In 2012, the Fifth Circuit decided Martin v Spring Break ’83, LLC, 688 F.3d 247 (5th Cir. 2012), holding that private settlements of FLSA claims involving bona fide disputes over hours worked or compensation owed are enforceable absent court supervision.
The Martin case arose in the context of union employees complaining about an alleged FLSA violation, and who were represented by their collective bargaining unit in resolving those claims through a private settlement that was not supervised by a court or the DOL. Because there was a bona fide dispute over the amount of hours worked (and, of course, the compensation owed), the Fifth Circuit held that the unsupervised nature of the settlement did not render it unenforceable.
A Texas district court later extended Martin to a general release that was entered by 2 former employees who had been sued by their employer in state court for breaching a non-compete agreement. Bodle v. TXL Mortg. Corp., Civil Action No. H–12–1515, 2012 WL 5828593 (S.D. Tex. Nov. 15, 2012). The district court agreed that Martin applied because the plaintiffs had raised unpaid salary and commissions in the non-compete case, and, by the way, had signed (but apparently not filed) consent-to-join forms in the underlying suit against their employer.
The Fifth Circuit reversed the district court, holding that the court extended Martin too far. Bodle v. TXL Mortg. Corp., No. 14–20224, 2015 WL 3478146, — F.3d —- (5th Cir. June 1, 2015). In short, there must be an actual dispute over an FLSA claim, and some discussion between the parties about it, to bring Martin in to play. The fact that the plaintiffs, at the time they negotiated their settlement, had signed consent to join forms for the existing FLSA suit was not enough in the Fifth Circuit’s view to make their settlement a bona fide dispute. The FLSA claims were not discussed as part of the negotiations between the parties. Plaintiffs also claimed there has to be a suit filed, but the Fifth Circuit did not say that it was adopting that specific requirement. Nevertheless, it did put a limit on the use of Martin for severance agreements and in general releases (note that the Ffith Circuit also rejected the argument that res judicata barred plaintiffs’ claims).
The U.S. Department of Labor’s proposed regulations dramatically reducing the number of employees who qualify for the white-collar overtime exemptions to the federal Fair Labor Standards Act are expected to be announced publicly in June. So far, no specifics have been provided by USDOL as to what the proposed regulations will say, but two changes are widely anticipated: (1) a new annual salary threshold in the range of $50,000 (more than twice the current salary threshold), and (2) a quantitative primary duty test requiring an employee to spend more than 50% of his or her time on tasks deemed exempt. We also believe the proposed regulations will preserve or increase the current complexity, subjectivity, and vagueness as to exempt criteria, contrary to President Obama’s directive to the Secretary of Labor to “simplify the regulations to make them easier for both workers and businesses to understand and apply.”
In any event, virtually all employers, large and small, will incur significant time and expense evaluating whether job positions currently classified as exempt still qualify and, if not, what actions to take. Employers should immediately intiate a proactive review of their exempt positions even before the specifics of the proposed regulations are announced.
In many cases, the potential increase in labor costs will be less significant than the hidden costs of additional recordkeeping, more complicated payroll administration, difficult employee relations issues, increased claims and litigation, scheduling complications, expanded training, and other human resource considerations.
- Proposed regulations, which have not been made public, were submitted to the White House OMB Office of Information and Regulatory Affairs (OIRA) on May 5, 2015.
- USDOL anticipates that the OIRA review will be completed sometime in June.
- Once OIRA completes its review, USDOL will publish the proposed regulations for comment.
- How long will the public comment period be? Brief. A full and comprehensive public comment process cannot be accomplished in less than 120 days. However, employers are apprehensive that USDOL will not allow a comment period of more than 60 days.
- At the end of the comment period, USDOL will review the comments and publish its final regulations. Given the USDOL’s “fast-track” leanings, the final regulations will likely appear in 4Q CY2015.
- Will there be an implementation period? Yes, but likely short. It is believed that USDOL will likely “fast-track” implementation to begin in the 1Q CY2016.
- Will Congress block the new regulations? Highly unlikely. There is no indication currently that key members of Congress are interested in taking on this issue. Most major employer associations have other labor and employment law matters that are higher on their priority lists.
