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.

 

Just When You Thought the DOL’s OT Rule Was Dead, It Lives to Fight Another Day

Posted in *New Exemption Rules, DOL News, Overtime

As my colleague Bill Pokorny reported back on August 31, a Texas District Court struck down the Obama Administration’s FLSA Overtime Exemption Rule, holding that the Department of Labor (DOL)  exceeded its authority by increasing the minimum salary for the Executive, Administrative, and Professional Exemptions to $913 per week. In a (somewhat) surprise move, on October 30, the DOL notified the District Court that it would be appealing the August order.

Wait…what?! Why is the Trump administration’s DOL appealing an order that ruled how it wanted? Is this some kind of Halloween trick? Well, it is likely that the DOL’s move is intended to protect the agency’s belief that the DOL has the authority to issue a rule that sets a salary threshold for overtime. Indeed, Labor Secretary Alex Acosta has indicated on multiple occasions that the Trump administration’s DOL intends to seek a revised version of the OT rule that includes a salary threshold more to its liking. The DOL’s statement issued on Monday confirmed as much stating the agency will undertake further rulemaking to determine the appropriate salary level for the overtime exemption. However, it is not entirely clear from the Court’s ruling whether the DOL even has the authority to determine a salary basis for the exemption without Congressional approval.

One other notable twist in this never-ending saga is that the AFL-CIO filed its own notice of appeal of the District Court’s order denying its request to intervene in the case. It is believed the AFL-CIO will support the DOL’s argument that it has the authority to set a new salary threshold, but may go further – advocating that the threshold should be the one set by the Obama Administration’s OT rule. If the AFL-CIO wins its appeal and is allowed to intervene, that could certainly make things interesting for the DOL!

So what does this all mean? The DOL’s goal is clear – erase the District Court’s order so that it will not limit or hamper the agency’s attempt at setting what it believes to be a more appropriate salary threshold. Such strategy is not without risk. It is possible that the Fifth Circuit Court of Appeals overturns the District Court’s ruling and upholds the Obama OT Rule in its entirety. This would be a huge burden for the Acosta-led DOL to overcome if President Trump truly wants to set a new salary threshold.

Service Adviser Exemption Goes Back to the Supreme Court

Posted in Exemptions

On September 28, 2017, the U.S. Supreme Court agreed to hear a case in which the Court will be asked to decide whether the FLSA’s overtime exemption covering “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” The case is Encino Motorcars v. Navarro, No. 16-1362.

If this sounds like déjà vu to anyone, that’s because the Supreme Court heard and issued a ruling on this very same case in June 2016. As we explained in our summary of that decision, the Court punted on the ultimate question of whether service advisers are exempt. Instead, it held that the DOL regulations that the Ninth Circuit Court of Appeals relied upon to hold that service advisers are not exempt were invalid. Rather than decide the matter, the Court remanded the case back to the Court of Appeals for reconsideration. On remand, the Court of Appeals reconsidered the issue without reference to the views of the Department of Labor. Looking solely at the language and intent of the statute, the Court of Appeals once again found that service advisers do not fall within the meaning of the terms “salesman, partsman, or mechanic” as used in the FLSA.

This ruling once again puts the Ninth Circuit’s position on the exemption at odds with rulings in the Fourth and Fifth Circuits. This time around, we anticipate that the Supreme Court will definitively resolve the issue one way or another.

In the meantime, automobile dealerships that employ service advisers or service writers should continue to think carefully before relying on the sales / parts / mechanics overtime exemption. Even in those circuits where the Courts of Appeals have ruled that the exemption applies to service advisers, a different ruling from the Supreme Court would supersede those decisions. Further, auto dealers should be mindful that state law might differ from federal law. In Illinois for example, the Illinois Minimum Wage Law provides an exemption for salesmen and mechanics, but does not include partsmen. 820 ILCS 105/4a(2)A. For the moment it’s not clear how a ruling on the federal exemption would affect the law in Illinois.

Until all of this is sorted out, auto dealers who wish to classify their service writers or service advisers as exempt from overtime may wish to focus on the FLSA Section 7(i) exemption for employees of retail or service establishments who are paid primarily on a commission basis. For more information on how service advisers can fall under that exemption, check out this post.

