Mike Pence.jpgUnless you are living under a rock, you are probably aware of the uproar in Indiana about the Religious Freedom Restoration Act that the state passed, triggering an incredible backlash inside and outside the state and a rush by legislators to revise the newly-enacted law. When even NASCAR is criticizing legislation instead of talking about its current season, you know that you have a serious problem. For those of you looking for a more balanced, statutory analysis of the issues underlying the RFRA debate, I would recommend that you start here and here.

Among the questions this week from clients about what their employees might face (if anything) when they come to Indiana, I have even fielded a couple of hypothetical questions about the IRFRA, including whether it could apply to wage and hour laws at the state or federal levels. While a little bit nuanced when it comes to ministers/clergy and objectors to Social Security and Medicare, the answer is generally “no.”

First, there are no blanket religious, church, or related exemptions from the FLSA, and I am unaware of any at the state level, either. Whether or not your business or religious entity falls under FLSA depends on the facts and circumstances of each case. As we discussed last year, the FLSA provides two different ways for coverage to apply: “enterprise coverage” and “individual coverage.” Put simply, for most businesses, the FLSA’s enterprise coverage provisions will apply if the business meets two tests. First, the business must be involved in interstate commerce. Second, the business’s gross annual revenue must be at least $500,000. If a business meets both tests, then all employees working for the business are covered, regardless of whether they ever engage in interstate commerce. Notwithstanding these limits, the FLSA may still apply individual coverage to any employee whose work affects interstate commerce.

Why RFRA Would Fail as an FLSA Defense

Under most RFRAs, you could use the Act to assert a “religion” defense to just about any conduct, provided that your objection is somehow tied to a religious practice. Indiana, Texas, and a few other states extend objector status to at least some types of businesses. However, just because you can assert an RFRA defense to wage and hour laws by claiming that Biblical parables require you to pay employees a flat daily rate and give you the right to do what you want with your money does not mean that you will be successful in defending against such a claim!

If you assert an RFRA defense to your non-payment of minimum wages or overtime, even in states that allow you to assert RFRA defenses as a business, you could expect the court to shoot down your defense rather quickly. For your defense to succeed, you would need to show that the government has no “compelling interest” in the challenged law. Typically speaking, laws like the FLSA that establish protections for workers from exploitation will reflect a valid and compelling government interest.

Special Exemptions for Religious Objectors to Social Security, Medicare

Notwithstanding the general rule above, religious exemptions to some withholding requirements do exist for certain religious groups, such as some Amish sects, that do not believe in commercial insurance. As part of its enactment of Medicare in 1965, and in response to Amish and other sects that had conscientiously objected to this government-mandated insurance, Congress exempted those groups from paying Social Security and Medicare taxes, provided the sect had been in existence since December 31, 1950. Notably, this potential exception only applies to Social Security and Medicare—these sects’ members must still pay the same income, property, sales, and other taxes as everyone else.

To claim an exemption from these withholdings and taxes, an individual must obtain a Social Security number and file IRS Form 4029. This Form requires applicants with a religious objection to waive any rights to Social Security and Medicare benefits, in addition to swearing to their conscientious objection to the programs. SSA must undertake at least a cursory religious inquiry to confirm the sect’s teachings, that it provides care for its dependent members, and that the sect has existed since 1950. Even then, an exemption from Social Security and Medicare taxes is applicable for self-employment income and wages, but not for wages paid to an employee. For employee wages to be exempt from all Social Security and Medicare withholdings, both the employee and the employer must have approved Form 4029 exemptions. Thus, wages paid to an Amish employee by an employer that is not a member of the sect would be subject to Social Security and Medicare withholdings, notwithstanding any Form 4029 exemption that the employee might hold for his or her self-employment income. Of course, even if both you and your employee hold Form 4029 exemptions, you still must pay the applicable minimum wage and overtime under the FLSA.

As I mentioned above, the one possible exception to all of this is the judicially created FLSA exception for ministers and clergy in some appellate courts, which I’ll address in my next post.

