Are your bonuses really discretionary?

Posted in Bonus, Overtime

As the holiday lights start to fade, we come to one of the most anticipated times of the year – bonus season!

Such a happy time. Who doesn’t love getting a bonus, and what employer doesn’t like rewarding good performance with some extra monetary recognition? Bonuses are great, but keep in mind that they also carry some legal obligations. In the case of non-exempt employees, that might include paying additional overtime based on your bonus payment. The FLSA requires employers to pay overtime based upon an employee’s “regular rate” of pay. The regular rate is not simply the employee’s base hourly pay rate. Rather, it is the rate calculated by adding up all of an employee’s non-overtime compensation for each workweek, then dividing by the total hours worked during the workweek. Non-discretionary bonuses are part of an employee’s total compensation, so must be included in this calculation even if the bonus is not calculated or paid out until after the employee’s regular pay.

“Ha!”, you might be thinking to yourself as you read this, “we don’t have to do that because our bonus policy says right in the title that bonuses are discretionary.” You might be right, but it’s not quite that simple. The FLSA regulations (specifically 29 C.F.R. § 778.211), discuss which bonuses can be considered “discretionary”:

 In order for a bonus to qualify for exclusion as a discretionary bonus under section 7(e)(3)(a) the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount. If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it. Thus, if an employer announces to his employees in January that he intends to pay them a bonus in June, he has thereby abandoned his discretion regarding the fact of payment by promising a bonus to his employees. Such a bonus would not be excluded from the regular rate under section 7(e)(3)(a). Similarly, an employer who promises to sales employees that they will receive a monthly bonus computed on the basis of allocating 1 cent for each item sold whenever, is his discretion, the financial condition of the firm warrants such payments, has abandoned discretion with regard to the amount of the bonus though not with regard to the fact of payment. Such a bonus would not be excluded from the regular rate. On the other hand, if a bonus such as the one just described were paid without prior contract, promise or announcement and the decision as to the fact and amount of payment lay in the employer’s sole discretion, the bonus would be properly excluded from the regular rate. (Underlining added.)

In sum, a bonus is not “discretionary” under this rule if an employer either commits in advance to paying a bonus or states the amount of the bonus or method of calculation in advance. Merely sticking a disclaimer at the end of your bonus policy or calling your bonuses “discretionary” doesn’t necessarily make it so.

So what if your bonus plan is non-discretionary – how do you calculate any overtime due? Look for a later post with the answer to that question, including a method of calculating bonuses that might allow you to skip the extra math altogether.

What Duties Can A Server Perform Under the Tip Credit Rules? [Wage & Hour FAQ]

Posted in Tip Credit, Wage and Hour FAQs

Q. We use the tip credit for servers who work in our restaurant. When service is slow, we ask our servers to pitch in with other jobs around the restaurant, like sweeping up the dining room and cleaning the restroom. Can we still take the tip credit for time that our servers spend working on these tasks?

A. Short answer: it depends.

Long answer: Specifically, it depends on whether the extra duties assigned to your servers are directly related to the servers’ “tip-producing occupation.” The U.S. Department of Labor recently re-issued a previously-withdrawn opinion letter dealing with this subject. The letter is worth a read if you are a wage & hour wonk, but the upshot is that the DOL will look to the job duties listed in the Occupational Information Network database, O*NET, available at, to determine whether duties are directly related to a tip-producing occupation. Tipped employees can perform any of the job duties listed in the “tasks” section of the Details report for their occupation in the O*NET database, without regard to whether they involve direct customer service, so long as the duties are “performed contemporaneously with the duties involving direct service to customers or for a reasonable time immediately before or after performing such direct-service duties.” For “waiters and waitresses”, this includes such tasks as setting up and cleaning tables and restrooms, among others. (See the O*NET report for waiters and waitresses for the full list.) Conversely, employers cannot take the tip credit for any work not included in the O*NET task list.

So, the duties listed in the question above would count as duties “directly related” to a server’s tip-producing job if performed while a server is also waiting tables, or immediately before or after the meal service. However, if a server was called in to clean the dining room and restrooms on a day when the restaurant is closed, the server would likely have to be paid the full minimum wage for that time. Likewise, a server who is asked to help enter payroll on a slow night may have to be paid at the full minimum wage for any time spent on that work, because entering payroll is not among the tasks included in the O*NET task list.

This guidance replaces the “80/20 rule,” which said that an employer can take the tip credit only if a tipped employee spends no more than 20% of their time performing “related duties” that do not directly involve customer service.

Insights for Employers

While the new guidance provides employers with greater flexibility, caution is still warranted.

