Ninth Circuit: Pay In Lieu of Benefits Is Included in the Regular Rate of Pay

for Overtime Purposes, Even.

Yes, this is what they call a "case of first impression." That means no court has decided the issue before.  The issue the Ninth Circuit Court of Appeals decided is this:

Although the value of benefits are obviously not included in the overtime calculation, the cash equivalents that employers sometimes pay "in lieu" of benefits count as wages that would be included.  This decision will apply in California because federal law applies everywhere.

So, let's back up. The City of San Gabriel had in place a "Flexible Benefits Plan" under which it allowed employees to take cash in lieu of certain health care benefits under certain circumstances, explained here:

The City provides a Flexible Benefits Plan to its employees under which the City furnishes a designated monetary amount to each employee for the purchase of medical, vision, and dental benefits. All employees are required to use a portion of these funds to purchase vision and dental benefits. An employee may decline to use the remainder of these funds to purchase medical benefits only upon proof that the employee has alternate medical coverage, such as through a spouse. If an employee elects to forgo medical benefits because she has alternate coverage, she may receive the unused portion of her benefits allotment as a cash payment added to her regular paycheck. 

The city designated these cash payments "benefits" and did not include them in the regular rate of pay for overtime purposes.

The city argued that these payments were excluded from overtime calculations and the regular rate under the Fair Labor Standards Act's section 207(e)(2), which excludes:

payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment.

The Ninth Circuit panel was concerned with the phrase "other similar payments to an employee which are not made as compensation for his hours of employment."  The court decided that the DOL's regulations and court's precedents did not include these payments in lieu of benefits.  Because pay in lieu of benefits did not fall within "other similar payments" they would be part of the regular rate.  

The court also noted that section 207(e)(4) expressly excludes the value of the benefits themselves from the regular rate. However, rather than treating the cash in lieu as a benefit equivalent, the court said that the payment "in lieu" meant that the cash was not a benefit at all.  Of note, the court found that the cash payments were made directly to the employees, whereas section 207(e)(4) requires payment of the benefit premiums to a third party such as a benefits trust. The regulation interpreting section 207(e)(4) actually permits payment of cash in lieu of benefits, but caps the amount at 20%.  The city's payment was more.

To add insult to injury, the court also found that the city's violation of the FLSA here was "willful" resulting in a 3-year statute of limitation and the availability of "liquidated" or double damages for the violation. The court believed the city did not do enough to research the law in the area, even though there was no case law on the subject (!).  This holding drew comment by two of the three judges that the court should re-examine its standards for finding "willfulness."

Cute disclaimer: I'm not an ERISA lawyer and I did not stay in a Holiday Inn Express last night. (No cookies).  Also, employers may or may not have discontinued these plans under the Affordable Care Act.  And the case might have come out differently if the pay-in-lieu were administered through a third party trust or administrator because it might have fallen within the section 207(e)(4) exemption. So don't panic until you check with qualified benefits counsel. 

However, this case is important if employers continue to offer pay in lieu of benefits, or if it did so within the past three years.  It also is important because it underscores the need for employers to consider whether payments to employees are properly included or excluded from overtime, and how overtime is calculated.  Again, although this is an FLSA case, it will have an impact in California. So heads up.

This case is Flores v. City of San Gabriel and the opinion is here. 

U.S. Dept of Labor's Administrator Interpretation Explains Joint Employer Status Under FLSA

We recently wrote an article about how courts and agencies are embracing the concept of sharing.
That is, forced sharing of responsibility among employers for the employment law violations of one.
(You can read our article here.  EMPLOYERS FACE NEW LIABILITY FOR OTHERS’ WORKERS )  As you'll see in that article, the National Labor Relations Board weighed in on joint employer status last year in a big decision.

Almost on cue, the U.S. Department of Labor has weighed in with one if its Administrator's Interpretations.  That is an opinion letter generally explaining an area of enforcement, which is not a full fledged regulation.  The Administrator Interpretation, No. 2016-1, is here.

Entitled "Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act," the Administrator of the DOL's Wage and Hour Division seeks to explain how it will apply the Fair Labor Standards Act to "joint employer" relationships.

For the government,  "joint employer" relationships are helpful in different contexts.  And by "helpful in different contexts" I mean "ways to facilitate holding as many employers responsible as possible." Let the Administrator explain just some of the ways:

When two or more employers jointly employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Additionally, when joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA and MSPA.4 Where joint employment exists, one employer may also be larger and more established, with a greater ability to implement policy or systemic changes to ensure compliance. Thus, WHD may consider joint employment to achieve statutory coverage, financial recovery, and future compliance, and to hold all responsible parties accountable for their legal obligations. the 

 Rather than issue a regulation, with its notice and comments, and possibility of congressional action to stop it, the Administrator has chosen to issue this opinion letter.  It is helpful for employers to understand the federal wage-hour agency's position on how it will treat multiple employer business relationships, such as staffing agencies, temporary firms, and subcontracts.  

Here are some of the highlights:

1.  The letter distinguishes between "horizontal" relationships and "vertical" relationships.  Horizontal means that an employee works for two employers, but they are related enough that each employer is responsible for the wage-hour issues of the other.  For example, if there is a joint employer relationship between two horizontal employers, then the hours worked in a week are aggregated for overtime purposes.   Vertical means that the employee works for an entity like a staffing agency, but economic realities are that the employee also works for a joint employer that receives the benefit of the employee's labor. 

2.  With respect to horizontal employment, the interpretation surveys cases and regulations and comes up with several bulleted factors that the DOL will consider relevant in deciding whether separately owned businesses may be considered joint employers of an employee:

• who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have any common owners);
  
• do the potential joint employers have any overlapping officers, directors, executives, or managers;
  
• do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
  
• are the potential joint employers’ operations inter-mingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for);
  
• does one potential joint employer supervise the work of the other;
  
• do the potential joint employers share supervisory authority for the employee;
  
• do the potential joint employers treat the employees as a pool of employees available
  to both of them;
  
• do the potential joint employers share clients or customers; and
  
• are there any agreements between the potential joint employers. 
  

3.  With respect to vertical employment - like temporary staffing agencies' staff working at a factory owned by another company, the DOL explains that there sometimes is NO actual employment relationship with the joint employer, whereas there usually is an employment relationship with both horizontal employers.  So, the question is whether the DOL should impute - find - a relationship based on "economic realities."
The economic realities test will include an analysis of multiple factors including

• who directs and controls the work
• who directs and controls the employment conditions
• what is the permanency of the relationship - is this a long term contract?
• how repetitive and rote is the work?
• is the work integral to the potential joint employer's business?
• is the work performed on the joint employer's premises?
• does the joint employer perform administrative tasks for the employees that employers normally do?

The Administrator concludes that the joint employer relationship will be scrutinized in future cases to ensure broad coverage:

As a result of continual changes in the structure of workplaces, the possibility that a worker is jointly employed by two or more employers has become more common in recent years. In an effort to ensure that workers receive the protections to which they are entitled and that employers understand their legal obligations, the possibility of joint employment should be regularly considered in FLSA and MSPA cases, particularly where (1) the employee works for two employers who are associated or related in some way with respect to the employee; or (2) the employee’s employer is an intermediary or otherwise provides labor to another employer. 

The result is that employers may be found liable for wage-hour issues for which they are not necessarily aware of, or in control of. Therefore, employers must ensure that they account for these potential liabilities in their business relationships and contracts.

U.S. DOL Issues Administrator Interpretation Re Independent Contractors

The U.S. Department of Labor issues "Administrator Interpretations" now instead of opinion letters. In the past, the DOL would respond to individual employers' or  other constituents' questions about an FLSA issue.  The DOL would offer its opinion about the specific situation and disclaim that it broadly applied to other factual contexts, etc.