A CNN op-ed piece caught my eye recently as it discussed some of the difficulties the so-called millennial generation is having in Silicon Valley and elsewhere when it comes to finding gainful employment. It paints a very grim picture about “sharing economy” jobs like Uber, Lyft, or Instacart. The writer opines that “[t]he sharing-economy jobs are even worse than minimum wage jobs because they offer no stability or protections for workers. Sharing economy jobs aren’t really jobs at all; they’re freelance gigs.” It refers to the sharing-economy as the “share the scraps” economy. Those are strong words, and the author doesn’t even touch on the wage and hour implications of the “sharing economy.”

Both employers and employees fool themselves if they think that a sharing economy job is the new small business. From a wage and hour standpoint, they appear to be nothing more than a twist on the independent contractor/employee classification issues that we discuss regularly here on the blog. Employers who might be drawn to the “sharing economy” business model gain neither loyal employees, nor control over the product or business they want to grow (witness Uber’s recent issues with assaults by drivers). Depending on how a court or agency applies the law, signing up workers for these services could be an unlawful agreement to pay less than minimum wage, while practically giving workers neither the advantages of having a job nor those of owning a business. Unsurprisingly, the “sharing economy” has started to attract attention.

Last week, two different California federal judges highlighted the wage and hour problems inherent in the “sharing economy” model in two class action lawsuits brought against two different ride-hailing companies, Uber and Lyft. The two cases each allege that the drivers are not independent contractors, as the companies claim, but should be classified and paid as employees. The classification triggers both federal and state law obligations – under the FLSA and various related state laws. Simply adopting “sharing economy” buzzwords does not magically transform employees into contractors. In both cases, the courts rejected the companies’ arguments on summary judgment and allowed the cases to proceed to the roll-of-the-dice of a jury trial (assuming you can even really “win” these cases as an employer, of course). And, it’s not just Uber and Lyft, either.  Instacart and Postmates (personal shopping), Homejoy (home cleaning), and Handy (repair), just to name a few all face similar lawsuits.

The cases are good reminders to employers about how difficult it is to apply laws drafted in the mid-20th century to the new 21st century business models that have sprung from the advance of technology. As the judge in the Uber case wrote, “many of the factors in that test appear outmoded in this context.” Yet, these are the tests that we have and that courts apply. Unsurprisingly, Uber and Lyft drivers fall smack in the middle of the gray area in wage and hour law. In some ways, the drivers resemble contractors because, for example, they can choose their work hours and their passengers. In other ways, drivers resemble employees because of the degree of control the companies exercise over them. With ambiguity in the law that even new regulations are unlikely to resolve, employers should think carefully (and get good legal counsel) before simply assuming that they can crowd source work that employees do.

Captain Obvious.jpgIt happens every year: I read a decision from a federal judge about the federal Fair Labor Standards Act and shake my head that it actually took litigation to resolve such an obvious question. It is only March, but 2015 already is no different. A recent decision by a federal district judge in New York compelled me to bring back our periodic Captain Obvious posting.

As I said last year, sometimes I wonder if Captain Obvious or his Midwestern cousin Mr. Obvious would make good judges. A recent case out of the Southern District of New York makes me think that one of them could have more easily handled what can only be seen as a completely unnecessary case and decision. In that case, individuals who performed community service as a condition of a deferred prosecution agreement sued the City of New York claiming that they were somehow “employees” for purposes of the FLSA. That’s right—people who had to perform community service to avoid criminal convictions tried to make crime pay.

The district court agreed that the individuals certainly were not “volunteers” under the FLSA, because they had no “civic, humanitarian, or charitable reasons” for performing work for the City. However, the Court disagreed with the plaintiffs’ conclusion that this somehow transformed them into “employees” under the FLSA. In the most obvious decision of the year (so far), the Court ruled that the plaintiffs could not be employees because they did not perform the work “for the purpose of enabling them to earn a living,” and granted the City’s motion to dismiss the case.

Like many states, New York permits individuals charged with minor criminal offenses to defer prosecution by agreement of the parties if they “perform services for a public or not-for-profit corporation, association, institution or agency.” Under New York law, defendants must have “consented to the amount and conditions of such service.” Successful completion of the community service leads to dismissal of the charges and avoids criminal convictions. Each of the plaintiffs performed their required community service, but then sued the City claiming that they were “employees” who were due wages for performing that very same service.

