This morning, the United States Supreme Court issued its long-awaited opinion in three consolidated cases pending before it (NLRB v. Murphy Oil Co.; Epic Systems Corp. v Lewis; Ernst & Young LLP v. Morris) on the issue of whether a class action waiver provision in an employment arbitration agreement violates the National Labor Relations Act (“NLRA”) and is, thereby, unenforceable. There previously was a split of authority among the federal circuit courts on this issue, with the Fifth Circuit (along with Second and Eighth Circuits) in Murphy Oil holding that class action waivers do not violate the NLRA, and the Seventh and Ninth Circuits (in Epic Systems and Ernst & Young, respectively) holding that such provisions do violate the NLRA. Writing for the Court in a 5-4 opinion, Justice Gorsuch resolved this split today, holding that class action waiver provisions in employment arbitration agreements do not violate an employee’s right under the NLRA to engage in collective, concerted activity for mutual aid and protection, and that these provisions remain enforceable under the Federal Arbitration Act (“FAA”). The Court’s more specific holdings are as follows:
Congress has instructed in the Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Arbitration Act’s saving clause nor the NLRA suggests otherwise.
The Arbitration Act requires courts to enforce agreements to arbitrate, including the terms of arbitration the parties select. The Act’s saving clause—which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract”—recognizes only generally applicable contract defenses, such as fraud, duress, or unconscionability, not defenses targeting arbitration either by name or by more subtle methods. By challenging the agreements precisely because they require individualized arbitration instead of class or collective proceedings, the employees seek to interfere with one of these fundamental attributes.
“The employees also mistakenly claim that, even if the Arbitration Act normally requires enforcement of arbitration agreements like theirs, the NLRA overrides that guidance and renders their agreements unlawful yet. . . . The employees ask the Court to infer that class and collective actions are ‘concerted activities’ protected by §7 of the NLRA, which guarantees employees ‘the right to self-organization, to form, join, or assist labor organizations, to bargain collectively . . . , and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.’ But §7 focuses on the right to organize unions and bargain collectively. It does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the Arbitration Act. It is unlikely that Congress wished to confer a right to class or collective actions in §7, since those procedures were hardly known when the NLRA was adopted in 1935. Because the catchall term ‘other concerted activities for the purpose of . . . other mutual aid or protection” appears at the end of a detailed list of activities, it should be understood to protect the same kind of things, i.e., things employees do for themselves in the course of exercising their right to free association in the workplace.’ . . . In another contextual clue, the employees’ underlying causes of action arise not under the NLRA but under the Fair Labor Standards Act, which permits the sort of collective action the employees wish to pursue here. Yet they do not suggest that the FLSA displaces the Arbitration Act, presumably because the Court has held that an identical collective action scheme does not prohibit individualized arbitration proceedings, see Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 32.’”
Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, dissented. The majority characterized the dissenting arguments as policy arguments and reminded us all (thank you majority) that the role of courts is not to make policy, but to enforce the laws as written. “The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act. Because we can easily read Congress’s statutes to work in harmony, that is where our duty lies.”
The Supreme Court’s opinion reverses unfavorable precedent in the Ninth Circuit (Ernst & Young v. Morris) and Seventh Circuit (Epic Systems v. Lewis), and reaffirms the important principles that arbitration agreements will, and must, be enforced according to their terms, and that laws (or judicial decisions) that seek to interfere with arbitration are preempted by the Federal Arbitration Act. Class action waiver provisions in arbitration agreements are enforceable and do not violate the NLRA. This is a nice win for employers.
In a major decision with wide-ranging implications, the California Supreme Court handed down a decision on April 30, 2018, substantially restricting the ability of California businesses to lawfully use independent contractors in their core business operations. Dynamex Operations, Inc. v. Superior Court (Lee), Case No. S22732.
Under pressure from government tax and employment law enforcement agencies, as well as labor representatives, the Court announced a new independent contractor test. The decision is widely viewed as a potential blow to the gig economy, and a significant restriction on employer flexibility in determining the most cost-effective configurations between contractors and employees.
Facts and Analysis
Dynamex is a nationwide package and documents delivery service. In recent years it classified its drivers and delivery personnel as independent contractors. The Supreme Court, citing arguments that such classification denied workers various employment benefits and resulted in significant loss of tax revenue, held these contractors were improperly classified, and must be treated as employees. The determination of class-wide damages awaits.