But in 2010, the DOL started issuing "Administrator Interpretations." These are not tied to any particular request for advice.  Rather, the Wage-Hour Administrator would pick a topic and offer an interpretation of an existing regulation.  Courts do not give these interpretations the same deference as actual regulations. But they are considered.  And the U.S. Supreme Court recently upheld the practice, discussed here.

With that background, you are ready to read the DOL's latest "Administrator Interpretation."  The agency has weighed in on the test for whether someone is an independent contractor or employee.  As you will see, in Administrator Interpretation 2015-1, the Administrator makes clear the DOL's enforcement position.  Here is the conclusion, verbatim:

In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). The factors should be used as guides to answer that ultimate question of economic dependence. The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employing low wage workers.

(emphasis mine).

The Interpretation reaches that conclusion by analyzing the federal "economic realities" test for whether a worker is economically dependent on the employer (and therefore an employee) or in business for him or herself.  It should be noted that this economic realities test differs from the "right of control" test that California courts use, although there is overlap.  However, the Interpretation opines that the right to control is just one factor and that the economic realities test is actually broader, in that it sweeps more workers into employee status.   That is because, the Interpretation provides, the "economic realities" doctrine explains whom the employer "suffers or permits" to work, which is the definition of "employ" under the Fair Labor Standards Act.

The Administrator goes through familiar economic realities factors such as:
 - Is the work performed an integral part of the business?  (If so, employee)
 - Does the worker's managerial skill affect his / her opportunity for profit / loss (if so, contractor)
 - What is the nature of the worker's "investment" vs. the employer's investment relative to the work?
 - Does the work require special skill or initiative? (If so, contractor)
 - Is the relationship permanent or indefinite (if so, employee)
 - What is the nature of employer control.

As you will see, the Administrator emphasizes that no one factor is determinative.  The overarching issue is whether, based on the totality of the circumstances, the worker is in business for him or herself, or is economically dependent on the employer.  However, if the Administrator's views of the test carry the day in court, there will be far fewer independent contractors out there.

The Administrator Interpretation, No. 2015-1 is here. 

U.S. DOL Proposes Revisions to Some FLSA Exemptions' Minimum Salaries and More

The announcement is only 285 pages, and you can read the entire Notice of Proposed Rulemaking Here.   The actual regulations are about 9 pages beginning on page 286 of the PDF.

I know you're reading headlines focusing on the salary test for exempt workers under the FLSA.   Yes, indeed the DOL proposes to raise that salary threshold for the exempt executive, administrative and artistic / learned professional exemptions.  That proposal is a salary of $921 / week or a minimum salary of $47,892 per year (unless you're in Samoa).  Here's the proposed general provision, a revision to 29 CFR 541.600:

To qualify as an exempt executive, administrative or professional employee under section 13(a)(1) of the Act, an employee must be compensated on a salary basis as of [EFFECTIVE DATE OF FINAL RULE] at a rate per week of not less than $921 (or $774 per week, if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities. As of [DATE TBD] on each subsequent year, such employee must be compensated on a salary basis at a rate per week of not less than the updated salary rate published annually by the Secretary in the Federal Register at least 60 days earlier (with the rate for American Samoa to be calculated at 84 percent of the updated salary rate, provided that when the highest industry minimum wage for American Samoa equals the minimum wage under 29 U.S.C. 206(a)(1), exempt employees employed in all industries in American Samoa shall be paid the full salary rate), exclusive of board, lodging or other facilities.

The proposal includes a way to increase the base salary without passing new regulations or laws. Under the proposal, the minimum salary will go up each year based on an announcement by the Secretary of Labor, to occur 60 days before the change. The change will be based on a calculation the DOL has not decided upon yet.  It will either rely on the "CPI-U" inflation index, or by adjusting the salary basis to maintain pace with actual wages paid to salaried workers.

The proposal retains the "highly compensated" exemption standard, which relaxes the duties test. But the "highly compensated" salary will increase to $122,148, again indexed in future years.

There will also be an hourly "computer exemption" rate of $27.63 for those employees who can otherwise satisfy the "computer" exemption.

The proposed regulations include explanations of how the salary test may be met, as well as language stating that additional hourly pay, bonuses, commissions, etc. above the minimum salary will not defeat the exemptions.

But wait, there's more.  The proposed regulations are all about salary.  But the DOL in its Notice is also "seeking input" on whether to change the "duties" tests for the exemption.  That is, the DOL is actively considering adopting California's standards regarding the white-collar exemption duties test.  California law, as you know, measures time spent on exempt duties and discourages "working managers" who "pitch in."

You don't believe me?  Sure you do. But here's an excerpt of the DOL's announcement regarding the duties test:

While the Department is not proposing specific regulatory changes at this time, the Department is seeking additional information on the duties tests for consideration in the Final Rule. Specifically, the Department seeks comments on the following issues:

A. What, if any, changes should be made to the duties tests?

B. Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?

C. Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?

D. Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?

E. Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?

If DOL follows through with this proposal, it will  - not hyperbole - drastically change wage hour law in states outside California. Those of you who know anything about California employment law, you know what will happen. For starters, there will have to be many, many conversions of now-exempt employees to non-exempt, resulting in huge overtime liability going forward, at the new, inflated wages caused by inflated minimum wage law. 

And second, for those employers that do not convert, FLSA collective actions will ensue like you have never seen before.  

These regulations are just a first step and may be revised, particularly based on comments the DOL receives. If you'd like to leave comments, the linked Notice provides instructions:

ADDRESSES: You may submit comments, identified by Regulatory Information Number (RIN) 1235-AA11, by either of the following methods: Electronic Comments: Submit comments through the Federal eRulemaking Portal http://www.regulations.gov. Follow the instructions for submitting comments. Mail: Address written submissions to Mary Ziegler, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, D.C. 20210. Instructions: Please submit only one copy of your comments by only one method. All submissions must include the agency name and RIN, identified above, for this rulemaking. Please be advised that comments received will become a matter of public record and will be posted without change to http://www.regulations.gov, including any personal information provided. All comments must be received by 11:59 p.m. on the date indicated for consideration in this rulemaking. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period as the Department continues to experience delays in the receipt of mail in our area. For additional information on submitting comments and the rulemaking process, see the “Public Participation” section of this document. For questions concerning the interpretation and enforcement of labor standards related to the FLSA, individuals may contact the Wage and Hour Division (WHD) local district offices (see contact information below). Docket: For access to the docket to read background documents or comments, go to the Federal eRulemaking Portal at http://www.regulations.gov.

It will be interesting to see if the DOL can issued these regulations before the November 2016 election. If they can't, it will be interesting to see what the new president / DOL secretary says about this issue. 

Stay tuned....

U.S. Supreme Court Upholds U.S. DOL's "Administrator Interpretations"

In 2010, the U.S. Department of Labor began issuing "Administrator Interpretations."  These are analyses of regulations that are broader and more comprehensive than the traditional opinion letters that DOL used to issue. The opinion letters generally were targeted to respond to requests made by individual stakeholders, often employers.  The Administrator Interpretations contain the DOL's view on how its regulations apply generally, not in response to a particular set of facts.

The DOL issued three of these in 2010, of which two remain published on its website. (Here)  These two address the definition of "clothes" under part of the Portal-to-Portal Act and whether mortgage loan officers qualify as "exempt" under the Fair Labor Standards Act.  In 2014, the DOL issued two more interpretations concerning home health care workers.

On the issue of mortgage loans officers, the DOL has changed its views several times in opinion letters over the years.  The 2010 Administrator Interpretation opines that mortgage loan officers are non-exempt.  Here.  That is because they primarily sell, and salespersons are not exempt under the "administrative test."