DOL opinion letters represent the agency’s interpretation of the law at the time of the letter. They are not themselves legally binding. As this reversal indicates, they are subject to change by the DOL, without Congressional action or even the more formal “notice and comment” rulemaking process used for binding regulations. Courts may or may not agree with the DOL’s interpretation of the law. Some states and localities may also impose different limitations on the amount of non-tipped work a tipped employee can perform. In New York state, for example, employers of service employees and food service workers cannot take a tip credit for days in which an employee works more than 20% or two hours, whichever is less, of the workday in a non-tipped occupation.

The U.S. DOL’s new interpretation also leaves plenty of unanswered questions. For example, new occupations may not be listed in O*NET. The guidance says that employers should look at similar occupations for guidance, but that leaves room for interpretation, which leaves potential risk for employers. The regulation also leaves room for debate about what is a “reasonable” amount of time for tipped employees to perform related duties.

In light of these uncertainties, be sure to speak with an employment attorney familiar with wage and hour law in your jurisdiction and your specific situation before making decisions regarding application of the tip credit to your work force.



Can Exempt Employees Earn Overtime Pay? [Wage & Hour FAQ]

Posted in Salary Basis, Wage and Hour FAQs

Q. Our company’s busy season is coming up, meaning we will be asking employees to work longer hours. Our non-exempt employees will all receive overtime pay when they work more than 40 hours in a week. Some of them will actually end up earning more per week than some exempt employees. We would like to address this by offering extra pay to our exempt employees who work extended hours during the busy season. Can we do this without converting our exempt employees to non-exempt?

A. To qualify for the executive, administrative, or professional exemptions under the FLSA, employees generally have to be paid on a “salary basis.”* That means that an employee must receive the same guaranteed salary for each workweek in which they perform any work, regardless of the quality or quantity of work performed or the number of hours worked. Taking impermissible deductions from an employee’s guaranteed salary can result in loss of exempt status not just for that employee, but for other employees in the same job classification. The idea here is that exempt executive, administrative, and professional employees are paid to perform a certain job, regardless of how many hours it takes to get that job done. Given that requirement, it’s understandable to wonder whether offering extra pay to an exempt employee based upon work hours might also jeopardize an employee’s exempt status.

This issue is addressed in the FLSA regulations at 29 CFR § 541.604, “Minimum guarantee plus extras.” That section provides that so long as an exempt employee receives a guaranteed salary of at least the minimum weekly salary level (currently $455 per week), providing an extra payment above the minimum guarantee does not jeopardize the employee’s exempt status. There is a caveat however. Under 29 CFR § 541.604(b), if the extra pay is computed on an hourly, daily, or shift basis, there must be a “reasonable relationship” between the guaranteed weekly salary and the amount that the employee actually earns. The regulations state that a “reasonable relationship” exists when “the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal scheduled workweek.”

The regulations include an example stating that a guaranteed weekly salary of $500 is “roughly equivalent,” and therefore “reasonably related,” to typical weekly earnings of $600 to $750. In a recent opinion letter, the DOL found based on this example that a 1.5-to-1 ratio of actual earnings to guaranteed weekly salary would constitute a “reasonable relationship” under the regulations. The DOL noted that this is not necessarily the ceiling. However, it found that a ratio of 1.8-to-1 was too great, and did not bear a “reasonable relationship” to earnings.

The DOL also commented on the question of how an employer should calculate “usual earnings.” It found that looking at an employee’s actual earnings over the course of a year would be reasonable. However, it noted that the inquiry must be “employee-specific,” so simply looking at earnings for an entire job classification or group “may not yield accurate ‘usual earnings’ for each individual employee.”

Insights for Employers

Returning to the question, yes, you can provide “overtime” pay to exempt employees based upon an hourly, daily, or shift rate without jeopardizing their exempt status. However, you must ensure that the employee still receives a guaranteed salary of at least $455 per week, and that the guaranteed salary is “reasonably related” to the employee’s “usual earnings” including the additional pay. To be safe, you should make sure that the ratio between the employee’s “usual earnings” and guaranteed pay does not go much beyond the 1.5-t0-1 ratio specifically endorsed by the regulations.

If this seems like a bit much to keep track of, consider alternatives that are not based on hours, days, or shifts worked. The “reasonable relationship” requirement does not apply to additional pay such as commissions or performance bonuses that, while perhaps indirectly related to the work an employee puts in, are not computed on an hourly, daily, or shift basis.

Also, keep in mind that the discussion above relates to federal law. Some state or local governments may have different requirements, so be sure to check with your employment counsel to make sure that your practices comply with the law in your jurisdiction.

*Administrative, professional, and computer employees can also be paid on a “fee basis,” and certain computer professionals can be paid at an hourly rate.

