FAQs17489126.jpgWe discuss the misclassification of non-exempt employees regularly here on the blog and in our presentations at conferences and webinars, but a reader of the blog wrote me before the holiday weekend to ask about the reverse situation. The reader’s company has previously determined (correctly, we’ll assume) that some of its employees meet the “computer professionals” exemption from the Fair Labor Standards Act’s overtime requirements, while others are supervisors who meet the executive exemption under the FLSA’s regulations. For various business reasons, senior management has decided to start paying these employees as though they were actually non-exempt employees: tracking their hours, paying them hourly rather than a salary, and paying overtime when applicable. The reader wrote to ask whether this was legal, given that all of the employees in question apparently meet the tests under the FLSA to be treated as exempt. This question is timely for an important reason other than this company’s business decision: the release of the proposed FLSA regulations that we expect any day, once the OMB’s Office of Information and Regulatory Affairs (OIRA) completes its review. Under the new regulations, many employers will have to face a mandatory move of employees from exempt to non-exempt status.

“Exemptions” are Not Requirements Under the FLSA

First, to answer the reader’s question, it is legal for an employer to change course and to treat employees who qualify for exemptions under the FLSA as non-exempt instead. To use a simpler example, you may qualify for a deduction from your personal taxes for unreimbursed business expenses or for high medical expenses. However, nothing in tax law requires you to claim these deductions just because you qualify. The same is true under the FLSA. Nothing in the law or its regulations require employers to treat employees as exempt, even if (as in our reader’s question) the employees apparently meet all parts of the requisite tests. Employers can certainly elect to classify exempt employees as non-exempt, or, relatedly, decide that it will treat “close cases” as non-exempt.

Keep in mind that other considerations might apply, too, such as collective bargaining agreements, employee offer letters, or employment agreements. To the extent that any of those require the payment of a fixed salary, treating an otherwise exempt employee as non-exempt could complicate any decision like this. The FLSA should be a starting point for your decision, but not the only one.

Employer Insights

The reader’s question raised one other issue for me that most employers will need to consider in the near future: how to transition employees from exempt to non-exempt status. As I said above, this transition might be forced on you if the definitional changes in the new FLSA regulations mean that a previously exempt employee no longer qualifies based on their weekly salary, duties, or both. Now, not later, is the time to audit your employees’ exempt status. A move from exempt to non-exempt will undoubtedly heighten awareness of FLSA classifications and the possibility that a previously “exempt” employee was misclassified. Expect more advertising on Google, social media, radio, and TV by plaintiffs’ lawyers capitalizing on the coverage of the release of the proposed regulations. This issue is not going away.

Want evidence of that? No less than The Wall Street Journal ran an article last week entitled “Can You Sue the Boss for Making You Answer Late-Night Email?” If you are an employer whose non-exempt (or about-to-be-non-exempt) employees use smartphones for work (theirs or yours), the answer is yes, if the time spent answering that e-mail amounts to more than de minimus (insubstantial or insignificant) amounts of time each week. Should you pay employees? Block employee access to work e-mail after hours? Implement an on-call policy of some type? These are the types of questions you should be asking as you start to audit your FLSA classifications. Whatever your analysis and ultimate decisions, always ensure that your non-exempt employees understand that they are not to perform any work activities that are not accounted for in your timekeeping system, and that supervisors monitor and take appropriate action with respect to employees who fail to comply with that policy.

Supreme Court building.JPGThe Supreme Court has declined to grant review of a Sixth Circuit decision that cast significant doubt on the effectiveness of an employee’s waiver of Fair Labor Standards Act (FLSA) collective action rights. Last summer, the Sixth Circuit became the first federal appellate court to address an employee’s waiver of rights to participate in a FLSA collective action outside the context of arbitration. There, the court invalidated a collective action waiver in a severance agreement, which was a blow to employers. Although the Supreme Court’s denial of certiorari was without comment, it is likely the Court declined to hear the case because the Sixth Circuit’s decision arguably created no circuit split for the Court to resolve since it did not involve an employer’s attempt to compel arbitration.

The plaintiffs were sales representatives who had claimed that their employer improperly classified them as outside salespeople exempt from overtime pay under the FLSA. Several of the sales representatives had signed standard FLSA collective action waivers as part of a general release and waiver contained in their separation agreements. Citing arbitration case law, the district court concluded that “[w]ithout…showing [that] the waiver …” nullifies the purposes of the FLSA or “thwart[ed] legislative policy,” the collective action waiver did not “offend the purposes of the FLSA,” and was therefore valid. However, the Sixth Circuit disagreed, invalidating the waivers under a 2013 decision holding that an employer cannot bind an employee by a contract that limits the exercise of FLSA rights. Distinguishing the severance agreements’ waivers from those in agreements to arbitrate disputes, the Sixth Circuit reasoned that employers would gain an unjust advantage over competitors and would discourage employees from bringing individual claims under the FLSA because any potential individual recovery would be outweighed by the costs of litigation. This holding, however, appears to conflict with Supreme Court dicta from a 2013 case:

the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

The Sixth Circuit noted that there were no conflicts on this issue with other appellate court decisions. The court reasoned that other appellate decisions only examined class or collective action waivers under the auspices of arbitration agreements, which implicated the Federal Arbitration Act, rather than the FLSA. The employer, KeHE Distributors, countered by asserting that these other decisions involved interpretation of the FLSA, rather than the Federal Arbitration Act. The employer further argued that other federal courts found nothing “in the text, legislative history or purpose of the FLSA” to suggest Congress “intended to confer a non-waivable right” to class litigation of FLSA claims.” The employer claimed that none of the other decisions turned on anything unique about arbitration.