- Will there be litigation seeking to overturn or enjoin the regulations? Chances are remote at best. No legal theories have been publicly articulated and no potential plaintiffs have come forward.
- Fewer employees will qualify for exempt status. Food service and retail trades, in particular, will be impacted negatively.
- It will be especially difficult to make determinations as to positions that are within +/- 10% of the new salary threshold and positions where currently exempt employees perform non-exempt duties to any significant degree.
- Remember: The USDOL regulations apply only to potential claims under the federal FLSA.
- If state law places more restrictions on salary basis or exempt duties than the proposed USDOL regulations, the employer must comply with state law even though it may be in compliance with the new USDOL regulations.
- The publicity generated by the nationwide impact will cause more exempt employees to critically question their classification status and bring administrative claims or lawsuits.
- If there is a collective bargaining agreement, employers will need to comply with the CBA in classifying or changing pay/benefits. Also, employees reclassified as non-exempt may become part of the bargaining unit.
Strategic Considerations for Maintaining Exempt Status
- Increase salary to meet new salary threshold. Cost/benefit analysis.
- Revise job descriptions to demonstrate that an individual’s primary duty involves actually performing exempt duties more than 50% of the time.
- Make sure that, in practice, exempt employees are actually performing exempt duties more than 50% of the time.
Strategic Considerations Concerning Reclassifications
- No employer is required to guarantee that an employee will receive overtime work.
- No employer is required to pay an employee more total wages as a non-exempt employee than what the employee was making as an exempt.
- To mitigate increased labor costs, employers may implement changes to bonuses, benefits, work schedules, and other measures.
- In setting an hourly rate for a newly non-exempt employee, the employer has options in how to compute the new hourly wage for formerly exempt employees. As a legal matter, employers can configure the hourly wage and the anticipated overtime pay such that the employee’s total compensation is approximately the same as when the employee was paid on a salary basis.
- Formerly exempt employees will often see reclassification as a “demotion” and resent being converted to hourly pay. Communications with employees about the conversion and, possibly, continuing to pay on a salary basis, while implementing a fluctuating work week program for overtime, may be a necessary employee-relations device.
- A major administrative burden and employee-relations issue will be the need to train new non-exempt employees on filling out timekeeping records, complying with meal/rest break requirements, restrictions on working outside normal work hours, travel time, and other compensable time issues.
Employers are strongly advised to conduct their classification analysis under the guidance of an experienced wage and hour attorney due to the complexity of potential issues and the availability of the attorney-client privilege to protect candid discussions involving legal advice and risk management.
Don’t Delay Planning
The USDOL final regulations on FLSA white-collar exemptions will go into effect very quickly in the near future. Employers need to begin their internal analysis of exempt positions now and identify their options to minimize negative impacts on employee relations, direct payroll costs, indirect administrative costs, and general operations.
by Michael J. Killeen, Sheehan Sullivan Weiss – Davis Wright Tremaine LLP
On Tuesday the Los Angeles City Council voted to raise the city’s minimum wage to $15 an hour by 2020. Los Angeles will join San Francisco, San Jose and Oakland as California cities with minimum wages higher than both the federal and state minimum wages.
The federal minimum wage is $7.25 per hour. California’s state minimum wage is currently $9 per hour, and is scheduled to rise to $10 per hour on January 1, 2016. Employees must be paid the highest minimum wage in effect, which in California is the state minimum wage except in cities that have established their own higher minimum wages.
The City of Los Angeles does not currently have its own minimum wage, but on Tuesday the City Council voted to establish a city minimum wage of $10.50 per hour effective July 1, 2016. Thereafter the city’s minimum wage will increase to $12.00 on July 1, 2017; $13.25 on July 1, 2018; $14.25 on July 1, 2019; and $15.00 on July 1, 2020. Beginning in 2022 the city’s minimum wage will be adjusted for inflation on July 1 of each year.
California cities that already have minimum wages higher than the state minimum wage include San Francisco (currently $12.25 per hour and scheduled to rise to $13 on July 1, 2016; $14 on July 1, 2017; and $15 on July 1, 2018; followed thereafter by annual adjustments for inflation each July 1); San Jose (currently $10.30 per hour and adjusted each January 1 for inflation); and Oakland (currently $12.25 per hour and adjusted each January 1 for inflation).