Ultimately, the Court rightly concluded that just because the plaintiffs did not fall within a specific FLSA exemption, like public service volunteers, did not mean that they were employees entitled to protection under the Act. Under the totality of the circumstances, the Court found (again, obviously) that people who perform community service as an express condition of a deferred prosecution agreement are not doing so “for the purpose of enabling them to earn a living,” or to receive financial compensation of any kind. The Court analogized plaintiff’s situation to those of inmates – a not too far off comparison – who also (obviously) do not have an employment relationship with the prison.

Sometimes it doesn’t take a law degree to do this stuff. Congratulations Judge Furman of the Southern District of New York. You win my unofficial award for the Most Obvious FLSA Decision of 2015 (So Far…).

DOL Perez.jpgLast week, Secretary of Labor Thomas Perez testified during a hearing held by the House Education and Workforce Committee to discuss President Obama’s budget proposal for the Department of Labor. Secretary Perez’s testimony touched a wide range of topics, most notably the oft-delayed FLSA regulations rewrite we have discussed in recent months. The DOL Secretary also echoed President Obama’s call for an increase in the federal minimum wage, despite the action of 17 states to enact increases in the past few years.

Secretary Perez testified as to the DOL’s ongoing efforts “to modernize the nation’s rules on overtime pay, which have not kept up with inflation or with changes in the economy.” The regulatory rewrite, which President Obama directed the Secretary to undertake last spring is not imminent. However, Secretary Perez quipped that DOL staff members were “working overtime” to prepare the new rules and that they would be released “sometime this spring.” He did not provide further details about timing, but again highlighted the salary threshold as a point of emphasis. “The basic premise of the overtime law that Congress enacted more than 75 years ago is pretty straightforward: If you work more, you should get paid more. But that basic principle is undermined in too many cases,” Perez said. He also highlighted the plight of “[t]he assistant manager at a fast food restaurant who puts in 60 to 70 hours a week for $455 and spends almost all of their time performing the same work as the employees they supervise and who does not get overtime is getting a raw deal. We are updating the rule to prevent this situation.”

Secretary Perez also commented on the Wage and Hour Division’s (WHD) increased compliance efforts. He observed that DOL had increased enforcement staff at the WHD, but that these efforts had only brought enforcement staffing back to 1970s levels, hence the administration’s request for additional appropriations in 2016 for WHD. He explained that the WHD had “shifted the focus of [its] enforcement efforts” to “targeted investigations in industries where we know workers are vulnerable,” based on industry analysis, data, and trends, rather than taking a “purely reactive” approach dependent on workers first lodging complaints.

In particular, WHD plans to focus on sectors where “wage violations are pervasive, especially for low-wage workers,” and will look to target not just violators themselves but also employers at the “top of the [supply] chain to evaluate the compliance practices of those below them; and to get them to think twice about whether it is worth the risk to their good name, and possibly their bottom line, to do business with a supplier or subcontractor who skirts the law.”

Secretary Perez’s testimony shows that employers should not breathe easy just because the FLSA regulations have been delayed again. The DOL and the WHD in particular clearly plan to continue their aggressive outreach and enforcement this year and into the 2016 fiscal year.

Maryland state flag.jpgRecently, the Maryland Court of Appeals took the position, albeit in dicta, that the state’s Wage Payment and Collection Law reflects a “strong” public policy of Maryland and urged Maryland courts to reject as unenforceable any future out-of-state forum selection provisions contained in employment agreements. While just one decision, employers with Maryland-based employees should review any such provisions in their agreements. Moreover, it also serves as a reminder that every employer with multi-state operations (even different states of incorporation and principal places of business) should carefully consider forum selection clauses when drafting or revising employment agreements. This is not just “boilerplate” that you throw in at the end of the agreement.