It has been argued that the Administrator Interpretations are actually in the nature of regulations, rather than opinion letters.  As such, the argument goes, they cannot be issued without going through the formalities of the federal Administrative Procedure Act.  That Act requires the agency to issue proposed regulations, followed by notice and comment by the public.  

There has also been a dispute as to whether an agency's "flip-flopping" or reversal of a prior interpretation is akin to a regulation, requiring APA procedures.  The Court of Appeals for the District of Columbia Circuit had held that when the DOL issues an interpretation that contradicts prior interpretations it is making what is in effect a new or amended regulation.

The U.S. Supreme Court in Perez v. Mortgage Bankers Association upheld the right of the DOL to issue these Administrator Interpretations without going through the APA requirements.   The Court disapproved the DC Circuit's approach and held that the Administrative Procedure Act does not require "notice and comment" procedures when the agency interprets its own regulations.

First, the APA does not require procedural safeguards with respect to agency interpretations generally.  But what is the difference between an interpretation and new rule?  Here is what the Court said:

the critical feature of interpretive rules is that they are “issued by an agency to advise the public of the agency’s construction of the statutes and rules which it administers.” Shalala v. Guernsey Memorial Hospital, 514 U. S. 87, 99 (1995) (internal quotation marks omitted). The absence of a notice-and-comment obligation makes the process of issuing interpretive rules comparatively easier for agencies than issuing legislative rules. But that convenience comes at a price: Interpretive rules “do not have the force and effect of law and are not accorded that weight in the adjudicatory process.” Ibid.

The Supreme Court rejected the Mortgage Bankers Association's argument that the DOL's decision to reverse course is analogous to amending the regulation.   The Court also refused to address the argument that the Administrator Interpretation was in fact a "legislative rule" or regulation rather than an interpretation of an existing rule.  That is because, the Court wrote, the parties had not litigated the case under that theory.

All nine justices rejected the D.C. Circuit's approach. But three justices pointed out in concurrences and partial dissents that the majority's decision allowed too much discretion in the administrative agencies' power to interpret their own regulations.  These justices based their objections not on the Administrative Procedure Act, but on the constitution's separation of powers.  Those arguments did not carry the day in this case.  However, the three justices signaled a willingness to walk back some older precedents on the power of administrative agencies.

What does this all mean?
- the DOL will continue to be allowed to issue Administrator Interpretations
- Administrator Interpretations may be attacked as inconsistent with the underlying regulation, but under a very deferential standard of review by the courts.
- The courts do not have to give deference to an Administrator Interpretation the same way that it must give deference to a regulation, particularly when the interpretation is inconsistent over time.
- Mortgage loan officers are probably non-exempt under the FLSA for now and the reasonably foreseeable future.

This case is Perez v. Mortgage Bankers Association and the opinion is here. 

P.S. I wrote about the first three Administrative Interpretations here.  The Supreme Court issued its ruling on the definition of clothes in Sandifer v. U.S. Steel, which I wrote about here.

CA Supreme Court: On-Premises, On-Call Time = Hours Worked (All Sleeping Time Too).

The California Supreme Court (unanimously) affirmed the Court of Appeal's decision in Mendiola v. CPS Security Solutions, Inc.  We posted about the Court of Appeal's decision here.  However, the Supreme Court actually went farther than the Court of Appeal in deciding that security guards' on-premises, on-call time is compensable as hours worked.

At issue were security guards who were required to remain on premises and on call at times when they were not active.  When "on-call" time applied, they could stay in trailers provided for their use on the construction sites to which they were assigned.  They were paid for time actually worked, but not for time they were "on call" in the trailers. There are more details in the post linked above.

The Supreme Court agreed with the court of appeal that the on-call time involved significant enough employer control to constitute hours worked.  Here's some of the key analysis:

California courts considering whether on-call time constitutes hours worked have primarily focused on the extent of the employer’s control.  * * * Indeed, we have stated that “[t]he level of the employer’s control over its employees . . . is determinative” in resolving the issue. * * *  ‘When an employer directs, commands or restrains an employee from leaving the work place . . . and thus prevents the employee from using the time effectively for his or her own purposes, that employee remains subject to the employer’s control.  According to [the definition of hours worked], that employee must be paid.’ ”  (Id. at p. 583.)
Courts have identified various factors bearing on an employer’s control during on-call time:  “ ‘(1) whether there was an on-premises living requirement;  (2) whether there were excessive geographical restrictions on employee’s movements;  (3) whether the frequency of calls was unduly restrictive;  (4) whether a fixed time limit for response was unduly restrictive;  (5) whether the on-call employee could easily trade on-call responsibilities;  (6) whether use of a pager could ease restrictions; and  (7) whether the employee had actually engaged in personal activities during call-in time.’  ([Owens v. Local No. 169 (9th Cir. 1992) 971 F.2d 347,] 351, fns. omitted.)”  (Gomez v. Lincare, Inc. (2009) 173 Cal.App.4th 508, 523-524 (Gomez).)    Courts have also taken into account whether the “[o]n-call waiting time . . . is spent primarily for the benefit of the employer and its business.”  

The Supreme Court, applying these factors, easily found sufficient control:

The guards here were required to “reside” in their trailers as a condition of employment and spend on-call hours in their trailers or elsewhere at the worksite.  They were obliged to respond, immediately and in uniform, if they were contacted by a dispatcher or became aware of suspicious activity.  Guards could not easily trade on-call responsibilities.  They could only request relief from a dispatcher and wait to see if a reliever was available.  If no relief could be secured, as happened on occasion, guards could not leave the worksite.  CPS exerted control in a variety of other ways.  Even if relieved, guards had to report where they were going, were subject to recall, and could be no more than 30 minutes away from the site.  Restrictions were placed on nonemployee visitors, pets, and alcohol use. 

Additionally, the Court of Appeal correctly determined that the guards’ on-call time was spent primarily for the benefit of CPS.  

So, we're not talking about a beeper or a requirement that on call employees call into work within 30 minutes of a page.  We're also not talking about special rules applicable to ambulance drivers. We're talking about people required to live on the premises during on-call periods. We are also not talking about the specific sleep provisions contained in Wage Order 5 and 9. So,
relax those of you who have on-call employees who are not required to stay at work.

Of note, though, the Court rejected federal regulations that allow on-premises employees to be uncompensated when they are free to engage in personal pursuits.  Therefore, the level of control that one must exercise over an on-premises employee is not dependent on federal case law.

The Court of Appeal cut CPS some slack, holding that an employee could agree that 8 of a 24 hour shift was unpaid sleep time under certain conditions. But the Supreme Court was having none of it.
Analyzing the control issue, the Court said that the employees were sleeping on premises, they were restricted and, therefore, they were "engaged to wait."

Finally, the Court took a slap at the Legislature concerning the difficulty employers have in deterring how to conduct themselves under the myriad wage hour laws:

We acknowledge CPS’s efforts to ascertain whether its policy complied with California’s labor laws and recognize the difficulty it and other employers can face in this regard.  Several factors may contribute to ongoing uncertainty, including the defunding of the IWC and the lack of adequate funding for DLSE enforcement.  Such issues, however, must be addressed by the Legislature

So, employers should ensure that their on-call policies comply with this new decision, particularly employers who exercise significant control.  The Court did not reject or modify the multiple factor test for on-call employees who are not required to live or sleep on premises.

The case is Mendiola v. CPS Security Solutions and the opinion is here.

.

Unanimous U.S. Supreme Court: Security Screenings Non-Compensable Under FLSA

The Supreme Court further explained how to determine whether time spent at work is "preliminary" or "postliminary" and therefore not compensable under the federal Fair Labor Standards Act.  Per the Court:

The employer in this case required its employees, warehouse workers who retrieved inventory and packaged it for shipment, to undergo an antitheft security screening before leaving the warehouse each day.