 

Does Paying Time and a Half For Certain Work Count Toward Overtime? [Wage & Hour FAQ]

Posted in Overtime, Wage and Hour FAQs

Q. Our organization has a policy of paying employees who perform certain kinds of work outside of regular business hours at 1-1/2 times their regular hourly rates. Do we have to pay additional overtime pay for these hours?

A. Maybe. The Fair Labor Standards Act requires employers to pay overtime at 1-1/2 times an employee’s “regular rate” of pay. The default method for calculating the regular rate is to divide the employee’s total non-overtime compensation for the workweek by the total number of hours worked.* Overtime pay is then calculated by multiplying one-half of the resulting regular rate by the number of overtime hours worked during the week. All compensation paid to an employee for their work in a given workweek must be included in the regular rate calculation unless the compensation falls within one of the exclusions specifically identified in the law.

One of the exclusions from the regular rate calculation is for bona fide overtime premiums. Compensation can count as a bona fide overtime premium if the rate of pay is at least 1.5 times the employees’ regular rate, and employees receive the premium for working in excess of an established number of hours per week or per day, for working on certain specified days of the week (e.g., Saturday or Sunday) or on special days (e.g., holidays), or for working outside certain established basic work hours. A premium rate that meets these requirements can be both excluded from the regular rate calculation for purposes of determining the overtime rate, and counted as a credit toward the amount of overtime pay due to the employee for the workweek.

Here, the premium rate described sounds as though it could qualify as a bona fide overtime premium, at least at first. It is 1-1/2 times the employee’s regular pay rate, and it is paid for working outside of regular business hours.

However, the question specifies that the premium rate is paid only for performing “certain kinds of work.” That qualification is important. A premium rate paid to encourage employees to perform certain job duties that might be viewed as less desirable, or to work less desirable shifts, is generally not a bona fide overtime premium and must be included in the regular rate calculation. As a result, an employee who receives the premium described may well be entitled to an additional overtime premium on top of the premium rate provided by the organization’s policy, even though the employee is already receiving “time and a half” for the work.

*As with most things under the FLSA, there are exceptions and provisos, but those are beyond the scope of this post.

Texas District Court Strikes Down Obama FLSA Exemption Rules

Posted in *New Exemption Rules
File:3D Judges Gavel.jpg

Via http://www.stockmonkeys.com/

On August 31, Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas issued his final ruling in State of Nevada et al. v. United States Department of Labor, et al. Judge Mazzant granted the Plaintiffs’ motion for summary judgment, holding that the Department of Labor exceeded the authority delegated to it by Congress by increasing the minimum salary for the Executive, Administrative, and Professional exemptions under the FLSA to $913 per week.

At this point, some readers may be scratching their heads and asking, “didn’t this already happen last November?” Yes and no. In November 2016, Judge Mazzant granted a preliminary injunction, halting the DOL from implementing the new rules until the court could hear the case and issue a final decision. This is now the final decision, and is basically consistent with the court’s prior ruling.

The Court’s reasoning is basically as follows:

Congress created an exemption to the FLSA’s overtime regulations for “bona fide executive, administrative, and professional employees.” In doing so, it defined the exemption according to job duties, not a minimum salary. Congress delegated authority to the DOL to define the exemptions from there, but that authority was limited to defining an exemption based on job duties. By increasing the minimum salary for exempt status to $913 per week, the DOL excluded a large number of employees whose job duties otherwise met the duties requirements for the executive, administrative, or professional exemptions from exempt status. That, the court held, exceeded the DOL’s authority under the statute.

Of course, that reasoning does beg the question: if the DOL lacked authority to set $913 as the minimum salary for exempt status, does the current minimum of $455 per week also conflict with the statute? No, says the Court:

The Department sets the minimum salary level as a floor to “screen the obviously nonexempt employees, making an analysis of duties in such cases unnecessary.” … Further, the Department acknowledges that in using this method, “[a]ny new figure recommended should also be somewhere near the lower end of the range of prevailing salaries for these employees.” … The use of a minimum salary level in this manner is consistent with Congress’s intent because salary serves as a defining characteristic when determining who, in good faith, performs actual executive, administrative, or professional capacity duties.

