New Overtime Regulations Closer to Final Roll-Out

On March 14th, the Department of Labor sent its final draft of the new regulations governing the white collar exemptions to overtime pay to the Office of Management and Budget.  The OMB’s review is the final step required for a regulation to be published and implemented.  Consequently, though the details are still “top secret,” the regulations’ release is more imminent.  The OMB’s review may take as long as 90 days, but the review period typically lasts between 30 to 60 days, and sometimes even less.

Once released, the regulations will likely go into effect 60 days thereafter.  Some pundits believe that the DOL is targeting Labor Day for an effective date, in which case, they will be published in final form before July 4th.  In order for the Administration to foreclose a rare but possible congressional override vis-à-vis the Congressional Review Act, they must be published by early July.  Though no one can accurately predict when they will actually be rolled out, based on this latest development it appears that they could be rolled-out as early as late April through early July.

The anticipated impact these regulations will have on employers will be widespread. The DOL appears primed to double the salary threshold for being exempt from overtime, and it may also redefine the types of duties employees may perform to qualify for the exemption.  For details, click here.  Employers may have to redesign their pay structures and reclassify employees from being exempt, to non-exempt.

Bottom line, employers should plan now to avoid being caught “flat-footed” by waiting and then only having 60 days to react.  Experienced counsel should be consulted to weigh options and to make sure all bases are covered.

The Proposed New Overtime Pay Exemption Rules: What’s the Latest Scoop?

For months, crystal balls have been working on overdrive trying to predict when the Department of Labor will roll-out the final version of the new white collar overtime pay exemption regulations and what will be in those regulations. While there is no way to accurately make these predictions, there have been some official comments a recently made about what could be expected, and it’s also not too late for employers to prepare for the new regulations even though the details are still uncertain.

THE “WHEN”

First, as to when – the Secretary of Labor is on record saying that “late Spring” is the goal. During a meeting of the American Bar Association’s Federal Labor Standards Legislation Committee mid-winter meeting held this week, Patricia Smith, the Department of Labor’s Solicitor of Labor, suggested that if one is loose as to what constitutes “late Spring,” a realistic roll-out could be made “around late June or early July.”

What is a “roll-out,” though, is subject to some interpretation and a few procedural steps. First, before the final regulations are published, they must be reviewed by the Office of Regulatory Review.  The public will know when the DOL submits them to the ORR.  The ORR will then undertake its review, which usually takes about 30 days, and in the process, it may make final edits or even substantive changes.  During this period, interest groups will aggressively lobby the White House to urge that certain items be included or excluded in the rules they’ve yet to see.  If the early July roll-out is a good prediction, we should know that it’s before the ORR by late May or early June.  In any event, at that same ABA meeting, the Solicitor of Labor told the audience that the “final rule will not be identical to the proposed rule [of last July].”

Second, after the final regulations are rolled out, i.e., made public, there will have to be some time allowed before they become effective.  The conventional wisdom is that the window for these rules will be 60 days.  Longer periods have occurred as to some new regulations in the past, and employers are urging for more time to be allowed in this instance.  Given the political context, however, more time is not likely.  Specifically, new regulations are always vulnerable to congressional overrides vis-a-vis the Congressional Review Act.  Under the CRA, Congress has a 90-day period during which it may trump a regulation, subject to presidential signature or veto overrides.  Even though such congressional action has been rarely undertaken, let alone successful, to insulate against such a tactic needing presidential action after a new administration takes office in January, the Solicitor implied that the DOL will make sure that this period will close before the end of the year.

THE “WHAT”

As proposed, the regulations would increase the minimum salary level required for salaried employees to be exempt, if they also satisfy one of the “duties tests,” from $455 per week (or $23,660 per year) to $970 per week (or $50,440 per year).  In addition, that salary level amount is proposed to annually adjust, but whether it will be indexed to the CPI or some other factor won’t be known until the regulations are finalized.

