On July 29, the Department of Labor (DOL) announced a final rule rescinding the Trump Administration’s Joint Employer rule. This move clearly reestablishes the DOL’s quest to broaden the scope of potential liability for businesses under the Fair Labor Standards Act (FLSA) for the wrongs of their subcontractors, franchisees and other entities. This move is consistent with the Biden Administration’s trend to reinstate the measures taken under the FLSA by the Obama Administration, including those taken to broaden the scope of who could be deemed joint employers under the FLSA. The rule promulgated by the Trump Administration had replaced an Administrator’s Guidance issued by the Wage and Hour Administrator of the Obama Administration, David Weil. Consistent with this trend, David Weil has been nominated to serve the current administration in the same role he held during the Obama Administration.

Many members of the business community saw the Trump-era rule as providing clarity on whether an entity constitutes a joint employer under the FLSA. The Biden DOL, on the other hand, characterized the rescinded rule as “contrary to statutory language and Congressional intent,” and contrary to the Guidance issued during the Obama Administration. That Guidance though was highly criticized by the business community and the courts as being too broad. The objective of that guidance was to make it easier to hold contracting employers and franchisors liable for the wrongs of employers “lower on the ladder,” thereby finding “deeper pockets” liable and facilitating larger class actions.  

The Rescinded Rule Lived an Interesting Life

Under the rescinded rule, an employer would be deemed to be a joint employer with the “direct employer” if, with respect to the employees of the direct employer, it:

(i)     Hires or fires the workers;

(ii)    Supervises and controls the workers’ work schedules or conditions of employment to a substantial degree;

(iii)    Determines the employees’ rates and methods of pay; and

(iv)    Maintains the employees’ employment records.

The rescinded rule provided further clarity by eliminating from the analysis such factors as whether the relationship was due to a franchise agreement, whether the franchisor provided sample handbooks to franchisees, whether the contractor’s employees worked on the contracting entity’s premises, whether the employees participated in association health or retirement plans, or whether the business required contractors to conform to minimum wage, workplace safety, sexual harassment and other policies. The current DOL believes the prior administration’s focus on control was too narrow.

The prior rule went into effect in March 2020, but it was enjoined by a federal court in New York in September 2020 due to a belief that the rule was inconsistent with the statute. Under the prior administration, the DOL appealed that ruling to the Court of Appeals and filed its brief shortly before the current administration took office. Rather than being placed in the awkward position of arguing contrary to the position taken in January as the appeal progressed, the DOL asked the court to hold the case in abeyance as the new administration was contemplating a change or rescission to the rule before the court. The court declined to do so. Now that the DOL is formally rescinding the rule, though, it is likely that the DOL will seek to have the case dismissed. 

Employers Need to Evaluate their Potential Exposure as Joint Employers

Despite the DOL’s assertions that rescinding the rule will have minimal effect on businesses since it “was not adopted by most jurisdictions,” many employers will be affected by the rescission. 

The DOL’s return to an “economic realities” in lieu of a “control” analysis foreshadows an increased effort by the DOL and employees to bring actions for unpaid wages under the FLSA against entities not typically considered to be employers. Employers, especially those who operate under a franchise model or engage many contractors, should therefore review their contracts and employment structures to better position themselves for responding to the scrutiny likely to be undertaken by the DOL and plaintiffs’ attorneys in the coming years. Contracts and basic practices which have been in place for decades may need to be revisited and revised.

Finally, employers need to stay alert to further changes to joint employment. While the DOL has not announced any further rulemaking plans, it did leave that door open if it determines that “alternative regulatory or subregulatory guidance is appropriate.”  Will that be vis-à-vis new regulations or a restated Administrator’s Guidance? Time will tell, but for now, it appears that at best employers are required to hold their relationships up to the patch-work of standards varying by circuit court jurisdictions that are otherwise in place, but which the current administration arguably construes more broadly than the courts have typically done in the past. For these reasons, we should expect that the DOL will endeavor to tilt the scales more towards its current interpretations through some formal action.