In its petition to the Supreme Court, the employer contended that the Sixth Circuit ruling conflicted with many appellate decisions, including a Supreme Court decision, because although those cases dealt with arbitration agreements, they were at bottom cases about the waiver of rights under the FLSA. The employer argued that other courts had uniformly held that the FLSA did not create a substantive right to collective actions, and that employees could waive the ability to participate in collective actions as a quid pro quo for consideration they received in severance agreements.

Employer Insights

Presumably, the Supreme Court would take another look at this question if presented with a split of authority in the appellate courts, rather than the claimed split presented by arbitration versus non-arbitration decisions. In a better case, the employer’s argument that there is little reason to treat class or collective action waivers under the FLSA differently based on the presence of an arbitration clause makes logical sense. For now, in the states of Kentucky, Michigan, Ohio, and Tennessee, employers have another potential drafting issue to consider when they seek waivers of FLSA claims. Employers, whose settlement agreements include FLSA waivers by default, rather than to address a specific claim or controversy, may wish to reconsider their inclusion, while employers who explicitly settle FLSA issues should examine whether adding targeted arbitration clauses makes sense in light of the Sixth Circuit’s position. We will continue to monitor cases in other circuit courts to see if they, too, will limit employer/employee agreements in a similar way when they examine FLSA class or collective action cases that do not involve arbitration provisions.

On April 20, the Second Circuit filled a gap left open by the Supreme Court by extending the Fair Labor Standards Act’s (FLSA) anti-retaliation provisions to oral complaints made to an employer (rather than just complaints made to a government agency). In Greathouse v. JHS Security, Inc., the appeals court cited both Supreme Court precedent and EEOC and DOL statutory interpretations to support this broader reading of the FLSA.

The issue of FLSA protection for oral complaints arises from a March 2011 Supreme Court decision in Kasten v. Saint-Gobain Performance Plastics Corporation that we covered at the time. In that case, an employee repeatedly complained about the location of time clocks and how they prevented employees from receiving credit for the time they spent donning and doffing their protective gear. Following his termination, the employee filed a lawsuit alleging that he was retaliated against in violation of the FLSA. Both the district court and the Seventh Circuit held that an oral complaint did not constitute “fil[ing] any complaint” under the anti-retaliation provision of the FLSA. The Supreme Court reversed, holding that the FLSA’s use of “filed any complaint” encompassed oral as well as written complaints, so long as the complaint was “sufficiently clear and detailed for a reasonable employer to understand it, in light of both content and context, as an assertion of rights protected by the statute and a call for their protection.” However, while the Court addressed the form of complaints, it declined to address whether the FLSA covers such oral complaints when they are “filed” solely with a private employer instead of a government agency.

The Second Circuit’s Greathouse decision fills that gap for employers in New York, Connecticut, and Vermont, finding that oral complaints made only to a private employer are protected by the FLSA’s anti-retaliation provisions in the Second Circuit. In the case, the employee claimed he was fired after he complained internally about his employer’s alleged failure to pay wages. After entering default when the defendants failed to appear, the district court concluded that a pre-Kasten case barred Greathouse’s FLSA retaliation claim because he had not filed a complaint with any government agency or other prosecutorial authority. Reversing the pre-Kasten precedent, the Second Circuit concluded that the FLSA’s anti-retaliation provision must be interpreted to encompass “oral complaints made to employers in a context that makes the assertion of rights plain.” Specifically, the court held that a complaint is “filed” for the purposes of the FLSA “when a reasonable objective person would have understood the employee to have put the employer on notice that the employee is asserting statutory rights under the Act,” even if the employee fails to mention the FLSA by name.

The court cited Kasten as its guide, but also noted that both the EEOC (in its Compliance Manual and appellate briefs) and the DOL (in its appellate briefs) had consistently advanced this reading of the FLSA. In addition, the court cited both the First and Ninth Circuits’ adoption of a similarly expansive definition of “to file.”

Employer Insights

Employers in the Second Circuit can be certain that oral complaints “filed” with them by employees will trigger FLSA anti-retaliation protections. Although this decision does not resolve the circuit split on this issue, employers everywhere should proceed cautiously when confronted with a possible oral complaint related to wage and hour issues. This decision, combined with the DOL’s aggressive enforcement agenda, serves as a good reminder that employers should ensure that they understand and comply with their myriad obligations under the FLSA and that they take any complaints about wage and hour violations just as seriously as any other employee complaint of unlawful conduct. Further, Greathouse, like Kasten, is another employee-friendly retaliation decision. More than ever, employers should ensure that they fully document the legitimate business reasons for all adverse employment actions.

