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Wage & Hour Law Update

Maximizing The Use Of The “Chain Of Service” Doctrine To Defend Claims

In cases challenging participation of food service workers other than the quintessential roles with which most diners are familiar (e.g., server/waiter, busboy, etc.) in tip sharing/pooling/splitting arrangements, some courts focus on whether  the position lacked sufficient direct customer interaction to warrant receipt of tips.  See generally Kilgore v. Outback Steakhouse, 160 F.3d 294, 301 (6th Cir. 1998).  In Etheridge v. Reins Internat. California, Inc., 172 Cal. App. 4th 908 (Cal. App. 2d Dist. 2009), California appellate Justice H. Walter Croskey addressed a claim brought pursuant to California Labor Code § 351 challenging the tip pool participation of dishwashers and kitchen staff.  Acknowledging distinctions between the California Labor Code’s regulation of tip pooling and the FLSA, the judge rejected the claim that the employees should not have shared in tips, and observed that such industry employees “are encouraged to give their best possible service as they know they will participate in the financial rewards if the customers are pleased with their work, even though the customers do not personally see them doing it.”

Since that time, concepts similar to this “chain of service” analysis (which one can envision being a favorite of economics-minded judges such as Seventh Circuit Justice Richard Posner) has been taken up by a handful of courts.  Turner v. Millennium Park Joint Venture, LLC, 2011 U.S. Dist. LEXIS 22295 (N.D. Ill. Mar. 7, 2011)(upholding inclusions of silverware roller in tip pool under FLSA because “employees receiving tips directly from customers may agree to share tips when they believe that the employees  with whom they share help them to serve the customers better and more fully and thus to obtain additional tips and sweeten the pot for everyone”).

“Many if not most hospitality professionals believe in chain of service not in terms of a legal defense to wage-and-hour claims, but as a key component of successful operations,” observes Jackson Lewis Shareholder and industry expert Paul DeCamp.  Indeed, popular culture, as demonstrated by the influx of restaurant renovation shows on the Food Network and Cooking Channel, now focuses its attention on the provision of these services and improvement of the customer experience.  Counsel and industry employers must continue to assert the viability of this doctrine at every opportunity.

Minnesota Congressman Drives Attachment of Debarment Provision to Appropriations Bills

Debarment – a bar on a federal contractor from receiving business from the federal government for a period of years – which is usually based on a violation of a public prevailing wage statute (such as the Service Contract Act (SCA)), is the most draconian civil penalty levied against most contractors, particularly those whose core businesses involve servicing the federal government.  Historically, there has not been a relationship between debarment and Fair Labor Standards Act (FLSA) compliance, save incorporation into the SCA or the Davis-Bacon Act of various FLSA principles.  Now, Congressman Keith Ellison (D-MN) has sought to attach a provision to new federal appropriations bills under which a contractor that has been found liable for even a modest FLSA violation (of as little as $5,000) would be subject to debarment on that basis alone.  Recently, the Congressman’s provision was adopted as part of 2015 Appropriations bills for Transportation, Housing and Urban Development, the Department of Defense, Energy and Water Development, Financial Services and General Government, State and Foreign Operations, and Interior and Environment.

“This is a classic example of proposed legislation that improperly invokes wage protections to create an overly draconian penalty system and needlessly hamper businesses,” said Leslie Stout-Tabackman, Washington, D.C.-based Jackson Lewis Shareholder and debarment expert.  “Essentially, the mildest of unwitting technical violations of the FLSA and its various byzantine requirements could result in the downfall of a business and significant job losses.”

Compliance with federal and state wage-and-hour laws remains paramount to the successful continued operation of federal contractors and indeed all businesses.

Virginia Judge Rejects Highly Compensated IT Professional’s Misclassification Claim

The FLSA’s technical “white collar exemption” regulations, slated for review and potential overhaul later this year, allow plaintiffs’ attorneys and even the highly paid employees they represent to challenge exempt status.  A recent decision from the Eastern District of Virginia rejects one such claim brought by a highly paid information technology worker paid a salary substantially above the FLSA’s $100,000 per annum cutoff for “highly compensated” workers.  Mock v. Fed. Home Loan Mortg. Corp., 2014 U.S. Dist. LEXIS 97259 (E.D. Va. July 15, 2014).

