The FLSA Administrative Exemption For the Financial Services Industry in the Areas of Tax and Financial Consulting: Current State and Recommendations for Review

© February 8, 2019.  By Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Senior Fellow, Wage and Hour Defense Institute.

It is an understatement to say that the financial services industry has been in a quandary over how to classify its employees since the decision in Perez v. Mortgage Bankers Association, 135 S.Ct. 1199 (2015).  This decision upheld the novel and confusing Department of Labor (“DOL”) Administrative Interpretation (“AI”) 2010-1, finding that mortgage loan officers were not exempt and must be paid overtime.  This was confusing because it added a new dividing line for which financial services professionals could potentially be exempt based solely upon who they were advising.  If such employees advised businesses of any size, they could be exempt.  But, if they advised individuals, DOL suggested in AI 2010-1 that they could not be exempt.  In response to this, many courts that have considered this outlier of a rule have rejected it.  In locales other than California, where different rules apply, courts have rejected it because it is inconsistent with both prior DOL opinions and judicial precedent.  It is also clear that such an arbitrary distinction makes little practical sense in today’s world, especially as it concerns tax and financial consultants.

When we speak of the financial services industry, it is important to remember that the DOL regulations carve out a specific exemption for “tax experts and financial consultants.”  29 CFR § 541.201(c).  These types of advisors are most often regulated and licensed, exercise varying levels of discretion, and make decisions on a daily basis that may affect the financial well-being of their clients.  The employees that challenge the administrative exempt status in this context often either seek to downplay their professional contribution or criticize employer incentives that such employees say eliminate their discretion.  For these reasons, if an employer uses incentives or disincentives, it is important to tie and support such to an employee’s fiduciary and other duties to the client so that the administrative exemption can be preserved.  In this article, we explain where we are in this area of the law and, hopefully, where we may be headed in the resolution of this quandary.

Introduction

The Fair Labor Standards Act (“FLSA”) mandates that covered employers pay overtime compensation for non-exempt employees.  Rainey v. McWane, Inc., 314 Fed. Appx. 693, 694 (5th Cir. Mar. 12, 2009), citing 29 U.S.C. § 207 (a).  The FLSA generally requires an employer to pay employees who work more than forty (40) hours per seven (7)-day workweek at a rate not less than one and one-half (1½) times the employee’s regular rate for that overtime work.  29 U.S.C. § 207(a) (1); Allen v. Coil Tubing Servs., LLC, Civ. A. No. H-08-3370, 2011 WL 4916003, at *5 (S.D. Tex. Oct. 17, 2011); Vela v. City of Houston, 276 F.3d 659, 666 (5th Cir. 2001); Thibodeaux v. Executive, Tet Intern., Inc., 328 F.3d 742, 749 (5th Cir. 2003).

Certain employees, however, are exempt from FLSA’s overtime requirements.  Whether an employee is exempt or not exempt under FLSA is mainly a fact issue determined by his salary and duties and application of the factors in 29 C.F.R. § 541.200(a), but the ultimate decision is a question of law.  Ford v. Hous. Indep. Sch. Dist., 97 F.Supp.3d 866, 874 (S.D. Tex. 2015)(citing Lott v. Howard Wilson Chrysler–Plymouth, Inc., 203 F.3d 326, 330–31 (5th Cir.2000); McKee v. CBF Corp., 299 Fed.Appx. 426, 429 (5th Cir. 2008).

The FLSA’s overtime provisions do not apply with respect to any employee working in a bona fide executive, administrative, or professional capacity.  29 U.S.C. § 213(a)(1); see also Cheatham v. Allstate Ins. Co., 465 F.3d 578, 584 (5th Cir. 2006).  To qualify for the administrative employee exemption, the following criteria must be met:

  1. The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
  2. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the    employer or the employer’s customers; and,
  3. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

29 C.F.R. § 541.200(a).  Moreover, as demonstrated below, DOL’s regulations have specific carve-outs for “tax and financial consultants” that must be properly understood and applied.

Salary Basis

The first prong of the administrative exemption is met if the employer establishes that the employee was compensated on a salary or fee basis at a rate not less than $455 per week.  29 C.F.R. § 541.200(a)(1).  To be viewed as paid on a “salary basis,” an employee must “regularly receive[] each pay period on a weekly or on a less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of work performed.”  Miller v. Team Go Figure, LLP, 2014 WL 1909354, at *7 (N.D. Tex. May 13, 2014), quoting 29 C.F.R. § 541.602(a).

As set forth in Section 541.602(b)(1), an employer may make deductions from an exempt employee’s pay when the employee is absent from work for one (1) or more full days for personal reasons, other than sickness or disability.  In addition, an employer may deduct from an exempt employee’s pay when the employee is absent from work for one (1) or more full days occasioned by sickness or disability, if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by such sickness or disability.  29 C.F.R. § 541.602(b)(2).  Although the term “bona fide plan” is not defined by the regulation, the DOL’s Wage and Hour Division (“WHD) has brought clarity to the definition of a “bona fide plan” through several opinion letters.

In Opinion Letter FLSA2006-32, the WHD provided an opinion on whether a particular sick/vacation leave plan qualified as a bona fide plan under the regulations implementing section 13(a)(1) of the FLSA.  (See DE 635).  The WHD was also asked to provide an opinion on whether the sick/vacation plan at issue allowed the employer to make salary deductions for employees who have either:  (1) not qualified for leave, or (2) exhausted their leave allowance.  (Id., at p. 1).  As noted in the opinion letter, the sick/vacation plan at issue provides, in pertinent part:

     “One year after [the] start date the employee is eligible for 40 hours off with pay. After  two years the employee will receive 80 hours off with pay. After 10 years[, the employee will receive] 120 hours [off with] pay. All vacation must be taken in . . . full work day [increments,] not an hour at a time. [For e]xample some departments may work 10 hour days[, which means those employees would be entitled to 4 days off.] Also one sick day is paid per year. [Salespeople] must take vacation one week at a time.”

(Id.)

As to the inquiry regarding the requirements for a “bona fide plan,” WHD explained that, “a plan that has defined sick leave benefits that have been communicated to eligible employees, and that operates as described in the plan, will in general qualify as bona fide.”  (Id., at p. 2).  WHD further explained that, to qualify as bona fide, the plan must be administered impartially, and its design should not reflect an effort to evade the requirement that exempt employees be paid on a salary basis.  (Id. (citing to Wage and Hour Opinion Letters FLSA2005-7 (Jan. 7, 2005) and August 15, 1972.)).  Whether a particular plan is bona fide depends on the actual design of, and practices applicable under, the plan.  (Id.)

WHD further explained that, given the fact-specific nature of the inquiry, there is no bright-line test articulating how many days and how short a waiting period are required for a plan to be bona fide.  (Id., at p. 3).  With this said, WHD noted that it has previously approved leave plans that allow for at least five (5) days of sick leave per year as bona fide under the regulations.  (Id. (citing to Wage and Hour Opinion Letters July 21, 1997; November 20, 1995; April 14, 1992; and August 15, 1972.)).  WHD further explained that it has previously deemed a leave plan that required one (1) year of service prior to payment of sick pay benefits to be bona fide.  (Id. (citing to See Wage and Hour Opinion Letter March 1, 1982.)).

While DOL’s regulations recognize two (2) forms of compensation for exempt employees – predetermined weekly salary and additional compensation – the regulations only state an “employer who makes improper deductions from salary” may lose the exemption.  29 C.F.R. § 541.603(a).  Therefore, nothing in the FLSA or the Secretary’s regulations prohibits employers from deducting debits during the computation of an employee’s commissions, as opposed to base salary.  See, e.g., Bell v. Callaway Partners, LLC, 2010 WL 6231196, at *6 (N.D. Georgia Feb. 5, 2010) (applying similar logic to find Secretary’s regulations did not prohibit deductions from exempt employees’ bonuses).

Further, case law establishes that employers may permissibly deduct from exempt employees’ commissions without losing the exemption.  Accord Hicks v. Mercedes-Benz U.S. Intern., Inc., 877 F. Supp. 2d 1161, 1178–79 (N.D. Ala. 2012); see also Havey v. Homebound Mortgage, Inc., 547 F.3d 158, 165 (2d Cir. 2008) (“A two-part salary scheme in which employees receive a predetermined amount, plus, on a quarterly prospective basis, an additional portion subject to deductions for quality errors does not violate the salary basis test.”).

A final issue concerns whether an employer may lose the exemption for deducting sums owed from an employee’s final paycheck.  In the Preamble to 29 C.F.R. Part 541 (“Preamble”), the DOL specifically considered whether employers should be able to recover salary advances from an employee’s final pay.  69 Fed. Reg. 22122, 22178.  The DOL decided that in that situation, “recovery of salary advances would not affect an employee’s exempt status, because it is not a deduction based on variations in the quality or quantity of the work performed.”  Id.  This means employers may permissibly recover advances from an employee’s final pay without losing the exemption.  Id.  This is a somewhat controversial position, and there is little precedent on it.

In Blaize v. Concrete Strategies, L.L.C., for example, the District Court was asked to determine whether an employer lost the executive employee exemption as a result of the company’s failure to pay the employee for the final eight (8) days of work.  Id. 2009 WL 10679035 (E.D. La. Dec. 17, 2009).  In finding that the exemption was not lost, the District Court cited to Donavan v. Agnew, which held that, “where an executive employee is guaranteed a weekly salary, the employer’s failure to pay that employee during the final weeks of employment amounts to a breach of contract, but does not cause a previously exempt employee to become protected under the FLSA.”  Blaize v. Concrete Strategies, L.L.C., No. CV 09-3089, 2009 WL 10679035, at *3 (E.D. La. Dec. 17, 2009); Donavan v. Agnew, 712 F.2d 1509, 1517 (1st Cir. 1983); see Nicholson v. World Business Network, Inc., 105 F.3d 1361, 1365 (11th Cir. 1997) (refusing to turn a contract action for unpaid salary into an FLSA suit).  Accordingly, the court explained:

     Although Concrete Strategies has not paid Blaize for his last eight days of work, this, on its face, raises a claim of breach of contract, even if the reason behind its failure to pay was dissatisfaction the quality of Blaize’s work.