The case involved temporary workers at an Amazon warehouse.  They were actually employed by Integrity Staffing Solutions, an agency.  Naturally, with all of that inventory around, security was important to minimize theft. So, 

Integrity Staffing required its employees to undergo a security screening before leaving the warehouse at the end of each day. During this screening, employees removed items such as wallets, keys, and belts from their persons and passed through metal detectors.

Busk and other employees filed a class action, claiming that the time spent on the screenings should be compensated because they were required to wait to be screened, because screening was for the employer's benefit, and because the screening process could take considerably more than a couple of minutes in some cases (sometimes up to 25 minutes even).

In a 9-0 opinion by Justice Thomas, with a concurrence by Justice Sotomayor with Justice Kagan joining, the Supreme Court reversed the 9th Circuit Court of Appeals.

The legal issue here involves the "Portal to Portal Act," which modified the federal Fair Labor Standards Act.  The P2P Act, as I like to call it today,  exempts from compensable time "activities which are preliminary to or postliminary" to "principal activities.” If they are pre- or post-luminary, they are not compensable.

Security screenings obviously are not "principal" actives. But that does not render them automatically pre- or postliminiary. That is because the term, "principal" activities, includes "all activities which are an ‘integral and indispensable part of the principal activities."

The Court explained what "integral and indispensable" means:

An activity is therefore integral and indispensable to the principal activities that an employee is employed to perform if it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform his principal activities.

Again, if it's "integral and indispensable" then it's compensable time under the FLSA.

So, the court applied the above definition of integral and indispensable to security screenings, thusly:

The security screenings at issue here are noncompensable postliminary activities. To begin with, the screenings were not the “principal activity or activities which [the] employee is employed to perform.” 29 U. S. C. §254(a)(1). Integrity Staffing did not employ its workers to undergo security screenings, but to retrieve products from ware- house shelves and package those products for shipment to Amazon customers.

The security screenings also were not “integral and indispensable” to the employees’ duties as warehouse workers. As explained above, an activity is not integral and indispensable to an employee’s principal activities unless it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform those activities. The screenings were not an intrinsic element of retrieving products from warehouse shelves or packaging them for shipment. And Integrity Staffing could have eliminated the screenings altogether without impairing the employees’ ability to complete their work.

(emphasis mine)

The Court rejected the 9th circuit court of appeals's conclusion that the time was compensable because the employees were "required" to undergo the screenings, and also rejected the notion that the time was compensable because it was for the employer's benefit:

If the test could be satisfied merely by the fact that an employer required an activity, it would sweep into “principal activities” the very activities that the Portal-to-Portal Act was designed to address. The employer in Anderson, for instance, required its employees to walk “from a timeclock near the factory gate to a workstation” so that they could “begin their work,” . . . . A test that turns on whether the activity is for the benefit of the employer is similarly overbroad.

The plaintiffs argued that the employer could have reduced the screening time by adding more screeners or by staggering break and shift times.  But the Court held that the employer's power to reduce the time it took did not change the character of  the activity from non-compensable to compensable. 

So, big victory for employers under the FLSA.  California employers, not so fast.

There is no P2P Act under California law.  Rather, all time is compensable if the employee is "subject to the control of the employer." That's why what may seem as "preiminary" or "postliminary" under California law may nonetheless be compensable.  As the California Supreme Court once wrote in rejecting importation of the P2P Act: "we conclude that the federal statutory scheme, which differs substantially from the state scheme, should be given no deference." Morillion v. Royal Packing Co., 22 Cal. 4th 575, 588 (2000).

Therefore, my opinion is, and I say that emphasizing this is NOT legal advice: employers should not change practices in California unless or until the California courts adopt the holding in this case, or unless or until a wage-hour lawyer with really good insurance says it's ok. 

Good luck out there.

The opinion in Integrity Staffing Solutions, Inc. v. Busk is here.

Greg 

Court of Appeal: OK to Deduct from Exempt Employees' PTO/Vacation for Partial Day Absences of Any Length

Basic wage-hour principle: With some exceptions, an employee classified as "exempt" under the federal Fair Labor Standards Act is entitled to a full salary for any week in which she / he performs any work.  There are some exceptions allowing for salary deductions. For example, an employer can deduct from an exempt employee's salary for full-day absences for personal pursuits, or full day absences for illness if the employer has a bona fide paid sick leave plan.

The corollary of the above:  It generally is illegal to deduct from "exempt" employees' salaries for missing partial days of work, except in very limited circumstances such as partial day, federal FMLA leave.   The consequences could be invalidation of the exemption.  That statement is true under both federal law (FLSA) and California law.

When employees have vacation or PTO balances, can employers lawfully deduct from them when exempt workers are absent for partial days, and leave the salary intact?  Well, it's a definite yes under federal law. Federal law does not consider vacation / PTO to be "vested," and does not care if employers deduct from those balances for any reason.

Under California law, it's a little trickier.  That is because vacation / PTO are "vested" balances. The argument against allowing deductions is that the exempt employee can work variable hours and is entitled to the full salary. Deducting from PTO is an end-around, which reduces a vested balance of wages otherwise owed, for an absence that the employee is entitled to take without affecting his or her pay.  That's the plaintiffs' bar's argument, but it's not correct.

In 2005, the Court of Appeal decided in Conley v. Pacific Gas & Electric Co. (2005) 131 Cal.App.4th 260, that California law follows federal law in this area.  However, the PG&E policy provided that exempt employees' partial day absences were subject to a deduction from PTO, only if the absence was longer than 4 hours.  After Conley, the state Division of Labor Standards Enforcement, grudgingly, decided that Conley only authorized deductions from exempt employees' PTO when the absence was more than 4 hours.

Although Conley says nothing about a 4 hour minimum absence, employment lawyers were hesitant to advise employers to go farther than the Conley holding because of the DLSE opinion.  And for good reason....

Enter Lori Rhea, who sued her employer, General Atomics.  General Atomics had a policy allowing deductions from PTO in any amount of time that exempt employees were absent from their jobs for partial days.  Rhea challenged this policy, arguing that Conley was wrongly decided, and that Conley only allowed deductions when her time away from work exceeded 4 hours.  The trial court disagreed, granting General's motion for summary judgment.

The Court of Appeal affirmed:

We do not agree with Rhea's contention that by requiring employees to use vested Annual Leave for partial-day absences, General Atomics is requiring a forfeiture of vested Annual Leave as that term is used in California law. In Suastez and Boothby the vacation time was forfeited because the employer took away the employee's vested vacation time. Suastez and Boothby establish that if an employer provides vacation benefits, the employer "is not free to reclaim it after it has been earned." (Henry v. Amrol, Inc. (1990) 222 Cal.App.3d Supp. 1, 5, italics added.) Here, General Atomics does not take away or reclaim vested Annual Leave when an employee is absent for a partial day; it merely requires that the employee use the Annual Leave under the terms and conditions that it has created. "The law permits an employer to offer new employees no vacation time" (Owen v. Macy's, Inc. (2009) 175 Cal.App.4th 462, 464; see Henry, at p. 6), and it correspondingly also affords an employer the right to control the terms under which vacation time may be exercised by employees. (Suastez, supra, 31 Cal.3d at p. 778, fn. 7 [noting "an employer's right to control the scheduling of its employees' vacations"].) General Atomics has set rules for the exercise of Annual Leave, which it is permitted to do. It has not taken away Annual Leave that has already vested.