Under prior law, the test for determining contractor status relied upon a number of factors, and thus allowed employers some flexibility in classifying certain workers as contractors, especially if they could demonstrate that one, but not all, of the definitions were met. No more. Now to establish an exemption the employer must prove that all factors point to independent contractor status under a new test. Here’s how it works:
First, the courts will presume that anyone whom the employer “suffers or permits” to work for them is presumed to be an employee. This definition presumes that “all workers who would ordinarily be viewed as working in the hiring business” are employees. (Emphasis is the Court’s.) The only examples of exclusions given by the Court would be workers – like plumbers or electricians – who the Court called “genuine independent contractors” – who do not perform services that are part of the employer’s scope of operations or line(s) of business.
Second, the Court adopted what in other states has been called the “ABC” test. Under this test, a worker is properly considered an independent contractor only if the employer establishes all of the following:
A. The worker is free from control and direction of the hirer in connection with the performance of the work, both under the contract and in fact; and
B. The worker performs tasks that are outside the usual course of the hiring party’s business; and
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring business. This normally means the worker will have established and promotes his or her own business; is licensed; does advertising; has other clients or potential customers; and the like.
What This Means
Although this test is new, the Court ruled that its decision was merely explaining existing law, which means it can and will be applied retroactively. In light of this, all California employers are well-advised to conduct a prompt audit of their use of contractors in light of the new standards. The expectation and intention of the decision is that large numbers of current contractors may not qualify for that status under the new test.
It remains to be seen how this ruling will affect joint employer or subcontractor relationships, in which a true contractor entity (such as a staffing company) is engaged but whose employees are subject to detailed direction by the retaining company. It is clear, however, that this ruling is intended to expand the populations of persons for whom tax deduction, statutory employee benefits, leave and discrimination benefits, and the like, are available, and that hiring companies could be exposed to statutory liability to the subcontractor’s employee, since it “suffered or permitted” them to work on its premises. It is not clear whether the rules on indemnification and reimbursement of expenses will be interpreted in the same fashion as the new rules on classification and taxation, but caution suggests these practices, and subcontractor indemnities, be examined as well.
By Jason E. Reisman, Blank Rome LLP
Spoiler alert! Today, the U.S. District Court for the Eastern District of Pennsylvania handed Uber what the Court described as Uber’s first win on its independent contractor classification for one class of its drivers: “This case is the first to grant summary judgment on the question of whether drivers for UberBLACK are employees or independent contractors with the meaning of the Fair Labor Standards Act ….” The case is Razak et al. v. Uber Technologies, Inc. et al. (Civil Action No. 16-573; 4/11/18).
Wow. Pretty significant progress for the gig economy’s foundational feature – the engagement of workers classified as “independent contractors.” I dare say that, with this decision, the gig economy may have just gotten a little more employer-friendly – at least here in Eastern Pennsylvania and at least as to Uber.
The Court pulled out one of those highly exciting, multi-factor, legal balancing tests to evaluate Uber’s classification of the drivers as independent contractors. As you undoubtedly expect, such tests involve weighing each factor against the others, where no one factor is dispositive, and also examining all of the circumstances as a whole. In essence, as the Court noted, the test examines the situation “as a matter of economic reality.” The 6 factors the Court evaluated come from a 1985 decision by the U.S. Court of Appeals for the Third Circuit, Donovan v. DialAmerica Marketing, Inc.:
(1) The degree of the alleged employer’s right to control the manner in which the work is to be performed;
(2) The alleged employee’s opportunity for profit or loss depending upon his managerial skill;
(3) The alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;
(4) Whether the service rendered requires a special skill;
(5) The degree of permanence of the working relationship; and
(6) Whether the service rendered is an integral part of the alleged employer’s business.
Using the above test, the Court found the 4 of the 6 factors weighed in favor of “independent contractor” status, with the other 2 only being somewhat supportive of employee status. Importantly, the Court noted that it was the plaintiffs’ burden to prove that they indeed were “employees” – and they failed to do that.
Stay tuned as this decision filters out – it will be interesting to see how and whether it impacts pending misclassification cases across the country against Uber, as well as other gig economy stalwarts, and likely even non-gig businesses. Though truly a fact-specific analysis, employment defense lawyers around the country are surely going to find creative ways to use this Uber decision to buttress arguments for their clients.
You (likely) heard it here first!