In Mock, plaintiff served as an Engineering Senior and Engineering Tech Lead for the Federal Home Loan Mortgage Corporation (a/k/a “Freddie Mac”) and was a member of one of the two groups responsible for Freddie Mac’s IT infrastructure.  He was considered “the subject matter expert and engineering lead for Freddie Mac’s virtualization infrastructure and ‘VMware,’ an intricate software with various component products that allows for the installation and testing of software programs virtually without affecting actual computers, and which increases information technology storage capacity in space while decreasing the need for physical hardware.”  Freddie Mac argued, and Judge Leonie M. Brinkema agreed, that Mock’s duties with respect to managing Freddie Mac’s VMware qualified for the administrative and computer professional exemptions, even without the relaxation in the standard for exempt status under the “highly compensated” exemption test.  As concerned the applicability of the computer professional exemption, the court observed that “although Mock did not create or write the VMware used by Freddie Mac, he upgrades the software, modifies it to adapt it to Freddy Mac’s complex operating systems, and tests upgrades and modifications . . . this necessarily requires both a high level of skill in systems analysis and in-depth knowledge of both the software and Freddie Mac’s operating systems, and clearly establishes that Mock’s duties are exempt.”

Judge Brinkema’s ruling in Mock provides some comfort and direction to employers seeking to apply the white collar exemptions to similar workers, but the case itself also demonstrates that wage claims can come from seemingly unlikely employees.

Fifth Circuit Confirms Employer’s Right To Set Workweek For Payroll Purposes

Employees may have an understanding of their own “work week” for various employment purposes based on different business practices or employer scheduling.  However, with respect to calculating hours worked for purposes of determining overtime pay under the FLSA, DOL regulations simply require that an employer designate and use a standard work week for a given employee.  This principle was recently reiterated by the Court of Appeal for the Fifth Circuit.  Johnson v. Heckmann Water Res. (CVR), 2014 U.S. App. LEXIS 13501 (5th Cir. July 14, 2014).

In Johnson, plaintiffs alleged that their overtime pay was under-calculated because the employer used a Monday to Sunday work week as opposed to a Thursday to Wednesday work week which they alleged was “their actual, seven consecutive day, Thursday through Wednesday work schedule.”  The Circuit court ruled that, because the employer applied the Monday-to-Sunday work week consistently, this calculation of hours worked conformed to the FLSA’s requirements as interpreted in DOL regulation (29 C.F.R. § 778.105), a 2009 DOL opinion letter and the Eighth Circuit’s prior decision in Abshire v. Redland Energy Services, L.L.C., 695 F.3d 792 (8th Cir. 2012) involving “nearly identical facts.”

Consistent application of compliant calculation methods is one key to FLSA compliance, both in terms of computing hours worked and resulting overtime pay due.

New York State Court Reiterates That Commissions Are Not Wages Until Earned

Ensuring contracts and agreements reflect when incentive compensation – usually “commissions” – is earned is of paramount importance to New York employers who wish to maximize their rights, as evidenced by a recent decision from New York County Supreme Court Justice Ellen M. Coin.  Sherwin v Mestel & Co. N.Y., LLC, 2014 N.Y. Misc. LEXIS 3055 (N.Y. Sup. Ct. July 8, 2014).

In Sherwin, plaintiff entered into an employment agreement with an attorney placement firm as a recruiter.  Sherwin placed attorneys with law firms on August 16, September 2 and September 5, 2013, but voluntarily resigned on September 3, 2013 before any compensation was due to Defendant for the placements under its client contracts, and before the six-month “guarantee period” set forth in Defendant’s contracts with the law firms had expired.  Because Sherwin’s employment agreement unambiguously stated that “no commission on a particular placement shall be considered earned until the completion of the conditions precedent,” and such conditions included the expiration of the guarantee period and payment by the law firm at which the attorney was placed, Justice Coin ruled no commissions were due to Plaintiff for these placements.  Because Sherwin was not contractually entitled to such payments, they were not “earned wages” within the meaning of New York Labor Law.

Sherwin reinforces the need for (and benefits of) precise drafting of incentive compensation plans.