Blaize, 2009 WL 10679035, at *4.  Now, we move to the second prong of the test.

Management of General Business Operations

The second prong of the administrative exemption is met if the employer establishes that the employee’s primary duty is the performance of office or non-manual work that is directly related to the management of general business operations of the employer or the employer’s customers.  29 C.F.R. § 541.200(a).  To determine whether an employee meets this prong as a matter of fact and law, a court must make findings concerning the “historical facts” of the case, including the determination of an employee’s “day-to-day duties” that would constitute an employee’s “primary duty.”  Dalheim v. KDFW-TV, 918 F.2d 1220, 1226 (5th Cir. 1990).

The regulations define “primary duty” as “the principal, main, major, or most important duty that the employee performs” in view of all the facts and “with the major emphasis on the character of the employee’s job as a whole.”  29 C.F.R. § 541.700(a).  Generally, the employee’s primary duty is “what she does that is of principal value to the employer, not the collateral tasks she may also perform even if they consume more than half her time.”  Dalheim, 918 F.2d at 1227.  Some factors to be considered in determining the primary duty of an employee are:  (1) the relative importance of the exempt duties as compared with other types of duties; (2) the amount of time spent performing exempt work; (3) the employee’s relative freedom from direct supervision; and (4) the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.  Miller, 2014 WL 1909354, at *7, quoting 29 C.F.R. § 541.700(a).  Section 541.700(b) provides that, “[e]mployees who do not spend more than 50 percent (50%) of their time performing exempt duties may nonetheless meet the primary duty requirement if the other factors support such a conclusion.” 29 C.F.R. § 541.700(b).

As noted above, 29 CFR § 541.201(c) directly provides an exemption for “employees acting as advisors or consultants to their employer’s clients or customers (as tax experts or financial consultants, for example).”  As addressed in detail below, agents for personal insurance customers have been determined to be exempt.  Hogan v. Allstate Ins. Co., 361 F.3d 621 (11th Cir. 2004) (cited in Preamble to 2004 FLSA Regulations).  Similarly, registered representatives for individual investors, who also had to pass a test and become licensed, have been found by DOL to be exempt.  Accord WHD Opinion Letter FLSA2006-43 (Nov. 27, 2006).  What is important in context is that tax and financial consultants are in a special area where DOL has carved out a specific exemption in the regulations.

While there is a dearth of cases on this, the issue of the tax and financial consultant exemption in the context of Section 201(c) was addressed in Hein v. PNC Financial Services Group, Inc., 511 F.Supp.2d 563 (E.D. Penn. 2007).  In that case, Mr. Hein was a licensed financial consultant who did not sell the services at issue and did not participate in traditional management activities for the business.  Id., at 569.  As a financial consultant, he was primarily involved in collecting client information (business and individual clients), analyzing the information, and advising the client on the best course with their money.  Id.  Because of this, the Court determined that Mr. Hein’s work is “directly related to the management or general business operations of Defendants and Defendants’ customers.”  Id. at 572 (citing 29 C.F.R. 541.200(a)(2)).

The phrase “directly related to the management or general business operations” refers to the type of work performed by the employee.  29 CFR § 541.201(a).  To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.  Id.  Section 541.201(b) provides that, work “directly related to management or general business operations” includes, but is not limited to:

work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.

When an employee is primarily involved in producing the product of the company rather than servicing the company, the administrative exception does not apply. Miller, 2014 WL 1909354, at *11, quoting Villegas v. Dependable Constr. Servs., Inc., Civ. No. 4:07-cv-2165, 2008 WL 5137321, at *7 (S.D. Tex. Dec. 8, 2008); Foster v. Nationwide Mut. Ins. Co., 710 F.3d 640, 644 (6th Cir. 2013) (citing Schaefer v. Indiana Mich. Power Co., 358 F.3d 39 4, 402 (6th Cir. 2004)); Reich v. John Alden Life Ins. Co., 126 F.3d 1, 9 (1st Cir. 1997).  The Fifth Circuit has described this distinction as between “employees whose primary duty is administering the business affairs of the enterprise” and “those whose primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce or market.” Dalheim, 918 F.2d at 1230.

In the Preamble to it 2004 FLSA Regulations, the DOL explained that in the “modern workplace” the administrative/production dichotomy was still “a relevant and useful tool in appropriate cases,” but that it should not be used as “a dispositive test for exemption.” 69 Fed. Reg. 22122, 22141 [Emphasis added].  The DOL further explained that its view that the ‘‘production versus staff’’ dichotomy has always been illustrative—but not dispositive—of exempt status is supported by federal case law.  Citing to Bothell v. Phase Metrics, Inc., 299 F.3d 1120 (9th Cir. 2002), the DOL explained that the administrative/production dichotomy is “but one piece of the larger inquiry” and should be used “only to the extent that it clarifies the analysis.”  Id.  “Only when work falls ‘squarely on the production side of the line,’ has the administration/production dichotomy been determinative.”  Id.  (quoting Bothell, 299 F.3d at 1127; see also Proposed Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 68 Fed. Reg. 15560, 15566 (March 31, 2003) (stating that “[t]he ‘production versus staff dichotomy’ … is difficult to apply uniformly in the 21st century workplace” and “[t]he proposed rule would … reduce the emphasis on the so-called ‘production versus staff’ dichotomy in distinguishing between exempt and non-exempt workers”).

Some courts have also questioned whether this dichotomy is useful at all in the service context.  In Kohl v. Woodlands Fire Dept., 440 F.Supp.2d 626, 636 (S.D. Tex. 2005), the Court stated:

     The analytic difficulty of applying the production/administration distinction has led some courts to question whether the dichotomy is analytically helpful in the context of the modern service industries and to emphasize that the analogy applies in a particular case only to the extent that it ‘elucidates the phrase ‘work business operations.’ ” . . . The revised 2004 Department of Labor regulations have moved away from this dichotomy in the context of service related industries. “Only when the work falls ‘squarely on the ‘production’ side of the line,’ has the administration/production dichotomy been determinative.

Id, citing Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 1126, 1127 (9th Cir. 2002); Id. at 20-21, n. 8; see also 69 Fed Reg. 22141.  What is relevant to the determination of this exemption is an employee’s “actual day-to-day job activities,” not the labels or job title the employer places on those duties.  29 CFR § 541.2; Kohl v. Woodlands Fire Dep’t., 440 F. Supp. 2d 626, 634 (S.D. Tex. 2006); see Dalheim, 918 F.2d at 1226.

For example, in Hamby v. Associated Centers for Therapy, the Tenth Circuit affirmed a grant of summary judgment for the employer after it found that a “family advocate” working for an employer that primarily provided services for clients with mental health problems was an exempt employee under the administrative exemption.  230 Fed. App’x 772, 773, 2007 WL 458011, at 1 (10th Cir. Feb. 13, 2007).  As a family advocate, the employee’s day-to-day activities were to provide “targeted” support services to children by implementing a system of care that was child-centered and assisting in the prevention of an out-of-home child placement.  Id.  Employee’s day-to-day activities included:

“(1) [s]upport for the child and his/her family; (2) [b]e active member of the local teams; (3) [b]e a member of the family team to assist in the strengths and the assessment and care plan development; (4) [t]o mediate between the families and the professionals; (5) [a]t times provide transportation; (6) [t]o fill out and submit ‘flex forms’ for the families as needed; (7) [t]o attend or speak at conferences as needed and assigned by the Project Director; and, (8) [o]ther duties as assigned by the Project Director.”

Hamby, 230 Fed.Appx. at 783-84.  Hamby argued that she produced a commodity for Associated Centers for Therapy by carrying out the day-to-day operations of ACT.  Id. at 10.  In disagreeing with Hamby, the court explained:

“All of [Hamby’s] duties are the type of work that is directly related to assisting with the running or servicing of ACT. Hamby’s job required her to assist client families by advising and counseling them regarding their problems and by advocating for them in order to promote ACT’s goal of helping families of mentally ill children.  In providing support to these families, Hamby’s job duties cannot be likened to the type of work performed on a manufacturing production line or in selling a product in a retail or service establishment. Hamby’s work in providing services to the client families was not akin to production or sale of a commodity; rather, her work was directly related to the general business operations of ACT.”

230 Fed.Appx. at 783-84.

The result in Hamby for a social worker makes clear that the distinction between helping businesses or individuals is a meaningless distinction in the services context, especially where matters of such importance are at issue.  It is also meaningless in the financial services industry, particularly tax and financial consulting, where the decisions made by financial advisors are often for a company’s individual clients and can often impact an individual’s relative wealth even more than some business advice.  Consequently, the second prong of the administrative exemption can also be met if the employer establishes that the “employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers.”  29 C.F.R. § 541.201(c).  [Emphasis added].  For example, employees acting as advisers or consultants to their employer’s clients or customers (e.g., as tax experts or financial consultants) may be exempt.  Id.

In Zannikos v. Oil Inspections (USA), Inc., the Fifth Circuit made clear that any analysis that only considers whether the employee’s duties are related to the management of the employer is inappropriate, because such an approach “necessarily conflict[s] with 29 C.F.R. § 541.201(c)” and leads to an incomplete analysis.  Zannikos v. Oil Inspections (U.S.A.), Inc., 605 Fed.Appx. 349, 353 (5th Cir. 2015).  Section 541.201(c), which was designed to clarify the second element of the administrative exemption, “demonstrates that the performance of functions directly related to the management of an employer’s customers is sufficient, rather than merely necessary, to satisfy the second element of the exemption.”  Id., at 354.

The employees in Zannikos argued that the district court erred in concluding that they performed non-manual work that directly related to the general business operations of Oil Inspections’ customers.  Id., at 354.  The employees argued that, “employees who produce the precise service offered to customers by their employers are engaged in production.”  Id.  The employees claimed that their functions necessarily constitute production; because they were hired to produce the very product their employer sells and markets – oversight.  Id.  In rejecting the employees’ argument, the court noted:

“In effect, the plaintiffs are arguing that, even if their services do not constitute production in relation to Oil Inspections’ customers, it is sufficient that they constitute production in relation to Oil Inspections. The district court disagreed, noting that, in Cotten, ‘the court only considered whether [the employee’s] duties were related to the management of the employer, not the customer.’ The court concluded that this approach ‘necessarily conflict[s] with 29 C.F.R. § 541.201(c) ’ and leads to an incomplete analysis. We agree.”