The Problem

The Biden DOL is primed to aggressively pursue errors made with respect to the payment of overtime compensation as required by the Fair Labor Standards Act (FLSA). While doing so, it’s also primed to assert claims for liquidated damages whenever it finds errors, even for errors that were inadvertent, and even for those that may seem nominal. These liquidated damages are equal to the amount of unpaid overtime its investigators deem due.

Liquidated damages are also generally due if an employer is found liable for unpaid overtime in any FLSA lawsuit filed by employees on either an individual or a collective class basis. When such lawsuits are brought, the employer may also be liable for the plaintiffs’ attorneys’ fees. These fees are often much greater than the claim for unpaid overtime and serve to overshadow the merits of the case and interfere with the ability to settle.

The Means to Address This Exposure

Prudent employers can take action to either eliminate or greatly reduce their exposure to unpaid overtime and liquidated damages claims. How? The answer is one word: “audit.”

A skillfully done audit can identify areas that typically trigger these inadvertent errors. The audit can identify and even correct concerns with respect to errors in:

• identifying hours that are compensable under the Act (such as pre- and post-shift activities, rest and meal breaks, travel, and medical testing and treatment);
• determining the correct regular rate of pay for calculating overtime pay (such as properly accounting for bonuses, commissions, longevity premiums, shift premiums, call-in pay, etc.); and
• classifying employees as exempt from overtime or as independent contractors.

Importantly, a mere audit may not suffice. The audit must be done and documented in a way to establish that the employer took its obligations under the Act seriously, conformed to the findings of the audit, and did so in good faith. This is key because if such an audit is relied upon, but the DOL or a court concludes that a violation on the areas audited still exists, the employer may be able to assert a “good faith” defense and reduce or eliminate its exposure to liquidated damages, and even reduce a potential look-back period for liability for unpaid time from three to two years. Such a position can also greatly benefit employers as they try to settle FLSA claims, as a well-done audit can serve to greatly lower the potential value of the claim.

As stated above, the audit must be skillfully done; not all audits are created equal. Often, we recommend that the audit be overseen, if not done, by an attorney who is well-versed in the FLSA. The auditor can help assure that the audit serves to support the good faith defense, if needed, and a lot of that may depend on the auditor’s expertise and reputation. Further, the auditor can counsel as to suggested adjustments. Last, but not least, if the auditor is an attorney, or the audit is being conducted through counsel, attorneys can provide assistance in maintaining the confidentiality of the audit’s findings, if desired, or advising the company regarding the waiver of any attorney-client privilege, as may be feasible.

Next Steps

Undertaking the audit sooner versus later cannot be overemphasized. If the project is put off and a DOL audit or lawsuit is filed, the advantages discussed above will be lost. It will be too late, and, as a result, otherwise avoidable liability could be triggered, liquidated damages will likely be in the mix, and the cost of the other side’s attorneys will impair the ability to negotiate a reasonable resolution.

If you have any questions regarding these issues or want to discuss the possibility of conducting an audit, contact an attorney skilled in this area of the law, including any members of the WHDI.

Earlier this month, on February 8, the Ninth Circuit Court of Appeals held that a California employer’s per diem expense reimbursement payments functioned as compensation for work rather than business expense reimbursements. As a result, the employer was required to factor those per diem payments into employees’ “regular rate of pay.” 

An employee’s “regular rate of pay” is used to calculate overtime under the FLSA and California Labor Code. It is also used to calculate double-time, sick leave, and reporting time pay in California. The decision, if adopted by other courts, could have devastating consequences for California employers with flat-sum and/or automatic expense reimbursement procedures.

The Details of the Case: Clarke v. AMN Services

AMN is a healthcare staffing company that places hourly-paid clinicians on short-term assignments. Each week AMN paid traveling clinicians a per diem amount to reimburse them for the cost of meals, incidentals, and housing while working over 50 miles away from their homes. AMN did not report these payments as wages and classified them as tax-exempt expense reimbursements. 