Meanwhile, San Diego’s minimum wage is on hold. In October 2014 the San Diego City Council voted to establish a city minimum wage that would rise to $11.50 per hour by January of 2017, and would also require employers to provide their employees with up to 40 hours of paid sick leave each year. But opponents of the ordinance gathered enough petition signatures to put the measure to a public vote. It will go into effect only if it survives a June 2016 referendum.
It is becoming increasingly clear that employers can no longer assume that compliance with federal and state laws is enough. The trend of cities establishing their own minimum wages appears to be picking up steam. Employers should take steps to stay abreast of, and comply with, all local minimum wages and other local mandates.
May 15, 2015
by Malani L. Kotchka
On January 26, 2015, the Ninth Circuit Court of Appeals amended its decision in Landers v. Quality Communications, Inc. Landers was employed by Quality as a cable services installer. He brought suit individually and on behalf of other similarly situated persons alleging that Quality failed to pay minimum wage and overtime wages in violation of the Fair Labor Standards Act. He alleged he was subject to a “piecework no overtime” wage system. The Ninth Circuit agreed with the First, Second and Third Circuits and held that in order to survive a motion to dismiss, the plaintiff asserting a claim of overtime must allege that he or she worked more than 40 hours in a given workweek without being compensated for the overtime hours worked during that workweek. The Ninth Circuit concluded that under the post-Twombly and Iqbal standard, Landers failed to state a plausible claim for relief under the FLSA. Since Landers declined to amend his complaint electing to stand on his claims as alleged, the district court correctly dismissed his complaint for failure to state a plausible claim.
On behalf of Landers, Nichols Kaster filed a Petition for Writ of Certiorari with the United States Supreme Court. Landers was joined by Civil Procedure Law Professors as Amici Curiae in support of Landers. Quality Communications opposed the Petition and on April 20, 2015, the United States Supreme Court denied the Petition for Writ of Certiorari.
Before unlocking the doors of discovery, a class action FLSA plaintiff must allege more than a general scheme which might result in non-payment of minimum wage or overtime. In the Ninth Circuit, the plaintiff must allege at least one workweek when he worked in excess of 40 hours and was not paid for the excess hours in that workweek or was not paid minimum wage.
On April 17, 2015, Judge James Donato of the U.S. District Court for the Northern District of California held that Integrity Staffing Solutions, Inc. v. Busk, 136 S.Ct. 513 (2014), in which the U.S. Supreme Court held the FLSA does not require employees to be compensated for time undergoing post-shift security screenings, does not apply to wage claims brought under California law. The case is Miranda v. Coach, Inc., No. 14-cv-02031-JD, 2015 U.S. Dist. LEXIS 51768 (Apr. 17, 2015).
Eve Miranda and Mary Lou Ayala filed a class action complaint against Coach, Inc., alleging they and other Coach sales associates were required to submit to “bag checks” each time they left the store. They alleged that waiting for and undergoing the bag check process, for which they were not paid, lasted anywhere from 5 to 30 minutes, and sought damages and penalties under California law for “off-the-clock” time. Coach moved to dismiss, arguing the bag check time was non-compensable under Integrity Staffing Solutions.
Judge Donato denied the motion to dismiss, explaining that while the decision in Integrity Staffing Solutions was premised on how the federal Portal-to-Portal Act of 1947 exempts employers from FLSA liability for certain categories of work-related activities, Coach was being sued under California law, which contains no similar exemption and defines “hours worked” differently. The opinion cited Morillion v. Royal Packing Co., 22 Cal.4th 575, 582 (2000), in which the California Supreme Court explained that California defines “hours worked” as including not only “time the employee is suffered or permitted to work,” but also “time during which an employee is subject to the control of an employer.” Given all this, Judge Donato denied the motion to dismiss, holding the plaintiffs’ claims for uncompensated time under California law “are viable and will go forward.”