Since last spring, we have been following developments in the oft-delayed Fair Labor Standards Act (FLSA) regulations rewrite by the Department of Labor (DOL). Yesterday, we received word that the DOL has completed a draft of the new regulations and sent them to the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) for review. On Tuesday, Perez wrote in a DOL blog post, “We’ve worked diligently over the last year to develop a proposed rule that answers the President’s directive and captures input from a diverse range of stakeholders. After extensive research, study and careful analysis, we have submitted the proposed rule to the Office of Management and Budget for review. In the near future, the public will have an opportunity to weigh in and help us craft a final rule.” The submission of the new draft regulations to OIRA is the final step before the DOL officially releases the new regulations as a Notice of Proposed Rule Making for public comment.

The draft regulations revising the overtime regulations are subject to the federal Administrative Procedure Act’s rulemaking process, which means the administration still must complete a number of time-consuming steps before finalizing any rule change. After OIRA conducts its initial review, which should be relatively quickly—possibly as early as late this month or early June, the DOL will then take testimony, consider public comments, and have a final version of the revised regulations approved by OIRA. Typically, the public comment period extends at least 30 days. After, the DOL drafts a final regulation that responds to any public comments, OIRA would then conduct a final review, approve the text of the regulation, and publish it in the Federal Register. The period for the Office to review a draft regulation is limited by an Executive Order to 90 days, with the possibility of a single, 30-day extension. While there is no minimum period for review, the average review time in past years has been approximately two months. Therefore, even with a short 30-day comment period and a quick turnaround on a final rule, the DOL’s new regulation will not likely be published until this fall.

Affected parties are likely to file legal challenges to the new regulations, just as they did in 2004, which could (but probably will not) delay the rules’ implementation further. Congress may also put up some resistance. When President Obama first directed the DOL to begin drafting new FLSA regulations last year, Sen. Lamar Alexander (R-TN), who now chairs the Senate Committee on Health, Education, Labor and Pensions, said, “The President’s directive—combined with his support for a minimum wage hike, his executive order increasing minimum wage for federal employees and federal contractors, and the heap of mandates from his health care law—seems engineered to make it as unappealing as possible to be an employer creating jobs in this country.” However, disapproval from members of Congress is unlikely to have any legal impact on the release of the new FLSA regulations, with President Obama holding the veto pen and enough Democrats in both the House and Senate to thwart any attempt to override his veto.

The DOL has updated the FLSA regulations only twice in the last 40 years, most recently in 2004, when the Bush administration overhauled the “white collar” overtime exemptions and set the salary threshold at $455 per week ($23,660 per year). As we have discussed previously, rumors suggest that the administration has settled on an annual salary threshold of over $40,000, and, as Secretary Perez’s blog posts suggests, we anticipate that the new white collar regulations will be more worker-friendly. 

“The rules governing who is eligible for overtime have eroded over the years,” Labor Secretary Tom Perez wrote yesterday. “As a result, millions of salaried workers have been left without the guarantee of time and a half pay for the extra hours they spend on the job and away from their families.”

In 2014, President Obama directed DOL to “propose revisions to modernize and streamline the existing overtime regulations.” In particular, the president stated that current regulations exempting certain employees from the Fair Labor Standards Act’s (FLSA’s) overtime requirements “have not kept up with our modern economy.” According to the White House, millions of salaried workers have had to work 50 or 60 hours a week without being paid overtime—and, in some cases, “making barely enough to keep a family out of poverty.”

We’ll keep a close eye on the OIRA review of the new DOL FLSA regulations and report back to you as soon as the DOL releases proposed rules or we learn any new information.

Basics-12254761.jpgPeriodically this year, we have discussed some of the fundamentals of wage and hour law, starting with a general review of the white collar exemptions. We will continue to periodically review some of the more fundamental concepts of the FLSA, including a comprehensive review of the new FLSA exemption rules that we expect the DOL to issue at some point this year. As always, remember that these are just the basics: the application of these rules to specific facts is where the rubber really meets the road for employers.

In this installment, we’ll look at the penalties for noncompliance with the FLSA. As you know if you have been following this blog, the FLSA requires that employers pay employees time and one-half of their regular rate of pay for every hour they work in excess of 40 hours in a given workweek under 29 U.S.C. § 207(a). There are exceptions and exemptions to this requirement and the method of overtime calculation, of course, but we’ll stick to the basics for now.

Employers that fail to make proper overtime payments are liable to employees in a private action filed in a federal district court for their unpaid overtime compensation. 29 U.S.C. § 216(b). Paying the backpay amount owed is a pretty obvious remedy, but what about other available damages? Some state laws, like Illinois’ Minimum Wage Law, provide for some form of interest payments, but the FLSA takes a different approach. In addition to backpay, employees may recover what are referred to as “liquidated damages” under the FLSA. “Liquidated damages” is a legal term of art used throughout statutes and in private contracts, and provides that a noncompliant party will pay a fixed sum of money.