Further, while the proposed regulations do not include changes to the “duties tests” for exempt status, when it published the proposed regulations the DOL asked for comments on a few ways the duties tests also could be changed. For instance, the DOL invited comments as to whether the “California rule” should be adopted and applied to exempt employees, and thereby require them to solely perform their exempt duties for more than 50 percent of their workweeks, as opposed to the current rule that their exempt duties merely constitute their primary duties even if performed simultaneously with non-exempt duties.  On this point, the Solicitor of Labor said that some sort of change to the duties test, whether it be the adoption of the California rule or some other test, should not be ruled out as a potential outcome to the rulemaking process.  If this actually occurs, an uproar will likely occur, but the DOL is confident that its legal footing to do so is sound.

WHAT TO DO NOW

Employers should not take a “wait and see attitude.” Instead, they should engage in some serious planning in anticipation of the new rules.  For instance:

  • Positions should be reviewed to identify which employees or positions are vulnerable to being reclassified as non-exempt due to the new standards;
  • Options to increase salaries to retain their exempt status should be weighed;
  • If salaries are not to be increased, employers should consider the various ways as to how wages will be set and if schedules can or will be modified, to mitigate against the exposure to paying overtime premiums;
  • Communication plans should be developed to explain to employees why they are losing their exempt status and how to address the potential morale problems these changes may cause;
  • Plans for training employees being reclassified will need to be developed to make sure these former exempt employees will properly track their work time, not engage in pre- or post-shift work without authorization, not work during lunch, not use their smart phones while not scheduled to work, properly track their travel time, etc.;
  • Decisions will have to be made regarding whether employees who lose their exempt status will be impacted in terms of bonus plans, paid time off, and other benefits;
  • If employees impacted by the new regulations are covered by collective bargaining agreements are covered by collective bargaining agreements, strategies for either increasing their salaries to retain their exempt status, or converting them to non-exempt, may require negotiations;
  • Supervisors will have to be trained as to how to manage the schedules and timekeeping obligations of these reclassified employees; and
  • Plans for dealing with budgeting issues as triggered by the new rules, for not only the immediate roll-out, but also future years due to anticipated annual indexing, can be undertaken.

Waiting until the new regulations are finalized may not leave enough time to implement new structures and procedures during the short period anticipated before the regulations become finalized. The regulations, when finalized, could have significant impact on many employers and employees, and the more preparation done now, the better employers will be able to respond. Options exist with respect to many of the areas discussed above, and experienced wage and counsel should be consulted to assist in this planning process.

Record Number of FLSA Cases Filed In 2015

Many employers are well aware of the increasing number of lawsuits filed under the FLSA in recent years, including a significant increase in collective/class actions. There were a record number of FLSA cases filed in 2015 according to the latest statistics. When cases are filed in federal court, they are categorized by the type of case as well as the statute or claims brought in the case. In 2015, there were 8,954 new cases filed in federal court alleging either claims under the FLSA for unpaid minimum wage, overtime or both. These filings are up by nearly 900 cases from 2014. And, the total number of FLSA cases in federal courts has gone up 450% since 2000.

What has changed? In 2004, the Department of Labor issued new regulations covering the white-collar exemptions (executive, administrative, professional, outside sales and computer-related occupations). In addition to making changes to the salary levels required to meet the exemption, the DOL changed some of the regulations regarding the “duties” tests. This change prompted more litigation, as employees who used to be traditionally considered exempt raised claims for misclassification in one of these white-collar exemption categories. In addition, many employees are misclassified as independent contractors and bring claims for unpaid overtime as well as other employee benefits.

Now, cases include not only misclassification, but more and more cases also include “off-the-clock work.” These are cases where employers usually do not have complete time records to dispute the claims, as employees will often allege that they were required to report early, work through lunch or stay late and the only proof is anecdotal evidence. Other cases involve the so-called “regular rate” calculation where employees allege that the overtime payments did not factor all compensation received, such as bonuses or shift differentials. Since the FLSA permits a prevailing plaintiff to recover reasonable attorneys’ fees, many plaintiff’s attorneys carefully screen cases before filing them to ensure that even if they are stuck in protracted litigation, there is a high chance that they will get all of their fees as part of any settlement or verdict.