Maryland Judge Rules On-Call Time Non-Compensable Due To Freedom For Personal Activities

The issue of whether time spent “on-call” is compensable under the Fair Labor Standards Act is a factual analysis, and thus the source of FLSA litigation.  A recent decision finding such time to be non-compensable highlights a preeminent principle in the analysis – in order for on-call time to be non-compensable, an employee must be free to engage in at least a reasonable range of personal pursuits.  Skrzecz v. Gibson Island Corp., 2014 U.S. Dist. LEXIS 95047 (D. Md. 2014).

In Skrzecz, plaintiff was employed on Gibson Island in Maryland as a police officer and EMT.  Her job required her to be on-call during certain hours in addition to her scheduled shift, time for which she alleged she was owed additional compensation.  The case record established that during the on-call time plaintiff could “stay in her home or [was] free to travel on the Island… [and] also that she could eat[], sleep[], watch[] television and spend[] time with her son.”  Judge Richard D. Bennett, drawing on the Fourth Circuit’s prior opinion addressing on call issues in Kelly v. Hines-Rinaldi Funeral Home, Inc., 847 F.2d 147 (4th Cir. 1988), a case concerning a live-in funeral parlor employee, determined that plaintiff “was not so restricted that she [could not] use her on-call time for personal activities.”  Thus, the time was not compensable.

Plaintiff Skrzecz’s specific freedoms highlight key aspects of any analysis of on-call time.  In the instant case, these FLSA principles were also deemed applicable to the determination of whether such time was compensable under Maryland state wage law.  Of course, state law must always be analyzed separately. Further, any time spent working after being called to active duty while “on-call” is of course compensable.

Ohio Judge: Mortgage Underwriters Properly Classified As Exempt Administrative Employees

The exempt status of loan officers continues to make headlines as the Mortgage Bankers Association presses for Supreme Court affirmance of its successful challenge to a DOL opinion regarding the applicability of the administrative exemption to those workers.  A new court decision highlights the fact intensive nature of exemption inquiries, and also the potentially misleading nature of an umbrella term such as loan officer or underwriter.  Lutz v. Huntington Bancshares Inc., 2014 U.S. Dist. LEXIS 86435 (S.D. Ohio June 25, 2014).

In Lutz, defendant Huntington Bank successfully demonstrated to the Court that its loan sales process is divided into two functions, “with . . . loan originators and loan processors contacting and discussing options with potential customers, selling those customers on the appropriate loan package, and collecting all necessary information for the loan application.”  Only when that discussion resulted in an application for a mortgage loan would the underwriter Plaintiffs then receive the application “for review and approval,” without communicating with the customer.  Based on this factual finding, the Court rejected a series of cases constraining application of the administrative exemption to loan officer or underwriter positions based on the predominance of their sales function and a narrow view of the applicability of the exemption to sales-related duties.

The Court then analyzed whether the underwriters’ work was related to the bank’s general business operations and whether they exercised discretion and independent judgment.  The Court found both of these aspects of the administrative exemption test were satisfied because the underwriters’ work was akin to that of (administratively exempt) insurance adjusters and they had discretion over the loan approval process.  The Court also rejected the Department of Labor’s 2010 opinion letter regarding the applicability of the administrative exemption to loan officers, the subject of the ongoing Mortgage Bankers Association litigation.

Banks, mortgage banking firms and other financial services sector employers continue to defend challenges to the applicability of white collar exemptions to various classifications of workers, often highly compensated ones.  Industry employers must stay abreast of legal developments within their states of operation, and seek to conform their classifications to legal guidance such as the Lutz opinion.

Fifth Circuit Finds Franchisor Was Not Employer Under Economic Realities Test

The judicially-devised “economic realities” test is designed to determine whether an individual is  liable as an “employer” under the FLSA, typically in addition to a corporate entity. For the second time in the past few years, the Court of Appeals for the Fifth Circuit has ruled that a franchisor was not the “employer of an individual with a business relationship to the employing entity, based on insufficient evidence of employer status.  Orozco v. Plackis, 2014 U.S. App. LEXIS 12680 (5th Cir. July 3, 2014).