In other words, a minimum salary is fine on the low end, but $913 was too much, as was the provision for automatically increasing the minimum in later years.

This is essentially the ruling that the Trump Administration recently asked the 5th Circuit Court of Appeals to make in the DOL’s appeal from Judge Mazzant’s earlier preliminary injunction order.

So what now?

Since the new ruling essentially gives the current Department of Labor what it wanted, the Department is unlikely to appeal the ruling again. Likewise, the states and employer groups that brought the lawsuit are likely to declare victory and head home. The wild card remains the AFL-CIO, which filed a motion for leave to intervene in the case to defend the rules. The District Court did not previously rule on that motion, then denied it as moot in light of its summary judgment ruling. Whether the AFL-CIO will attempt to appeal remains to be seen. At least for the time being, this seems to be another nail in the coffin of the $913 minimum salary for exempt employees. However, the DOL may propose a more modest increase to the current minimum over the coming months.

 

Fifth Circuit Limits Use of Fluctuating Workweek

Posted in Misclassification, Overtime

Employers who rely on the fluctuating workweek method to calculate overtime for employees should take a few minutes to review a new ruling from the Fifth Circuit Court of Appeals that draws some new lines around when the method may be used. Hills v. Entergy Operations, Inc. (5th Cir., Case No. 16-30924, Aug. 4, 2017).

Background

As far as the U.S. Department of Labor is concerned, the “fixed salary for fluctuating workweek,” or just “fluctuating workweek” method of calculating overtime pay has always been something of a disfavored stepchild. That likely has something to do with the fact that, used properly, this calculation can greatly reduce an employer’s overtime liability. For an explanation of how this works, please see our earlier post explaining the concept.

There are some important limitations on when an employer can use the fluctuating workweek method. Those include that the employees’ work hours must actually fluctuate, and there must be a clear, mutual understanding between the employer and employee that their salary is intended to compensate them for any and all hours worked in a given workweek.

Almost twenty years ago, the Fourth Circuit Court of Appeals held in Griffin v. Wake County, 142 F.3d 712 (4th Cir. 1998) that the fluctuating workweek method could be applied to a group of EMTs whose shift schedules alternated in a set pattern between twenty-four and seventy-two hours in a given workweek. The court rejected arguments that the EMTs’ schedules did not truly “fluctuate” because the pattern of alteration was fixed. It further held that the fact that this practice existed for a period of years was enough to establish the required “clear mutual agreement” between the EMTs and their employer.

Fast forward to 2016 and a lawsuit filed against Entergy Operations, Inc. by nineteen current and former “security shift supervisors” who worked at a nuclear power plant operated by Entergy. The plaintiffs were scheduled to work in 12-hour shifts, alternating between three shifts (36 hours) and four shifts (48 hours) per week. The plaintiffs alleged that Entergy misclassified them as exempt, and therefore failed to pay them overtime due under the FLSA when they worked more than 40 hours in a week. Entergy disputed that argument, and also argued that even if they were exempt, the plaintiffs’ overtime pay should be calculated using the fluctuating workweek method. The district court held that the exemption issue could only be resolved with a trial because the material facts were disputed by the parties. However, it granted partial summary judgment in favor of Entergy on the fluctuating workweek question. Following the Fourth Circuit’s approach in Griffin, the district court held that the alternating 36 and 48-hour schedules met the “fluctuating hours” requirement and established that the employees accepted a fluctuating workweek calculation as a matter of law. This ruling in turn led to dismissal of two of the plaintiffs, because use of the fluctuating workweek method reduced those plaintiffs’ potential recovery below zero due to some other offsets claimed by Entergy. Those two plaintiffs then appealed to the Fifth Circuit.