Most employment agreements, even for otherwise at-will employees, contain certain “forum selection” clauses, also known as choice of law and venue clauses. These clauses often look something like this:

The laws of the state of West Texizona will govern any dispute arising from or relating to this Agreement. The parties submit to the jurisdiction of the state of West Texizona and courts for or in Capital City, Central County, West Texizona, and agree that any legal action or proceeding relating to this Agreement may be brought in those courts.

In this example, the first sentence identifies which state’s laws will apply to the agreement (choice of law). The second sentence governs the location of any disputes about this agreement (choice of venue). The choice of law clause is designed to determine up front what law the parties (and courts) will look to determine enforceability of the provisions in the agreement. Choice of venue determines where any legal proceedings will be held in the event the parties engage in legal proceedings over the agreement. Despite carefully crafted forum selection clauses, courts will not always honor the parties’ choice.

In the Maryland case, an employee who lived in Maryland sued his former D.C.-area, but Virginia-based, employer for unpaid wages, liquidated damages, and attorney’s fees. The employer argued that Virginia law applied to his claims since the parties had entered into an employment contract in Virginia (The parties’ agreement did not include a choice of law provision). The appeals court rejected the employer’s argument because the case did not involve the validity, enforceability, interpretation, or construction of the agreement and nothing—express or implied—in the agreement applied Virginia statutory, regulatory, or case law. Accordingly, the court found that Maryland law should apply.

The Maryland Court of Appeals went further, though, by expressing its view that “in Maryland, the protections afforded the timely payment of wages owed are quite important, and many of our laws dealing with the subject reflect our strong public policies in that regard.” Accordingly, the opinion urged other courts to reject forum selection clauses that selected other states’ laws. This position directly rejects earlier state and federal decisions that took a more equivocal position on the importance of Maryland law.

Insights for Employers

The court’s position demonstrates that state courts will often favor their own laws first, notwithstanding what the parties might have agreed to in the agreement. Employers, like the one in this case, without any forum selection clauses in their employment agreements should consider whether and what State’s law to adopt now so as not to find themselves dragged into an unwanted or even unfavorable forum. Employers that use forum selection clauses, particularly those with employees in Maryland, should carefully consider what effect decisions like these may have on their agreements.

The calendar has flipped from February to March, but there is still nothing from the Department of Labor regarding new regulations governing the Fair Labor Standards Act. Don’t worry, you haven’t missed anything. The DOL missed its February deadline and has not announced any new deadlines just yet. As we have written here, the new regulation is intended to implement President Obama’s directive to modernize and streamline FLSA regulations for executive, administrative, and professional employees. Although the calendar has changed to February, the page where the regulations, or at least a final release date, would be announced has yet to change.

You will recall that last Spring, the DOL originally set a November deadline for the regulations. Its’ Solicitor confirmed back in October that the DOL would miss that deadline and that the regulations would be released in early 2015. In the November release of its Fall 2014 Agency Rule List, the DOL’s “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” regulation was slated for a February release. February has come and gone, and the regulations are still MIA, not that employers are likely heartbroken about it.

What has the DOL been up to? Last month, it released its final rule extending FMLA leave rights to same-sex couples, as my colleague Jeff Nowak discussed on his FMLA Insights blog. The Department has also been busy with its appeal of a district court’s decision to enjoin its new rules for home health care providers, who were previously exempt from the FLSA’s rules on minimum wage and overtime payments. The decision put both federal and state rules and programs into limbo, thus diverting the DOL’s attention. Because the DOL’s regulation date has yet to change with the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA), it would appear that the DOL has not abandoned hope of releasing the FLSA regulations soon. We’ll keep watching and report back to you as soon as the DOL releases the regulations or any new information.

While you are waiting, you can go back and read what we have been telling you to expect from the new Fair Labor Standards Act regulations, which has not changed over the past year, as I explained in November. We also have documented some of the not-so-subtle lobbying efforts of various Democrats and Democratic-aligned groups.

Remember, too, that even if the DOL releases new regulations today, they will only be proposed changes. The Obama administration would need to complete a number of time-consuming steps before any FLSA rule change could take effect. These steps include a required notice of proposed rulemaking and a public comment period. Then, the DOL would need to hear testimony, consider public comments, and have a final version of the revised regulations approved by the OIRA.  Typically, the public comment period will extend 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 an immediate release of proposed rules, the DOL is unlikely to be able to implement a new regulation in its final form before June 2015.