Illinois Employers - Update Your Expense Reimbursement Policies

Posted in Expenses

There’s nothing like a looming deadline to prompt action. Back in August, Governor Rauner signed into law an amendment to the Illinois Wage Payment and Collection Act that, for the first time, requires Illinois employers to reimburse employees for reasonable expenditures or losses required in the course of their employment duties and that primarily benefit the employer. Because the new law takes effect January 1, 2019, we’ve been receiving quite a few questions from employers about what they should be doing to comply. Right now, there is very little guidance on how the statute will be interpreted by the Illinois DOL or the courts, so anything we can say at the moment is provisional. With that caveat, here are a few preliminary “dos” and “don’t’s”:

DO have a written expense reimbursement policy. Even if you have a very small business and a workforce that should have few if any business expenses, having an express policy on employee express reimbursement is your best defense to claims under the new law. The statute expressly provides that an employer is “not required to reimburse expenses that are not authorized or required by the employer,” and permits employers to set caps on the amount of reimbursements.

DO be explicit about what you will and will not reimburse. If there are certain categories of expenses that your organization does not require employees to incur and for which you will not pay, say so in your policy. For example, if you have employees who sometimes elect to work from home for their personal convenience, you might state in your policy that working from home is not required, and that you will not reimburse employees who elect to work from home for any home phone or Internet service that they may use, because they have the option of coming in to the office. Similarly, if you will only reimburse for travel expenses up to a certain amount or require employees to use a specific travel provider, say so.

DO Include Reimbursement Procedures. Employees are entitled to reimbursement under the new law only if they comply with the employer’s written expense reimbursement policy. Because of this, it pays to be explicit. If you require employees to submit an electronic report, say so. If reports are due by a certain date, say so. (But see the note below about the 30-day rule.)

DO Include a catch-all provision for any expenses not expressly discussed. Your policy should address common expense categories that you know your employees might incur or ask about. However, trying to address every possible expense that employees might incur is an impossible task. For that reason, you should include language stating that employees must request advance approval before incurring any expense not expressly provided for in your policy. This is not necessarily a “get out of jail free” card, because it’s possible that employees might incur one-off expenses in circumstances that do not allow for prior approval. However, it may help avoid those recurring situations that present the largest risk of liability.

DON’T Refuse to reimburse for expenses legitimately required for the job. The main effect of the new law is to force employers to really give some thought to what they expect and require of employees. Say for example that your company uses an app-based timekeeping and scheduling system that employees access using their personal smartphones. If that is the only way that employees can record their time or check their schedules, having a smartphone with data service is arguably a requirement of the job, and you may have to reimburse employees for at least a portion of the cost of their device and monthly service. If you provide an alternative, like an onsite kiosk and local phone number where they can check their schedule, you might plausibly be able to say that having a smartphone is a convenience for employees, not a requirement of the job.

DON’T Set artificially low reimbursement rates. While the new law allows employers to set caps for what they will reimburse, it also provides that employers may not establish a “de minimus” reimbursement rate. So, if you have employees who routinely drive their personal vehicles between worksites during the work day, you can’t avoid the law by setting a mileage reimbursement rate of $.01 / mile. Right now we don’t have any guidance on exactly how far this principle goes, so employers should do their best to tie any reimbursement caps to employees’ reasonably anticipated expenses.

DON’T Require employees to request reimbursement sooner than 30 days after the expense is incurred. The statute provides that an employee must request reimbursement and provide documentation within 30 days after the expenditure. Although this is not expressly stated, the conservative interpretation is that while employers can give employees more than 30 days to request reimbursement, they cannot shorten the period. This may require employers to change how they administer expenses. Suppose for example that an employer requires employees to report expenses by the 10th day of each month for the preceding calendar month. Bob incurs an expense on November 30. Under the policy, Bob would have to report that expense by December 10. But under the new law, he would have 30 days, or until December 30. If Bob gets his expense report in within 30 days, his employer may be able to delay payment of his expense until January, but might run into trouble if it refused reimbursement altogether.

And finally,

DO talk to your employment counsel and stay on top of developments under this new law. Right now there are more questions than answers, but we expect further guidance from the Illinois DOL and eventually the courts to emerge over time.


Employees Are Not Entitled to Compensation for FMLA Covered Breaks

Posted in DOL News

As mentioned previously here last summer, the U.S. Department of Labor’s Wage & Hour Division has brought back the Opinion Letter, the process previously used by attorneys and HR professionals to obtain guidance from the WHD. The DOL dropped the practice in 2010, but it has since been reinstated.

Yesterday, on April 12, 2018, the WHD issued multiple Opinion Letters, including one addressing compensability of breaks covered by the Family and Medical Leave Act (FMLA).  Specifically, the WHD was asked for an opinion regarding the following situation:

Whether a non-exempt employee’s 15-rest breaks, which are certified by a health care provider as required very hour due to the employee’s serious health condition and are thus covered under the FMLA, are compensable or non-compensable time under the FLSA [Fair Labor Standards Act].