Under the FLSA, liquidated damages are an amount equal to the pay employees should have received. In other words, employees can recover double “backpay” damages for unpaid overtime. As the Seventh Circuit has explained, doubling the unpaid overtime “is not some disfavored ‘penalty.’ [There is] a strong presumption in favor of doubling, a presumption overcome only by the employer’s ‘good faith . . . and reasonable grounds for believing that [the] act or omission was not a violation.” Thus, employers can only avoid double damages for unpaid overtime if they can show that (1) their actions were taken in good faith and (2) they had reasonable grounds for their belief that they were complying with the FLSA. 29 U.S.C. § 260.

So how do employers meet those two tests? Under the “good faith” component of the test (the first element), courts will view the conduct from the perspective of the employer, but require a measure of subjective reasonableness. Usually, that means that an employer must take some concrete action to demonstrate its violation was not willful. Doing nothing isn’t going to shield the employer from double damages. Courts have held that an employer cannot “simply remain blissfully ignorant of FLSA requirements” to avoid double damages under the FLSA.

For example, in a 2011 case from the Fourth Circuit, Perez v. Mountaire Farms, Inc., the employer, a chicken processing plant, was found liable under the FLSA for failing to pay workers for time they spent donning and doffing protective gear. Nonetheless, the district court did not award liquidated damages because it concluded that the employer acted in good faith. The Fourth Circuit explained:

Mountaire also produced evidence of its good faith by showing that the company relied on the advice of David Wylie, an attorney retained by the National Chicken Council. Mountaire presented to the district court fourteen letters and memoranda from Wylie in which he interpreted donning and doffing cases from various jurisdictions, provided updates on plant surveys conducted by the Department of Labor, and advised poultry companies on how the companies could alter or maintain their practices to remain in compliance with the FLSA, as interpreted by different courts. The district court found that Mountaire “clearly” changed its policies based on Wylie’s information and advice.

By showing that it sought (and followed) the advice of qualified wage and hour counsel, Mountaire Farms avoided what would have been nearly $750,000 in liquidated damages. As this decision demonstrates, an employer’s assumption that its classifications comply with the FLSA alone, does not establish reasonableness because an assumption does not amount to an affirmative, “good faith” step.

The “reasonable grounds” component of the test (the second element) requires objective reasonableness. Employers can establish reasonableness if they actually rely on a reasonable, albeit erroneous, interpretation of the FLSA and its accompanying regulations. In other words, it’s not enough to consult wage and hour counsel in good faith. Courts also require employers to show that they followed that advice, like Mountaire Farms did. For example, the Tenth Circuit awarded liquidated damages against an employer who sought (and followed) legal advice on how to properly pay day rates under the FLSA, but then ignored counsel’s advice that its failure to pay overtime, regardless of the day rate, violated the FLSA.

Courts have found that an employer can more easily demonstrate reasonable grounds where the issue is novel, different, confusing, or unsettled. The absence of precedent is also a relevant factor when determining objective reasonableness. For obvious reasons, employers have to take affirmative action before plaintiff’s counsel files a lawsuit or the DOL begins an investigation. A good faith inquiry into a perfectly reasonable interpretation of the FLSA will do you no good after the fact.

As this discussion suggests, avoiding liquidated damages will depend on the particular facts of the situation. Since most lawsuits and DOL investigations aren’t looking at last week’s paycheck only, the next relevant question is how far back employees can go in seeking unpaid overtime. We’ll tackle the FLSA’s statute of limitations in our next Wage and Hour Basics installment.

sunshine.jpgWe’ve reached almost the end of April, and the long delayed, new FLSA regulations are still percolating somewhere in deep inside the DOL. So what has the agency been up to instead? Last month, as part of the annual “Sunshine Week” spotlighting the importance of open government, freedom of information, and the public’s right to know, the DOL took a rather odd view of government transparency: spotlighting enforcement against businesses. In a blog post commemorating Sunshine Week, Jesse Lawder, the DOL’s Acting Chief of Staff for DOL’s Office of Public Affairs wrote that “open, transparent government is one of the hallmarks of democracy.” However, Mr. Lawder wasn’t announcing government transparency of the type you might expect, such as open, substantive stakeholder engagement in the development of new FLSA regulations, or a return to the longstanding (but now halted) Wage and Hour Division practice of publishing opinion letters. Instead, the DOL announced that it was “quite proud” of its Online Enforcement Database (OED), a database of information on DOL enforcement activities, including the names of employers who have run afoul of DOL enforcement under the FLSA and other laws.