In many ways, federal immigration laws and various labor and employment laws, including the FLSA, may appear fundamentally at odds with each other: prohibiting work by undocumented workers on one hand, but allowing them to recover damages when they are not paid work on the other. We have examined this issue with state laws in the past on this blog, and published lengthier articles on the topic elsewhere as well. This past month, the District of Arizona confronted a damages question concerning the intersection of these laws in Vallejo v. Azteca Electrical Construction.

Since the Supreme Court’s 2000 Hoffman Plastic Compounds decision, courts have wrestled with whether undocumented workers were entitled to recovery under the FLSA. For instance, in 2013, the 11th Circuit held that the Supreme Court had limited undocumented workers ability to claim prospective relief under the National Labor Relations Act for work not yet performed, but had not changed the broader definition of an “employee.” The appeals court found that the FLSA definition of “employee” would include undocumented workers as well as documented ones, meaning that undocumented workers could recover back wages and overtime pay. The Arizona court faced a related question that treads closer to the line drawn by the Supreme Court in Hoffman Plastic Compounds: could undocumented workers with claims for unpaid wages and overtime also recover liquidated damages under the FLSA? Reconciling the somewhat competing interests of federal immigration laws like the Immigration Reform and Control Act (IRCA) and the FLSA, the court held that undocumented workers could recover liquidated damages.

In its opinion, the Arizona district court acknowledged that the purposes of the FLSA and the IRCA clash, but found several considerations that favored the award of liquidated damages under the FLSA. The court held that while enforcing the FLSA may somewhat undercut the IRCA, in certain ways, it nonetheless served that law by removing employers’ incentive to take advantage of unauthorized workers who will work for less than the legal minimum wage. The court observed that requiring employers to comply with the FLSA for all work performed, regardless of who performs it, presents no inherent unfairness. Accordingly, the court reasoned, an employer should not be able to rely on a worker’s status to pay he/she less than what the law requires the employer to pay to whomever it hires. By extension, the FLSA’s liquidated damages provisions represent compensation for work actually and already performed (thereby avoiding Hoffman Plastic Compounds), and the FLSA mandates the award of liquidated damages for violations of the FLSA except where the employer establishes both subjective and objective good faith. Accordingly, the court held that the employer could be excused from the statutory liquidated damages only if it carried its burden of establishing good faith and lack of willfulness in committing wage violations, not by merely alleging or demonstrating that the affected workers did not have work authorizations.

For employers in any industry, but particularly those in trades that rely heavily on immigrant workforces, this case should reinforce that an immigrant—whether documented or not—is still an employee. Like any other employee, federal (and state) wage and hour laws provide them with specific protections. An employee’s undocumented status, by itself, provides no defense to deficient pay practices that violate federal or state laws.

Thumbnail image for Supreme Court building.JPGIn a case we labeled one of the “cases to watch” this term, a relatively unified Supreme Court decided in Perez v. Mortgage Bankers Association that a federal agency does not need to engage in notice-and-comment rulemaking pursuant to the Administrative Procedure Act (APA) before it can significantly alter an interpretive rule of an agency regulation, even if parties have relied on that rule to their detriment. Put simply, the Supreme Court agreed with the DOL that federal agencies can indeed “flip flop” their interpretations with each new administration without first going through the more laborious process of promulgating new regulations. Although not entirely unexpected, the decision is nonetheless a disappointment for employers (and employees) who continue to get whipsawed by ever-changing administrative interpretations at the DOL, NLRB, and other agencies. However, there is a silver lining. With the ability to issue interpretations without engaging the formal rulemaking process, agencies are likely to continue to issue such guidance and interpretations. In other words, while you still may be subject to the whims of whatever administration is currently in power, you are at least likely to understand those whims more fully.