The Ninth Circuit Rules That Employers Cannot Rely On Prior Pay To Justify A Pay Differential Between Men And Women
On Monday, the Ninth Circuit issued an en banc opinion in Rizo v. Yovino, holding that an employer may not rely on prior pay as a defense to a gender pay equity claim under the federal Equal Pay Act (“EPA”). This is a significant decision as it reverses Ninth Circuit law established over 35 years ago and creates a split between federal circuits on this issue, which opens the door to review by the United States Supreme Court. The practical impact of the decision is immediate: Employers defending gender pay equity claims cannot rely on prior pay as even part of the justification for a pay differential between men and women.
Aileen Rizo was hired by the Fresno County Office of Education in 2009. The County set Rizo’s starting salary based on its policy of placing new employees within the County’s salary schedule at a step corresponding to their prior salary plus 5%. Rizo filed an equal pay claim in 2012 after learning she was earning less than male colleagues performing the same work. The County sought summary judgment on the ground that prior salary fell under the EPA’s “any factor other than sex” defense and as such, was a permissible basis for setting compensation under the EPA. The County’s summary judgment motion was denied, and the County obtained permission to file an immediate appeal. On appeal, a three-judge panel of the Ninth Circuit reversed the trial court’s denial of summary judgment, concluding that under a 1982 Ninth Circuit decision, Kouba v. Allstate Insurance Co., prior salary constitutes a “factor other than sex” under the EPA, as long as the employer’s consideration of prior salary was reasonable and effectuated some business policy.
The Ninth Circuit then granted Rizo’s petition to rehear the appeal en banc. On rehearing, an 11 judge en banc panel of the Ninth Circuit reversed course, overturned Kouba v. Allstate, and held that prior salary is not a “factor other than sex,” and therefore cannot be used to justify a pay differential between the sexes, independently or as one of several factors.
The Court’s en banc opinion was authored by Stephen Reinhardt, known as “the liberal lion of the Ninth Circuit,” who passed away on March 29, 2018 at the age of 87. In the majority opinion, Judge Reinhardt concluded “unhesitatingly, that ‘any other factor other than sex’ is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.” He observed that since the 1963 EPA was intended to eliminate long-existing, endemic sex-based pay disparities, it was “inconceivable” that Congress would create an exception for basing new hires’ salaries on those very disparities. Accordingly, the Court held: “Prior salary, whether considered alone or with other factors, is not job related and thus does not fall within an exception to the [Equal Pay] Act that allows employers to pay disparate wages.”
In response to an argument made in a concurring opinion, the Court noted that its decision expressed a general rule, and did not resolve its application under all circumstances. The Court specifically stated that it was not deciding whether or under what circumstances past salary might play a role in the course of an individualized salary negotiation, and expressly reserved questions relating to individualized negotiations to future cases.
What This Means
This is a significant development for all California employers. First, the case was decided under the EPA, which applies to employers nationwide. However, California’s Fair Pay Act, which took effect on January 1, 2016, was designed to be substantially tougher than the EPA. To accomplish this, the California legislature expanded coverage to employees performing “substantially similar work” instead of “equal work,” and also narrowed the “catch-all defense.” In contrast to the “any factor other than sex” language under the EPA, the defense under California law is limited to “a bona fide factor other than sex.” Under California’s formulation of this defense, an employer must prove the “factor other than sex” is job-related, consistent with business necessity, and not based on or derived from a sex-based factor. Given these more stringent requirements, it is not hard to see how a California court would adopt the Ninth Circuit’s reasoning and conclude that prior pay cannot constitute a “bona fide factor other than sex.”
Second, the Ninth Circuit did not just prohibit the use of prior pay as the sole justification for a challenged pay disparity. (California law already prohibits an employer’s reliance solely on prior pay.) The Court went one step further and held that prior pay, “whether considered alone or with other factors” could not be used to justify a pay differential. This could mean that an employer who uses prior salary along with valid job-related factors such as education, past performance, experience and training, could lose an equal pay claim because it failed to justify the entire pay disparity based on legitimate factors. In this regard, the Ninth Circuit’s interpretation of the EPA is more restrictive than other circuit courts that have addressed this issue.
Use of prior pay as a factor in setting compensation is already under attack. California is one of several states that prohibit an employer from even inquiring about an applicant’s prior pay. With the Ninth Circuit’s decision in Rizo and California’s nascent Fair Pay Act, employers are well-advised to avoid using prior pay in setting compensation, and to review the pay of existing employees whose starting pay was set based on prior pay, preferably as part of a broader, privileged audit of pay practices.