The short answer to this question is that the breaks are “non-compensable.”  But keep in mind that this Opinion Letter is based on the facts of the situation addressed therein and is not binding precedent.  Nevertheless, the Opinion Letter provides guidance to employers as to how to handle similar situations.

Although compensability is generally considered a FLSA issue, the question addressed in the Opinion Letter crosses over into the territories of both the FLSA and FMLA.  The FMLA provides for unpaid leave.  However, the FLSA has its own rules regarding whether time is paid or not.  Generally speaking, rest breaks up to 20 minutes in length are considered primarily for the benefit of the employer, and time spent primarily for the benefit of the employer is considered compensable under the FLSA.  Nonetheless, there are circumstances where such a rest break is primarily for the benefit of the employee and therefore not compensable.

At least one federal court, Spiteri v. AT&T Holdings, Inc., has looked at this issue and held that an employee was not entitled to compensation for frequent “accommodation breaks” to relieve back pain because those breaks predominantly benefitted the employee. The Spiteri court also concluded that the FMLA does not entitle an employee to take unlimited personal rest breaks under 20 minutes and be compensated for all such breaks.

The Opinion Letter reviews the case law, as well as the FLSA and FMLA, in concluding the breaks in the letter are not compensable.  Ultimately, the WHD determined that the FMLA-protected breaks in the letter are being given to accommodate the employee’s serious health condition, are for the benefit of the employee, and thus are not compensable.   The WHD reasoned that the frequent FMLA-protected breaks identified in the letter more closely align with those in Spiteri rather than breaks commonly provided that predominantly benefit the employer.  The WHD also concluded that text of the FMLA itself confirmed that the breaks were to be unpaid and provides no exception for breaks of up to 20 minutes.  See 29 U.S.C. s 2612(c).

Insights for Employers

 The WHD’s Opinion Letter is not a drastic change in the status of the law, but simply provides more guidance for employers dealing with these types of breaks.  Employers should make sure to follow the requirements of both the FMLA and FLSA when dealing with accommodation breaks, and keeping track of these breaks for purposes of calculcating intermittent leave.

Employers should also remember that employees who take FMLA covered breaks must also receive the same number of paid breaks as their co-workers.  Therefore, if all employees get two 15-minute paid rest breaks per 8-hour shift, an employee needing 15-minute “accommodation breaks” every hour should get paid for two of those breaks.

Employers Can’t Use Salary History to Defend Pay Gap

Posted in Pay Equity

On Monday, April 9, 2018, the day before Equal Pay Day, the Ninth Circuit Court of Appeals held that employers cannot use an employee’s past salary to justify paying women less than men under the federal Equal Pay Act (EPA).  The Ninth Circuit’s decision in Rizo v. Yovino overruled prior holdings in the circuit that past salary is a “factor other than sex” that employers could use to justify a pay gap between men and women under the EPA, concluding that prior salary cannot be used, alone or in combination with other factors, to justify a wage differential.

Enacted in 1963, the EPA prohibits employers from paying men and women differently for the same work.  The intention of the statute is to correct the serious and endemic wage gap between men and women in the workplace.  However, the statute allows employers to pay employees different rates based on seniority, merit, the quantity or quality of the employee’s work, or “any other factor other than sex.”  Prior to Rizo, appellate courts (even the Ninth Circuit) commonly held that salary history could be used alongside other factors, with the Seventh Circuit (the court of appeals covering Illinois, Wisconsin, and Indiana) going so far as to state that salary history was a “factor other than sex.”  With Rizo taking salary history out of the equation, there is now a circuit split between the Ninth Circuit and the Seventh Circuit and other appellate courts that have addressed this issue, which may ultimately land this issue at the Supreme Court.

In Rizo, the plaintiff, a math consultant, sued the Fresno County Superintendent of Schools, Jim Yovino, claiming the district’s policy of paying workers slightly more than what they earned at their last job carried forward existing pay gaps between men and women, and thus violated the EPA.  The Ninth Circuit agreed with Rizo, finding it “inconceivable” that Congress meant to include salary history as a “factor other than sex.”  Instead, the Court reasoned that it is unlikely that Congress intended for salary history to be included in this exception to justify new gaps in pay based on prior or existing gaps.  Doing so would perpetuate the very disparity the EPA was intended to eliminate.