First created in 2010, the DOL’s OED combines enforcement data collected by the Wage and Hour Division, the Office of Federal Contract Compliance Programs (OFCCP), the Employee Benefits Security Administration (EBSA), the Occupational Safety and Health, Administration (OSHA), and the Mine Safety and Health Administration (MSHA). Prior to OED’s introduction, only OSHA and MSHA databases were available online. Now, as Lawder’s blog post explains, all of the data is streamlined and aggregated in one location and accessible through common search terms. The post obliquely refers to “previously unpublished information” that the “press and outside stakeholders,” along with the public, can use to “look closely at industry and corporate trends.”
In the wage and hour context, that means that the OED site now includes fully geocoded WHD case and violation data that can be mapped and searched by year. The data includes an FLSA “Repeat Violators” chart and even the ability to search by company name. The DOL also added the ability to search WHD data by monetary penalty and back wages paid. All of the statistical data has some value in the aggregate, to be sure, but employers who find their names in the database may be legitimately concerned about the potential for negative publicity, use of the data by unions in organizing campaigns, and targeting by plaintiffs’ lawyers. 
Whatever one’s stance is on the merits of the database, employers should be concerned. Wage and hour law is full of ambiguities and traps for the unwary. Even well-meaning employers can find themselves in the OED as a result of inadvertent violations or deciding to settle claims rather than protest the DOL’s findings. Releases of anonymized, aggregate data for examination of the DOL’s enforcement efforts and priorities makes perfect sense, particularly in commemoration of a celebration of open government. Particularly when coupled with outreach into areas like “predictable scheduling” and the agency’s flip-flopping on FLSA interpretations, though, tying that same data to specific employers without any obvious way to correct either the data, or the labels and insinuations that the DOL applies to it, simply underscores the agency’s increasingly aggressive agenda.

First created in 2010, the DOL’s OED combines enforcement data collected by the Wage and Hour Division, the Office of Federal Contract Compliance Programs (OFCCP), the Employee Benefits Security Administration (EBSA), the Occupational Safety and Health, Administration (OSHA), and the Mine Safety and Health Administration (MSHA). Prior to OED’s introduction, only OSHA and MSHA databases were available online. Now, as Lawder’s blog post explains, all of the data is streamlined and aggregated in one location and accessible through common search terms. The post obliquely refers to “previously unpublished information” that the “press and outside stakeholders,” along with the public, can use to “look closely at industry and corporate trends.”

In the wage and hour context, that means that the OED site now includes fully geocoded WHD case and violation data that can be mapped and searched by year. The data includes an FLSA “Repeat Violators” chart and even the ability to search by company name. The DOL also added the ability to search WHD data by monetary penalty and back wages paid. All of the statistical data has some value in the aggregate, to be sure, but employers who find their names in the database may be legitimately concerned about the potential for negative publicity, use of the data by unions in organizing campaigns, and targeting by plaintiffs’ lawyers.

Whatever one’s stance is on the merits of the database, employers should be concerned. Wage and hour law is full of ambiguities and traps for the unwary. Even well-meaning employers can find themselves in the OED as a result of inadvertent violations or deciding to settle claims rather than protest the DOL’s findings. Releases of anonymized, aggregate data for examination of the DOL’s enforcement efforts and priorities makes perfect sense, particularly in commemoration of a celebration of open government. Particularly when coupled with outreach into areas like “predictable scheduling” and the agency’s flip-flopping on FLSA interpretations, though, tying that same data to specific employers without any obvious way to correct either the data, or the labels and insinuations that the DOL applies to it, simply underscores the agency’s increasingly aggressive agenda.

FAQs17489126.jpgOver the last month, Domino’s has been in the news for some of the wrong reasons, with not one but two Fair Labor Standards Act (FLSA) class action lawsuits alleging that two large Domino’s franchisees paid delivery drivers less than minimum wage. Ho-hum, “wage theft,” #FightFor15, etc., right? Why am I highlighting this case? It’s the reason the workers have cited in the separate lawsuits against approximately 100 stores in Georgia and 70 in California. In both cases, the franchisees paid the workers at least the minimum wage for hours worked. However, the plaintiffs allege that it was the franchisees’ methods for reimbursing delivery drivers for their expenses that led to the FLSA violations.

That’s what makes these cases interesting. One question that often comes up for business owners is whether they must reimburse employees for mileage or other expenses, such as a technician that drivers his own truck, a maintenance worker who purchases his own tools, or a production worker who purchases uniforms. Many employers do reimburse employees for their work-related expenses, whether for employee morale reasons or simply for the tax deduction, but the FLSA does not require employers to do so. In fact, the FLSA does not contain any rules mandating these reimbursements. If that’s true, why are these Domino’s franchisees in court? The FLSA has one narrow exception.

The FLSA requires that employers pay an employee’s wages finally and unconditionally, or “free and clear.” If an employee is required to return some portion of wages—whether directly or indirectly—and that “kickback” puts the employee’s hourly rate below the minimum wage, then the employer has violated the FLSA’s minimum wage requirement.

A kickback is triggered in one of two ways:

  1. through deductions from the employee’s wages to pay for an expense that was for the benefit of the employer;
  2. by failing to reimburse an employee for those expenses.