By Abad Lopez, Dykema (email@example.com)
On April 2, 2018, the United States Supreme Court in Encino Motor Cars, LLC v. Navarro, Justice Thomas writing for the majority, held that car dealership “service advisors” are “salesm[e]n… primarily engaged in… servicing automobiles” and therefore are exempt from the FLSA’s overtime requirements under 29 U.S.C. § 213(b)(10)(A). Significantly, in addition to issuing a ruling that is favorable to auto dealerships, the Court also provided useful language to all employers based on its view of how FLSA overtime exemptions should be construed.
In its ruling, the Court held that the service advisors’ activity of selling services makes them salesmen in the “ordinary meaning” of the term. Even though they don’t directly service automobiles, the Court pointed to the broad range of tasks they perform and that they “are integral to the servicing process.” Although “service advisors do not spend most of their time physically repairing automobiles,” the Court noted that the same is true of partsmen. The inclusion of partsmen in the statute means that “the phrase ‘primarily engaged in… servicing automobiles’ must include some individuals who do not physically repair automobiles themselves but who are integrally involved in the servicing process.”
Relying on longstanding precedent, the Ninth Circuit Court of Appeals denied the auto dealership’s exemption for its auto service advisors under Section 213(b), stating that exemptions should be “construed narrowly.” The Supreme Court rejected this canon of construction, noting that nothing in the FLSA mandates this narrow construction and thus there is “no reason to give [the exemptions] anything other than a fair interpretation.” The Court also noted that “the FLSA has over two dozen exemptions in § 213(b) alone… Those exemptions are as much a part of the FLSA’s purpose as the overtime pay requirements.” The Court also rejected the notion that the “remedial purpose” of the FLSA was paramount to its other provisions or that it should be pursued at all costs. Rather, the FLSA’s exemptions should be construed plainly, and without favor to grant or deny any such exemption.
The Supreme Court’s pronouncement lies in stark contrast to judicial opinions from lower courts premised on the “narrow construction” of the FLSA’s exemptions while expanding the statute’s remedial purposes to its outer limits. This narrow interpretation often resulted in an unpredictable and unfair bent against employers. In Encino Motor Cars, LLC, the Supreme Court puts to rest once and for all the argument that the FLSA’s exemptions should be construed narrowly. Even further, the Court’s decision may be used to reign in the canons of construing statutes liberally or using legislative history to achieve a preordained result, versus simply relying on a fair reading of the statutory text.
The best reading of the FLSA is a fair reading, not a liberal construction in favor of employees, particularly where the sole justification for such liberal construction is based on amorphous canons or legislative history. With this case, the Supreme Court has dispensed with an oft-cited but critically flawed canon for construing the FLSA’s exemptions under § 213(b) narrowly to favor employees. In doing so, employers have been provided with a strong rebuttal to litigants seeking to apply the FLSA broadly, where the statutory text would not otherwise allow.
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.
California Supreme Court Clarifies Required Method for Calculating Overtime On Flat-Rate Bonuses (and it isn’t the FLSA method)
Earlier this week, the California Supreme Court issued an opinion in Alvarado v. Dart Container Corporation of California, holding that when an employee has earned a flat sum bonus during a single pay period, the employer must calculate the employee’s overtime pay rate using only the regular non-overtime hours worked by the employee during the pay period, not the total hours worked.
In California, the Division of Labor Standards Enforcement’s Enforcement Policies and Interpretations Manual (the “DLSE Manual”) sets forth a formula for calculating overtime due on non-discretionary bonus payments. (Whether a bonus is “non-discretionary” is the subject of detailed FLSA regulations, which California generally follows.) The DLSE overtime formula requires dividing the bonus by only the regular non-overtime hours worked in the pay period (i.e., not both the non-overtime and overtime hours), and using a multiplier of 1.5 to calculate the overtime premium due on the bonus. In Tidewater Marine Western, Inc. v. Bradshaw, however, the California Supreme Court held that certain portions of the DLSE Manual were void as “underground regulations.” Tidewater (1996) 14 Cal.4th 557, 571.
Dart Container paid a $15 “attendance bonus” to employees who worked on a Saturday or Sunday. For employees who worked overtime during a pay period in which they received an attendance bonus, the company calculated overtime on the bonus by dividing the bonus by the total number of hours worked in the pay period (both non-overtime and overtime hours). The company then used a multiplier of 0.5 to determine the amount the bonus added to the employee’s hourly overtime pay.