What this means for employers, especially when the DOL has published proposed regulations to increase the salary levels for the white-collar exemptions, is that an ounce of prevention is worth a pound of cure. It is important for employers to ensure that employees are classified correctly if they are indeed exempt. Job titles alone are rarely of any significance, as the job duties actually performed are what the DOL and courts will look at to determine proper classification. If employees are entitled to overtime and not exempt, employers need to be cognizant of the different rules for calculating the regular rate to ensure that all compensation is factored in for overtime purposes. Often, these types of cases can result in a very small payment of back overtime to employees, but if it is brought on a collective or class-wide basis, the overall costs can be significant. And, there is of course, liquidated damages in an equal amount and attorneys’ fee to add to cost of the claim.

Contact any one of the members of the Wage & Hour Defense Institute for further information about proper classification and payment of overtime both under the Fair Labor Standards Act and any applicable state law.

Paul Bittner, WHDI Member

California Minimum Wage Ordinances: Employers Cannot Rely on State and Federal Law Alone

California’s minimum wage increased to $10 per hour effective January 1, 2016. This is the second increase in just 18 months under legislation signed by Governor Jerry Brown in 2013. This latest increase to the statewide minimum wage is not the only one facing California employers. At least twelve cities across California have already enacted their own minimum wage ordinances – and several other cities are looking to follow suit.

To complicate matters more for business owners, HR and payroll administrators, and managers, several of these local ordinances also include posting and mandatory sick leave requirements (above and beyond California’s recently-enacted statewide sick leave law). This patchwork of laws creates an administrative quagmire for employers—particularly those with multiple locations across the state.

The twelve cities that have enacted local minimum wage ordinances are listed below, together with their applicable local minimum wage rates and known upcoming increases:

 

City Local Minimum Wage As of January 2016 Upcoming Increases in Near Future
 

Berkeley

 

$11.00/hour

 

 

 

$12.53/hour

(effective October 1, 2016)

 

 

Emeryville

 

$12.25/hour for

businesses with 55 or

fewer employees

$14.44/hour for

businesses with more

than 55 employees

 

 

 

$13/hour for

businesses with 55 or

fewer employees

$14.82/hour for

businesses with more

than 55 employees

(effective July 1, 2016)

 

 

Long Beach

 

$13.80/hour

 

 

 

Los Angeles

 

$10.50/hour

for businesses with

26 or more employees

(effective July 1, 2016)

 

$15.37/hour

for hotel workers

 

 

$10.50/hour

for business with

25 or fewer employees

(effective July 1, 2017)

 

Mountain View

 

$11.00/hour

 

 

 

 

Oakland

 

$12.55/hour

 

 

 

 

Palo Alto

$11.00/hour  

 

 

Richmond

 

$11.52/hour

 

 

 

 

San Francisco

 

$12.25/hour

 

 

 

$13.00/hour

(effective July 1, 2016)

 

 

San Jose

 

$10.30/hour

 

 

 

Santa Clara

 

$11.00/hour

 

 

 

Sunnyvale

 

$10.30/hour

 

 

 

In addition to these cities, which all have active minimum wage laws, Sacramento has a minimum wage ordinance that goes into effect in 2017 and San Diego (via ballot referendum) and Pasadena are among the cities that are close to enacting their own minimum wage ordinances as well.

We will try to keep you posted and update this information regularly. Employers with workers in California should consult legal counsel to make sure they are complying not only with state law, but with any local wage and hour laws as well.

Court Holds California Law Does Not Require Apple to Pay Employees for Bag Checks

Last week a federal district judge in California granted summary judgment to Apple Inc. in a class action brought by employees who claimed they were owed unpaid wages under California law for post-shift security screenings, commonly referred to as “bag checks.” In an effort to deter employee theft of merchandise, Apple applied its bag check policy to employees who chose to bring bags, packages or Apple products to work. The court held the time was not compensable because employees could easily avoid bag checks by not bringing to work bags or other items included within the policy. The case is Frlekin v. Apple Inc., No. C 13-03451 WHA (lead) (USDC, N.D. Cal., Nov. 7, 2015).

