Hair Today, Gone Tomorrow: Seventh Circuit Rejects Claim That Cosmetology Trainees Were Employees

Former cosmetology students are not employees entitled to pay under the FLSA and various state laws, the Seventh Circuit holds, rejecting the Department of Labor’s six-factor test but declining to adopt any bright-line test. Hollins v. Regency Corporation, 2017 U.S. App. LEXIS 15076 (7th Cir. Aug. 14, 2017).

The plaintiff was a student enrolled at one of 80 cosmetology schools, known as Regency Beauty Institutes. Each school offered both classroom and practical instruction, the latter consisting of discounted cosmetology services to the public, as well as performing various administrative and janitorial tasks at a school-operated salon.  Seeking to recover on behalf of both herself and a class of former students, the plaintiff alleged that she was an employee and thus entitled to minimum wage under federal and state law.  The district court granted summary judgment to the employer, finding the plaintiff was not engaged in compensable work and on appeal, the Seventh Circuit affirmed.

After first determining that a “final judgment” existed to create a proper appeal, the Seventh Circuit moved onto determining whether the plaintiff was properly classified as an unpaid trainee and not an employee. In resolving the issue, the Court first noted the circular, and practically meaningless, definition of “employee” found in the FLSA (“any individual employed by an employer”).  It then considered whether to adopt the DOL’s six factor “test” or some other multi-factor analysis, including those used by the Second and Eleventh Circuits and in earlier Seventh Circuit decisions, to distinguish between an employee and an unpaid intern.  While clearly expressing skepticism of the DOL’s test and appearing to be more amenable to those factors adopted by the other courts of appeal, the Seventh Circuit ultimately concluded that it could not make “a one-size-fits-all decision” about programs that include practical training or internships, and held that regardless of what factors are used, the overarching determination is “the economic reality of the working relationship.”

Here, the Seventh Circuit found particularly compelling the fact that the practical instruction implemented by the defendant was a state-mandated requirement for graduation from the cosmetology program and therefore was part of the instruction the plaintiff was paying to receive. The Court of Appeals further found compelling that the defendant did not operate salons independently of those used to train its students and prohibited licensed cosmetologists from working in its salons.  In addition, the students were awarded licensing hours and academic credit, not pay, for the services they performed.  Finally, the fact that some of the services the students were required to perform included janitorial or other menial tasks did not alter the analysis because these very types of tasks were part of the job of cosmetologists; in fact, the Seventh Circuit noted, “Salon Safety and Sanitation” comprises the greatest percentage of the state cosmetology examinations in both Illinois and Indiana.

The Seventh Circuit’s opinion in Hollins does not establish a clear-cut test for employers seeking to distinguish between employees and non-employees, instead allowing the law flexibility depending on the particular relationships at issue, which may be welcome news as the “gig” economy grows.

New Oregon Overtime Law both Giveth to, and Taketh Away from, Manufacturing Employers

Effective immediately, Oregon’s law has been clarified to provide relief to non-union employers operating mills, factories or other manufacturing facilities with respect to certain overtime pay obligations, but also has been revised, effective January 1, 2018, to limit the number of weekly hours employees in such establishments may work.

Previously, the Oregon Bureau of Labor and Industries (“BOLI”) had concluded that employees who worked enough hours to qualify for both daily overtime pay (for 10 or more hours worked in a single day) and weekly overtime pay (more than 40 hours total in a given week) were entitled to receive both, thereby requiring employers to pay twice for some overtime hours. The new law rejects BOLI’s interpretation and establishes that employees are entitled only to the greater of either daily or weekly overtime, not both.

In addition, the new law limits such manufacturing employees to working no more than 55 hours, or at employee request or by employee consent up to 60 hours, per week absent undue hardship. Existing law already limited manufacturing employers to no more than 13-hour workdays.  Driven primarily by the state’s significant wine, agricultural and fishing industries and their seasonal harvesting demands, the new law does allow employees who process perishable products to consent to work up to 84 hours per week, with certain limitations. However, the law also prohibits employers from disciplining employees who refuse to consent to work more than 55 hours a week and provides statutory and liquidated damages for violations of the daily or weekly work-hour maximums. For further details, see Oregon Clarifies, Overhauls Manufacturing Overtime Rules.

Washington Supreme Court Clarifies State Meal Break Requirements

Under Washington State’s meal break statute, an employer must provide an employee working five or more consecutive hours a 30-minute meal period, although employees may waive the meal break under state law.  In answering questions certified to it by a federal district court, the Washington Supreme Court first explained that the statute does not provide for strict liability, that is, an employer does not always violate the statute whenever an employee misses a meal break.  But if an employer is not automatically liable under the statute when an employee misses a meal break, what standard applies?  Answering this second, and more difficult question, the court rejected the more employer-friendly approach adopted by the district court and proposed by Autozone – that the employer’s burden is merely to provide the employee with a meaningful, reasonable opportunity to take the meal break, without impeding or discouraging the employee from doing so – and instead concluded that a greater burden exists on employers when an employee asserts a meal break violation under WAC 296-126-092.  Under the standard adopted by the court, an employee satisfies his or her prima facie case by providing evidence that he or she did not receive a timely meal break.  The ultimate burden of proof then shifts to the employer to demonstrate either that no violation occurred (i.e., the employee was in fact provided a meal break) or that a valid waiver existed.  Brady v. Autozone Stores, Inc., 2017 Wash. LEXIS 681 (Wash. June 29, 2017).