Id.  The Fifth Circuit emphasized that the employees’ interpretation would render the administrative exemption largely meaningless, saying:

Many—perhaps most—employees whose primary duties directly relate to the management of customers perform the precise services offered by their employers. For example, tax experts, financial consultants, and management consultants, perform the precise services offered to customers by the accounting and consulting firms for which they work. Thus, under the plaintiffs’ interpretation, these employees should not fall under the administrative exemption. This result, however, conflicts with Section 541.201(c), which explicitly states that such employees satisfy the second element of the exemption. Likewise, the plaintiffs’ interpretation would insulate employees who perform work in the “functional areas” described in Section 541.201(b) from the exemption so long as the employer is in the business of providing those services. This result is also contrary to the regulatory text.

Id. at 354.

In the Preamble to 2004 FLSA Regulations, the DOL addressed commenters’ requests that it change the language of the then proposed Section 541.201(c).  69 Fed. Reg. 22122, 22142.  Specifically, the DOL noted that, commenter Karen Dulaney Smith urged the Department to “insert the word ‘business’ to clarify that the exemption does not apply to ‘individuals whose “business” is purely personal.’”  Id.  The Department did not make this change, explaining:

Nothing in the existing or final regulations precludes the exemption because the customer is an individual, rather than a business, as long as the work relates to management or general business operations.

Id.  Clearly, DOL had the opportunity to “clarify” the regulation as requested by the commenter, but it elected not to do so.

In AI 2010-1, the DOL attempts to use a restatement of Karen Dulaney Smith’s comments as a basis for adding the “purely personal” limitation to Section 541.201(c).  AI 2010-1, at p. 7.  The DOL noted –

As stated by commenter Smith, the exemption does not apply when the individual’s ‘business’ is purely personal, but providing expert advice to a small business owner or a sole proprietor regarding management and general business operations, for example, is an administrative function.

Id.  This commentary, however, should be given as much weight as it was given by the DOL when it was deciding on the final language for the regulation – which is to say, none.  The DOL received commenter Smith’s request, acknowledged the request, and then did nothing with the request.  As discussed above, a plain reading Section 541.201(c) demonstrates that there is no business/personal distinction regarding the nature of the “management . . . of the employer’s customers.”  See 29 C.F.R. §541.201(c).  As such, it is inappropriate to give any deference to the DOL’s post hoc attempt to limit the scope of the regulation in a manner that is inconsistent with both the plain language of the regulation and the regulation’s legislative history.

DOL also claimed in AI 2010-1 that its interpretation of Section 504.201(c) is supported by a “thorough review of the case law that has continued to develop on the exemption.”  Id. at p. 1.  Evidently, DOL’s review may not have been that thorough, as the DOL failed to include both Hogan v. Allstate Ins. Co. and Henry v. Quicken Loans, Inc. in its analysis of Section 504.201(c).  Instead, the DOL cites to two (2) cases (Talbot v. Lakeview Center, Inc., 2008 WL 4525012 (N.D. Fla. Sept. 30, 2008 and Bratt v. County of Los Angeles, 912 F.2d 1066 (9th Cir. 1990)) and three (3) opinion letters (FLSA2005-21, FLSA2005-30, and FLSA 2007-7) that fail to provide analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

In Hogan, the Eleventh Circuit was asked to review the lower court’s ruling that Allstate insurance agents were “administrative employees,” exempt from the FLSA’s overtime requirements.  Hogan v. Allstate Ins. Co., 361 F.3d 621 (11th Cir. 2004).  Allstate would create and provide to customers a variety of insurance products, including car, home, property, boat, commercial, renter’s, life, and comprehensive personal liability insurance.  Id., at 624.  The employees were Neighborhood Office Agents (“NOA”), whose chief duties were to promote and to sell Allstate’s insurance products, to advise and to service customers and potential customers, and to oversee the operation of their office and staff.  Id., at 624.

In affirming the district court’s ruling, the court held that the employees’ primary duty was office or non-manual work directly related to management policies or general business operations of Allstate or its customers.  Id., at 627.  The court explained:

Construing the evidence and inferences therefrom in the light most favorable to plaintiffs, test plaintiffs spent the majority of their time servicing existing customers. Their duties included promoting sales, advising customers, adapting policies to customer’s needs, deciding on advertising budget and techniques, hiring and training staff, determining staff’s pay, and delegating routine matters and sales to said staff. These duties are similar to administrative, rather than production, tasks. See Reich v. John Alden Life Ins. Co., 126 F.3d 1, 9–10 (1st Cir.1997) (deciding that “production” duties involve the development of an insurance policy, not the sale of the policy itself); Wilshin v. Allstate Ins. Co., 212 F.Supp.2d 1360 (M.D.Ga.2002) (finding Allstate insurance agents to be administrative employees).”

Hogan, 361 F.3d at 627.  [Emphasis added].  The holding in Hogan stands in the face of AI 2010-1’s “purely personal” limitation, as the fact that the NOA’s were providing services to Allstate’s customers for personal matters did not prevent the court from finding that employees were exempt.

In Henry, the Sixth Circuit affirmed a jury verdict that “mortgage bankers” were bona fide administrative exempt employees.  Henry v. Quicken Loans, Inc., 698 F.3d 897 (6th Cir. 2012).  According to Quicken, mortgage bankers performed a variety of roles:  (1) “collecting and analyzing the relevant information from our Clients concerning their financial status”; (2) “understanding our Clients’ objectives, goals and needs”; (3) “educating and advising our Clients on the entire financing process”; and (4) closing loans.  Id., at 898.  The mortgage bankers, by contrast, insisted they were glorified salesmen.  Id., at 899.  The mortgage bankers pointed to letters and internal memos that identify the mortgage bankers as a “sales force” and encourage them to “SELL SELL SELL.”  Id.  According to the mortgage bankers, their daily routines were largely prescribed by a two (2)-page document that outlines a ten (10)-step process for developing business.  Id.

In determining whether the mortgage bankers were exempt, the court first looked to whether the jury’s findings on the second element of the administrative exemption were “seriously erroneous.”  Id., at 899-900.  The court noted that to satisfy the “management-related prong” the employee’s “primary duty” must involve “work directly related to the management or general business operations” of the company or its customers.  29 C.F.R. 541.200(a)(2).  Id., at 899.  The court then cited to Section 541.201(b)’s guidance for determining whether a financial-services employee fits within the exemption –

Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing, or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

Id., at 899–900 (quoting 29 C.F.R. § 541.201(b))

The court held that the jury acted “well within its bounds” in finding that the employees’ duties met the requirements of the administrative exemption’s second prong.  This holding stands in the face of AI 2010-1, as the court determined that the result was not “seriously erroneous” even though employees’ duties clearly include advising Quicken’s customers on purely personal matters.  See also Hein v. PNC Fin. Servs. Grp., Inc., 511 F. Supp. 2d 563, 569 (E.D. Pa. 2007) (court found that employee’s primary duty, which included advising the company’s clients on personal financial matters, met the second element of the administrative exemption).

In AI 2010-1, the DOL inaccurately cites to Talbott as the supporting authority for the “purely personal” limitation.  AI 2010-1, at p. 7.  First, Talbott does not include a meaningful analysis of Section 541.201(c).  Moreover, Talbott fails to recognize that the plain language of Section 541.201(c) does not require that the employee assist the employer’s customer on business-related matters.

In Talbott, the court found that the administrative exemption did not apply to the employees. Talbott, 2008 WL 4525012.  With regard to its analysis of the second prong of the exemption, the court focused only on Sections 541.201(a) and (b), concluding that, “defendant has not met its burden of showing . . . that plaintiffs have assumed duties that are directly related to… management or general business operations.”  [Emphasis added].  Id. at *4-6.  The court’s discussion of 541.201(c) was limited to dicta in footnote 5 –

The regulation also provides that the employee’s work may be directly related to the general business operations of “the employer’s customers.” 29 C.F.R. § 541.200(a)(2). The court does not find this provision relevant because even if Lakeview’s foster clients are “customers,” they do not have “general business operations.”

 Id., at n. 5.  Even if this comment were accepted as an analysis of Section 541.201(c), it is a conclusory and incomplete analysis.  Moreover, the court’s dicta fails to recognize that the plain language of Section 541.201(c) does not require that the employee assist the employer’s customer on business related matters.  Indeed, it refuses to consider the situation where the business operations at issue are those of the employer, as well, in implementing its—and each employee’s—fiduciary or contractual duties to the clients.  As such, Talbott fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Bratt is also misplaced, as Bratt does not address the questions raised by an analysis of Section 541.201(c).  In Bratt, six (6) of the employees at issue were employed by the County’s Probation Department as Deputy Probation Officers II (“DPO II”).  Bratt, 912 F.2d at 1067.  The DPO II’s would, “conduct factual investigations for, and make recommendations to, County courts, either to aid in sentencing an adult offender or to determine whether and how to detain a minor who has been arrested.”  Id.  The County argued that, employees’ duties were “more akin to those of advisory specialists or consultants such as stock brokers or insurance claim agents and adjusters,” thus, servicing the business of the courts by advising the management.  Id. at 1069-1070.  The Ninth Circuit disagreed, stating:

Accordingly, to the extent that probation activities can be analogized to a business, the work of the DPO II Employees primarily involves the day-to-day carrying out of the business’ affairs, rather than running the business itself or determining its overall course or policies.

 Id. at 1070.

As to the County’s argument that the employees were servicing the business of the court, the Ninth Circuit also disagreed.  The court explained:

The use of stock brokers and insurance claims agents and adjusters in § 541.205(c)(5) as examples of employees who are “servicing” a business is not inconsistent with the language of the regulations. To the extent that these employees primarily serve as general financial advisors or as consultants on the proper way to conduct a business, e.g., advising businesses how to increase financial productivity or reduce insured risks, these employees properly would qualify for exemption under this regulation. Here, although probation officers provide recommendations to the courts, these recommendations do not involve advice on the proper way to conduct the business of the court, but merely provide information which the court uses in the course of its daily production activities.