The employees filed separate class actions (later consolidated) in July 2013, asserting claims for unpaid wages under the Fair Labor Standards Act (FLSA) and the laws of various states, including California. All claims other than those brought under California law were dismissed after the United States Supreme Court’s decision in Integrity Staffing Solutions, Inc. v. Busk, 135 S. Ct. 513 (2014), which held that time spent during mandatory security screenings was not compensable under the FLSA. The other state laws at issue in the case all mirrored the FLSA, so the case proceeded solely under California law. Earlier this year the district court certified a class consisting of employees who worked at Apple retail stores in California.

In last week’s decision, U.S. District Judge William Alsup denied the employees’ motion for summary judgment and granted Apple’s. Judge Alsup began his analysis by noting that California’s broad definition of “hours worked” includes both “the time during which an employer is subject to the control of an employer” and “the time an employee is suffered or permitted to work, whether or not required to do so.”

Reviewing a line of cases interpreting the “control” theory, the court concluded “the activity must be mandatory and not optional at the discretion of the worker.” In the case of Apple workers, the mandatory element was not met because any Apple worker could avoid bag checks by choosing not to bring to work any bag or other item subject to Apple’s search policy.

The court also found the time the employees spent waiting for or undergoing bag checks was not time they were “suffered or permitted to work, because the bag checks bore no relationship to the employees’ job responsibilities; they were merely waiting while managers or security guards conducted the searches.

While this case is a welcome development for employers, it is not likely to be the last word on the subject of post-shift security screenings. The employees may appeal, and even if the court’s decision stands it will not be binding on other courts, including California state courts. The decision will not be helpful to employers that require all employees to undergo security screenings, regardless of whether they bring to work bags, packages, or other item subject to search. Still, the decision will likely dampen the enthusiasm of the plaintiffs’ bar for filing class actions based on the theory that any time employees spend in security screenings automatically constitutes “hours worked” under California law.

Aaron BuckleyPaul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Ninth Circuit Adopts California Supreme Court’s Iskanian Rule Prohibiting Enforcement of PAGA Waivers

Last week the Ninth Circuit Court of Appeals held that waivers of the right to bring representative actions under the California Labor Code Private Attorneys General Act of 2004 (PAGA) are unenforceable, essentially adopting the rule established in June 2014 by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC. Prior to the Ninth Circuit’s decision, district courts in California had been divided on the issue, but most district courts deciding the issue had rejected the Iskanian rule.

The Ninth Circuit’s decision was in Sakkab v. Luxottica Retail North America, Inc., No. 13-55184 (9th Cir. Sep. 28, 2015). In that case, Shukri Sakkab filed a putative class action for unpaid overtime and inaccurate wage statements against his former employer, Luxottica Retail North America, Inc. After Luxottica answered and removed the case to federal court, Sakkab filed an amended complaint adding a representative claim for civil penalties under the PAGA. Luxottica then filed a motion to compel arbitration under the dispute resolution agreement contained in its Retail Associate Guide. The agreement purported to prohibit Sakkab from filing or participating in any “class-based” lawsuit or arbitration, “including any collective action” or “collective arbitration.” The district court granted the motion, holding Sakkab had waived his right to bring a class action or representative PAGA action, and ordering him to arbitrate his individual claims.

After the district court granted Luxottica’s motion and entered judgment, the California Supreme Court issued its Iskanian decision, ruling that PAGA waivers are unenforceable under California law.

On appeal, Luxottica argued the Federal Arbitration Act (FAA) preempts the Iskanian rule. In a 2-1 decision, the Ninth Circuit panel rejected the preemption argument. In reaching its decision, the panel majority explained that the Iskanian rule is a generally applicable contract defense that is not limited to arbitration agreements, and therefore falls within the FAA’s savings clause, which preserves generally applicable contract defenses providing they do not conflict with the FAA’s purposes. Next, the majority determined the rule does not conflict with the FAA’s purposes of (1) overcoming judicial hostility to arbitration and (2) ensuring enforcement of the terms of arbitration agreements, because PAGA claims can be arbitrated, and the Iskanian rule merely prohibits waivers of the right to bring representative PAGA claims in any forum.

In a lengthy dissent, Justice N. Randy Smith stated his view that the FAA does preempt the Iskanian rule, relying on a line of United States Supreme Court cases including AT&T Mobility LLC v. Concepcion, in which the nation’s high court held that class and representative action waivers in consumer contracts were enforceable, reversing a previous Ninth Circuit decision to the contrary.