Judge Donato’s opinion is not binding on any other court, but there is no reason to believe other courts presented with the same issue will reach a different conclusion. This does not mean—and Judge Donato did not hold—that time spent by employees undergoing bag checks is compensable under California law; it merely means the time may be compensable. For example, in certain situations there may be a viable argument that the time is so minimal as to be de minimis and therefore non-compensable. In class actions, certification might be defeated by showing that even where an employer requires bag checks, the employer’s policy affects employees differently, with the result that individualized inquiries will be needed to establish liability.
This case is another reminder that California’s wage and hour laws differ from their federal counterparts in important respects. As a result, decisions construing the FLSA and other federal laws cannot be relied on as indicators of what may allowed under California law. This presents challenges to all California employers, and especially to employers that are based outside California, but have employees working in the state. Employers should consult counsel before relying on any judicial decisions.
Employers That Prevail in Discrimination Cases Are No Longer Automatically Entitled to Recover Costs
It has long been the rule in California that the prevailing party in a discrimination or harassment claim under the Fair Employment and Housing Act is entitled to recover costs. A prevailing plaintiff is also entitled to automatically receive an attorneys’ fee award, while a prevailing defendant needed to prove that the plaintiff’s claim was frivolous or otherwise unreasonably brought or pursued. Although fee awards are difficult to obtain for prevailing employers, the ability to recover costs has served as a useful deterrent against marginal claims.
However, in a disappointing ruling for California employers, on May 4, 2015, the California Supreme Court ruled in Williams v. Chino Valley Independent Fire District that an employer’s ability to recover its costs after prevailing in a discrimination or harassment case is subject to the same “objectively without foundation” standard that applies to attorneys’ fee awards. The Court concluded the legislature intended for the Fair Employment and Housing Act to provide an exception to the general rule that a prevailing defendant is automatically entitled to recover costs, and imposing the higher standard of proof on a prevailing defendant’s cost application was consistent with California’s policy not to chill the vindication of employees’ rights under the FEHA.
What This Means
An employer will no longer be able to automatically recover costs in a FEHA case, even if it proves a plaintiff’s case has no merit. This further reduces the downside risk for employees and their attorneys who file baseless claims, and removes an important tool for employers to resolve unmeritorious claims.
Massachusetts Highest Court Rules that Taxicab Drivers Are Independent Contractors Under the Wage Act
The Massachusetts Independent Contractor statute is among the strictest in the country, and employers face an uphill battle in proving that individuals satisfy the three-prong test for correctly being classified as independent contractors. The test, however, is not impossible to surmount, as demonstrated by a decision issued earlier this week.
On April 21, 2015, the Massachusetts Supreme Judicial Court (SJC) held in Sebago, et al. v. Boston Cab Dispatch, Inc., et al., that taxicab companies may classify taxicab drivers as independent contractors. The plaintiffs in this case were taxicab drivers that leased taxis and medallions at a flat-rate from taxicab and medallion owners. The plaintiffs brought suit against three groups of defendants: taxicab and medallion owners, dispatch service companies and a taxicab garage. They claimed that the defendants jointly misclassified them as contractors rather than employees, entitling them to relief under Massachusetts’ minimum-wage and overtime laws.
The SJC ruled against the taxicab drivers. In reaching this conclusion, the court first addressed the issue of whether the defendants were joint employers. It held that the defendants should not be considered “as a single employer exercising monolithic control over the taxicab industry.” Instead, entities can formulate legitimate business-to-business arrangements to secure services, and this, on its own, does not render the entities joint employers. Thus, when analyzing claims under the independent contractor statute, the SJC explained that courts must look separately at each defendant’s relationship with the plaintiffs to assess potential liability.
Before determining whether the taxicab drivers were employees, the court assessed the threshold question of whether the taxicab drivers provided services to the defendants. The court held that the drivers provided no services to the garage, but that the drivers did provide services to the dispatch companies and the taxicab and medallion owners.