 Id.  The foregoing discussion focuses only on whether the employers established that the requirements of Section 541.201(a) were met.  The Ninth Circuit apparently did not have cause to analyze the question of whether the employee’s “primary duty was the performance of work directly related to the management or general business operations of the employer’s customers.”  See 29 C.F.R. §541.201(c).  As such, Bratt fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Opinion Letter FLSA2005-21 is also misplaced, as the letter does not address the questions raised by an analysis of Section 541.201(c).  WHD Opinion Letter FLSA2005-21.  In FLSA2005-21, WHD was asked to provide an opinion “concerning the applicability of the administrative exemption  . . . to background investigators . . .”  Id.  Although WHD quotes Section 541.201(c) in its entirety, the WHD’s analysis was focused on Section 541.201(a).  Id.  After applying the facts presented to Section 541.201(a), the DOL concludes as follows:

“We believe that the activities performed by Investigators employed by your client are more related to providing the ongoing, day-to-day investigative services, rather than performing administrative functions directly related to managing your client’s business.  From the information provided in your letter, it appears that the primary duty of the Investigator is diligent and accurate fact-finding, according to DSS guidelines, the results of which are turned over to DSS who then makes a decision as to whether to grant or deny security clearances. Such activities, while important, do not directly relate to the management or general business operations of the employer within the meaning of the regulations.”

Id., at p. 4.  As the Ninth Circuit did in Bratt, the WHD’s analysis only answers whether the employee’s primary duty is directly related to the management or general business operations of the employer.  As such, FLSA2005-21 fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Opinion Letter FLSA2005-30 is also misplaced as the letter’s analysis is focused on the employee’s duties, and not on the identity of the employee.  WHD Opinion Letter FLSA2005-30.  In FLSA2005-30, WHD was asked to provide an opinion on whether a “Regional Advocate” can be considered an exempt administrative employee.  Id., at p. 1.  The following is a description of the Regional Advocate’s duties:

The Regional Advocate is responsible for advocating for services for people with disabilities.  The Regional Advocate represents the wishes and desires of a client and must do so in accordance with national protection and advocacy standards.  The Regional Advocate’s duties include keeping informed of changes in federal/state laws, regulations, policies, and court orders affecting persons with disabilities. The Regional Advocate maintains full and accurate documentation of all clients assigned, and prepares and provides regular monthly reports of assigned cases to the Data Report Specialist and other management personnel.  The Regional Advocate is also responsible for investigating and acting upon complaints of abuse or neglect, directly advises the Lead Advocate on matters relating to the client’s concerns, and participates in client case reviews.  Furthermore, the Regional Advocate is responsible for representing the employer in outside forums, committees, and work groups as assigned by the Program Director.  The Regional Advocate does not supervise other employees.

Id.

WHD concluded that a Regional Advocate does not meet the criteria to qualify as an exempt administrative employee.  Id. at p. 2.  The WHD explained –

[T]he Regional Advocate is not primarily tasked with performing any of the management or general business operational areas described in 29 C.F.R. 541.201(b); nor is the Regional Advocate primarily tasked with providing administrative services to the employer’s customers as contemplated in 29 C.F.R. 541.201(c).  Based on this analysis, we conclude that a Regional Advocate’s job function does not satisfy the requirement that the primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.  See Opinion Letter dated March 5, 1999 (finding that employees in the positions of intake coordinator, program coordinator and assisted living coordinator for individuals with disabilities are engaged in production work and, therefore, do not qualify for the administrative exemption); Opinion Letter dated March 30, 1999 (finding social workers/counselors of a social service agency do not qualify for the administrative exemption).

Id.  As mentioned, the letter’s analysis is clearly focused on employee’s duties, and not – as the DOL suggests – on the identity of the employer’s customer.  After addressing the Regional Advocate’s duties, WHD lumps Section 541.201(b) and Section 541.201(c) together to explain that Regional Advocate does not perform the required administrative functions.  Id.  The analysis does not turn on the identity of the customer.

The DOL’s reliance on Opinion Letter FLSA2007-7 is also misplaced as the letter does not address the questions raised by an analysis of Section 541.201(c).  WHD Opinion Letter FLSA2005-21.  In FLSA2007-7, WHD was asked to provide an opinion on whether the administrative exemption applied to Case Managers.  Id.  WHD concluded that the described Case Managers did not qualify for the administrative exemption.  Id.  The DOL provided the following explanation:

After reviewing the information you provided, we believe that the activities performed by Case Managers employed by your client are more related to providing the Company’s ongoing, day to-day case management services for its consumers, which involves duties such as assessing costs of care, preparing a plan of care, and identifying and implementing services to meet the consumers’ needs, rather than performing administrative functions directly related to managing either your client’s business or any business of your client’s customers. A Case Manager is not primarily tasked with performing duties in any of the management or general business functional areas described in 29 C.F.R. § 541.201(b); nor is the Case Manager primarily tasked with providing administrative services to the employer’s customers as contemplated in 29 C.F.R. § 541.201(c).

 Id., at pp. 2-3.

In providing its opinion, however, the DOL failed to make clear what it was relying on, or referring to, when it alluded to the “contemplated” application of Section 541.201(c).  Presumably, the DOL is referring to the following quoted excerpt from Preamble:

With regard to the type of work performed, the preamble to the Department’s 2004 revisions to the Part 541 regulations explains that “the administrative exemption covers only employees performing a particular type of work—work related to assisting with the running or servicing of the business.”

Id. (citing to 69 Fed. Reg. 22,122, 22,141.)  The DOL, however, failed to accurately quote the preamble.  The full quote is as follows:

Based on these principles, the Department provided in proposed section 541.201(a) that the administrative exemption covers only employees performing a particular type of work—work related to assisting with the running or servicing of the business.

69 Fed. Reg. 22122, 22141.  [Emphasis added].  As such, the quoted excerpt only addresses the “contemplated” application of Section 541.201(a).  It does not address Section 541.201(c).   Moroever, if DOL was relying on the plain text of the regulation, then, as discussed above, such an interpretation is unsupported.

The foregoing discussion demonstrates that DOL failed to provide any authority containing a pertinent analysis that might support its post hoc attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.  Moreover, it makes little practical or business sense.  In the Preamble, the DOL provided guidance regarding the analytical focal point when determining whether the administrative exemption applies.  The DOL states, “[t]he final rule distinguishes the exempt and the nonexempt financial service employees based on the duties they perform, not on the identity of the customer they serve.”  69 Fed. Reg. 22122, 22146.  The DOL goes on to explain, “[f]or example, a financial services employee whose primary duty is gathering and analyzing facts and providing consulting advice to assist customers in choosing many complex financial products may be an exempt administrative employee.”  Id.  It is certainly no coincidence that the DOL used the “financial services” employee to illustrate the significance of focusing the analysis on the duties performed by the employee rather than the identity of customer served.  As explained by the DOL, financial services often require an employee to analyze complex matters, and often require an employee to make decisions or offer advice on matters of substantial significance to the customer.  Of course, the rendering of complex financial services (e.g. advice or consultation) that are of substantial significance can occur in either a personal or business context.  In either scenario, the complexity of the financial advice need not necessarily change.  This is why the Preamble to DOL’s 2004 FLSA Regulations instructs us to look at the employee’s duties and not at the identity of the customer.

Discretion and Independent Judgment On Matters of Significance

The third and last prong of the administrative exemption is met if the employer establishes that the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.  29 C.F.R. § 541.200(a)(3); 29 C.F.R. 541.202(a).  In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.  29 C.F.R. 541.202(a).  “The term ‘matters of significance’ refers to the level of importance or consequence of the work performed.”  Talbert v. American Risk Insurance Company, Inc., 405 Fed. Appx. 848, 853, quoting 29 C.F.R. § 541.202(a).

The phrase “discretion and independent judgment” must be applied in the light of all the facts involved in the particular employment situation in which the question arises.  29 C.F.R. § 541.202(b).  Factors to consider for this determination include, but are not limited to, whether an employee has authority to formulate, affect, interpret, or implement operating practices; whether an employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business; and whether the employee has authority to waive or deviate from established policies and procedures without prior approval.  Id.  However, a case-by-case analysis is required for this determination. See McKee v. CBF Corp., 299 Fed.Appx. at 429.  For example, in Haywood v. North American Van Lines, the Seventh Circuit upheld the administrative exemption where an employee could negotiate on behalf of the employer with some degree of settlement authority, conduct independent investigation, and had authority to deviate from established procedures without prior approval.  Haywood v. North American Van Lines, 121 F.3d 1066, 1071–73 (7th Cir. 1999).

While the exercise of discretion and independent judgment implies that the employee has the authority to make an independent choice, free from immediate direction, an employee may exercise discretion even if his decisions are reviewed, revised, or reversed at a higher level.  29 CFR § 541.202(c); Cheatham v. Allstate Ins. Co., 465 F.3d 578, 585 (5th Cir. 2006).  Thus, the term “discretion and independent judgment” does not require that the decisions made by an employee have a finality that goes with unlimited authority and a complete absence of review.  29 C.F.R. § 541.202(b); Lott, 203 F.3d at 331.  The decisions made as a result of the exercise of discretion and independent judgment may consist of recommendations for action rather than the actual taking of action.  29 C.F.R. § 541.202(c).  The fact that an employee’s decision may be subject to review and that upon occasion the decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment.   29 C.F.R. § 542.202(c).

The regulations also explain that the use manuals or guidelines do not preclude a finding that the employee exercised discretion and independent judgment.  29 C.F.R. §541.704; Cheatham, 465 F.3d at 585.  Section 541.704 provides as follows:

The use of manuals, guidelines or other established procedures containing or relating to highly technical, scientific, legal, financial or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills does not preclude exemption under section 13(a)(1) of the Act or the regulations in this part.  Such manuals and procedures provide guidance in addressing difficult or novel circumstances and thus use of such reference material would not affect an employee’s exempt status.  The section 13(a)(1) exemptions are not available, however, for employees who simply apply well-established techniques or procedures described in manuals or other sources within closely prescribed limits to determine the correct response to an inquiry or set of circumstances.