For the time being, PAGA representative action waivers are not enforceable in either the state or federal district courts in California. But the issue isn’t entirely settled. Luxottica may seek en banc review in the Ninth Circuit, or seek review by the United States Supreme Court. In the meantime, employers should review their arbitration agreements with counsel and make adjustments if necessary.

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

WHDI Comments on the DOL’s Proposed 541 (aka “Overtime”) Regulations

The comment period for the United States Department of Labor’s proposed new regulations regarding the white collar exemptions closed on Friday, September 4.   For more detail on the proposal, please see the excellent piece by our colleague Jason Reisman.

The WHDI submitted a comment regarding the proposed new regulations, which can be found here.

In short, we believe that the proposed new regulations are a bad idea.  Contrary to DOL’s rationale, the regulations do not simplify the interpretation of the FLSA, are seriously flawed, will lead to more (not less) litigation, have significant hidden administrative and employee morale costs, and, contrary to impression created by publicity, do not obligate employers to increase an employee’s total compensation under the FLSA when converting from exempt to non-exempt status.

U.S. Department of Labor WHD Issues Administrator’s Interpretation on Independent Contractors and Asserts that “Most Workers are Employees”

As promised earlier this summer, on July 15, 2015, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued an “Administrator’s Interpretation” (AI) regarding when individuals are misclassified as independent contractors under the Fair Labor Standards Act (FLSA). The AI sends a signal to employers that the WHD has set a demanding standard for establishing when an individual is properly classified as an independent contractor and indicates that the agency views the issue as an enforcement priority. The AI states that, in the view of the WHD, “most workers are employees under the FLSA’s broad definitions.”

As background, unlike regulations, AIs are not subject to the rulemaking process such as that which is now underway for the proposed amendments to the white collar overtime rules. Rather, the AI provides the WHD’s view of the law, and that view is very unfriendly to those attempting to classify workers as independent contractors. In media interviews this week, the WHD’s Administrator David Weil stated that the AI was designed to give employer’s “fair notice” that they will run into the agency’s crosshairs if they misclassify individuals.

According to the AI, in order to determine whether an individual is an employee or independent contractor, the “economic realities” need to be examined to determine the true relationship. This test is to determine “whether an individual is economically dependent on the [putative] employer (and thus an employee) or is really in business for him or herself (and thus is an independent contractor).”

The AI uses a six-factor test commonly used by courts in determining status under the FLSA. The factors are (1) whether the work performed is integral to the employer’s business; (2) whether the worker has an opportunity for profit and loss based on his/her skills; (3) the relative investments of the employer and the worker; (4) whether the work requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. The AI emphasizes that no one factor is determinative.

While the factors discussed above are not new, the WHD’s application of them is more expansive than ever articulated by the federal government. In weighing the factors in the AI, the WHD clearly puts its thumb on the scale in favor of employee status. For example, in discussing the “control” factor — which many have viewed as the most indicative factor in determining status — the AI emphasizes that “it should not play an oversized role in the analysis” and states that an employer’s “lack of control over workers is not particularly telling if the workers work from home or offsite.” It also states that “workers’ control over the hours when they work is not indicative of independent contractor status.”

Importantly, the AI states it will give no weight to the parties’ understanding or agreement concerning the relationship. The AI states that “an agreement between an employer and a worker designating or labeling the worker as an independent contractor … is not relevant to the analysis of the worker’s status.”

Notably, the FLSA is only one of many laws governing worker classification. Many states, including Massachusetts, have set a high bar for establishing that an individual is an independent contractor. Given these trends, we expect to see litigation and enforcement action to increase.

Jonathan Keselenko
Foley Hoag
Boston, MA

A Fresh Challenge to Lyft’s Independent Contractor Classification of its Drivers

The ride-sharing industry faces another challenge to its business model, this time on account of an FLSA lawsuit alleging that Lyft drivers are denied minimum wage and overtime compensation because they have been misclassified as independent contractors rather than employees.   Frederic v. Lyft, Inc., d/b/a Lyft Florida, Inc., No. 8:15-cv-01608, (M.D. Fla.July 8, 2015).