The Case

Perez v. Mortgage Bankers Association and its companion case, Nickols v. Mortgage Bankers Association, were brought, respectively, by the Secretary of Labor and an intervening mortgage loan officer. In 2006, the Bush administration’s DOL issued an opinion letter in which it announced an interpretation of the revamped 2004 FLSA rules as applied to mortgage loan officers. Under those rules, the DOL opined that mortgage loan officers would be exempt from overtime under the administrative exemption. Then four years later, in 2010, the DOL did an about-face and issued a new Administrative Interpretation in which it withdrew its 2006 opinion letter and announced a contrasting interpretation, namely that the loan officers were not exempt from overtime after all.

The Mortgage Bankers Association sued to overturn the DOL’s 2010 interpretation, but the D.C. district court dismissed the challenge. The D.C. Circuit reversed the lower court ruling, relying on a series of rulings and other dicta dating to 1997, holding that an agency may not change any interpretation of a rule without engaging in the notice and comment rulemaking process. The Fifth Circuit had also adopted the same doctrine, but the First, Second, Fourth, Sixth, Seventh, and Ninth Circuits had rejected it.

The Supreme Court’s Decision

In an opinion written by Justice Sotomayor, and joined in the judgment by a unanimous Court, the D.C. Circuit’s decision was overturned. The Court wrote that:

When a federal administrative agency first issues a rule interpreting one of its regulations, it is generally not required to follow the notice-and-comment rulemaking procedures of the Administrative Procedure Act (APA or Act…The [D.C. Circuit’s] doctrine is contrary to the clear text of the APA’s rulemaking provisions, and it improperly imposes on agencies an obligation beyond the “maximum procedural requirements” specified in the APA.

Relying on a 1978 case, Vermont Yankee, the Court reiterated that the APA “clearly” says that unless a notice or hearing is required by statute, the law’s notice-and-comment requirement does not apply to interpretative rules. “This exemption of interpretive rules from the notice-and-comment process is categorical, and it is fatal to the” D.C. Circuit’s rationale. The Court wrote that imposing judge-made procedures when a court disagrees with the wisdom of a policy would violate “the very basic tenet of administrative law that agencies should be free to fashion their own rules of procedure.”

“In the end, Congress decided to adopt standards that permit agencies to promulgate freely such rules—whether or not they are consistent with earlier interpretations,” the Justices ruled. Extending that point to the Mortgage Bankers Association case, the Court held that “[b]ecause an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or repeals that interpretive rule.”

The Blurry Line Between “Interpretation” and “Rulemaking”

The larger underlying problem raised by Mortgage Bankers Association is that administrations frequently change, meaning that interpretations of regulations change with them. Drawing the distinction between “interpretation” and “regulation” is not as simple in practice as it seems on paper. As the Association argued, an agency’s interpretations are entitled to (some) deference under two seminal cases, including one decided before the APA was even enacted. Accordingly, the distinction between “interpretation” and “regulation” is more academic.

Whether before the EEOC (which has issued guidance on pregnancy discrimination, background checks, and more), the NLRB (whose Division of Advice and General Counsel routinely issue opinions), DHS (establishing criteria for prosecutorial discretion), the DOL or other agencies, whenever an agency opines about a subject in something other than a regulation, it necessarily blurs the line between mere interpretation and rulemaking. Mortgage Bankers Association does nothing to resolve this problem. Courts will continue to struggle drawing the line between interpretations requiring deference and interpretations that rise to the level of rulemaking.

The Concurrences and the Future of Agency Deference

But do not despair; it is not all bad news for employers. While Justices Alito, Scalia, and Thomas all joined in the judgment, they wrote separate occurrences strongly suggesting that they were open to reevaluating whether to give any deference to agency interpretations of regulations. A footnote in Justice Sotomayor’s opinion recognizes in dicta, in an apparent nod to the concurrences, that “[e]ven in cases where an agency’s interpretation receives…deference, however, it is the court that ultimately decides whether a given regulation means what the agency says. Moreover,… deference is not an inexorable command in all cases.” 