Unfortunately, the Rizo opinion  leaves some ambiguity as to how salary history may be used.  The Ninth Circuit specifically stated that the new rule announced in Rizo did not “resolve its applications in all circumstances,” and states that past salary may play a role in individual salary negotiations.  However, the Court does not provide any further guidance as to how that information may be used by employers.  In light of this unresolved issue, employers in the Ninth Circuit – which includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington – should consider not using salary history in negotiations until this issue is further fleshed out by the courts. Further, employers in the Ninth Circuit that have policies expressly providing for the use of salary history in determining salary offers for new hires should revise those policies.

The Rizo decision represents a significant development in the law aimed at closing the wage gap. It is also a related component of the proliferation of state and local laws banning inquiries into salary history. At least seven states and cities have passed such laws, though not all have gone into effect. Therefore, while the Rizo ruling is only legally binding on employers in the Ninth Circuit, employers are advised to ensure their pay practices comply with applicable federal, state, and local laws.

Gabrielle Long contributed to this article. Gabrielle Long is a second-year law student at Loyola University Chicago and is a Franczek Radelet extern. 

New Tip Pool Rules - Changes to the FLSA and DOL Guidance

Posted in Tip Credit

If you’ve been paying attention to the news relating to wage and hour law (and really, who isn’t?), you may recently have heard quite a bit about new federal rules on tipped employees, and more recently Congress stepping in with new legislation. There has been a lot of rhetoric on all sides, though not always a lot of clarity, so here is a summary of what employers need to know about the new rules.

What hasn’t changed

To recap, the Fair Labor Standards Act requires employers to pay employees a specified minimum wage, currently $7.25 per hour for most employees. However, under FLSA Section 3(m), employers are allowed to count up to $5.12 per hour of employees’ tips against their total minimum wage obligation. (State and local laws vary.) The DOL’s rules have long made clear that employers cannot take this “tip credit” if any tips are kept by the house, or if the employer requires employees to share tips with managers or employees who do not customarily and regularly receive at least $30 per month in tips (e.g., “back of the house” personnel such as cooks, dishwashers, etc.). These basic rules remain the same.

What has changed

What wasn’t clear, until now, was whether the FLSA imposes any restrictions on tip pooling for employers who don’t take the tip credit. The Obama administration said yes – the restrictions on tip pooling apply regardless of whether an employer takes the tip credit. The Trump administration, and several federal courts, said no – the FLSA only governed minimum wage, it said nothing about what employers can do with tips for employees who are paid the full minimum wage without resort to the tip credit. (See our earlier post on the Trump administration’s proposed rules for more background.)

On March 23, 2018, President Trump signed H.R. 1625 (.pdf), the Consolidated Appropriations Act for 2018. Buried deep in the 878-page law (page 801, if you’re counting) is an easy-to-overlook provision relating to “Tipped Employees.” In that short section, Congress amends the FLSA to specifically prohibit employers from requiring employees to share their tips with the employer, including any managers or supervisors, whether or not the employer takes a tip credit. This is significant, because it means that an employer can now violate the FLSA through an improper tip pooling arrangement even if it is paying employees the full minimum wage.

On April 6, 2018, the DOL issued Field Assistance Bulletin No. 2018-3 (.pdf), explaining how the Department intends to implement the new amendment. There, the DOL states that as an enforcement policy, it will use the duties test for the executive exemption to determine whether an employee is a “manager or supervisor” for purposes of Section 3(m). Interestingly, this may mean that the DOL would not pursue claims against employers where lower-level supervisors or lead workers who don’t meet the test for the executive exemption – for example, because they lack sufficient authority over hiring, firing, discipline, or conditions of employment – participate in a tip pool. However, since this is only an enforcement policy, the DOL could easily change its position, and the courts may not adopt the same rule.

While employers cannot require employees to share their tips with managers and supervisors, the new law eliminates the regulation restricting employers who do not use the tip credit from require tip pooling with employees who are not “customarily and regularly tipped,” until “any future action” by the Administrator of the DOL’s Wage and Hour Division. This means that, for now, employees who are paid at least the minimum wage in cash can be required to share tips with cooks, dishwashers, and other non-management, non-supervisory “back of the house” employees, absent a state or local law to the contrary.

Uncertainty About Tipped Managers

The new law does not address the question of what do with FLSA-exempt employees who customarily and regularly receive tips as part of their work. Exempt employees are not covered by the minimum wage and overtime provisions of the FLSA, so one might think that those employees should not be affected by this amendment. However, the amendment does not distinguish between exempt and non-exempt employees, so the conservative reading would be that it the new rules do apply. Additionally, since the amendment expressly says that employees cannot be required to pool tips with managers or supervisors, this might imply that managers and supervisors cannot be required to pool tips with one another. In other words, it is possible that the new law would restrict even a management-only tip pool. Employers will have to await further guidance from the courts and the DOL to see exactly how the new amendment may apply to exempt managers and supervisors who receive tips.