Id.  Further, the “fact that many employees perform identical work, or work of the same relative importance, does not mean that the work of each such employee does not involve the exercise of discretion and independent judgment.”  29 CFR § 541.202(d).

In Cheatham, the Court noted that “consult[ation] with manuals or guidelines does not preclude the[ ] exercise of discretion and independent judgment.”  Cheatham, 465 F.3d at 585 (citation omitted).  The Court then went on to enumerate the ways in which the insurance adjusters being considered exercised discretion, despite consulting claims manuals, including “determining coverage, conducting investigations, determining liability and assigning percentages of fault to parties, evaluating bodily injuries, negotiating a final settlement, setting and adjusting reserves based upon a preliminary evaluation of the case, investigating issues that relate to coverage and determining the steps necessary to complete a coverage investigation, and determining whether coverage should be approved or denied.”  Id. at 586; see also Id. at 585 n. 7.

Such investigatory and evaluative functions clearly extend beyond the observation of processes, enforcement of standards, and reporting of noncompliance.  Zannikos, 605 Fed.Appx at 359.  Indeed, while claims manuals may inform assignments of fault, injury evaluations, settlement negotiations, and other aspects of the claims process, they seldom dictate the results in absolute terms or obviate the need to evaluate possible courses of action.  Id.  (citing McAllister v. Transamerica Occidental Life Ins. Co., 325 F.3d 997, 1001 (8th Cir.2003)).  This type of discretion is what led DOL to recently find that Client Service Managers who are professional, licensed insurance agents and advisors are administratively exempt.  DOL Op. FLSA2018-8 (January 5, 2018).  An employer’s volume of business may also make it necessary to employ a number of employees to perform the same or similar work.  The fact that many employees perform identical work, or work of the same relative importance, does not mean that the work of each such employee does not involve the exercise of discretion and independent judgment with respect to matters of significance.  29 C.F.R. § 541.202(d).

Conclusion

As stated at the outset, the purpose of this article was to explain the current state of the FLSA administrative exemption in the context of tax and financial consultants, and recommend a framework for their review.  While we’ve tried to be thorough, it is always appropriate to consult a knowledgeable attorney in this complex and evolving area of the law, especially with respect to your company’s unique business model and employee policies.  The attorneys at the Wage and Hour Defense Institute have this expertise, are committed to the defense of employers, and can advise them on their rights and responsibilities in their wage and hour practices.

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California Court Rules Employers That Require Employees to Call in Before Scheduled Shifts Must Pay Them

On February 4, 2019, the California Court of Appeal held employers that require employees to call in to work two hours before scheduled “on-call” shifts to find out whether they need to report to work trigger California’s “reporting time” pay requirements.

Clothing retailer Tilly’s, Inc. scheduled its retail store employees to work both regular and “on-call” shifts.  Employees were required to call their stores two hours before the start of their on-call shifts to determine whether they were needed to work those shifts.  Tilly’s told its employees to consider on-call shifts as “a definite thing” unless they were advised they did not need to come in to work.

A former Tilly’s employee filed a putative class action alleging Tilly’s owed her and other employees reporting time pay for on-call shifts.  The employee’s argument was based on Wage Order No. 7-2001, which applies to the retail industry.  That wage order requires employers to pay “reporting time pay” to employees for each workday “an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work.”  The reporting time pay requirement is “half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours.”

The trial court ruled in favor of Tilly’s, holding that calling in to ask whether to report for work did not constitute “reporting for work.”   But on Monday the Court of Appeal reversed, concluding that requiring employees to call in to work two hours before scheduled on-call shifts falls within the definition of “reporting to work” and therefore triggers the reporting time pay provisions.  Under this holding, the employer would be required to pay the employee for at least half of the on-call shift (up to four hours), even if the employee did not work that amount of time.

The Court reasoned that by scheduling employees for on-call shifts and not informing them whether they would be required to work until two hours before those shifts, Tilly’s effectively deprived the employees of the ability to schedule other work or make plans for personal activities, and this was “precisely the kind of abuse that reporting time pay was designed to discourage.”

Although this decision was limited to Wage Order No. 7-2001, which governs retail employees, similar reporting time pay provisions are found in other wage orders.  California employers who need employees to be on call should examine their practices.  The critical element in this case was Tilly’s practice of requiring all on-call employees to call in prior to their shifts, which the court held was effectively requiring the employees to report to work.  If Tilly’s did not require such an effort from its employees, but instead only called off the employees that it determined were not needed to work, the court’s result may well have been different.  Accordingly, if a California employer needs to have employees on call, but does not want to pay reporting time pay, it should not require any pre-shift action by employees, but instead should have supervisors contact only those employees who are not required to come to work.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP

WAGE AND HOUR LAW IN THE POLAR VORTEX

This week, people across the United States are facing dangerous arctic weather. Chicago will be colder than Antarctica, several states have declared a state of emergency, airlines are canceling thousands of flights, and schools and businesses around the country are closed. Even here in Atlanta, with Super Bowl LIII days away, the government and most schools—fearing a repeat of 2014’s Snowpocalypse—have closed because there “might” be snow later today.

Over the past several years, in response to adverse weather events and natural disasters, states and localities have enacted laws to address the compensation and treatment of employees during unanticipated closures. Several companies have also enacted policies and procedures for the payment and treatment of employees impacted by adverse weather conditions. In situations like these, it is important for employers to remember the contractual or statutory obligations they may have towards certain segments of their workforce.

A few general reminders:

  • Consult WHDI counsel regarding local requirements, and understand that compensation is not the only issue. If you do not have company-specific policies, and are uncertain whether the jurisdiction/s in which your business operates has special statutory requirements for the compensation or discipline of workers during adverse conditions, you should consult counsel. Links to the Wage and Hour Defense Institute’s national network of recognized practitioners is available here: http://wagehourdefense.org/
    • Keep in mind that compensation requirements are not the only issue. An employer may not need to pay an employee who elects not to come to work during dangerous weather conditions, but state law may prohibit discipline of that employee if the governor has declared a state of emergency. Employers that have point systems for attendance, for example, may need to consider the ramifications of including absences from a week when there is a state of emergency or national disaster.
  • Federal law requirements. Federal law (the Fair Labor Standards Act or “FLSA”) focuses on the status of the employee, whether the absence was at the employer’s request, and whether any work was performed in the day or week. An improper salary deduction can have ramification beyond potential reimbursement of the affected employee. When an exempt employee’s salary is improperly deducted, it can threaten the exempt classification for all other employees in the same job classification. It is important to properly understand and apply the rules.
    • Hourly non-exempt employees are the easiest. Those who do not show up and work do not need to be paid, regardless of whether the business is open or closed. Exempt employees, and even non-exempt salaried employees in certain contexts, are treated differently.
    • When the business is closed for the day:
      • Exempt employees willing and able to work must be paid unless they indicate they are not available to work on that day. And if any work is done that day, even small amounts, an exempt employee is entitled to their entire salary for the day.
      • Salaried non-exempt employees who are paid on a fluctuating workweek basis (guaranteed salary regardless of variable hours worked) in order to take advantage of the reduced overtime payment obligations must also be paid their entire salary under such conditions.
    • When the business is closed for an extended period of time:
      • If a business is closed for an entire week, and an exempt employee performs no work during the week, then there is no obligation under the FLSA to pay the salaried employee.
    • When the business is open for the day:
      • If the business is open, and an exempt employee does not come in, then the employee is not available to work and their salary can be deducted for the absence.
      • This of course assumes that no work is performed. With many employees able to work remotely, employers may need to provide clear guidance to employees to preserve the ability, if so desired, to deduct the salaries of exempt employees absent during adverse weather conditions

Paul Barsness

Parker Hudson Rainer & Dobbs LLP – Atlanta, GA

California’s Piece-Rate Compensation Law Survives Court Challenge

On January 4, 2019, the California Court of Appeal rejected a request to declare the state’s piece-rate compensation law unconstitutionally vague.  The 2016 law, codified as Section 226.2 of the California Labor Code, requires employers to compensate piece-rate employees separately for so-called “nonproductive” work time that is not directly related to the activity being compensated on a piece-rate basis.

The statute requires separate compensation for rest and recovery periods mandated by state law, as well as “other nonproductive time.”  Nisei Farmers League brought suit seeking to have the statute declared unconstitutional, arguing the phrase “other nonproductive time” is unconstitutionally vague because it doesn’t say whether such activities as “traveling between work sites, attending meetings, doing warm-up calisthenics, putting on protective gear, sharpening tools, waiting for additional equipment, or waiting for weather to change” are “nonproductive” time within the meaning of the statute.  The Court of Appeal rejected the argument, finding the phrase in question was expressly defined by the statute as time under the employer’s control not directly related to the activity being compensated on a piece-rate basis, and there was no constitutional requirement to define precisely what activities fall within the definition.

The 2016 legislation is a codification of earlier appellate court decisions holding that piece-rate workers must be separately compensated for rest breaks.  A February 2017 appellate decision reached a similar conclusion as to the nonproductive work time of employees classified as exempt from overtime under the commissioned employee (a/k/a “inside sales”) exemption.  (Employees classified as exempt under the “outside sales” exemption are not subject to minimum wage, overtime, or meal/rest break requirements.)  All employers with piece-rate and/or inside commissioned sales employees in California should take immediate steps to ensure they separately compensate these employees for all rest breaks and other nonproductive time.

The case is Nisei Farmers League v. California Labor & Workforce Development Agency, No. F075102 (Cal. App. January 4, 2019.)

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Michigan Legislature Amends State Minimum Wage and Paid Sick Leave Acts

By Robert A. Boonin, James Hermon and Andrea Frailey of Dykema Gossett, PLLC

On December 4, 2018, the Michigan Legislature pared back the minimum wage and paid sick leave laws it passed last September in an effort to preclude those issues from being on the November ballot. Had the Legislature not adopted the language of the ballot initiatives legislation, the measures would have been on the November ballot and it would have needed a vote of three-fourths of each house to amend the law if adopted by the voters. By enacting the proposals directly, it only needed a simple majority to amend those laws. The strategy of using a lame-duck legislative session to amend the laws by a simple majority it passed just two months earlier has been viewed as controversial, but the outcome is welcomed by many in the business community.