The court also rejected the plaintiff's premise that partial day deductions was an impermissible "substitution" of vacation wages for salary that was legally required to be paid:

Put another way, Rhea argues that General Atomics is impermissibly "substituting" the employee's Annual Leave hours for the employee's salary earned during the partial-day absence. * * * * 

[W]e conclude that Rhea's argument fails because she has not established that General Atomics fails to pay all of the wages that it is obligated to pay during an employee's partial-day absence. It is undisputed that General Atomics continues to pay an employee's full salary during a partial-day absence and that the employee fully continues to accrue Annual Leave during a partial-day absence.13 Thus, there is no shortfall in wages or compensation during a partial-day absence that General Atomics "makes up" by requiring an employee to use Annual Leave for that period. This is simply not a situation like in Armenta where employees worked for a period without receiving compensation. Here, General Atomics' employees continue to receive their full compensation even when they are absent for a partial day.

Finally, the Court held that the "four hour" minimum absence is not required under California law:

we find no basis in California law for concluding that an employer is prohibited from requiring exempt employees to use their vacation or leave time when they are absent from work for a partial day. Rhea has not identified any reason for us to distinguish between partial-day absences of different lengths. Instead, she simply points out that the employer's policy in Conley only covered absences of at least four hours. We conclude that regardless of whether the absence is at least four hours or a shorter duration, a requirement that exempt employees use Annual Leave time for a partial-day absence does not violate California law.

So, it is legal to debit an exempt employee's PTO balance for absences of any length.  However, employers must consider the employee relations aspects of doing so.  If an employee works six 12-hour days, are you going to nick that employee's PTO balance for working only 4 hours on the seventh day in the week?

Also, as the court of appeal noticed, General Atomic did not deduct negative PTO balances from final pay upon termination of employment.  You don't do that either, right?  Cuz that would be bad.

The case is Rhea v. General Atomics and the opinion is here.

9th Circuit: Employer's Credit for Paid Overtime Calculated Week by Week

So, the Ninth Circuit decided that Los Angeles mis-classified certain employees as "engaged in fire protection."  Under the FLSA, those "fire protection" employees are due overtime only after 212 hours worked in a 28-day work period (or 204 hours worked in a 27-day period).  Employees who are not "engaged in fire protection" are due the normal overtime pay for work > 40 hours in a workweek (unless another exemption applied).

These county fire dispatchers and air paramedic employees worked standard hours of 9 X 24 hour shifts in a 27 day work period, or 216 hours.  So, because they were mis-classified, overtime is due each workweek for each hour worked > 40.

Anyway, I know most of you are not running a city or fire protection operations and are not concerned with the above. But wait.  There's more.

After the district court found in favor of the employees, the parties disagreed on how to calculate the overtime due. LA argued that it was entitled to offset overtime already paid, as it was paying employees for the hours worked > 204 in a 27-day work period.

For example, under the normal rule, if an employee worked  60 hours per week for 4 weeks, that would be 20 hours per week of overtime, times 4 weeks = 80 hours of overtime premium pay due.   Under the exemption for fire protection, the overtime due for 240 hours worked in 28 days would be approximately 36 hours.  (Assuming 28 instead of 27 days).  So, big liability.

The city argued that it dutifully had been paying overtime for > 204 hours in the 27 day period Therefore, the city argued, it should be liable only for overtime hours not already paid for during that same 27-day period.  Meaning, the overtime paid during the entire work period would be offset against what was still owing.  The city  argued in the alternative it should be given  an offset for all overtime paid in the three year period of the lawsuit, with the amount paid credited against the total overtime owed.

No, said the Ninth Circuit.  The employer would be allowed to credit / offset overtime only for the workweek in which the overtime was paid.

Under the FLSA, 29 U.S.C. § 207(h)(2), an employer may credit overtime payments already made to employees against overtime payments owed to them under the FLSA. The statute, however, does not specify the method to be used to calculate these overtime payments. The statute simply states that “[e]xtra compensation . . . shall be creditable toward overtime compensation payable pursuant to this section.” 29 U.S.C. § 207(h)(2).

* * *

The district court correctly applied a week-by-week approach. Section 207(a) sets forth the basic overtime standard, set at forty hours in a seven-day workweek and time and one-half for overtime. To determine the overtime owed for each workweek, the total hours worked over forty is multiplied by one and one-half the regular rate. Then, under § 207(h), the overtime already paid by the employer is determined and credited against the overtime owed. While § 207(h) does not state whether credits must be determined on a workweek basis, it must still be read within the context of the overtime due under § 207(a), which is calculated on a workweek basis. Under this reading, compensation already paid for work done within one workweek should not be transferrable and offset against overtime due in another workweek. This makes sense because Plaintiffs are owed what they should have been paid had the City obeyed the law.

This decision adds to a split in the circuit courts.  The Supreme Court eventually may decide this issue. Until then, in the Ninth Circuit, employers will not be able to offset overtime already paid, except on a work week by workweek basis.

Although this is an FLSA case, California wage-hour laws track the FLSA unless there's a reason in the California law to depart from federal law.  In this instance, California courts are likely to follow the FLSA on this point, because it is the calculation method that is most generous to employees.

This case is Haro v.  City of Los Angeles and the opinion is here. 

President Calls on DOL to Revise Exemption Regulations

He doesn't expressly say how:

I hereby direct you to propose revisions to modernize and streamline the existing overtime regulations. In doing so, you shall consider how the regulations could be revised to update existing protections consistent with the intent of the Act; address the changing nature of the workplace; and simplify the regulations to make them easier for both workers and businesses to understand and apply.

The memorandum is here.

So, what will this mean to employers?  The White House's  "Fact Sheet" about the memorandum, which is longer and more detailed than the memo itself, provides some clues:

Workers who are paid hourly wages or who earn below a certain salary are generally protected by overtime regulations, while those above the threshold who perform executive, professional or administrative duties are not. That threshold has failed to keep up with inflation, only being updated twice in the last 40 years and leaving millions of low-paid, salaried workers without these basic protections. Specifically: 

In 1975 the Department of Labor set the threshold below which white collar workers were entitled to overtime pay at $250 per week.
In 2004 that threshold was set at $455 per week (the equivalent of $561 in today's dollars). 

This is below today’s poverty line for a worker supporting a family of four, and well below 1975 levels in inflation adjusted terms. 

Today, only 12 percent of salaried workers fall below the threshold that would guarantee them overtime and minimum wage protections (compared with 18 percent in 2004 and 65 percent in 1975). Many of the remaining 88 percent of salaried workers are ineligible for these protections because they fall within the white collar exemptions. Many recognize that these regulations are outdated, which is why states like New York and California have set higher salary thresholds.

If you haven't heard, the administration is pushing hard to raise the minimum wage to $10.10 per hour, which is equivalent to a full time salary of $21,008 or so.  (They have not invented a pajama boy for the minimum wage - yet- but they're still pretty committed.)  Under the current regulations, the salary basis minimum is just over $23,000.  So, raising the salary basis threshold is another way of raising the "minimum wage," at least for those workers who qualify as "exempt" under federal law.

As for the duties tests, the DOL revised them in 2004, which addressed some outdated regulations and terms.  The DOL also simplified certain exempt tests, particularly when workers earned more tha $100,000 per year.  So "simplification" must mean "tougher exemptions." For example, the executive exemption might be changed to require supervision of more than the current two employees.  The administrative exemption could be reserved to senior administrative employees with greater discretion.  The professional exemption might be revised to include the salary test (hi, contract lawyers).  The duties test could be turned into a quantitative measure of time spent on exempt work (a la California) rather than a qualitative test.  Etc.

So, by now, some of you may be concerned that these regulations are going to happen and soon. The press and seminar sellers write articles etc. as though this is just around the corner.   I don't think any changes are nigh, or imminent, even.

First, it will take years to draft, vet, re-draft, re-vet, and finally promulgate these regulations.  Because that's how the DOL issues regulations.  Second, although it is true that this administration has issued gobs of regulations, it also has failed to issue others (Hi, NLRB poster, NLRB quickie election rules, etc.).   Third, I hear there's an election in 2016.  The outcome could affect whether and to what extent any proposed changes are implemented.  Even the 2014 election could shift the winds.  Who knows?