Justice Scalia specifically criticized the deference given to agencies, writing in his concurrence that the Court has:

developed an elaborate law of deference to agencies’ interpretations of statutes and regulations. Never mentioning [5 U.S.C.] §706’s directive that the “reviewing court… interpret…statutory provisions,” we have held that agencies may authoritatively resolve ambiguities in statutes. Chevron,…And never mentioning §706’s directive that the “reviewing court … determine the meaning or applicability of the terms of an agency action,” we have – relying on a case decided before the APA, Bowles v. Seminole Rock & Sand Co., … – held that agencies may authoritatively resolve ambiguities in regulations.

Justice Scalia “would therefore restore the balance originally struck by the APA with respect to an agency’s interpretation of its own regulations… [by] applying the Act as written. The agency is free to interpret its own regulations with or without notice and comment; but courts will decide—with no deference to the agency—whether that interpretation is correct.”

Justice Thomas also concurred in the judgment, but provided his own lengthy explanation of why “the entire line of [deference] precedent beginning with Seminole Rock raises serious constitutional questions and should be reconsidered in an appropriate case.” Justice Alito, too, affirmed that he would entertain “a case in which the validity of Seminole Rock may be explored through full briefing and argument.”

Employer Insights

Put simply, the bottom line for employers is that Mortgage Bankers Association confirms that federal agencies are still free to reinterpret their statutes and regulations at any time, even if successive interpretations are incompatible. Furthermore, agencies need not go through the detailed and time-consuming procedures (or judicial review) required by the APA. Largely, the status quo employers have come to expect will continue: agencies will be free to interpret and reinterpret regulations as they see fit, even if that means overturning longstanding interpretations that employers have relied on, as in this case. By failing to provide any additional clarity on these issues, the Supreme Court’s decision also further complicates courts’ ability to draw the already-fuzzy line between substantive regulations and “lesser” interpretations, policies, or guidance.

Notably, the Court was not entirely unanimous on every point, though. The silver lining here is that Justices Alito, Scalia, and Thomas all raised broader questions in separate concurrences about whether any deference to agencies is appropriate under the APA. Albeit in dicta, even the Court’s opinion written by Justice Sotomayor and joined by the remaining Justices raises questions about the long term vitality of judicial deference to interpretations like the DOL’s here. While this case did not present the Court with the appropriate opportunity to reconsider its longstanding agency deference doctrine, it appears that the Justices are open to doing so in a future case.

Wage-Hour-Division1.gifLast week, Department of Labor Wage and Hour Division (WHD) Administrator Dr. David Weil, who we have profiled in the past, announced on the DOL’s blog that WHD recovered more than $240 million dollars from employers on behalf of workers during fiscal year 2014, which ended last September. This total was down about 4% from last year’s $249 million, but is still an enormous total given WHD’s limited investigative capabilities.

According to Dr. Weil, WHD has recovered a total of more than $1.3 billion since 2009. Last year’s average recovery of $890 was distributed to more than 270,000 workers. Notably, though, Dr. Weil reports that WHD initiated 43% of its investigations, up from just 35% five years ago. WHD credits its focus on data analysis and “emerging business models” as leading to this increase. WHD’s fissured industry initiative is clearly paying dividends for the agency. Most importantly, WHD investigators found violations in these agency-initiated investigations 78% of the time.

Coupled with the continued increase in FLSA lawsuits, the Wage and Hour Division’s eye-popping haul and the fact that an investigation leads to a violation nearly 80% of the time should remind employers that now is the time to audit wage and hour practices. As part of this analysis, we suggest that employers carefully examine some of the practices that we’ve highlighted here on the blog, including volunteers and interns, independent contractors, meal breaks, and wages for salaried employees. To me, an 80% violation rate does not signal that the overwhelming majority of employers are necessarily “stealing” from their employees. Instead, I see this more as a result of an outdated, complex regulatory system (FLSA) that makes compliance a struggle (at best), particularly without careful attention and good counsel.

Time Card iStock_000016412520XSmall.jpgLast summer, we highlighted an example of how good recordkeeping practices can result in a favorable decision. In the Kaiser Foundation Health Plan case, the employer successfully defended an “unauthorized overtime” claim where an employee worked off the clock against Kaiser’s policies and without its knowledge. A recent Eleventh Circuit decision demonstrates the limits of relying solely on policies as a defense in these types of cases.