Penalties for Violations

The new amendment specifies that employers who withhold tips from employees in violation of the law will be liable to employees for the sum of the amount of any tip credit taken and the amount of all tips withheld, plus an equal amount of liquidated damages. Additionally, the law gives the DOL authority to impose civil monetary penalties of up to $1,100 per violation. The DOL’s Field Assistance Bulletin states that the DOL will apply its existing practices with respect to civil monetary penalties, “including by determining whether the violation is repeated or willful.”

Tips For Employers

Here are the major take-aways from the new law and DOL guidance:

  • Employers that maintain tip pooling arrangements should carefully examine their tip pooling practices in light of the new law.
  • For employers who take a tip credit, not much has changed – the same restrictions on tip pooling continue to apply. Employers cannot retain any tips paid to employees, except as part of a valid tip pooling arrangement. Tip pools may not include management or supervisory employees, or other employees who do not customarily and regularly receive tips.
  • Employers who don’t take a tip credit must ensure that managers and supervisory employees are excluded from any tip pooling arrangement as of March 23, 2018.
  • Employers must also ensure that they are not taking any other improper deductions from employee tips, such as charges for credit card processing fees that exceed the employer’s actual cost for such fees. (See this earlier post for a discussion of such charges.)
  • In most jurisdictions, employers that do not use the tip credit are now free to adopt tip pooling arrangements that include “back of the house” employees. However, employers should be sure to check state and local law.

Supreme Court Rules Auto Service Advisers Are Exempt From Overtime

Posted in *New Exemption Rules, Overtime, Supreme Court

Earlier today (April 2, 2018), the U.S. Supreme Court ruled that auto service advisers (also commonly referred to as “service writers”) are exempt from overtime under the Fair Labor Standards Act (“FLSA”).  Today’s ruling in Encino Motorcars LLC  v. Navarro et. al. has affirmatively answered the long-standing question as to whether auto service advisers are covered by the FLSA’s “salesman” overtime exemption, which includes “any salesman, partsman or mechanic primarily engaged in selling or servicing automobiles.”  The Court’s decision overturned the Ninth Circuit Court of Appeals ruling that service advisors do not fall under the exemption, and followed rulings in both the Fourth and Fifth Circuit Court of Appeals holding that they were exempt from overtime.

As we have previously communicated, this is the second time the Supreme Court was asked to decide this issue.  In June 2016, the Court declined to decide the ultimate issue as to whether service advisers were exempt, and instead remanded the case back to the Ninth Circuit for reconsideration without giving weight to the regulations issued by the U.S. Department of Labor in 2011 (those DOL regulations provided that service advisers were no longer exempt from overtime pay).  On remand, the Ninth Circuit disregarded the DOL’s regulations and focused solely on the language and intent of the FLSA, but again found that service advisers do not fall within the meaning of the terms “salesman, partsman, or mechanic,” and therefore were not exempt from overtime pay.

Encino then appealed the Ninth Circuit’s newest ruling, and the Supreme Court agreed to hear the case for a second time. Oral argument took place in January.  In today’s opinion, the Court focused on the meaning of term salesman – someone who sells goods or services – and noted that service advisors sell services to customers for their vehicles.   The Court therefore concluded that service advisors do in fact typically operate as a salesman primarily engaged in the sale of services for automobiles, thus falling within the salesman overtime exemption.

This is a big win for auto dealerships.  While the Court’s opinion covers any claims under the FLSA, auto dealerships should keep in mind that state law might be different from federal law and should be consulted.  For example, in Illinois, we continue to advise dealerships to structure their service adviser pay plans to comply with the 7(i) sales exemption, which is expressly included in the Illinois Minimum Wage Law.

What to Make of the DOL'S PAID Program

Posted in DOL News

You may have read about the U.S. Department of Labor’s new “Payroll Audit Independent Determination” or “PAID’’ pilot program. Under this program, the DOL invites employers to voluntarily audit their payroll practices and disclose any “non-compliant practices” to the DOL. The DOL then reviews the employer’s records and calculations of what is owed to employees, and tells the employer what it thinks the employer should pay. The employer then pays its employees, and employees sign a release of any FLSA claims against the employer. Participating employers are not subject to civil monetary penalties and are not required to pay liquidated damages to employees. (Available details on the program are included in the DOL’s press release and a FAQ page on the DOL’s website.)

Sounds like a pretty painless way to clear up any FLSA violations, right?

Well, as you can imagine there are a few provisos.

First, the whole point of the program is that the DOL will conduct an independent review of any issues identified by the employer and determine what it thinks the employer owes in back wages. The DOL’s FAQs don’t say what happens if the employer disagrees with the DOL’s assessment. Will an employer then be subject to further enforcement action? Will the DOL threaten to impose additional penalties? Perhaps the DOL will answer these questions at some point, but for now, we don’t know.