In Orozco, plaintiff worked for a franchisee of a local restaurateur, who owned a separate restaurant under the “Craig O’s” brand and also licensed franchisees to operate under the Craig O’s trade name.  Plaintiff brought FLSA claims not only against the franchisee corporation and its owners, but the franchisor’s principal, Craig Plackis.  At trial, a jury found Plackis liable as an employer.

On appeal, Plackis argued that the evidence proffered by Orozco was insufficient as a matter of law to support the jury’s finding as to his employer status.  Citing its prior precedent in Gray v. Powers, in which the court affirmed a summary judgment ruling that an absentee nightclub owner was not an employer, the Fifth Circuit agreed, and reversed the trial court ruling.  The court’s analysis centered on its review of the trial testimony concerning a meeting between Plackis and the franchisee, Sandra Entjer.  The trial court had upheld the jury’s verdict based on evidence that the Plackis and Entjer discussed issues such as scheduling and compensation at the meeting, and that Entjer and her husband hired some of Plackis’ employees to work at their franchisee store. The appeals court found these facts insufficient to support the jury’s finding, noting the unimpeached testimony from Plackis and Entjer (which plaintiff’s own testimony corroborated) that the latter made her own decisions regarding employment, scheduling and compensation, and that Entjer had her own independent reasons for hiring Plackis’ workers, namely their familiarity with operating a Craig O’s store.

Different federal Courts of Appeal continue to apply their own formulations of the economic realties test to questions of joint or individual liability under the FLSA.  Given the Supreme Court’s rejection of one recent certiorari petition seeking review of this issue, business owners must continue to analyze their personal exposure to wage claims by reference to the law of their Circuit.

Proposed Amendment To New York’s Wage Theft Prevention Act A Mixed Blessing for Employer Community

Following several rounds of lobbying and legislative proposals, both houses of the New York State Legislature this week passed a bill repealing the annual wage notice requirement (requiring a written notice during the month of January regardless of the timing of pay increases or date of hire) codified in New York Labor Law § 195 by the 2011 Wage Theft Prevention Act.  As part of the compromise leading to passage of the bill, penalties associated with violation of other provisions of the Labor Law were increased.  The bill did not modify the other notice requirements set forth in the Act.

“Repeal of the annual notice if enacted into law is a win for employers,” observed Long Island based Jackson Lewis Shareholder Jeff Brecher.  “However, given the potential increased penalties associated with the Act’s new hire notice and wage statement requirements, employers must take care to ensure that they not only issue these documents, but comply fully.”

As of this writing, the Governor’s office had not yet commented whether he will sign the proposal into law.

Second Circuit Upholds Volunteer Finding Vis a Vis Former Student Turned School Aid

In December 2012, we discussed a lower court’s ruling that a young man who volunteered his time at his old high school working with at risk youths was not an “employee” within the meaning of the Fair Labor Standards Act entitled to minimum wage protection.  On appeal, the Court of Appeals for the Second Circuit affirmed that decision.  Brown v. N.Y. City Dep’t of Educ., 2014 U.S. App. LEXIS 11412 (2d Cir. June 18, 2014).

In its affirmance, the Circuit court focused on the specific DOL regulation relating to public sector volunteering, analyzing whether Plaintiff in volunteering:

1) ha[d] a civic, charitable, or humanitarian purpose,

(2) ha[d] not been promised or expect[ed] or receive[d] compensation for the services rendered,

(3) perform[ed] such work freely and without pressure or coercion, direct or implied, from the employer, and

(4) [was] not . . . otherwise employed by the same public agency to perform the same type  of services.

29 C.F.R. § 553.101.  The Court also analyzed whether certain payments to Plaintiff by school administrators were of the type authorized for volunteers by 29 C.F.R. § 553.106.

Based on the record below, the Court was satisfied that the tests were met, and that Plaintiff accepted the volunteer role to help students with the understanding that he would not be paid.  The Court reached this conclusion notwithstanding the fact that school administrators occasionally gave Plaintiff Brown small sums of money or transit reimbursement, and indicated at various times that they would search for the funds necessary to provide him with a paid position.

Minimum wage claims based on the failure to treat a service provider as an employee remain a source of liability and a recurring basis for FLSA filings.  Employers must analyze their relationship with such providers, and in consultation with counsel utilizing appropriate written documentation.