Next, the court turned its analysis to whether the dispatch companies and taxicab and medallion owners could lawfully classify the drivers as independent contractors under Massachusetts’ independent contractor statute. The SJC explained that all three of the following elements must be met in order for the defendants to prevail: (1) the drivers must be “free from control and direction in connection with the performance of the service,” both under their contracts and in fact; (2) the service being performed must be “outside the usual course of the business of the employer”; and (3) the drivers must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”
Under the first prong, freedom from direction and control, the SJC determined that the drivers were mostly independent. The drivers selected their own shifts and which passengers to pick up or refuse. The court also found that the defendants satisfied the second prong because the drivers’ services were outside the usual course of the defendants’ businesses. The court reasoned that the medallion owners’ leasing businesses were not dependent on the success of the drivers’ operations. Rather, a driver paid a daily flat-rate to lease a taxicab, and the taxicab and medallion owner retained this fee regardless of how much money the driver earned on a given day. The court similarly found that the dispatch companies were not in the business of giving rides; instead, they were in the business of selling dispatch services to medallion owners.
Finally, under the last prong, the court found that the drivers engaged in an independent trade or business. Specifically, the drivers had the freedom to lease from whomever they wanted on whatever days they wanted. The drivers were not tied to particular medallion owners, and they were free to advertise their services as they wished. Because the defendants carried their burdens under all three prongs of the statute, the SJC ruled that the drivers were properly classified as independent contractors. A significant component of the court’s rationale was that regulations governing the taxicab industry recognized that drivers could be independent contractors as well as employees. Under this regulatory scheme, the entities–be it the taxicab and medallion owners, dispatch companies or the drivers themselves–are free to plan an arrangement that provides for either result.
Sebago is important because it reiterates that legitimate business-to-business relationships are outside of the stringent Massachusetts independent contractor statute. The plaintiffs’ bar will likely claim that the unique regulatory scheme covering the taxicab industry makes this case inapposite to misclassification disputes arising in other industries. However, the decision suggests that businesses in any industry will not be treated as employers for purposes of state wage laws when the services they provide are legitimately different from those provided by a contractor.
Seventh Circuit Articulates Broad View of FLSA Section 7(i) for Commissioned Workers and Service or Retail Establishments in Rejecting Overtime Claims of Window Washers
On April 1, 2015, the Seventh Circuit, in Alvarado v. Corp. Cleaning Services, Inc., Case No. 13-3818, ruled that high-rise window washers in Chicago were exempt from overtime under Section 7(i) of the Fair Labor Standards Act (FLSA). Under Section 7(i) of the FLSA, the retail or service establishment exemption, the following three elements must be met in order to qualify:
- the employee’s regular rate of pay must exceed one and a half times the federal minimum wage;
- the employee must be employed by a retail or service establishment; and
- more than half the employee’s total earnings for a representative period must consist of commissions.
The plaintiffs in this case, high-rise window washers, argued that neither the second nor the third element was met and, as such, they were not exempt from overtime under Section 7(i).
The defendant, Corporate Cleaning Services (CCS) is Chicago’s largest provider of window-washing services to high-rise business operators, apartment building owners, and other non-residential buildings. When CCS receives a window-washing order, it uses a “point system” to calculate the price it will charge for the job. The assessed points are based on the complexity of the job as well as the estimated number of hours to complete it. Each window washer assigned to the job usually gets the same share of points allocated to the job. CCS then pays the window washer the number of points allocated to him multiplied by a rate specified by the company’s collective bargaining agreement. CCS regularly makes price adjustments depending on variable costs, such as permits, equipment rental and competition, which cause the percentage of the price attributable to the window washers’ compensation to vary from job to job. The annual pay for a CCS window washer ranges from $40,000 to $60,000.
On appeal, the plaintiffs argued that their compensation, based on this point system, did not amount to a commission system and that the sale of window-washing services to managers of tall buildings “lacks a retail concept.” The Seventh Circuit disagreed. Although CCS called its compensation system a “piece-rate” or “piecework” system from job to job, the Court noted “the nomenclature is not determinative.” Instead, a commission system need only be “proportional and correlated” to the price. More importantly, according to Judge Posner, the irregularity of the work (because of the peculiar conditions of window-washing such as high winds, dive-bombs from peregrine falcons, and the like) makes the window-washers even more like commissioned employees. The fact that a window-washer cannot count on working 40 hours each week for an entire year is precisely “the reason for exempting his employer from the requirement of paying the worker time and a half for overtime.”