These bills have just been signed by the Governor Snyder, who said in his signing message: “I look at legislation presented to me through a policy lens – is it the right policy for the state of Michigan and Michiganders as a whole? . . . That’s what I did with these bills and have now signed them into law. I looked at what the potential impacts and benefits of the changes would be and decided that signing these bills was the appropriate action.”

These revised minimum wage and paid sick leave laws will go into effect around March 21, 2019 (depending on the exact date the current legislative session ends). All Michigan employers must familiarize themselves with these new laws.

THE IMPROVED WORKFORCE OPPORTUNITY WAGE ACT

The changes to the Improved Workforce Opportunity Act—the Act controlling Michigan’s minimum wage and overtime rules—relate to increases to the minimum wages paid to all workers, including those who receive tips.

For non-tipped employees, the minimum wage will gradually increase from the current rate of $9.25 per hour to $12.05 in 2030, as opposed to $12.00 in 2022 as previously enacted. In addition, the amendments also eliminate the automatic increases to the minimum wage after 2022 based on increases to the CPI that was part of the previously adopted ballot initiative language.

Under the current law, tipped employees need to be paid a wage of at least $3.52 per hour, provided the employees make up the difference between that rate and the regular minimum wage in tips. This offset is commonly known as the “tip credit.” Under the original law passed last September, the tip credit would have been phased out in its entirety by 2024 and tipped employees would have been entitled to the same minimum wage that all other employees receive from that date onwards. That change was eliminated by the new law. Instead, the tipped minimum wage will be 38 percent of the minimum wage. (Click here for a table comparing the September version to the December version of the Act.)

THE PAID MEDICAL LEAVE ACT

The Legislature also passed the “Earned Sick Time Act” in September 2018, by adopting voter initiative petition language. This Act, for the first time, mandated the accrual of paid sick time for employers with more than 10 employees, and paid and unpaid sick time for smaller employers. The recent amendments significantly changed the amount of time eligible employees may accrue, which employees and employers are to be subject to the Act, how the time may be used and carried over, and how the Act may be enforced. The Legislature also changed the Act’s name to the “Paid Medical Leave Act.” A summary of the changes and obligations are provided below. (Click here for a table comparing the original version of the Act to the version as amended in December.)

Who is Covered?

The recent amendments changed both which employers are covered by the Act, and which employers are eligible for leave.

  • Instead of having virtually all Michigan employers subject to the Act as in the September legislation, the amended Act only applies to employers with 50 or more employees. Smaller employers will no longer be covered by the Act.
  • Instead of making leave under the Act available to virtually all employees in the state, the amended Act applies to employees from whom the employer is required to withhold for federal income tax purposes. In addition, the amendments add several exemptions to the Act that were not in the September version. Most significant in this regard are:
    • White-collar employees who are exempt under the Fair Labor Standards Act;
    • Private sector employees covered by collective bargaining agreements; and
    • Employees working fewer than 25 weeks in a calendar year, or fewer than an average of 25 hours per week in the preceding calendar year.

How much leave must be provided and what are the other major requirements?

Under the Act as passed in September, employees of large employers (10+ employees) were to earn 1 hour of time off for every 30 hours worked, and employees of small employers would earn 1 hour of time off for every 40 hours worked. The new law significantly reduces the rate at which leave accrues. Now, employees of covered employers (i.e., those employing 50 or more employees), only, may earn paid time off under the Act and at the rate of at least 1 hour for every 35 hours worked. An employer may, however, limit the accrual to 1 hour for every calendar week worked, and further may limit total accrual to 40 hours for any benefit year. Employers also may limit the carryover of any accrued but unused hours to 40 hours, and employers may limit the total hours to be used in any benefit year to 40.

Further, the amendments more clearly provide for the right for employers to grant at least 40 hours of paid medical leave at the beginning of the year instead of using the accrual method. If the employer does so, there is no obligation to allow any of the hours to carryover from one year to the next.

Employers with paid leave plans, such as PTO, sick leave or vacation which provide for at least 40 hours of paid time off per benefit year, may count those days towards the hours required by the Act. Also, the amount to be paid to employees using paid hours under the Act need not include overtime, tips, commissions, bonuses, supplemental pay, or the like; only base pay is to be paid.

Leave accrued under the Act has no cash value upon termination unless otherwise provided by the employer.

Records regarding the administration of the Act will have to be retained for one year under the amended Act, versus the three years required by the September version. Posters will be required as well, but with less detail than those required under the September version. The requirement for providing a written notice of the employees’ rights under the Act per the September version was removed in the December version.

For What Reasons and How Can an Employee Take Paid Medical Leave?

While the Michigan Legislature did not make substantial changes to the reasons an employee can cite for taking leave, it is worth reiterating what those reasons are. An eligible employee can take paid leave under the amended Act for: (1) their own mental or physical illness; (2) the mental or physical illness of their family member; (3) medical care, counseling, relocation, or court appearances relating to domestic violence or sexual assault against the employee or a family member; and (4) the closure of the employee’s place of work or the employee’s child’s school due to a public health emergency. Notably, the only change the Michigan Legislature made here was to delete the provision that allowed an employee to take leave for a meeting at the employee’s child’s school regarding the child’s health, disability, or effects of domestic violence or sexual assault on the child.

The Legislature also changed the definition of “family member” which will narrow the scope of what an employee can use leave for. “Family member” no longer includes an employee’s domestic partner or an employee’s domestic partner’s children or parents.

Under the amended version, leaves must be taken in hourly increments, unless other increments are required or allowed in a handbook or other written benefit document, instead of increments of an hour or less, if allowed per the employer’s payroll system. Special documentation requirements apply to leaves related to domestic violence and sexual assaults.

And finally, under the September Act, employers could require no more than seven days’ notice of an employee’s desire to use paid sick time, if feasible. Under the amended law, employers may apply its usual notice, procedural and documentation requirements support paid leave requests.

Remedies

The new version of the Act removed the anti-retaliation and discrimination provisions of the September version. It also removed the right to a civil action to enforce the Act. Under the new Act, enforcement is accomplished vis-à-vis an employee filing a complaint with the Department of Licensing and Regulatory Affairs within six months of the alleged violation. That is substantially different from the Act that was passed in September which allowed for civil actions and had a statute of limitations of three years. Further, if the Department determines that the Act has been violated, it can award the employee payment of their paid medical leave that was improperly withheld as well as assess a $1,000 administrative fine against the employer. No other damages are available.

THE LEGAL LANDSCAPE

The fact that these Acts are being amended during the same legislative session in which they were first enacted, questions have been raised (at least in some political camps) about the Legislature’s authority to make these amendments in light of the Constitutional process underlying their initial adoption, i.e., keeping the initiatives off last November’s ballot. The Michigan Legislature has never taken a similar action under these circumstances, and the Michigan Constitution does not explicitly address the issue of the Legislature’s authority to do so. Until December 4, 2018, the only legal authority suggesting that the Legislature may have lacked the authority to act as it did is a 1964 opinion of the Michigan Attorney General (Frank Kelley, D) that states “the legislature enacting an initiative petition proposal cannot amend the law so enacted at the same legislative session without violation of the spirit and letter” of the Michigan Constitution. That statement arguably was beyond the scope of the questions presented to the Attorney General at that time, and the opinion never has been tested in court. On December 4, the current Attorney General (Bill Schuette, R) issued his own opinion discrediting the 1964 opinion and concluding that there is no constitutional basis proscribing the Legislature from amending a law enacted earlier during the same legislative session per the ballot initiative process or otherwise. It is too early to tell whether legal action testing these opinions will occur in an effort to void the December bills.

TAKEAWAYS

For now, employers should begin preparing for the Acts to take effect in March. Employers who pay the minimum wage (including the modified minimum for tipped employees) should familiarize themselves with the new minimum wages and what the scheduled increases are, and consider if their pay structures need adjusting in light of any wage compression at stake. In addition, all employers with 50 or more employees should evaluate whether or not their current paid leave polices comply with the paid sick/medical leave act, and modify their policies to conform to the Act’s requirements. In this regard, it is anticipated that most employers will have to go to the policy drafting table and, in the process, they are advised to consult with counsel to address the nuances of the law.

On December 4, 2018, the Michigan Legislature pared back the minimum wage and paid sick leave laws it passed last September in an effort to preclude those issues from being on the November ballot. Had the Legislature not adopted the language of the ballot initiatives legislation, the measures would have been on the November ballot and it would have needed a vote of three-fourths of each house to amend the law if adopted by the voters. By enacting the proposals directly, it only needed a simple majority to amend those laws. The strategy of using a lame-duck legislative session to amend the laws by a simple majority it passed just two months earlier has been viewed as controversial, but the outcome is welcomed by many in the business community.

These bills have just been signed by the Governor Snyder, who said in his signing message: “I look at legislation presented to me through a policy lens – is it the right policy for the state of Michigan and Michiganders as a whole? . . . That’s what I did with these bills and have now signed them into law. I looked at what the potential impacts and benefits of the changes would be and decided that signing these bills was the appropriate action.”

These revised minimum wage and paid sick leave laws will go into effect around March 21, 2019 (depending on the exact date the current legislative session ends). All Michigan employers must familiarize themselves with these new laws.

THE IMPROVED WORKFORCE OPPORTUNITY WAGE ACT

The changes to the Improved Workforce Opportunity Act—the Act controlling Michigan’s minimum wage and overtime rules—relate to increases to the minimum wages paid to all workers, including those who receive tips.

For non-tipped employees, the minimum wage will gradually increase from the current rate of $9.25 per hour to $12.05 in 2030, as opposed to $12.00 in 2022 as previously enacted. In addition, the amendments also eliminate the automatic increases to the minimum wage after 2022 based on increases to the CPI that was part of the previously adopted ballot initiative language.