The FLSA kickback rule is at the heart of the Domino’s franchisee lawsuits. According to the complaints, the franchisees reimbursed delivery drivers a flat $1 per delivery in most cases. Relying on the current IRS mileage reimbursement rate of 57.5 cents per mile, the plaintiffs calculated that the franchisees had shorted them about $1.30 per delivery. Averaged out across multiple deliveries, the plaintiffs claim that they were indirectly giving a kickback to their employers of $3.25 per hour, taking them below the minimum wage.

This FLSA kickback rule comes up with some regularity in cases involving delivery drivers who use their own vehicles, for obvious reasons. Anytime an employee uses a personal vehicle for company business, employers need to pay close attention to whether the expenses the employee bears by doing so puts him or her below the minimum wage.

For workers making at or near the minimum wage, it only takes minor expenses to create major problems. An employee making $8.00 per hour needs to incur just $6 per day in expenses for the kickback to take him or her down to the federal minimum wage.  Expenses for the benefit of an employer are defined broadly, too.   

As always, remember to consider state law in addition to the FLSA. Obviously, the minimum wage is higher in some states, but states also often have specific requirements for expense reimbursements or deductions.  The FLSA does not necessarily require you to reimburse employees for mileage or other expenses. But remember, employees cannot waive their right to receive minimum wage, directly or indirectly. Particularly for employees who make at or near the minimum wage, you must remain mindful of the impact of business expenses like mileage, uniforms, or travel that you require employees to bear. Otherwise, the FLSA kickback rule could come back to haunt you.

Reversing a district court decision, and declining to follow decisions from a number of other courts, including the Fourth and Fifth Circuits, the Ninth Circuit has deferred to the Department of Labor’s (DOL) “flip-flopped” view of whether the FLSA’s exemption for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles,” applies to auto dealer service advisors/service writers.

The decision comes on the heels of the Supreme Court’s decision in Perez v. Mortgage Bankers Association acknowledging that a federal agency can indeed “flip flop” its interpretations of laws with each new administration without first going through the more laborious process of promulgating new regulations. In April 2011, the DOL did just that, disavowing its 24-year-old opinion that Fair Labor Standards Act’s Section 13(b)(10)(A) overtime exemption applies to auto dealership employees working as service advisors, writers, etc. The DOL’s new interpretation contended that a “service advisor” was not included in Section 13(b)(10)(A)’s list of “salesman, partsman, or mechanic,” which meant that service advisors/writers would no longer be considered exempt from the FLSA’s overtime requirements. The DOL’s reversal came despite at least five federal courts since the 1970s finding that service advisors/writers were exempt under the same language.

Examining this new interpretation for the first time in Navarro v. Encino Motorcars, LLC, the Ninth Circuit held that the DOL’s opinion was entitled to deference because the underlying FLSA language was ambiguous. “[W]here there are two reasonable ways to read the statutory text, and the agency has chosen one interpretation, we must defer to that choice,” the court wrote, reversing a district court’s dismissal of a service advisor’s FLSA and state wage and hour law claims.

Like many dealers, Encino Motorcars employed service advisors whose jobs required them to greet customers, evaluate their service needs, and make recommendations about repairs. The advisors also solicited customers for additional repairs or maintenance, and prepared service estimates. The dealership paid its service advisors on a commission-only basis. The district court dismissed the service advisors’ overtime claims, concluding that the employees fell within the auto sales, parts, and mechanics exemption under the Section 13(b)(1)(A). The Ninth Circuit reversed under a Chevron deference analysis, observing that FLSA exemptions must be narrowly construed in favor of employees. The court acknowledged that a service advisor could be a “salesman” under the FLSA, but that the law could be read equally “in a more cabined way: a salesman is an employee who sells cars; a partsman is an employee who requisitions, stocks, and dispenses parts; and a mechanic is an employee who performs mechanical work on cars.” Finding that the legislative history was of no more help, and since service advisors did none of the three things under the court’s “cabined” view, the Court reasoned that it was up to the DOL to fill the gap in the statute.

Here, the Ninth Circuit declined to find that the DOL had acted inconsistently or unreasonably. “The Department of Labor’s regulations consistently—for 45 years—have interpreted the statutory exemption to apply narrowly. The agency reaffirmed that interpretation most recently in 2011, after thorough consideration of opposing views and after a formal notice-and-comment process. Under these circumstances, Chevron provides the appropriate legal standard.” Nonetheless, said the court, under Perez, if the 2011 final rule did amount to a change of position on the reach of the exemption, the DOL was still entitled to deference.

Employer Insights

The decision to find service advisors non-exempt in the Ninth Circuit conflicts with the Fourth and Fifth Circuits on this issue, as well as the Supreme Court of Montana and several federal district courts. Nonetheless, that’s the law for now in Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon, and the State of Washington (as well as the CNMI and Guam). As we noted in the aftermath of Perez, though, three justices (Alito, Scalia, and Thomas) have explicitly raised broad questions about agency deference in situations like this. Even the Perez majority opinion raised questions about the long term vitality of judicial deference to interpretations like the DOL’s. Perhaps this circuit split will be the vehicle that the Supreme Court uses to reconsider its longstanding agency deference doctrine.