The Fifth Circuit Rejects Griffin and Sends the Case Back for Trial

The Fifth Circuit reversed the judgment, holding that the district court had adopted “too literal a conception of ‘fluctuating’.” While it did not rule out application of the fluctuating workweek method, the Fifth Circuit held that Entergy had to do more than establish that employees were paid a flat salary and that they knew their workweek would fluctuate between 36 and 48 hours each week. Those schedules, the court found, were actually “‘fixed’ in the sense that the parties agreed to it at the outset of their employment relationship,” at least according to the plaintiffs. The court found that such a “biweekly alternating, but fixed, schedule is not necessarily ‘fluctuating’ as that term of art is used in the fluctuating workweek method.”

While the Fifth Circuit overturned the district court’s summary judgment ruling, it did not rule out the prospect that the method might apply. It found that Entergy could still prevail on that argument if the plaintiffs “did indeed agree to have their salaries compensate an unlimited amount of hours each week.” Because the facts on that issue were in dispute, the matter had to be resolved at trial rather than on summary judgment.

Lessons for Employers

Employers, if you want the fluctuating workweek method to apply to any of your employees you must have a clear agreement with those employees that the salary you are paying them is intended to compensate them for all hours worked each workweek, not some fixed or even regularly alternating number of hours.

The only reliable way to prove that you have a specific agreement with an employee is to put that agreement in writing. That might be as simple as inserting some language in your offer letter or your routine communication with employees about salary adjustments. Even a line in an employee handbook would be better than nothing. However you do it, make sure your employee receives the document and that you have some signed acknowledgment proving that they did.

Employers who wish to use the fluctuating workweek method should also avoid unqualified statements about regular schedules, particularly statements that draw a link between the schedule and the employee’s compensation. For example, saying “this salary is based on a 35-hour workweek” strongly suggests that the salary is to compensate the employee only for the first 35 hours of work, and that the employee should receive additional pay for working more than 35 hours.

Finally, keep in mind that these lessons apply not just to salaried non-exempt employees, but also to exempt employees who might pursue misclassification claims. If you are going to pay an employee a fixed salary as their sole compensation for whatever hours they may work, it’s best to tell them that, explicitly and in writing.

 

 

Be Careful When Using Biometric Information

Posted in Recordkeeping

User placing finger on fingerprint scanner

While not strictly speaking a wage and hour issue, here is a heads-up to any employers that use timekeeping systems featuring biometric security, like a thumbprint or fingerprint scanner:

You might want to read this recent Crain’s Chicago Business article about a class action lawsuit recently filed against the Mariano’s chain of grocery stores under the Illinois Biometric Information Privacy Act (BIPA). In this lawsuit, a former pharmacy employee claims that Mariano’s violated his rights under BIPA by requiring him and other employees to check in and out of work using a fingerprint scanner without providing the disclosures mandated by the law.

BIPA requires any “private entity” in possession of “biometric identifiers or biometric information” to, among other things:

  • Develop and make publicly available a written policy for retention and destruction of biometric identifiers and information;
  • Dispose of such information once the purpose for collecting it has been satisfied or within 3 years of the individual’s last interaction with the entity, whichever occurs first;
  • Provide a written notice to and obtain a written release from an individual before collecting or obtaining their biometric information or identifiers;
  • Treat any biometric data “in a manner that is the same as or more protective than” the manner in which it the entity “stores, transmits and protects other confidential and sensitive information.”

The law provides a private right of action against any private entity that violates it, and allows individuals to recover liquidated damages of $1,000 per violation for negligent violations, or $5,000 or for intentional or reckless violations, in addition to attorneys’ fees and court costs.

While it’s not at all clear that the law was written with employee timekeeping in mind, it’s provisions are certainly broad enough to cover those systems, and it applies to just about every organization other than state and local governments and certain financial institutions.

BIPA is an Illinois law, but other states have either considered or adopted similar legislation. For example, Texas Business and Commercial Code Sec. 503.001 imposes similar requirements. For a relatively recent overview of the law in this area, check out this article by Ted Claypoole and Cameron Stoll in Business Law Today.

If your organization uses biometric security for its timekeeping system, building access, information security, or any other purpose, either make sure that you’re complying with the law in your jurisdiction, or consider turning those features off and securely deleting any data that you may have collected.

 

 

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