Employee-plaintiff Hector Alvarado contended Dart Container’s method of calculating overtime pay was illegal because it did not comply with the DLSE Manual. Alvarado argued the company should have divided the bonus only by the number of non-overtime hours worked during the pay period, and should have applied a multiplier of 1.5.
Dart Container argued that because the DLSE’s method was void as an underground regulation, its method of calculating the overtime rate was proper because it complied with the FLSA, which permits an employer to divide a bonus by total hours worked and apply a 0.5 multiplier. The Court of Appeal agreed with Dart Container, and held its method of calculating overtime was permitted under California law.
The California Supreme Court reversed, holding that even though the DLSE’s method is void as an underground regulation, it nevertheless is the proper method for calculating overtime on flat-rate bonuses. The court reasoned that because California’s state policy is to discourage overtime, the method used by an employer must not encourage the use of overtime. The FLSA formula does just that, because every hour of overtime worked incrementally decreases the regular rate, thereby incentivizing employers to require their employees to work more overtime.
Based on this reasoning, the court further held that only the non-overtime hours the employee actually works in a pay period should be the divisor, rather than all the potential full-time non-overtime hours in a pay period, and that the proper multiplier for the bonus premium is 1.5, not 0.5: “We conclude that the flat sum bonus at issue here should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”
This decision firmly establishes the method employers must use to calculate a California employee’s overtime pay rate when the employee has earned a non-discretionary flat sum bonus during a single pay period. Additionally, because the same policy consideration of discouraging overtime applies to other types of bonuses, the California Supreme Court’s reasoning very likely applies to bonuses that cover multiple pay periods, such as annual non-discretionary bonuses. Employers should immediately review their payroll policies and practices to ensure their California employees receive overtime pay calculated in a manner consistent with this opinion. In particular, multi-state employers that use centralized payroll systems must now ensure overtime pay for California employees is calculated using a different method than overtime pay for employees who work outside California.
One final note: Dart Container argued that if the California Supreme Court adopted the DLSE calculation method, its decision should be applied only prospectively because, up to now, no California statute, regulation or wage order clearly required that method. The court declined the request, which effectively means the court’s decision applies retroactively. Look for overtime litigation in California to spike in the near future.
Paul, Plevin, Sullivan & Connaughton LLP
San Diego, CA
By: Jason E. Reisman, Blank Rome LLP
No one questions the incredibly complex and nuanced web of wage and hour regulations that the U.S. Department of Labor (DOL) has laid down over the last 80 or so years as guidance under the Fair Labor Standards Act (FLSA). Of course, in one sense, the regulations represent a grand effort to try to address just about every possible scenario implicating minimum wage and overtime pay concerns. On the other hand, the sheer volume of the regulations and embedded intricacies often leave employers scratching their heads. Well, compliance help may be on the way! In another (expected) move under Republican administration stewardship, which typically focuses on compliance assistance rather than “gotcha” enforcement, there will soon be an option for any employer that realizes it has been mistakenly out of compliance to self-report and obtain a final resolution.
The DOL’s Wage and Hour Division (WHD) has just announced that it will implement a new nationwide pilot program, the Payroll Audit Independent Determination (PAID) program, which it says is designed to “facilitate resolution of potential overtime and minimum wage violations under the [FLSA].” See the WHD’s information page here (https://www.dol.gov/whd/paid/) for more details. The DOL has created the program to assist in expeditiously resolving claims and avoiding unnecessary litigation, while also providing a vehicle to (1) improve employer compliance with minimum wage and overtime obligations, and (2) ensure that more employees receive the back wages they are owed without the delay associated with pursuing claims through lawsuits or DOL investigations.
The WHD plans to implement this pilot program nationwide for approximately six months. Upon completing the pilot, the WHD will evaluate how effective it is, whether potential modifications to the program would enhance it, and whether to make the program permanent. Voluntarily participating employers can correct compliance errors without risk of paying liquidated damages, civil money penalties, or attorneys’ fees.
The benefits of this program (to the extent it ultimately becomes permanent) will be for those employers who are vigilant and monitor their wage and hour compliance … and want to properly correct any mistakes found, which includes voluntarily paying any back wages employees are owed. Currently, when an employer identifies a compliance issue where back pay is owed, it cannot simply calculate and pay the back wages and have certainty that the matter is resolved. The potential for litigation remains (possibly seeking more money, liquidated damages, a longer back pay period, and attorneys’ fees) as well as a time-consuming and costly DOL investigation.