Finally, as the White House memo points out, California employers already must apply exemptions that are much stricter than federal law.  So, don't expect much impact on California employers' practices unless the DOL regulations are incredibly onerous.

Feel better?  Go look at pajama boy again.

U.S. Supreme Court Decides What the Definition of "Clothes" Is

Section 203(o) of the federal Fair Labor Standards Act permits unions and employers to include provisions in their collective bargaining agreements re whether "changing clothes" is compensable time or not.

Sandifer and others sued their employer U.S. Steel under the FLSA.  They claimed that the protective gear they had to wear as part of their job duties were not "clothes." Therefore, they were not under the exemption in Section 203(o), or covered by their collective bargaining agreement's exclusion.

The principal dispute was over these items:

Petitioners point specifically to 12 of what they state are the most common kinds of required protective gear: a flame-retardant jacket, pair of pants, and hood; a hardhat; a “snood”; “wristlets”; work gloves; leggings; “metatarsal” boots; safety glasses; earplugs; and a respirator.

A "snood"?   More later.

Anyway,  if Section 203(o) did NOT apply, then the normal rules on "donning and doffing" would.  Under those regulations and under case law, the changing into these items likely would be compensable.  Therefore, the employees wanted Section 203(o) to be inapplicable. U.S. Steel wanted the CBA's provision and Section 203(o) to bar the claim.   As a result, the Supreme Court had to decide:  what does "changing clothes" mean under Section 203(o).

Justice Scalia, writing for a unanimous court (except Justice Sotomayor did not join fn 7), concluded the following:

Dictionaries from the era of §203(o)’s enactment indicate that “clothes” denotes items that are both designed and used to cover the body and are commonly regarded as articles of dress. See Webster’s New International Dic- tionary of the English Language 507 (2d ed. 1950) (Web- ster’s Second) (defining “clothes” as “[c]overing for the human body; dress; vestments; vesture”); see also, e.g., 2 Oxford English Dictionary 524 (1933) (defining “clothes” as “[c]overing for the person; wearing apparel; dress, raiment, vesture”). That is what we hold to be the meaning of the word as used in §203(o).

 

The Court rejected the employees' argument that "clothes" did not include any type of covering that was "indispensable" to performing the job, such that anything that provided extra safety would be excluded from the definition. The Court also rejected the employer's argument that clothes means the entire ensemble or "outfit."

That task accomplished, the Court next defined "changing." The employees argued that "changing" meant only substituting one article of clothing for another (i.e., changing shirts or pants from street wear to work pants). The Court, however, disagreed:

We think that despite the usual meaning of “changing clothes,” the broader statutory context makes it plain that “time spent in changing clothes” includes time spent in altering dress.

But seriously - what is a Snood? The Court answered the question when it applied its definition of "changing clothes" to the protective gear discussed above:

Petitioners have pointed to 12 particular items: a flame- retardant jacket, pair of pants, and hood; a hardhat; a snood; wristlets; work gloves; leggings; metatarsal boots; safety glasses; earplugs; and a respirator. The first nine clearly fit within the interpretation of “clothes” elaborated above: they are both designed and used to cover the body and are commonly regarded as articles of dress. That proposition is obvious with respect to the jacket, pants, hood, and gloves. The hardhat is simply a type of hat. The snood is basically a hood that also covers the neck and upper shoulder area; on the ski slopes, one might call it a “balaclava.” The wristlets are essentially detached shirt- sleeves. The leggings look much like traditional legwarm- ers, but with straps. And the metatarsal boots—more commonly known as “steel-toed” boots—are just a special kind of shoe.

Not sure why 9 Supreme Court justices would analogize to an Eastern European ukulele or a flaky pastry. I thought that ski slope gear was called a "dickey."  Live and learn.

But what of the remaining items: earplugs, glasses, and the respirator?  They are definitely not "clothes," the Court said.  The employer then argued that putting these items on was "de minimis."  No sale. The Court noted,

A de minimis doctrine does not fit comfortably within the statute at issue here, which, it can fairly be said, is all about trifles—the relatively insignificant periods of time in which employees wash up and put on various items of clothing needed for their jobs. Or to put it in the context of the present case, there is no more reason to disregard the minute or so necessary to put on glasses, earplugs, and respirators, than there is to regard the minute or so necessary to put on a snood.

Yep, he mentioned the s-word again.

So, here's where the Court worked some magic that only the highest court in the land can do. It simply held that although ear plugs etc. were not "clothes," these additional items would still be subject to Section 203(o) collective bargaining.  That is, putting on earplugs would be compensable if the parties negotiated that.  

The employees won the argument, but lost the case.  Why?  Because the Court did not want to have district judges serving as time-study experts.  Not kidding:

it is most unlikely Congress meant §203(o) to convert federal judges into time-study professionals. That is especially so since the consequence of dispensing with the intricate exercise of separating the minutes spent clothes-changing and washing from the minutes devoted to other activities is not to prevent compensation for the uncovered segments, but merely to leave the issue of compensation to the process of collective bargaining.

This is a narrow decision that affects only the negotiation of "clothes changing" in a collective bargaining agreement.  It will have little applicability in the nonunion context.

The opinion in Sandifer v. U.S. Steel Corp. is here.

9th Circuit Allows Wage Claim Based on End of Day Security Screen

Integrity Staffing Solutions employed temp warehouse workers in Nevada.  At the end of the workers' day, they had to pass through security screenings to minimize theft. They had to remove metal from pockets and pass through a metal detector.  Sometimes, they had to wait up to 25 minutes for the security check.

The plaintiffs brought a claim for off-the-clock work, claiming the screenings were part of the compensable work day in violation of the Fair Labor Standards Act. They also brought state law claims under Nevada law.  They claimed that they had to walk to the lunch room to punch out for meals, and had to undergo security screenings after lunch before returning to work. These took only 5 minutes.

The court of appeals held that (based on the plaintiffs' allegations in the complaint) waiting for security could be compensable time under the Fair Labor Standards Act:

Here, Busk and Castro have alleged that Integrity requires the security screenings, which must be conducted at work. They also allege that the screenings are intended to prevent employee theft – a plausible allegation since the employees apparently pass through the clearances only on their way out of work, not when they enter. As alleged, the security clearances are necessary to employees’ primary work as warehouse employees and done for Integrity’s benefit. Assuming, as we must, that these allegations are true, the plaintiffs have stated a plausible claim for relief.
***
Integrity allegedly requires the screening to prevent employee theft, a concern that stems from the nature of the employees’ work (specifically, their access to merchandise).

As for the claims that the plaintiffs were delayed from enjoying their unpaid meal period, the court of appeals was not convinced:

Busk and Castro alleged they were not “completely relieved from duty” because by placing the time clocks far from the lunchroom, Integrity forced upon them the “duty to walk to the lunch room in order to eat lunch.” But the district court correctly held that walking to the lunchroom is not a work duty. Walking to the lunchroom is not necessary to the plaintiffs’ principal work as warehouse employees. Moreover, though the Portal-to-Portal Act does not clearly preclude compensation for walking to the lunchroom, as it only expressly applies to walking before the workday starts

* * *

Finally, the first amended complaint alleges that employees had to pass through a security clearance on their way to the lunchroom. Assuming that the time passing through the security clearance on the way to lunch constitutes compensable work, the time alleged in this case is de minimis. See Lindow v. United States, 738 F.2d 1057, 1062–64 (9th Cir. 1984) (discussing de minimis exception). As alleged in the first amended complaint, the walk to and from the cafeteria takes “approximately five minutes” each way, though employees pass through security only on their way to the cafeteria, not on the return trip. The relatively minimal time expended on the clearance in this context differs from the 25-minute delay alleged for employees passing through security at day’s end. Therefore, the district court correctlydismissed this claim under Rule 12(b)(6).