Under the current law, tipped employees need to be paid a wage of at least $3.52 per hour, provided the employees make up the difference between that rate and the regular minimum wage in tips. This offset is commonly known as the “tip credit.” Under the original law passed last September, the tip credit would have been phased out in its entirety by 2024 and tipped employees would have been entitled to the same minimum wage that all other employees receive from that date onwards. That change was eliminated by the new law. Instead, the tipped minimum wage will be 38 percent of the minimum wage. (Click here for a table comparing the September version to the December version of the Act.)

THE PAID MEDICAL LEAVE ACT

The Legislature also passed the “Earned Sick Time Act” in September 2018, by adopting voter initiative petition language. This Act, for the first time, mandated the accrual of paid sick time for employers with more than 10 employees, and paid and unpaid sick time for smaller employers. The recent amendments significantly changed the amount of time eligible employees may accrue, which employees and employers are to be subject to the Act, how the time may be used and carried over, and how the Act may be enforced. The Legislature also changed the Act’s name to the “Paid Medical Leave Act.” A summary of the changes and obligations are provided below. (Click here for a table comparing the original version of the Act to the version as amended in December.)

Who is Covered?

The recent amendments changed both which employers are covered by the Act, and which employers are eligible for leave.

  • Instead of having virtually all Michigan employers subject to the Act as in the September legislation, the amended Act only applies to employers with 50 or more employees. Smaller employers will no longer be covered by the Act.
  • Instead of making leave under the Act available to virtually all employees in the state, the amended Act applies to employees from whom the employer is required to withhold for federal income tax purposes. In addition, the amendments add several exemptions to the Act that were not in the September version. Most significant in this regard are:
    • White-collar employees who are exempt under the Fair Labor Standards Act;
    • Private sector employees covered by collective bargaining agreements; and
    • Employees working fewer than 25 weeks in a calendar year, or fewer than an average of 25 hours per week in the preceding calendar year.

How much leave must be provided and what are the other major requirements?

Under the Act as passed in September, employees of large employers (10+ employees) were to earn 1 hour of time off for every 30 hours worked, and employees of small employers would earn 1 hour of time off for every 40 hours worked. The new law significantly reduces the rate at which leave accrues. Now, employees of covered employers (i.e., those employing 50 or more employees), only, may earn paid time off under the Act and at the rate of at least 1 hour for every 35 hours worked. An employer may, however, limit the accrual to 1 hour for every calendar week worked, and further may limit total accrual to 40 hours for any benefit year. Employers also may limit the carryover of any accrued but unused hours to 40 hours, and employers may limit the total hours to be used in any benefit year to 40.

Further, the amendments more clearly provide for the right for employers to grant at least 40 hours of paid medical leave at the beginning of the year instead of using the accrual method. If the employer does so, there is no obligation to allow any of the hours to carryover from one year to the next.

Employers with paid leave plans, such as PTO, sick leave or vacation which provide for at least 40 hours of paid time off per benefit year, may count those days towards the hours required by the Act. Also, the amount to be paid to employees using paid hours under the Act need not include overtime, tips, commissions, bonuses, supplemental pay, or the like; only base pay is to be paid.

Leave accrued under the Act has no cash value upon termination unless otherwise provided by the employer.

Records regarding the administration of the Act will have to be retained for one year under the amended Act, versus the three years required by the September version. Posters will be required as well, but with less detail than those required under the September version. The requirement for providing a written notice of the employees’ rights under the Act per the September version was removed in the December version.

For What Reasons and How Can an Employee Take Paid Medical Leave?

While the Michigan Legislature did not make substantial changes to the reasons an employee can cite for taking leave, it is worth reiterating what those reasons are. An eligible employee can take paid leave under the amended Act for: (1) their own mental or physical illness; (2) the mental or physical illness of their family member; (3) medical care, counseling, relocation, or court appearances relating to domestic violence or sexual assault against the employee or a family member; and (4) the closure of the employee’s place of work or the employee’s child’s school due to a public health emergency. Notably, the only change the Michigan Legislature made here was to delete the provision that allowed an employee to take leave for a meeting at the employee’s child’s school regarding the child’s health, disability, or effects of domestic violence or sexual assault on the child.

The Legislature also changed the definition of “family member” which will narrow the scope of what an employee can use leave for. “Family member” no longer includes an employee’s domestic partner or an employee’s domestic partner’s children or parents.

Under the amended version, leaves must be taken in hourly increments, unless other increments are required or allowed in a handbook or other written benefit document, instead of increments of an hour or less, if allowed per the employer’s payroll system. Special documentation requirements apply to leaves related to domestic violence and sexual assaults.

And finally, under the September Act, employers could require no more than seven days’ notice of an employee’s desire to use paid sick time, if feasible. Under the amended law, employers may apply its usual notice, procedural and documentation requirements support paid leave requests.

Remedies

The new version of the Act removed the anti-retaliation and discrimination provisions of the September version. It also removed the right to a civil action to enforce the Act. Under the new Act, enforcement is accomplished vis-à-vis an employee filing a complaint with the Department of Licensing and Regulatory Affairs within six months of the alleged violation. That is substantially different from the Act that was passed in September which allowed for civil actions and had a statute of limitations of three years. Further, if the Department determines that the Act has been violated, it can award the employee payment of their paid medical leave that was improperly withheld as well as assess a $1,000 administrative fine against the employer. No other damages are available.

THE LEGAL LANDSCAPE

The fact that these Acts are being amended during the same legislative session in which they were first enacted, questions have been raised (at least in some political camps) about the Legislature’s authority to make these amendments in light of the Constitutional process underlying their initial adoption, i.e., keeping the initiatives off last November’s ballot. The Michigan Legislature has never taken a similar action under these circumstances, and the Michigan Constitution does not explicitly address the issue of the Legislature’s authority to do so. Until December 4, 2018, the only legal authority suggesting that the Legislature may have lacked the authority to act as it did is a 1964 opinion of the Michigan Attorney General (Frank Kelley, D) that states “the legislature enacting an initiative petition proposal cannot amend the law so enacted at the same legislative session without violation of the spirit and letter” of the Michigan Constitution. That statement arguably was beyond the scope of the questions presented to the Attorney General at that time, and the opinion never has been tested in court. On December 4, the current Attorney General (Bill Schuette, R) issued his own opinion discrediting the 1964 opinion and concluding that there is no constitutional basis proscribing the Legislature from amending a law enacted earlier during the same legislative session per the ballot initiative process or otherwise. It is too early to tell whether legal action testing these opinions will occur in an effort to void the December bills.

TAKEAWAYS

For now, employers should begin preparing for the Acts to take effect in March. Employers who pay the minimum wage (including the modified minimum for tipped employees) should familiarize themselves with the new minimum wages and what the scheduled increases are, and consider if their pay structures need adjusting in light of any wage compression at stake. In addition, all employers with 50 or more employees should evaluate whether or not their current paid leave polices comply with the paid sick/medical leave act, and modify their policies to conform to the Act’s requirements. In this regard, it is anticipated that most employers will have to go to the policy drafting table and, in the process, they are advised to consult with counsel to address the nuances of the law.

California Governor Jerry Brown Signs #MeToo Bill Package Affecting Employers

Governor Brown Signs #MeToo Bill Package Favoring Employees in Harassment Litigation and Settlements, Expanding Anti-Harassment Training Requirements, and Protecting Employers From Defamation Claims

Summary

On September 30, 2018, Governor Brown acted on the last of over 1,200 bills that the Legislature passed this year, including a slate of #MeToo inspired laws.  This e-Update surveys the most significant changes.

Discussion

Although the Governor’s reaction to the #MeToo legislation was mixed, the laws taking effect on January 1, 2019 will significantly affect California employers.

Senate Bill 1300 is most impactful.  It establishes that a single incident of harassment may satisfy the requirement that harassment be “severe or pervasive.”  The law also directs trial courts that sex harassment cases should generally be resolved by a jury trial.  Further, the law  makes it harder for an employer that prevails in a discrimination or harassment suit to recover its attorneys’ fees.  Finally, the law limits an employer’s use of confidentiality and non-disparagement agreements in harassment and discrimination settlements.

Governor Brown also signed Assembly Bill 2770, which aims to protect employees and employers from certain defamation claims.  A.B. 2770 deems three specific communications privileged: (1) an employee’s credible report of sexual harassment to an employer; (2) communications between an employer and “interested persons” (like witnesses or victims) about sexual harassment claims; and (3) an employer’s statements to prospective employers that a decision to not rehire an individual is based on the employer’s finding that the individual engaged in sexual harassment.  All communications must be made without malice to be privileged.

The Governor also signed Senate Bill 820, which prohibits any provision in a settlement agreement that would prevent the disclosure of facts related to sexual assault, harassment, or discrimination. The law excepts only provisions that shield the claimant’s identity or the settlement amount.

Another new bill is Senate Bill 1343, which expands employer training obligations.  Currently, employers with 50 or more employees must provide anti-harassment training to supervisory employees within six months of hire and every two years.  The new law extends the training requirement to employers with five or more employees.  The law also requires that non-supervisory employees receive one hour of training, starting in January 2020.

Paul, Plevin will review these new laws at the firm’s annual Employment Law Update on November 2, 2018.

What This Means

These laws are certain to alter harassment litigation in California.  The new ban on non-disclosure provisions in harassment cases is certain to make early settlement more precarious as it will no longer ensure a publicity-free resolution.  The new laws will also impede the dismissal of sex harassment claims.  Finally, employers must now expand their harassment prevention efforts by training both supervisory and nonsupervisory employees every two years.

Employers have until January 1, 2020 to provide the first mandated training, which must be repeated every two years thereafter.  PPSC regularly offers customizable compliance trainings both on-site and at our offices.  For more information, see our website.

We note that some of the bills vetoed by Governor Brown this year, such as the bill prohibiting mandatory arbitration of harassment claims, are likely to be presented again in 2019 before a new Governor and Legislature.  Paul, Plevin will continue to track these legislative proposals and provide updates on developments that affect California employers.

This E-Update was co-authored by Desi Kalcheva and Mary Allain.  For more information, please contact Ms. Kalcheva, Ms. Allain or any Paul, Plevin attorney by calling (619) 237-5200.