With the PAID pilot program, a self-reporting employer coming forward in good faith can pay 100% of the back wages owed under the WHD’s supervision and achieve peace of mind knowing the matter is conclusively resolved. Of course, not surprisingly, employers currently in litigation or under investigation by the WHD cannot participate in this program for the issues involved in the litigation/investigation. Although employees being offered back wages do not have to accept the payment (and can retain any right to pursue an action), if the employee accepts the payment, she/he will be required to grant a release “tailored to only the identified violations and time period for which the employer is paying the back wages.”
Stay tuned for the DOL announcing exactly when the pilot program will begin and providing more detailed information about participation. Please don’t hesitate to reach out to any member of the Wage and Hour Defense Institute with questions.
|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.
By Robert A. Boonin, Dykema Gossett PLLC, firstname.lastname@example.org
In 2009, shortly after the prior administration first took office, it pulled-back 17 Wage & Hour Opinion Letters that were finalized near the end of the Bush Administration. On January 5, 2018, the DOL republished all of those Opinion Letters, and by doing so, the DOL has firmly gotten back into the Opinion Letter business.
THE USE AND HISTORY OF WAGE AND HOUR OPINION LETTERS
The FLSA provides that opinions issued by the Wage and Hour Administrator, if relied upon by employers and if directly applicable to the employers’ circumstances, are absolute defenses to claims for back pay and liquidated damages for overtime violations. In other words, if the Opinion Letter applies AND was relied upon, the employer can get a “free pass” even if the DOL is later found by a court to have reached the wrong opinion. Thus, for decades, the availability and use of Opinion Letters had been widely used and served to not only limit liability, but perhaps more importantly, allowed employers to be assured that – at least in the DOL’s opinion – a pay plan being used or considered was consistent with the FLSA’s often-times nuanced provisions.
In 2009, as the Bush Administration was winding down, the Wage and Hour Administrator announced that it was publishing a number of Opinions, Opinions that had been pent-up in the process for being finalized. Almost immediately after taking office, though, the Obama administration put a hold on or withdrew many of those Opinions, and its “hold” was never released. The DOL did not issue any FLSA Opinion Letters thereafter, and in March 2010, the new Wage and Hour Administrator announced that Opinion Letters would no longer be provided. Instead, the DOL announced, it would only periodically issue Administrator Interpretations (AIs) on the FLSA, and these AIs would be more generic in form than the fact-specific Opinions previously issued.
THE OPINION LETTER CONCEPT IS RESTORED BY SECRETARY ACOSTA
Soon after taking office last year, Labor Secretary Acosta announced that he would be restoring the use of Opinion Letters. This announcement was welcomed by many in the employer, and even some in the employee, community since these letters do provide a level of certainty needed as play plans are developed, particularly pay plans that are creative or being adjusted to reflect the realities of the modern economy. On January 5, 2018, the DOL delivered on the Secretary’s promise and activated all 17 Opinions put on hold in 2009.
Among the new Opinions are:
- A clarification that deductions are permissible to salaries of a salaried/exempt employee, in that if the employee is absent for a full-day but only has a partial day of paid leave available to cover the absence, the employee can be docked for the balance of the day (FLSA2018-14);
- If job bonuses are provided for a day’s work, that bonus must be rolled into the employees’ regular rates of pay for overtime pay calculation purposes (FLSA2018-11);
- When calculating a year-end bonus as a percentage of all straight time and overtime earned over the year, the employer can exclude previous payments made that are otherwise excludable from the regular rate of pay (FLSA2018-9);
- School athletic coaches who are volunteers or are not otherwise employed by the school in an non-teaching capacity, may be treated as exempt from the Act’s pay requirements since they are effectively still exempt “teachers” under the Act (FLSA2018-6);
- On call time spent by ambulance personnel who work 30 hours per week, but who may be on call for another 40 hours, is not compensable in light of the frequency of calls and the time needed to take the calls, and that conclusion is not changed by the fact that the personnel have to appear when called within 5 minutes and in uniform, in light of the totality of the facts presented (FLSA2018-1); and
- Based on the facts present, the follow employees were viewed as being exempt from overtime pay: construction project superintendents (FLSA 2018-4), client service managers for an insurance company (FLSA2018-8), and consultants, clinical coordinators, coordinators and business development managers employed by a medical staffing company (FLSA2018-12), but helicopter pilots were found to be nonexempt (FLSA2018-3).
It is anticipated that new Opinion Letters will be published in the near future, particularly once a new Wage and Hour Administrator is confirmed by Congress.