AMN used a number of factors to calculate the per diem payment, including the extent to which clinicians worked their scheduled shifts. Notably, under the per diem policy, the payments could decrease if clinicians worked less than their scheduled shifts, and work hours in excess of those scheduled could be “banked” and used to “offset” missed or incomplete shifts. Interestingly, AMN provided “local” clinicians per diem payments under the same policy, but such payments were reported as taxable wages.  It was not clear why AMN took a different position with the local clinicians

The Ninth Circuit determined that these characteristics indicate that the per diem payments to traveling clinicians functioned as compensation for hours worked, and not expense reimbursements. The court relied heavily on AMN’s decision to pay both local and traveling clinicians under the same per diem policy but treat payments to local clinicians as wages. The Court also noted that “AMN offers no explanation for why ‘banked hours’ should effect” per diem payments, and found “the only reason to consider ‘banked hours’ in calculating” per diems is to compensate clinicians for hours worked.

Potential Implications for California Employers

Many California employers implement a business expense reimbursement policy aiming to fully reimburse employees for all expenses they incur, while (1) minimizing administrative burdens and expenses, and/or (2) avoiding the creation of preferential work assignments and a perverse incentive for employees to “incur” expenses. 

The process of submitting, reviewing and processing expense reimbursements is cumbersome, especially for employees who work in the field and/or travel frequently.  For this reason, some employers adopt a flat-sum reimbursement policy in which the amounts paid are at least partially fixed, such as AMN’s per diem policy. They often issue these payments automatically, without obtaining documentation of the expenses from employees. This issue is especially important during the COVID-19 pandemic because California employers often use fixed expense reimbursement amounts for computer and other expenses for remote workers. 

The Clarke decision should concern any employer with a business expense policy that includes such flat-sum or automatic reimbursement payments. It is unclear whether or not the holding of the Clarke case will be extended in other cases or whether it will be distinguished based on the unique facts of the case and inconsistencies of AMN’s implementation (i.e., that AMN was paying local clinicians a per diem, but treating it as part of wages under the same policy). 

Significant liability can arise if reimbursement payments, in whole or in part, are deemed to function as wages that must be factored into the regular rate of pay. In addition, plaintiffs could also argue that if such payments were actually “wages” then they were not properly reimbursed for their business expenses under section 2802 of the California Labor Code. As a result of this decision, California employers should carefully review any flat-sum or automatic reimbursement policies and procedures to ensure that they do not present any of the dangers illustrated in the Clarke decision.  In addition, the scope of this decision remains unclear.  Therefore, employers in other states particularly those employers with employees in states covered by the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington), should also take a close look at their per diem policies in conjunction with the Ninth Circuit holding in Clarke. 

A few weeks ago, California’s Pay Data Reporting Act, went into place.  This new Act requires California private employers with 100 or more employees that are required to file an annual EEO-1 report with the EEOC to also submit a “pay data report” to the California Department of Fair Employment & Housing (“DFEH”).  Earlier this week, the DFEH released new reference materials that provide guidance on how to prepare the pay data report and submit it to DFEH, including a user guide, an excel template and a CSV example (plain text file).  California employers that are subject to the reporting act must submit the requisite pay data report to the DFEH (by way of an online portal) by March 31 this year and every subsequent year.  The portal will be operational by February 16.  In addition, the DFEH maintains and updates a Frequently Asked Questions resource page that explains the substantive requirements of the act and how to satisfy them.  Links to the FAQs, user guide, portal, and the samples are here.  

There have been many changes in California wage and hour law and leave laws over the last year.  If you have employees in California, we encourage you to reach out to one of our California based members at Paul Plevin (So Cal) or CDF Labor Law (Nor Cal). 

The Ninth Circuit Court of Appeals recently upheld the Federal Motor Carrier Safety Administration’s (FMCSA) determination that federal law preempts California’s meal and rest break requirements as to drivers of property-carrying commercial motor vehicles (CMVs), who are subject to the FMCSA’s hours of service (HOS) regulations. The Ninth Circuit’s decision provides much needed clarity for companies employing such drivers, allowing them to operate in compliance with the FMCSA HOS drive-time, break, and time recording rules, without the additional costs burdens imposed by California’s break rules. 