Michigan Legislature Adopts Minimum Wage Increases and Paid Sick Leave: Political Poker Is Alive and Well in Michigan

By Robert Boonin (rboonin@dykema.com), James Hermon (jhermon@dykema.com) and Andrea Frailey (afrailey@dykema.com) of Dykema Gossett, PLLC

After various court battles, two ballot initiatives were set to be on the November ballot for voter consideration. If passed, one would have increased the state minimum wage and the other would have required employers to provide sick leave to employees. Under Michigan law, though, the Legislature is permitted the opportunity to foreclose the issues from appearing on the ballot by adopting those initiatives through legislation.

Even though the Republican majority of both houses appeared philosophically opposed to the initiatives, on September 5 both houses voted to adopt both of them. Ironically, even though the Democratic minority appeared anxious to have the initiatives on the ballot, most Democrats voted against their adoption by the Legislature.

Are you cross-eyed yet? What accounts for what most would consider ironic? It’s all a matter of sophisticated and high-stakes politics. By the Legislature taking ownership of both laws, the Legislature can more easily amend them during the coming lame-duck session, or even after a new Governor takes office. Voter initiatives require a three-fourths legislative majority to be amended, versus the simple majority required laws like these that are passed through the normal legislative process. Thus, though these actions are technically set to become law at this moment, they may be amended before their early 2019 effective dates.

In the meantime, Michigan has officially joined the ranks of states continually raising their minimum wages, and perhaps more significantly, the small minority of states which have enacted some sort of general paid leave requirement.

The Minimum Wage Increases, as Passed

The Improved Workforce Opportunity Wage Act (the “IWOA”) primarily does two things: a) it raises the state’s general minimum wage, and b) it eventually eliminates the lower minimum wage for employees who typically receive tips, a/k/a “tip credits.” The increases will be phased in over three years, as follows:

General Minimum Wage Tipped Employees’ Minimum Wage
Current $ 9.25 $ 3.52
January 1, 2019 $10.00 $ 4.80
January 1, 2020 $10.65 $ 6.39
January 1, 2021 $11.35 $ 7.95
January 1, 2022 $12.00 $ 9.60
January 1, 2023 COLA Increase 90% of Gen’l. Minimum
January 1, 2024 COLA Increase 100% of Gen’l. Minimum

Each year after 2022, the general minimum wage will be subject to an increase based on the percentage increase to the CPI provided the CPI has not increased over the prior year by more than 8.5 percent. This automatic indexing is a new feature to Michigan’s minimum wage law.

The Paid Sick Leave Law, as Passed

The Legislature also passed the Earned Sick Time Act (the “ESTA”). This law allows most Michigan employees to earn paid sick time. The ESTA requires employers with more than 10 employees to grant one hour of paid sick time for every 30 hours worked by each employee. For employers with less than 10 employees, the law requires their Michigan employees to earn one hour of paid sick time for every 40 hours of work. No employer with 10 or more employees, though, is required to permit employees to use more than 72 hours of paid sick leave a year, and smaller employers may cap their use to 32 hours per year.

Paid sick time earned under the law may be used by employees for time off needed: a) due to the employee’s or family member’s health condition or injury, including preventative care or diagnosis; b) due to the employee’s or family member’s treatment, services, relocation, or participation in criminal proceedings, relating to being a victim of domestic violence or sexual assault; or c) due to the temporary closure of a business or school due to a public health concern.

What the Legislation Means for Employers

These acts could have widespread impact on employers, but it is unlikely that they will go into effect as currently written. Since the Legislature adopted the initiatives instead of allowing a popular vote on them, there is more room for amendment; there already is serious talk in the Legislature about possible amendments. Amendments may adjust how the changes are phased in, address the new automatic minimum wage indexing provision, or even repeal either or both of the new laws. Until that happens, these provisions are Michigan law and employers with employees in Michigan should begin the process for complying with them in their current form. Waiting for possible amendments will be too speculative and, without planning now, adjusting pay scales, changing leave policies and union contracts, preparing to accrue paid sick time and budget for higher wages at the last minute may be impracticable.

California Supreme Court Holds Federal De Minimis Rule Not a Defense to Wage Claims Brought Under California Law

Yesterday, the California Supreme Court ruled that the de minimis rule found in the federal Fair Labor Standards Act (FLSA) does not apply to wage claims brought under California state law.  The court thus rejected an attempt by Starbucks to invoke the rule as a defense to an employee’s claim that he was routinely required to work off-the-clock for a few minutes each day.

Background on the De Minimis Rule

Under the FLSA, employers are generally required to pay at least the federal minimum wage for all ‘‘hours worked.’’ California’s Industrial Welfare Commission (IWC) wage orders include similar requirements, which generally define ‘‘hours worked’’ more broadly as ‘‘the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.’’

But federal courts have long recognized an exception to the general rule requiring pay for all hours worked.  Under the de minimis rule, employees generally cannot recover for otherwise compensable time if it amounts to only a few seconds or minutes of work beyond scheduled working hours.  To determine whether work time is de minimis, courts consider: (1) the practical administrative difficulty of recording the additional time; (2) the aggregate amount of compensable time; and (3) the regularity of the additional work.  Applying these standards, numerous courts have held that daily periods of up to 10 minutes are de minimis under federal law and thus not compensable.

Troester v. Starbucks Corporation

As a shift supervisor for Starbucks, Douglas Troester was responsible for performing certain tasks at the end of the business day after clocking out, including transmitting sales data to Starbucks headquarters and setting the store alarm. These closing activities generally totaled fewer than four minutes, and they nearly always took fewer than 10 minutes.

After his termination, Troester sued Starbucks for unpaid wages under California law.  The federal district court granted Starbucks’s motion for summary judgment based on the de minimis rule.  Troester appealed.

The Ninth Circuit Court of Appeals, finding no opinion by the California Supreme Court applying the de minimis rule to California wage claims, asked the California Supreme Court whether the rule applied under California state law.  Yesterday the California Supreme Court found that it did not.

In its decision, the court noted that although the de minimis rule has been part of federal law for 70 years, neither the Labor Code nor the wage orders have been amended to recognize a de minimis exception.  Only one published California Court of Appeal decision has applied the de minimis rule, and it found that the rule did not apply to the case before it.  And although the California Division of Labor Standards Enforcement (DLSE) has for some time identified the de minimis rule as defense to claims for small amounts of unpaid time in its Enforcement Policies and Interpretations Manual and a handful of opinion letters, neither is binding, and the court found no intent to incorporate the rule into California law.

The court also noted practical considerations undermining the application of the de minimis rule in California wage actions.  The rule was first adopted by federal courts decades ago when it was more difficult to track small amounts of time.  With the technology available today, the court concluded that capturing all employee work time is considerably less difficult.

Although the court rejected the FLSA de minimis rule as a defense to state-law wage claims, the court did not decide whether a general de minimis principle may ever apply to wage and hour claims under state law.  The court made it clear that no such principle applied in the case before it, because Starbucks was aware that Troester and other supervisors worked a few minutes off the clock every time they closed a store.  But the court gave no examples of where a general de minimis principle might apply in future cases.

What This Means For Employers

Yesterday’s decision makes it clear that the FLSA de minimis rule is no defense to claims for small amounts of unpaid time under California law.  Employers with nonexempt employees in California should enact and enforce policies and practices designed record every minute of every employee’s working time, and to pay employees for every minute worked.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

California’s Equal Pay Act is Amended . . . Again

Last week, Governor Brown signed into law Assembly Bill 2282, which was introduced in February 2018. The bill is another amendment to California’s Equal Pay Act, which has now been amended three times since January 1, 2016, when the Fair Pay Act expanded the law to apply to employees performing “substantially similar work” and limit the factors employers can rely on to justify pay disparities. The changes to the law take effect on January 1, 2019.

Details

The new amendments are primarily intended to clarify the obligations imposed on employers by Assembly Bill 168, which took effect on January 1, 2018. AB 168 prohibited employers from asking job applicants for salary history information, and it also required employers to provide “applicants” with the “pay scale” for a position based on a “reasonable request.” Since AB 168 took effect, employers have struggled to interpret these requirements, including whether “applicants” included current employees, what information had to be included when providing the “pay scale,” and what constituted a “reasonable request.” AB 2282 addresses these questions by providing more details about employers’ obligations. Specifically, the new amendment provides:

  • An “applicant” is an individual seeking employment, not a current employee.
  • “Pay scale” is a salary or hourly wage range, and does not include bonuses or equity compensation.
  • A “reasonable request” is a request made after an applicant has completed an initial interview with the employer.

The amendment also states what was previously understood:  The ban on inquiring about an applicant’s pay history does not prohibit inquiries about an applicant’s “salary expectations.”

Finally, the new amendment drives home that employers cannot rely on prior salary – ever – to justify a pay disparity between employees performing substantially similar work.  Existing law said employers could not rely on salary history information of an applicant as a factor to determine what salary to offer the applicant.  Existing law also said employers could not use prior salary “by itself” to justify any disparity in compensation.  The amendment removes the “by itself” limitation, and also adds a new sentence that says: “Prior salary shall not justify any disparity in compensation.”  However, the amendment provides a slight exception for current employees, by providing: “Nothing in this section shall be interpreted to mean that an employer may not make a compensation decision based on a current employee’s existing salary, so long as any wage differential resulting from that compensation decision is justified” by the statutory factors of a seniority or merit system, a system that measures earnings by quantity or quality of production, or a “bona fide factor” other than gender, race or ethnicity, such as education, training or experience.

What This Means

This amendment provides employers with some additional clarity by better defining their obligations to provide pay scale information to applicants. The amendment also makes it clear that employers cannot rely on prior pay in initial salary setting, and cannot include prior pay even as one consideration in justifying a pay disparity between employees performing substantially similar work. Even though employers may make compensation decisions based on an existing employee’s current salary, employers still must be able justify any resulting wage differential based on factors enumerated in the statute. This means that employers must rely solely on these statutory factors, and never on prior pay, when explaining starting salaries or any pay differential between employees performing substantially similar work. Considerable uncertainty remains, however, over how narrowly courts will construe the statutory factors, especially a “bona fide factor other than gender, race or ethnicity,” which requires employers to prove an “overriding legitimate business purpose” and that the factor has been “applied reasonably.” It will take time for these questions to be answered by the courts.

Fred Plevin