In Bailey v. TitleMax of Georgia, TitleMax advanced some of the same arguments as Kaiser: it maintained policies that prohibited non-exempt employees from working off the clock, required those employees to record accurate hours, and mandated that they report inaccuracies in their records; and that its employee had failed to abide by those policies. TitleMax argued that this employee misconduct completely barred any FLSA overtime claim. The Eleventh Circuit disagreed, reiterating the rule that when an employer knows or has reason to know its employee misreported his hours, it cannot escape FLSA liability by asserting equitable defenses like “unclean hands” based on that misreporting. “To hold otherwise would allow an employer to wield its superior bargaining power to pressure or even compel its employees to underreport their hours, thus neutering the FLSA’s purposeful reallocation of that power,” the appeals court held.

In its opinion, the court focused on the unequal bargaining power between employers and employees, observing that the “the prime purpose” of the FLSA is “to aid the unprotected, unorganized and lowest paid of the nation’s working population” and “to counteract the inequality of bargaining power between employees and employers.” The TitleMax supervisor “both encouraged artificially low reporting and squelched truthful timekeeping,” by instructing the employee to underreport his time and by changing his time records to show fewer hours worked. The court explained that nominally requiring employees to accurately report hours through policies is not enough when, as in TitleMax’s situation, evidence shows that supervisors encouraged employees to underreport hours in practice.

Normally, this would be the end of the inquiry, as it is in the majority of FLSA cases. However, TitleMax tried something “somewhat novel” in excusing its supervisor’s behavior: the company argued that as a matter of equity, it was entitled to summary judgment because of the employee’s own misconduct in underreporting his hours and failing to avail himself of the policies that would protect against the alleged supervisory misconduct. The Eleventh Circuit rejected TitleMax’s argument. Citing a lack of case law supporting TitleMax’s position, the court drew from the Supreme Court’s 1995 ADEA decision in McKennon v Nashville Banner Publishing Co. In McKennon, an employer had sought to use an equitable defense based on an employee’s misconduct to bar an ADEA claim. The Supreme Court had held that equitable defenses should not act as a total bar to an ADEA claim, only as relevant evidence in deciding the appropriate remedy, because of the ADEA’s deterrent purpose. The Eleventh Circuit observed that the FLSA, like the ADEA, has a deterrent purpose in remedying employer non-compliance. The court reasoned that allowing TitleMax’s equitable arguments to completely bar an FLSA claim would undermine that purpose.

Insight for Employers

The TitleMax case provides a good contrast with the Kaiser case from last year and demonstrates why these cases are so fact specific. Kaiser had told the plaintiff he was eligible to work overtime hours, had never denied his request to work overtime, had always paid him for all of the hours worked he reported, and had never told him to work off the clock. Indeed, evidence showed that Kaiser had even taken action when it learned of concerns that pharmacy employees were working off the clock. In TitleMax, evidence showed that a supervisor told the plaintiff that the company did not allow overtime pay, that the supervisor directed the plaintiff when to clock in and out (even though it did not match his hours actually worked), and that the supervisor edited his time records to decrease the number of hours he reported. Other than promulgating policies, TitleMax did not show that it had taken any steps to prohibit or discover off the clock work.

For employers, the clear message in both of these decisions is that adopting and communicating policies about accurate time reporting and off the clock work is not enough on its own to avoid liability. You must take steps to ensure your time records are complete and accurate for all non-exempt employees. For instance, consider having employees review and sign off on their time records each week, and provide them with a mechanism to edit those records or report improper actions by their supervisors, such as directions to work off the clock. Of critical importance to employers is to educate your supervisors on wage and hour law, and take great care to ensure that they do not confuse the perfectly legal practice of controlling overtime hours with the prohibited practice of requiring employees to work overtime hours without pay. If you notice unusual patterns of hours worked or you suspect that employees are working off the clock, take concrete action to discourage and end that practice.

Taking these steps may not eliminate wage and hour claims or even allow you to obtain dismissal of all such claims without a trial, but they can help. They’ll certainly leave you with better options than something “somewhat novel” with no support in the case law.