identify unlawful pay disparities. A self-evaluation conducted to achieve pre-determined results or justify disparities is not a good faith self-evaluation.
- Reasonable in detail and scope: Whether an evaluation is reasonable in detail and scope will depend on the size and complexity of the employer’s workforce, looking at factors such as (1) whether the evaluation includes a reasonable number of jobs and employees; (2) whether the evaluation takes into account relevant information; and (3) whether the evaluation is reasonably sophisticated in its analysis of comparable jobs, employee compensation, and the permissible reasons for pay disparities set forth in the Act. The guidance also provides useful templates and checklists to guide employers in conducting reasonable self-evaluations, including a Pay Calculation Tool employers may use to detect pay disparities within comparable job classifications. These documents make clear that some level of statistical analysis is necessary for a self-evaluation to be reasonable in the eyes of the AG.
- Reasonable progress: Reasonable progress, for the purposes of the affirmative defense, means that the employer has taken meaningful steps toward eliminating unlawful pay disparities. Such a determination will depend on (1) how much time has passed since the evaluation; (2) the degree of progress made compared to the scope of the problems identified, and (3) the size and resources of the employer.
- Eliminating unlawful pay disparities: The AG interprets this phrase to mean adjusting employee’s pay so that employees performing comparable work are paid equally, but eliminating unlawful pay disparities does not require employers to pay employees retroactively for historical disparities.
Importantly, the guidance states that a self-evaluation must address the employee or job at issue in order for the employees to make use of the affirmative defense to a claim under the Act or the Massachusetts anti-discrimination statute.
While some provisions of the Act remain vague, the AG’s guidance answers many of the questions employers have had since the passage of the Act, and gives employers a preview of how the AG will enforce it. Attorney General Maura Healey has made pay equity one of her top priorities, so employers should expect robust enforcement efforts beginning on July 1, 2018. In the meantime, employers should take advantage of the time before the Act goes into effect to review their compensation and handbook policies to make sure they are compliant with the Act. Moreover, employers will want to consult with their counsel to determine whether conducting a self-evaluation makes sense for their organization and, if so, to begin taking steps to design and conduct a self-evaluation that can potentially shield them from liability under the Act.
|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.