In light of the holding, employers should continue to ensure that their employees are taking required meal breaks or, if an employee elects to waive that right, that proof of the waiver exists, preferably in writing and signed by the employee.

Pre-Litigation FLSA Settlements Don’t Require Court or DOL Approval, New York Federal Court Holds

In a case of first impression in the Second Circuit, a court in the U.S. District Court for the Southern District of New York has held private settlements under the FLSA entered into prior to a lawsuit being filed do not require approval by either the Department of Labor or a court.

In Gaughan v. Rubenstein, 2017 U.S. Dist. LEXIS 107042 (S.D.N.Y. July 11, 2017), the plaintiff filed FLSA and state law claims against her former employer seeking unpaid wages and liquidated damages, despite having settled these same claims long before filing suit.  On the employer’s motion to dismiss, the plaintiff argued that the settlement was not binding because it was never approved by the Department of Labor or a court, citing Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2nd Cir. 2015), a recent case from the Second Circuit holding that parties may not simply file a stipulation of dismissal with prejudice in a pending FLSA case without either DOL or court approval.  Distinguishing Cheeks, the district court held Federal Rule of Civil Procedure 41, applicable to voluntary case dismissals, was not at issue when a FLSA dispute is settled before the relevant litigation is filed; rather, it applies only to settlements reached during the pendency of an existing case.

The Second Circuit has not ruled on whether pre-litigation settlements can be binding in the absence of DOL or court approval and courts in other jurisdictions are split:  The Fifth Circuit Court of Appeals has held a pre-litigation settlement may be valid and binding where it is the result of a “bona fide FLSA dispute over hours worked or compensation owed” (as opposed to a non-FLSA settlement that merely contains a general waiver and release provision encompassing FLSA claims), Martin v. Spring Break ’83 Productions, LLC, 688 F.3d 247 (5th Cir. 2012), while the Eleventh Circuit has reached the opposite conclusion.  Lynn’s Food Stores, Inc. v. U.S. Department of Labor, 679 F.2d 1350 (11th Cir. 1982).  Distinguishing the oppressive, “one-sided bargaining” that occurred in Lynn’s Food Stores, the court in Gaughan concluded that to require DOL or court approval “given the procedural and substantive indicia of fairness present here[] would inhibit productive settlements,” and that “it would effectively require that any parties, even ably counseled plaintiffs, wishing to settle an FLSA dispute out-of-court without bringing suit, obtain judicial or agency approval for their settlement,” circumstances that the district court found unpalatable and unnecessary.

Should the plaintiff ultimately appeal, a Second Circuit decision furthers a circuit split regardless of its holding and sets up a potential Supreme Court resolution.

Oral Argument on Overtime Rule Appeal Scheduled for October 2nd

The Fifth Circuit Court of Appeals tentatively has set oral argument for October 2nd on the Obama-era overtime pay rule that has been blocked from government enforcement by a federal district court in Texas since last November.  The DOL under the Trump administration already has backed away from the government’s previous position, asserting in its appellate brief that it will not continue to advocate for the salary level set forth in the final rule but instead will undertake further rulemaking to determine what the proper salary level should be.  To that end, just last week the DOL issued a public request for information in anticipation of new rulemaking setting forth a lower salary level.  The DOL continues to argue on appeal, however, that it has the statutory authority to establish a salary level test, contrary to the conclusion of the district court.   It will be interesting to see how the DOL asks the Court to confirm its authority to set a salary level and reverse the district court on that point, but at the same time, not revive the Obama Final Rule that the DOL is now on a path to replace.

Coincidentally, oral argument before the Supreme Court is set for the same day in NLRB v. Murphy Oil USA and consolidated cases, to address the validity of class and collective action waivers in employment arbitration agreements.  The Court’s holding no doubt will have a significant impact on wage and hour class and collective actions going forward and is another matter in which the new administration has parted ways from its predecessor, the Department of Justice recently asserting in its brief to the Court that such waiver provisions are valid and enforceable.  So, October 2nd is shaping up to be a big day for employers.