Based on this case, employers should consider whether "bag checks" and other security screening at the end of the shift should paid time (at least in the Ninth Circuit), unless it happens quickly enough to be "de minimis."

Of interest to litigators, the Court of Appeals decided that a federal "opt in" class action under the Fair Labor Standards Act could proceed simultaneously with a state-law based "opt out" class action.

This case is Busk v. Integrity Staffing Solutions and the opinion is here.

U.S. Supreme Court Holds Settlement Offer Thwarted FLSA Collective Action

Laura Symczyk, a nurse, challenged her employer's policy of "auto-deducting" a half hour for meal breaks, claiming that she and others "similarly situated" worked "off the clock."  She brought a "collective action" under the federal Fair Labor Standards Act, which is essentially an "opt-in" class action. That is, the other employees are given a chance to "opt in" to the action. In a class action, once certified, the unnamed class members are given a chance to "opt out" or they are bound by the judgment or settlement.

The courts never reached the auto-deduct issue.  The employer answered the complaint and simultaneously made an "offer of judgment" under Federal Rule of Civil Procedure 68. The offer was for $7500 plus attorneys fees and costs as determined by the court.  (Because it was the very beginning of the case, the employer must have figured the attorney's fees would be low).

The plaintiff ignored the Rule 68 offer.  The employer then brought a motion to dismiss the case, arguing that the Rule 68 offer completely compensated the plaintiff for her claims, and rendered it "moot" because she no longer had a stake in the case.  Therefore, she had no basis for leading the collective action against the employer.

The lower courts agreed that the settlement offer would have given the plaintiff complete relief. The district court dismissed the claim, but the Third Circuit Court of Appeals held the class action could proceed because the employer was trying to "pick off" the name plaintiff.

The Supreme Court assumed without deciding that an unaccepted Rule 68 offer would "moot" a claim if it offered complete relief. The Court did so because the plaintiff conceded that point in the courts below.

Based on that assumption and the plaintiff's concession, the Court decided that the claim could not proceed:  Justice Thomas, writing for 5 justices, wrote:

In the absence of any claimant’s opting in, respondent’s suit became moot when her individual claim became moot, because she lacked any personal interest in representing others in this action. While the FLSA authorizes an aggrieved employee to bring an action on behalf ofhimself and “other employees similarly situated,” 29 U. S. C. §216(b), the mere presence of collective-action allegations in the complaint cannot save the suit frommootness once the individual claim is satisfied
***
[W]e conclude that respondent has no personal interest inrepresenting putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness. Respondent’s suit was, therefore, appropriatelydismissed for lack of subject-matter jurisdiction.

Justice Kagan wrote for 4 dissenters.  She in essence argues that an unaccepted offer does not moot the case, which the majority did not decide because the plaintiff conceded the point and the lower courts so held.  Justice Kagan in essence "yelled" at the lower courts that this approach was "wrong, wrong, and wrong again."  (We'll see if those who criticize Justice Scalia when he gets sassy objects to her rather caustic opinion, which I enjoyed reading a lot by the way).

To me, the plaintiff should be able to reject an offer and continue litigating, hoping to do better than the offer of judgment.  The issue here is that the plaintiff agreed she could not have obtained a more favorable result on her individual claim.  Plaintiffs in future cases may not make that concession which, as Justice Kagan predicts, will render this case inapplicable to most future claims.

Anyway, it remains to be seen how this case will affect future FLSA collective actions.  California law regarding offers to compromise is governed by Code of Civil Procedure Section 998, so state-law cases are not directly affected.  But we will have to stay tuned to see whether California courts follow the federal approach.

The opinion is Genesis Healthcare Corp. v. Symczyk and you can read it (and the dissent) here.

U.S. Supreme Court: Pharmaceutical Sales Reps are FLSA Exempt

The Supreme Court resolved a split between circuit courts and held that pharmaceutical sales representatives engage in "sales" and therefore are exempt under the Fair Labor Standards Act.

Under the FLSA and California law (and other states' laws), "outside salespersons" are exempt from minimum wage and over time law.

The issue for the Supreme Court was that pharmaceutical reps do not really "sell" drugs to doctors. They "sell" to the doctor that the doctor should promise to prescribe the pharma company's medicine.  Plaintiffs argued that because the rep makes no "sale" he or she should not be considered a salesperson.  Rather, they are non-exempt "promoters."

The Department of Labor took the position that Pharmaceutical reps were non-exempt beginning in 2009.  But the DOL's reasoning apparently evolved as to "why."  According to the Court, the Agency argued:

“[a]n employee does not make a ‘sale’ for purposes of the ‘outside salesman’ exemption unless he actually transfers title to the property at issue.” Brief for United States as Amicus Curiae 1213 (hereinafter U. S. Brief).13 .

That would seem to remove from the exempt a whole lot of sales persons who previously were exempt, and it was much narrower than regulations and prior case law.  So, the Court refused to defer to the DOL interpretation.

The decision was 5-4.  The dissent agreed that the government's own interpretation was not worth much.  But the dissent's opinion was that the duties performed do not amount to "sales" but rather were promotion activities and non-exempt.

This decision may not directly affect California's outside sales exemption. But it should, because California law does not go into any level of detail regarding what is an "outside salesman."  Therefore, the courts and agencies may will follow the Supreme Court's opinion regarding what counts as a sale.

The case is Christopher v. Smithkline Beecham and the opinion is here.

U.S. Dept of Labor to Cut Overtime Exemption for Home Caregiver Agencies

The Fair Labor Standards Act exempts from minimum wage and overtime law:

domestic service employees employed ``to provide companionship services for individuals who (because of age or infirmity) are unable to care for themselves (as 
such terms are defined and delimited by regulations of the 
Secretary). 

Section 13(b)(21) exempts any employee employed "in domestic service in a household

and who resides in such household."

Under current regulations, an employer such as an agency can employ these caregivers and live-ins and treat them as exempt under the FLSA.  That is, qualifying employees would be paid a certain amount of money to perform the duties without tracking their time or receiving overtime premiums.  Presumably, the agencies markup this rate to add overhead and profit and then charge the patient a fixed amount of money for the service.

The U.S. DOL has issued a proposed regulation (here)  that would prohibit home care agencies from treating caregivers as exempt.  However, individual caregivers not employed by an agency or its individual employer (the patient or patient's family) still may assert the exemption.  (Note - After a humongous analysis and notice of proposed rule making, the proposed regulations are all the way at the very end of the link).  Here is the section that applies to third party agencies:

Sec.  552.109  Third Party Employment.

    (a) Third party employers of employees engaged in companionship services within the meaning of Sec.  552.6 may not avail themselves of the minimum wage and overtimeexemption provided by section 13(a)(15) of the Act, even if the employee is jointly employed by the individual or member of the family or household using the services. However, the individual or member of the family or household, even if considered a 
joint employer, is still entitled to assert the exemption, if the employee meets all of the requirements of Sec.  552.6.
    (b) * * *
    (c) Third party employers of household workers engaged in live-in domestic services within the meaning of Sec.  552.102 may not avail themselves of the overtime exemption provided by section 13(b)(21) of the Act, even if the employee is jointly employed by the individual or member of the family or household using the services. However, the individual or member of the family or household, even if considered a 
joint employer, is still entitled to assert the exemption.

This is one cryptic draft regulation. Even if the individual's family is a joint employer with whom?? The public can comment until Feb. 27, 2012.  Maybe they'll clear it up.