As to the last element—being a retail or service establishment—the Court found that CCS is best described as a “retail service establishment” because it sells its window-cleaning services to building owners and managers. While the plaintiffs’ attempted to characterize this as a wholesale relationship, the Court pointed out that the building owners and managers are the “ultimate customers; they do not resell the window cleaning.” Accordingly, CCS satisfied the third element as well. Interestingly, the Court’s ruling is in direct conflict with the Department of Labor’s (DOL) position on this issue. In July 2014, the DOL filed an amicus brief supporting the plaintiff’s position and arguing that the exemption should not apply to a company like CCS, which failed to present “any evidence that its sales are ‘recognized’ as retail in the window washing industry.” The Seventh Circuit, however, was not swayed. Paying extra for overtime “is said to be a boon to low-wage workers,” but, as the Court pointed out, the window washers here are well paid.
Joseph E. Tilson and Jeremy J. Glenn, Meckler Bulger Tilson Marick & Pearson
By: John Ho – Bond, Schoeneck & King
WHDI member, Dennis McClelland served as a moderator for a presentation by Jennifer Brand, Associate Solicitor of Labor, at the American Bar Association’s, Federal Labor Standards Legislation Committee’s Mid-Winter Meeting held this morning. Mr. McClelland is also the Employer Co-Chair of the Committee. Ms. Brand provided an update on important DOL initiatives and activities. In her discussion, Ms. Brand discussed recent litigation involving interns and confirmed that the Department still believes the six factors outlined in USDOL Fact Sheet #71 is the proper test to determine whether an unpaid internship is lawful. Ms. Brand did acknowledge that as the workplace evolves, it may, in unusual situations, be appropriate to consider other factors.
Ms. Brand also discussed the Department’s appeal of the U.S. District Court for the District of Columbia’s order vacating two major provisions in the DOL’s Home Care Rule originally intended to be effective January 1, 2015. The new rule would have excluded third-party employers from relying on the companionship and live-in domestic worker exemptions and would have significantly narrowed the definition of companionship services. The Department believes the case should be heard in the May term. Mr. McClelland specifically asked Ms. Brand why the revocation of the companionship exemption to third-party employers should not a Congressional issue. Ms. Brand responded that significant changes to home care services over several decades including the approximately 2 million hone care workers have dramatically changed the profession and that the United States Supreme Court provided DOL with the authority to define the term “companionship services.”
Finally, Ms. Brand acknowledged that the highly anticipated proposed changes to the white-collar exemptions would not be published this month as DOL had previously suggested. She further stated that they are “not imminent.” Although she would not comment on specifics, she stated that DOL is examining the appropriate salary level test and whether the duties test needs to be reviewed.
Other WHDI members serving on panels at the conference include Lawrence Peikes, Joseph Tilson, Reed Russell, Jeremey Glenn, and John Ho.
In 2014, President Obama directed the Secretary of Labor to streamline existing overtime regulations for the “white-collar” exemptions. These exemptions from overtime, which cover the typical executive, administrative and professional employees, were last revised in 2004. When the revisions became effective in 2004, there were significant changes in the application of the exemptions for many employers. It remains to be seen whether these proposed changes will have as sweeping an impact across industry.
In 2014, there was quite a bit of discussion by proponents of change to increase the minimum salary required to be exempt. Some commentators pointed to examples of entry-level management employees who, by and large did the same tasks as their subordinates, but were not entitled to any overtime compensation. This can result in subordinate employees working fewer hours or making more money once the overtime premiums were factored in.
Last fall, the Department of Labor stated that it would delay the publication the proposed final regulations until February 2015. The month is quickly coming to a close and the Department of Labor has yet to publish these proposed new regulations. Of course there will be a comment period prior to final implementation. If it is similar to the 2004 changes, there will be some tweaks from the first version published to the final version that is actually implemented in the Code of Federal Regulations. The Wage & Hour Defense Institute will be closely monitoring the Department of Labor and its proposed rules once they are published for the benefit of its members and their clients. But, suffice to say that all employers should take note of the changes to ensure compliance, especially those with executive employees.