However, the decision may still be overruled through en banc review by the Ninth Circuit or on petition to the Supreme Court.  Additionally, it is possible that the FMCSA reverses course after President Biden’s nominated Secretary of Transportation, Pete Buttigieg is in the driver’s seat.  A copy of the opinion is available here.

BACKGROUND & SUMMARY

On December 21, 2018, the FMCSA issued a Determination of Preemption, finding that California’s break rules are subject to the Secretary of Transportation’s authority to review and preempt state laws and regulations on CMV safety. (Federal regulations delegate the Secretary’s authority to the FMCSA Administrator.)  This finding was a departure from a 2008 decision, in which the FMCSA concluded that California’s break rules could not be regulations on CMV safety because they “cover far more than the trucking industry.”  The FMCSA supported the departure by pointing to its 2011 revisions to the HOS rules.  Among other changes, the 2011 revisions created a mandatory rest period requirement, which the FMCSA found are “unquestionably” rules on CMV safety. Because California’s break rules govern the same subject as the mandatory rest break requirement under the FMCSA’s HOS rules, the FMCSA concluded that California’s break requirements are also rules on CMV safety and thus subject to preemption review.

Because California’s rules are additional to or more stringent than the HOS regulations, they were subject to preemption upon a finding that they either (1) have no safety benefit, (2) are incompatible with the HOS regulations, or (3) would cause an unreasonable burden on interstate commerce.  The FMCSA determined that California’s break rules check each box. It then concluded that California may no longer enforce its break rules with respect to property-carrying CMV drivers subject to the FMCSA’s HOS rules.  

On December 28, 2020, the International Brotherhood of Teamsters petitioned the Ninth Circuit to review and reverse FMCSA’s determination.  California’s Labor Commissioner and others also filed petitions for review.  The Ninth Circuit rejected petitioners’ arguments and upheld the FMCSA’s decision, holding the FMCSA acted within its authority under federal law.  The court distinguished its prior decision in Dilts v. Penske Logistics, LLC, 769 F.3d 637 (9th Cir. 2014) because it was decided based on a different federal preemption law concerning state laws that are “related to” CMV prices, routes, or services. 

PRACTICAL POINTERS

Many California truckers and drivers remain subject to the state’s break rules.  Although the FMCSA’s HOS regulations, and thus the preemption decision, will apply to any person who operates a CMV (49 C.F.R. §§ 390.5 and 395.1), the roads are not all clear.  Companies must confirm that drivers are operating a vehicle that meets the detailed definition of a CMV, which is not always a simple task.

A CMV is defined as “a self-propelled or towed vehicle used on the highways in interstate commerce to transport passengers or property” depending on the vehicle’s weight or weight rating, number of potential passengers, or the type of property it is used to transport.  A critical factor is whether the vehicle is used “in interstate commerce,” which includes “trade, traffic, or transportation … [b]etween two places in a State as part of trade, traffic, or transportation originating or terminating outside the State or the United States.” (49 C.F.R. § 390.5.)  This definition includes the intrastate transport of goods in “the flow of interstate commerce,” which may be interpreted broadly. 

For example, in 2019, a California Court of Appeal concluded that a driver who transported beer and liquor from his employer’s California warehouse to California retail stores was engaged in interstate commerce because the “deliveries, although interstate, were essentially the last phase of a continuous journey of the interstate commerce.”  Nieto v. Fresno Beverage Co., 33 Cal.App.5th 274 (2019), reh’g denied (Mar. 27, 2019), review denied (July 10, 2019). In that case, the court found the beverages were held in the employer’s warehouse for a “short period,” which was not sufficient to disrupt the “continuous stream of interstate travel.” 

Before leaving California’s break rules in the dust, companies should evaluate its drivers’ routes and shipments to confirm that they are transporting property in interstate commerce, which would likely require the advice of legal counsel.  Additionally, those companies and their drivers still must comply with the FMCSA’s HOS drive-time, break, and time recording rules.  It would be the employer’s burden to establish the FMCSA preemption defense in any related litigation, which would be a difficult task if the employer does not treat them as being subject to the FMCSA’s HOS rules. Moreover, employers should be aware that this area of the law may continue to evolve in the near-term.