Second, even if the DOL is willing to accept an employer’s proposed settlement, affected employees remain free to reject the settlement, and even retain counsel and file suit. In some cases there may be significant incentive to do so. The default statute of limitations under the FLSA is two years, but this can be extended to three years for “willful” violations. The DOL’s FAQs don’t specify what time period will be involved in any settlement. Judging from the DOL’s typical enforcement practices and the fact that the program is intended to allow correction of “inadvertent” noncompliance, we can assume that settlements under the PAID program will typically go back two years. However, the bar for establishing a “willful” violation is not high, so employees who know the law or receive legal counsel may be tempted to reject a PAID settlement so that they can receive a third year of pay. Or, they may accept the settlement, but file suit to collect that third year of back pay anyway. Because the PAID program release will be limited to “potential violations for which the employer had paid back wages,” it likely will not preclude employees from pursuing claims arising outside the period covered by any back wage payment.

In addition to back wages, employees who file suit under the FLSA can typically recover an equal amount as “liquidated damages.” Employees who are offered a PAID settlement might well decide that, as nice as an immediate payment would be, they would prefer to receive double whatever they are being offered. This may be less tempting when the amount of back pay due to any given employee is small, but where employees stand to receive hundreds or thousands of dollars from a settlement, doubling their recovery might sound pretty good.

Another potential pitfall of the PAID program is that although employees who sign a release will be giving up their claims under the FLSA, it is not clear that the releases would cover wage claims under state law. Many states provide longer statutes of limitations than the FLSA and impose their own statutory penalties for minimum wage and overtime violations. An employer that settles with employees under the PAID program may turn around the next day and find that the settlement is being used as an admission of guilt in state court as employees seek to recover additional wages and penalties under state law.

Finally, the PAID program is not available to resolve issues already being investigated by the DOL or raised in a lawsuit or threatened litigation. So, while it might help in cases where an employer identifies problems on its own, it offers no solution to employers seeking to settle current disputes over alleged FLSA violations.

Because of these limitations, the PAID program is far from a “get out of jail free” card for employers. Participating in the program may have some benefits, particularly where the FLSA compliance issues are relatively small, well-defined, and unlikely to result in litigation. Unfortunately, those are the issues where a program like PAID is least necessary. An employer facing more serious FLSA compliance issues, such as systemic problems with off-the-clock work or misclassification, will have to think very carefully about participating in the PAID program, as doing so may amount to putting up a big neon “Sue Me!” sign in the employee lunch room.

Explanation of the DOL's Proposed Rules on Tips

Posted in DOL News, Tip Credit

There’s been plenty of press this week regarding the U.S. Department of Labor’s proposed rules governing employer treatment of tips. Commentators are debating whether the proposed changes are a sensible return to the four corners of the Fair Labor Standards Act or a cash-grab for the restaurant industry at the expense of workers. We’ll leave the economic and political analysis to others, but we do think that it’s important for employers to understand exactly what the proposal is, and is not.

Some History

The Fair Labor Standards Act requires employers to pay a specified minimum wage (currently $7.25 per hour), plus overtime for any hours worked over 40 in a single workweek. Employees who “customarily and regularly receive tips” must still receive at least the specified minimum wage. However, employers can count up to $5.12 per hour of those employee’s tips toward the minimum wage. This is referred to as the “tip credit.”

The tip credit provision of the FLSA was enacted in 1966. Originally, the law did not include any restriction on employers’ use of tips, even allowing employers to require that all tips be turned over to the employer as a part of gross receipts. In 1974, Congress amended Section 3(m) of the FLSA to provide that the tip credit provision does not apply with respect to a tipped employee unless “all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.” This means that if the employer keeps any part of the tip pool, or shares it with “back of the house” personnel such as line cooks and dishwashers, it risks losing the tip credit and being obligated to pay employees the full cash minimum wage.

Section 3(m) does not expressly address the question of whether there are any restrictions on treatment of tips when an employer pays tipped employees the full minimum wage in cash rather than taking advantage of the tip credit. In 2010, the Ninth Circuit Court of Appeals weighed in on that issue in Cumbie v. Woody Woo, Inc., holding that Section 3(m)’s tip retention requirements applied only to employers that actually use the tip credit provision. The court explained:

If Congress wanted to articulate a general principle that tips are the property of the employee absent a “valid” tip pool, it could have done so without reference to the tip credit. “It is our duty to give effect, if possible, to every clause and word of a statute.” [Citation omitted.] Therefore, we decline to read the third sentence in such a way as to render its reference to the tip credit, as well as its conditional language and structure, superfluous.