Department Of Labor To Rescind 2011 Tip Pooling Regulation

Today the Trump Administration, through the Office of Management and Budget’s Office of Information and Regulatory Affairs, released the federal government’s semi-annual Unified Agenda of Regulatory and Deregulatory Actions. This agenda provides public notice of the regulatory actions the various agencies of the Executive Branch anticipate taking in the coming year. Among the items listed for the Department of Labor is a matter for the Department’s Wage and Hour Division entitled “Tip Regulations Under the Fair Labor Standards Act (FLSA),” Regulation Identifier Number 1235-AA21. The agenda notes that current “regulations limit an employer’s ability to use an employee’s tips regardless of whether the employer takes a tip credit under Section 3(m) [of the FLSA] or instead pays the full FLSA minimum wage directly to the employee” and that “the Department will propose to rescind the current restrictions on tip pooling by employers that pay tipped employees the full minimum wage directly.” The agenda contemplates issuing a Notice of Proposed Rulemaking in August 2017.

The rule under consideration would reverse a controversial position taken during the Obama Administration in 2011 when, in response to a federal appellate court decision concluding that the FLSA imposes no restrictions on tip pools where employers pay full minimum wage, the Department issued regulations expressly limiting the use of tip pools even when employers pay the full minimum wage to all employees. See Updating Regulations Issued Under the Fair Labor Standards Act, 76 Fed. Reg. 18,832 (Apr. 5, 2011). That ruling has spawned a number of lawsuits and is currently before the Supreme Court in two certiorari petitions, Nos. 16-163 and 16-920. The Department’s decision to rescind the regulation appears to reflect a recognition that the position taken in the prior administration is vulnerable to legal challenge, as well as a broader concern that if the Supreme Court takes the case up it could lead to a significant reining in of the authority of Executive Branch agencies to issue regulations in the absence of clear statutory permission to do so. The government’s brief in No. 16-920 is currently due on September 8, 2017.

DOL Opinion Letters Are Back

The U.S. Department of Labor announced today that it will reinstate the Department’s long-standing practice of issuing opinion letters to employers and employees regarding application of the Fair Labor Standards Act.   The Obama Administration eliminated opinion letters in favor of broader “Administrator Interpretations,” but those were few and far between.   “The letters were a division practice for more than 70 years until being stopped and replaced by general guidance in 2010,” the DOL release said.  Opinion letters address specific, and often nuanced questions, regarding application of the FLSA and its implementing regulations.  They provide guidance to employers, who, under the FLSA can rely on the guidance in structuring operations and compensation.  And if the employer relies on the opinion letter, even if a court later decides the DOL opinion letter does not accurately apply the law, the employer may be able to avoid liability under the “good faith” defense established by the FLSA.  “Reinstating opinion letters will benefit employees and employers as they provide a means by which both can develop a clearer understanding of the Fair Labor Standards Act and other statutes,” said Secretary Acosta.  At the beginning of the Obama administration, the DOL withdrew, for further consideration, several opinion letters that had been prepared by the Bush Administration, but not mailed prior to inauguration.  During the following eight years of the Obama Administration, however, the DOL did not take any further action with respect to those opinion letters.   It is possible that some of these opinion letters may be reinstated.

DOL Withdraws Joint Employer and Independent Contractor Administrator’s Interpretations

U.S. Secretary of Labor Alexander Acosta announced on June 7, 2017, the immediate withdrawal of two Wage and Hour Division Administrator’s Interpretations (“AIs”) on joint employment and independent contractor status issued by the Obama administration.

Administrator’s Interpretation No. 2016-01, issued in January 2016, addressed joint employment under the Fair Labor Standards Act (“FLSA”) and Migrant and Seasonal Agricultural Worker Protection Act (“MSPA”) and Administrator’s Interpretation No. 2015-1, issued in July 2015, addressed the definition of independent contractors under the FLSA. The AI regarding joint employment was viewed as an attempt to expand the definition of joint employment and the AI defining independent contractor status as narrowing those classified as independent contractors.

DOL made clear that removal of the two AIs “does not change the legal responsibilities of employers under the Fair Labor Standards Act or Migrant Seasonal Agricultural Worker Protection Act, as reflected in the Department’s long-standing regulations and case law.” But the withdrawal of these two AIs likely signals a policy shift in how DOL will interpret and seek to enforce matters relating to joint employment and independent contractor.

Acosta also signaled during his confirmation hearing that he may re-implement the agency’s practice of issuing opinion letters and, if this practice is reinstated, it is possible DOL may issue opinion letters further addressing joint employment and independent contractor issues.

New York State Department of Labor Appeals Decision Invalidating Regulations Governing Payroll Debits Cards and Direct Deposit

The New York State Department of Labor (NYSDOL) has appealed the Industrial Board of Appeals decision that invalidated and revoked final regulations issued by the NYSDOL which would have significantly restricted the use of payroll debit cards and imposed new disclosure and consent requirements for direct deposit.  The regulations (12 NYCRR §192) were to become effective on March 7, 2017, had the Industrial Board of Appeals not invalidated them.  Further discussion regarding the proposed rules can be found here.

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