According to plaintiff Fequiere Frederic, who drove one of the familiar pink-mustached shared rides for almost two years, Lyft exercised almost complete control over how and when he would perform his work and, he claims, he should have been considered an employee.  For example, according to Frederic, Lyft controlled the means by which he performed his work, it decided who would be hired and fired, it retained the right to terminate the Lyft “platform” that would prevent drivers from picking up riders, his tips were subject to a 20 percent administrative fee, Lyft set drivers’ rates of pay, it required him to accept all customer discounts and promotions, and he had to comply with Lyft’s requirements regarding his car’s appearance and cleanliness.   In sum, Frederic contends that “in an effort to avoid providing its drivers with the minimum benefits and protections afforded employees under the FLSA and Florida law, Lyft has willfully, uniformly, and unilaterally classified each and every one of its drivers as independent contractors, rather than employees, despite the fact that the factual circumstances of the relationship between Lyft and its drivers clearly demonstrate that Lyft drivers are in fact employees of the company.” Lyft has not yet responded to the lawsuit.

The Frederic case comes on the heels of two recent decisions in California involving Lyft and its competitor Uber, where separate courts denied summary judgment and found that it was up to a jury to decide whether their respective drivers were employees or independent contractors.  O’Conner v. Uber Technologies, Inc., — F.Supp.3d —, 2105 WL 1069092; Cotter v. Lyft, Inc., 60 F.Supp.3d 1067 (N.D. Cal. 2015).  For anyone who has ever wrestled with the issue of whether a worker is an employee or an independent contractor, Judge Vince Chhabria said it best in his ruling on the Cotter matter: “Lyft drivers don’t see much like employees,” but then again “Lyft drivers don’t seem much like independent contractors either.”  So goes the independent contractor/employee conundrum.

Andrew S. Naylor

Waller Lansden Dortch & Davis, LLP

Nashville, Tennessee

California Paid Sick Leave Law Amended and Clarified

The Healthy Workplaces, Healthy Families Act of 2014 took full effect on July 1, 2015.  The new law requires employers to provide paid sick leave to employees who work 30 or more days in California in a calendar year.

Yesterday Governor Jerry Brown signed a bill amending and clarifying several provisions of the new law. The bill was passed as an “urgency statute” and took effect immediately. Among the most noteworthy changes are the following:

Eligibility: The new bill clarifies that to be eligible for paid sick leave, an employee must work 30 days for the same employer in California, and not simply work 30 days in California.

Accrual: As originally enacted, the law allowed employers to provide paid sick leave either by providing 24 hours in bulk at the beginning of the year, or by accrual at a minimum rate of one hour of paid sick leave for every 30 hours of work. This threw a wrench into many existing paid sick leave and paid time off programs that tie accrual to pay periods, not time worked. The new bill provides greater flexibility by specifically allowing the following additional accrual methods:

24 Hours Within 120 Days: An employer may use an accrual method different than one hour of paid sick leave for every 30 hours of work, provided the accrual is on a regular basis and the employee will have 24 hours of accrued paid sick leave available by the 120th calendar day of employment.

Grandfathering of Pre-Existing Accrual Methods: If an employer provided paid sick leave before January 1, 2015 pursuant to an accrual method different than providing one hour per every 30 hours worked, that program will satisfy the law’s accrual requirements provided an employee (including any employee hired after January 1, 2015) will accrue eight hours of paid sick leave within three months, and the employee is eligible to earn at least 24 hours within nine months.

Unlimited Sick Leave: If an employer provides unlimited paid sick leave or unlimited paid time off, the law’s written notice requirement may be satisfied by indicating on the notice or the employee’s itemized wage statement that such leave is “unlimited.” [Note: Employers should carefully consider the implications of “unlimited” paid time off, and exercise caution when drafting such policies.]

Rate of Pay Clarified: Employers may pay out paid sick leave to nonexempt employees either at the regular rate of pay for the workweek in which the employee uses paid sick leave, or by dividing the employee’s total wages (not including overtime premium pay) by the employee’s total hours worked in the full pay periods of the prior 90 days of employment. Paid sick leave for exempt employees should be calculated the same way as other forms of paid leave time.

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