All is not lost for auto dealers, though. Service advisors often qualify for the alternative exemption available under FLSA Section 7(i) for commissioned sales employees.  To meet the 7(i) exemption service advisors must meet all of the following criteria:

  1. The service advisor must be employed by a retail or service establishment (an auto dealership qualifies); and
  2. The service advisor’s regular rate of pay must exceed 1.5 times the applicable minimum wage for every hour worked in a workweek; and
  3. More than half of the employee’s total earnings in a representative period must consist of commissions on goods or services.

This exemption has some quirks, too, which we’ll examine in an upcoming Wage and Hour Basics post on the commissioned sales employees.

FAQs17489126.jpgIn recent years, I have noticed a movement away from the traditional categories of “vacation” and “sick” leave and holidays to hybrids like PTO, holiday hours, and personal days. While those new categories provide greater flexibility to employees and apparent ease as to record-keeping, they also complicate the question for employers about whether those accrued leave categories have to be paid out when an employee leaves the job. Some states make it easy, like Minnesota. Back in 2007, the Minnesota Supreme Court held in Lee v. Fresenius Medical Care, Inc., that, under Minnesota law, whether benefits like accrued vacation or PTO are due is “wholly contractual.”

But, what if your employee is in a state like Illinois or California that has a wage payment law requiring employers to pay “earned vacation and earned holidays” or “vested vacation time?” Can you simply relabel “vacation” as PTO or personal days and avoid the effect of these laws? What if you keep “vacation,” but also create a separate “personal hours” leave bank that employees forfeit on termination. Does that work? The answer to both questions could be no, depending on your situation and your state’s laws. When it comes to paying accrued leave, the label you attach to the leave often matters far less than how your employees can use it.

For instance, under Illinois’ Wage Payment and Collection Act (WPCA) regulations, employers may maintain a “use it or lose it” policy for vacation or similar leaves as long as they clearly communicate their policy to employees and give them a “reasonable opportunity to take the vacation.” 56 Ill. Admin. Code 300.520(e). However, at termination, the rules are a bit different. You would create a substantial risk of a wage claim by requiring terminating employees to forfeit vacation they have earned. Under the Illinois WPCA, whenever an employee resigns or is terminated without having taken all earned vacation time, an employer must pay the monetary equivalent of all of that earned, but unused, time to him or her “as part of his or her final compensation at his or her final rate of pay.”

So what about calling “vacation” pay “personal days” instead? Does that get you off the hook? Illinois regulations strongly suggest that it would treat a “personal hours” leave bank as “earned” (and therefore compensable at termination) for purposes of the Act, making a policy of forfeiture on termination is unlawful. The Department has issued a regulation explaining the classification of “paid time off” where employers maintain a single bank of hours that can be used for any purpose, rather than separate vacation and sick leave banks. In this situation, the Department states that “[b]ecause employees have an absolute right to take this time off (unlike traditional sick leave in which using sick leave is contingent upon illness), the Department will treat ‘paid time off’ as earned vacation days.” 56 Ill. Admin. Code 300.520(f)(3). In other words, the label you apply will likely not be determinative. Instead, what appears to matter is whether you give employees the “absolute right” to take the leave, as opposed to restricting it (e.g., “you have to be sick to take sick leave”). If so, then Illinois may consider the PTO “earned” for purposes of the Act, no matter the label.

Even if your state does not share similarly strict statutes and regulations with Illinois and California, most states that place restrictions on “use it or lose it” policies require employers to give employees a reasonable opportunity to take the leave in order to comply with those statutes. Depending on your situation, if you do not provide such an opportunity to employees, you might find your business running afoul of even more pedestrian wage payment laws.

cross38631766.jpgLast week, in my post about the impact of the various iterations of the Religious Freedom Restoration Act (RFRA) on wage and hour law, we discussed the general rule that the FLSA does not contain blanket exceptions or exceptions for religious entities or individuals, with only a few exceptions. One potential caveat to this rule is an FLSA exception for ministers and clergy, the so-called “ministerial” exception.

Under the FLSA itself (as well as other employment statutes, like Title VII), the only thing you need to know is that there is no ministerial exception in the statute. To the extent an exception from the FLSA exists for ministers, federal (and state) court judges have created it in the tradition of judge-made law under our common law system. Why? Courts have recognized the potential tension between the First Amendment’s establishment and free exercise clauses and government involvement in employment matters involving religious entities and their employees. In a range of areas of employment law, judges have interpreted the First Amendment to allow certain religious entities to ignore federal and state wage and hour and anti-discrimination language for ministers and clergy.

The ministerial exception from laws first appeared in cases before the turn of the 19th century. Since then, of course, Congress and state legislatures have passed a wide range of laws prohibiting discrimination and requiring the payment of a minimum wage and overtime. However, the ministerial exception has survived.