However, in 2011, the Department of Labor issued new regulations regarding the tip credit requirement, reaching the opposite conclusion regarding the applicability of the rules to employers that do not use the tip credit. Specifically, 29 C.F.R. 531.52 was revised to provide:

The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. (Emphasis added.)

In 2012, the Oregon Restaurant and Lodging Association sued to block the new regulation, arguing that the Department of Labor exceeded its authority under the FLSA by re-interpreting Section 3(m) to apply to employers that do not take the tip credit. The Association initially prevailed, with the district court ruling that the revised regulation was invalid. The Department of Labor appealed to the Ninth Circuit Court of Appeals, which consolidated the appeal with another case, Cesarz v. Wynn Las Vegas, raising the same issue. The Court of Appeals reversed the ruling, holding that the district court should have deferred to the U.S. Department of Labor’s new interpretation of the statute. That ruling has been appealed to the U.S. Supreme Court, which has yet to determine whether it will take up the case. The Ninth Circuit’s ruling is stayed until the matter is resolved by the Supreme Court, and the DOL has decided as a matter of enforcement policy that it will not seek to enforce the rule within the Ninth Circuit (including California, Alaska, Idaho, Montana, Nevada, Arizona, Hawaii, and Oregon) for the time being.

Three other federal appellate courts have rejected the Ninth Circuit’s conclusion, finding the 2011 rule is invalid. These include the Fourth Circuit (with jurisdiction over Maryland, Virginia, West Virginia, and North and South Carolina) in Trejo v. Ryman Hospitality Properties, Inc.,  the Tenth Circuit (Kansas, Oklahoma, Utah, Wyoming, Colorado, and New Mexico) in Marlow v. The New Food Guy), and the Eleventh Circuit (Florida, Georgia, and Alabama) in Malivuk v. Ameripark, LLC.

The Proposed Regulation

Now, the Department of Labor is seeking to reverse course on the 2011 rule. The new proposal would re-write 29 C.F.R. 531.52 to read, in relevant part:

An employer that takes a tip credit is prohibited from using an employee’s tips for any reason other than that which is statutorily permitted in Section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.” (Emphasis added.)

Contrary to some hyperbolic headlines, the regulation does not apply to all tipped employees, but only to those who receive the full federal minimum wage in cash. The rule also does not supersede state laws, some of which include separate restrictions on tip sharing practices.

According to the DOL, it is advancing this proposal because it has “serious concerns that it incorrectly construed the statute in promulgating its current tip regulations to apply to employers that have paid a direct cash wage of at least the full Federal minimum wage to their tipped employees and serious concerns about those regulations as a policy matter.” The history above makes the legal concerns fairly clear: the 2011 rules were arguably a departure from prior interpretations of the statute, and have already been ruled invalid by most of the federal appellate courts to have considered the issue. Given the split in authority and the current makeup of the Supreme Court, it would not be surprising if the Court did take up the issue and found the current rule invalid.

From a policy perspective, the DOL mainly cites increased employer flexibility, the ability to address wage disparities between tipped employees and “back of the house” staff such as cooks, and the benefits of allowing all employees who contribute to the service experience to share in the tip pool. Opponents of the move suggest that employers could address any wage disparity by simply increasing wages of those who are paid too little, and express concern over giving employers even more control over how tips are distributed and used. (For a summary of the arguments from both sides, check out this article from Eater.)

What Now?

The DOL will be accepting public comments on the proposed rule until January 4, 2018. As of Friday, December 8, nearly 1,500 comments have already been submitted. An un-scientific survey (consisting of your author quickly flipping through the submitted comments) suggests that the vast majority of those submitted so far are from individual citizens opposed to the change.

Notwithstanding the negative comments, it seems highly likely that the final rule will be published in something like its present form, and given the language of Section 3(m) of the FLSA it seems likely that it will pass muster with the courts absent some procedural misstep by the DOL in its rulemaking process.

That being said, before employers start to re-vamp their tip policies, they should be aware of a few things.

First, the new rule is not in effect yet. Yes, it’s likely coming, and yes at least in those states within the Fourth, Tenth and Eleventh Circuits, the current rule has already been held invalid. But elsewhere, the 2011 rule arguably remains in effect, and could still be the subject of private lawsuits even if the DOL is not inclined to take enforcement action. So don’t count your chickens before they hatch.

Second, once again, the new rule only affects employees who receive the full cash minimum wage, without the tip credit. The current rules remain in effect for employees whose cash wages are less than the federal minimum wage of $7.25 per hour. If you intend to take the tip credit, check out our prior posts on various ways employers can get in trouble by not complying with those rules.

Finally, employers must make sure that they comply with state and local law concerning tips, regardless of any changes that occur at the federal level. The new rule does not supersede those requirements.