The proposed regulation also revises the definition of "companionship services" and "live-in domestic services.  To see those, click the link above and scroll way down to the draft regulation at 552.6.  Employees who do not pass the duties tests in these regulations also must be treated as non-exempt - by individual employers and agencies alike.

California employers will be affected by this, because the federal rule will apply even if California would extend the exemption to home agencies.  If federal law says no exemption, that controls.   Also, this change would not affect most employers. But it sure will affect people who count on home care agencies to deliver services.  Who is going to pay for the overtime and other obligations (like record keeping) that the lost exemption will cause?   

DGV

Ninth Circuit Interprets Learned Professional Exemption

The State of Washington's Department of Social and Health Services employ social workers, whom the agency classifies as exempt under the Fair Labor Standards Act.  The state relies on the "learned professional exemption," which means "an employee whose primary duties require 'knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.'” 29 C.F.R. § 541.300(a)(2)(I).

The state's requirements for social worker positions included:

at least a “[b]achelor’s degree or higher in social services, human services, behavioral sciences, or an allied field,” as well as eighteen months as a Social Worker 1 or two years’ experience in an equivalent position. Candidates for Social Worker 3 must meet the same educational requirements and have additional work experience. Within one year of their appointment, new employees in these positions must complete a formal training program that includes four weeks of classroom instruction and two weeks of field instruction.

The state also had guidance regarding when equivalent work experience could substitute for specialized degrees.

Reversing the district court, the court of appeals decided that the social worker position was not "exempt" automatically and required a trial to find out the facts.  The court explained:

while social workers no doubt have diverse jobs that benefit from a multi-disciplinary background, 6 the “learned professional” exemption applies to positionsthat require “a prolonged course of specialized intellectual instruction,” not positions that draw from many varied fields. While particular coursework in each of the acceptable fields may be related to social work, DSHS admits that it does not examine an applicant’s coursework once it determines that the applicant’s degree is within one of those fields. For the “learned professional” exemption to apply, the knowledge required to perform the duties of a position must come from “advanced specialized intellectual instruction” rather than practical experience. 29 C.F.R. § 541.301(d). The requirement of a degree or sufficient coursework in any of several fields broadly related to a position suggests that only general academic training is necessary, with the employer relying upon apprenticeship and experience to develop the advanced skills necessary for effective performance as a social worker.

So, the issue is not whether a job requires a college degree generally.  The issue is whether the job requires a college degree in a particulars skill that is directly related to the job.

The case is Solis v. State DSHS and the opinion is here.

U.S. Supreme Court on FLSA Retaliation

The U.S. Supreme Court held that the Fair Labor Standards Act's anti-retaliation provision covers oral and written complaints, whether internal or to the government.  So, here's some invaluable and insightful advice: don't retaliate against employees who complain about alleged wage and hour violations. Try not to decide whether to retaliate based on if a complaint is oral or written, mmmkay?

In a nutshell, Kasten claimed he complained to management and other employees about the location of the time clocks at the St. Gobain factory. Because of the time clock's placement, he did not get paid for "donning and doffing" time.  The company allegedly fired Kasten for not keeping his time card correct. Kasten claimed it was retaliation for his complaints. The district court dismissed the case because Kasten had not "filed" a written complaint with the government and, therefore, was not covered by the anti-retaliation provision in the FLSA.  The Supreme Court took time out of its busy day to resolve a dispute among the lower circuit courts over whether a written complaint was required.

The case is Kasten v. St. Gobain Performance Plastics, Inc., and the opinion is here.

Ninth Circuit: Pharmaceutical Sales Representatives are Exempt under FLSA

The plaintiffs in Christopher v. SmithKline Beecham Corp. were pharmaceutical sales representatives. They visit doctors on behalf of the company and attempt to persuade the doctors to prescribe their particular drugs to patients.  The company argued that these employees were exempt as "outside sales." The employees argued they were not sales persons, primarily because the patients themselves were the buyers, not the doctors.

The Ninth Circuit disagreed, holding that pharmaceutical sales reps obtain "sales" by convincing a doctor to agree to prescribe the product (a non-binding commitment).

The case is interesting for two reasons. First, the court explains what kinds of activities the outside sales exemption covers, and there is not much case law on this in the Ninth Circuit. In particular, there is a lengthy discussion about the difference between "selling" and "promoting."  The former is exempt and the latter is not. Second, the court refused to follow the US Department of Labor's current position on the exemption, which carried the day in another case in the Second Circuit.  In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010).

California law should follow the FLSA outside sales exemption. So this case may be helpful in California cases as well.  But, as the Novartis case shows, the US DOL and some courts do not agree that pharmaceutical salespersons are exempt, so keep that in mind.

The case is Christopher v. SmithKline Beecham and the opinion is here.

Payroll Company Not an "Employer" for Wage Hour Purposes

If an employer "outsources" payroll services to another company, can that payroll service company be held liable for wage-hour violations as an "employer?"  No.

The California Supreme Court in Martinez v. Combs (discussed here) determined who is liable under California wage and hour law - i.e., who is an "employer."  The court of appeal in Futrell v. Payday California, Inc., applied Martinez's definition of "employer" in deciding that a payroll service provider was not an "employer."

Futrell provided private police / crowd control services for a Reactor, a production company that makes commercials. The production company "payrolled" its employees through Payday, a payroll service company.  Futrell brought a class action against Payday, alleging wage-hour violations. Payday prevailed on a motion for summary judgment because the trial court held Payday was just a vendor of Futrell's actual employer, the production company.

The court of appeal held that Martinez restricts who may be held liable for wage-hour violations. The court rejected Futrell's argument that Payday exercised control over his wages:

There is no evidence in the record showing Payday exercised any control over Futrell‟s hours or working conditions. Reactor hired Futrell, and arranged and supervised the location shoots. . . . This means the only possible linchpin for finding that Payday was Futrell‟s employer is whether Payday “exercised control over his wages.”


If Payday had merely collected tax information from workers, kept track of time cards, calculated pay and tax withholding, and submitted reports to Reactor detailing such information, leaving it for Reactor to issue paychecks to the workers on its productions, we would have an easy case; Reactor would be the only employer. In our view, the issue in this case then comes down to whether Payday exercised “control over workers‟ wages” by going beyond handling the ministerial tasks of calculating pay and tax withholding, and by also issuing paychecks, drawn on its own bank account. We think not.

. . .. . Writing on a clean slate, we conclude that “control over wages” means that a person or entity has the power or authority to negotiate and set an employee‟s rate of pay, and not that a person or entity is physically involved in the preparation of an employee‟s paycheck. This is the only definition that makes sense. The task of preparing payroll, whether done by an internal division or department of an employer, or by an outside vendor of an employer, does not make Payday an employer for purposes of liability for wages under the Labor Code wage statutes.

The court then reached a similar conclusion under the federal Fair Labor Standards Act:

Although the FLSA applies a slightly different test than California law, the predominant factor remains the control an alleged employer exercises over an employee. Incorporating the reasons explained above into the FLSA test, we find Payday was not Futrell‟s employer for purposes of the FLSA. The economic reality existing between Futrell and Payday is that the latter prepared paychecks for the former for the work he performed on behalf of his actual employer, Reactor.

This case will come as good news to PEOs and other HR outsourcing companies, who may have been sued as "joint employers" for wage and hour violations. The court here, though, held that nothing in the opinion affects the analysis of who is the "employer" under any other body of law except wage-hour.

The case is Futrell v. Payday California, Inc. and the opinion is here.

US DOL Clarifies Unpaid Internships

The US Department of Labor issued new guidance regarding unpaid internships (here). The DLSE just got done with their opinion letter (posted here), and here come the feds with a fact sheet of their own. Coincidence? I think NOT! Scuse me, I need to dry clean my tinfoil hat.