Ministers and clergy may often qualify for the white-collar exemptions to the FLSA (administrative, executive, and professional) if they meet the regular requirements. However, courts have also recognized a ministerial exception to the FLSA, such as the Fourth Circuit Court of Appeals, which first identified this exception in a 1990 case entitled Dole v. Shenandoah Baptist Church. The court found that it could exclude a member of the clergy who worked for a religious entity from the definition of “employee” under the FLSA, which precluded his FLSA overtime claims. The court looked at Congressional floor debates and resulting guidelines that had appeared in the Department of Labor’s Wage and Hour Division’s Field Operations Handbook:  

Persons such as nuns, monks, priests, lay brothers, ministers, deacons, and other members of religious orders who serve pursuant to their religious obligations in schools, hospitals, and other institutions operated by their church or religious order shall not be considered to be “employees.”

Relying on Title VII descriptions of “ministerial duties,” the Fourth Circuit used a “primary duties” test to determine whether the exception applies. Courts in many jurisdictions, however, applied other tests. The Second Circuit took into account all of the duties of a particular position, not just the primary duties. The Fifth Circuit looked at whether the employee was chosen for the position based “largely on religious criteria” and performed “some religious duties and responsibilities.” The Ninth Circuit adopted a similar test in finding a ministerial exception to Washington’s Minimum Wage Act.

The Supreme Court clarifies the ministerial exception factors in Hosanna-Tabor

The factors used to evaluate ministerial exception claims did not become clear until January 2012, when the Supreme Court decided EEOC v. Hosanna-Tabor Evangelical Lutheran Church. In that case involving a parochial school teacher who spent most of her work time on non-religious duties, the Court identified four factors in finding that the teacher in a religious school fit a ministerial exception to Title VII: that she was formally commissioned or ordained as a Lutheran “minister,” that she did perform “important religious functions” in addition to her teaching of lay subjects in the classroom, and that her non-religious duties, however extensive, did not make a difference. Chief Justice Roberts noted that the Court was unsure whether any church employee would ever exclusively perform religious duties.

The Court rejected the Fourth Circuit’s “primary duties” test and excluded the Fifth Circuit’s focus on religious criteria from its test. The Court wrote that the ministerial exception question “is not one that can be resolved by a stopwatch. The amount of time an employee spends on particular activities is relevant in assessing that employee’s status, but that factor cannot be considered in isolation, without regard to the nature of the religious functions performed and the other considerations discussed above.”

The Court’s decision eliminates the patchwork of tests used by federal and state courts and broadens the exception beyond the limits set by many courts, but still leaves some questions. For example, how should courts weigh among the four factors? Does the weight given to each factor depend on the nature of the claim? Does the test apply to FLSA claims at all? What types of institutions may use the exception? These answers have yet to be litigated by the Supreme Court. As Chief Justice Roberts wrote near the end of the Court’s opinion, “There will be time enough to address the applicability of the exception to other circumstances if and when they arise.”

“Ministerial” Positions Under Case Law

Applying various, generally narrower tests over the years, courts have found a range of positions to be “ministerial” and therefore excepted from coverage under the FLSA and/or state wage and hour laws:

  • A seminarian who assisted with Catholic Mass
  • Church music/choir directors
  • Ordained and non-ordained Baptist seminary faculty
  • A Catholic diocese’s Director of Religious Formation
  • A Mashgiach, who supervises the kashrut status of a facility, at a Jewish nursing home
  • A religious hospital’s chaplain
  • Salvation Army administrators who led worship and had separate duties at Salvation Army thrift shops
  • A Catholic nun denied tenure for a canon law professor ship at Catholic University

Obviously, determining which positions are “ministerial” depends on the specific facts and the particular court interpreting those facts. However, religious entities do have some guidance. First, organizations must ensure that their governing/founding documents, policies, handbooks and other key documents demonstrate that they do have a clear religious purpose and that they adhere to them. Second, organizations should look to the Supreme Court’s factors to analyze whether a particular position might qualify for a ministerial exception to the FLSA (or other employment laws). Some positions, such as a Catholic priest or other congregational leader, likely fall squarely within the ministerial exception. Others, such as lay administrators, maintenance workers, office staff, or secular instructors, are a closer call. For instance, the Ninth Circuit has held that lay teachers at a church-owned school who neither attended to others’ religious needs nor instructed students in religious doctrine did not fulfill the function of “ministers” for purposes of exemptions from anti-discrimination laws. Where there is uncertainty, religious entities should tread carefully before treating employees as exempt from the FLSA or state wage and hour laws. The ministerial exception to the FLSA (and other employment laws) is anything but a one-size-fits-all designation.

Like other employers, religious entities need to carefully examine and maintain job descriptions and monitor actual job functions to ensure that they match. You can expect courts to continue to construe this exception narrowly. Articulating a clear, reasonable and individualized basis for excluding someone from FLSA or state wage and hour laws will be the best defense to a wage and hour action challenging a ministerial exception.