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Wage & Hour Law Update

Third Circuit Joins Second Circuit In Rejecting Vague Pleadings of FLSA Violations

The Court of Appeals for the Third Circuit has joined the Second Circuit’s recent opinions requiring plaintiffs in FLSA cases to provide more than generalized allegations regarding hours worked in order to satisfy the the Supreme Court’s Iqbal/Twombly standard (all arising in the medical setting).   Davis v. Abington Mem. Hosp., 2014 U.S. App. LEXIS 16472 (3d Cir. Aug. 26, 2014).

Davis, like the Second Circuit’s decision in Lundy v. Catholic Health System of Long Island Inc., 711 F.3d 106 (2d Cir. 2013), concerned an FLSA complaint alleging in very general terms that Defendant hospital “did not compensate them for hours worked in excess of forty per week during meal breaks, at training programs, and outside of their scheduled shifts.”  The Third Circuit rejected this pleading, citing the Second Circuit’s opinion in Lundy and explaining that some factual specificity regarding work in excess of 40 hours that went uncompensated is necessary.

With the rising volume of FLSA litigation, complaints that are poorly drafted and contain inadequate facts should be dismissed, and employers who find themselves FLSA defendants should evaluate the complaint in light of this decision.

Sixth Circuit: Employee Did Not Have to be “Double Paid” Based On Layoff Plan Election

The term “severance pay,” is often used loosely, sometimes mixing together potential obligations under the law with those under employer policies, collective bargaining agreements or benefits plans.  In many states, such as New York, there is no obligation to give severance as a matter of state labor law.  See generally Glenville Gage Co. v. Industrial Bd. of Appeals, 70 A.D.2d 283 (3d Dep’t 1979).  However, some severance, separation or benefit programs have elaborate structures, and employers must assess the interplay between those policies and wage-and-hour law, as illustrated in a new decision from the Sixth Circuit rejecting a novel minimum wage claim.  McCarthy v. Ameritech Publ., 2014 U.S. App. LEXIS 15517 (6th Cir. 2014).

Plaintiff McCarthy was given two options under an involuntary layoff program: (1) receive a lump sum and retire; or (2) continue to work at 85% of her prior pay rate.  She chose Option 2.  In a later lawsuit alleging minimum wage violations, she argued that because the payments she received pursuant to the severance plan under Option 2 “constituted a preexisting severance obligation” rather than wages, she had not been compensated for the hours she worked.”  The Sixth Circuit was not convinced and rejected this minimum wage claim, holding that even though Plaintiff might be able to show that defendant fraudulently induced her to make the unfortunate choice (she claimed that she was misled into selecting Option 2 based on false information concerning health insurance coverage), she could not “import her fraud claim into a separate FLSA claim.”

Reductions in force with severance payouts can trigger wage/hour claims and employers should carefully consider all potential claims when implementing a reduction in force with severance payouts.

Virginia Governor Signs Executive Order Establishing Joint Task Force on Worker Misclassification and Payroll Fraud

Virginia employers may see more robust worker misclassification enforcement and enhanced cooperation between state agencies with respect to misclassification issues in the near future.  Following the lead of the federal government and other states, Governor Terry McAuliffe’s recent Executive Order, signed on August 14, 2014, calls for the establishment of an interagency task force on worker misclassification and “payroll fraud.”

According to the text of Executive Order 24, the Joint Legislative Audit and Review Commission (JLARC) estimates that worker misclassification has a significant negative impact on Virginia’s state income tax collections.  Instead of piecemeal enforcement, JLARC recommended that various state enforcement agencies, including the Virginia Employment Commission, the Department of Labor and Industry, the Department of Professional and Occupational Regulation, the State Corporation Commission’s Bureau of Insurance, the Department of Taxation, and the Workers’ Compensation Commission, work together to target worker misclassification and payroll fraud in the Commonwealth.  The Governor’s Executive Order makes JLARC’s recommendation official, adding the above-listed Virginia organizations to the ranks of government agencies who have sought to coordinate efforts in this area.

Among the stated purposes of the Virginia task force are evaluating the enforcement practices of the various agencies, developing procedures for more effective cooperation and joint enforcement, and making recommendations for legislative or administrative reform.  A progress report is due to the Governor by December 1, 2014.

Brooklyn Federal Court Finds Local Establishment Not Covered by FLSA

The high volume of FLSA litigation, particularly in jurisdictions such as New York and Florida, has in recent years forced many small businesses truly outside the scope of FLSA coverage to defend lawsuits brought pursuant to its minimum wage and overtime provisions.  Typically, these smaller employers attempt to address the issue of coverage early in the litigation with the goal of avoiding a protracted proceeding, though they are not always successful.  Recently, a federal judge in Brooklyn found a local Long Island restaurant to be outside the scope of FLSA coverage.  Li v. Zhao, 2014 U.S. Dist. LEXIS 109920 (E.D.N.Y. Aug. 8, 2014).

Defendant restaurant New China House Take Out was a “small dine-in, take-out, and delivery restaurant” in Westbury Long Island owned and operated by a husband/wife team and consisting of “four tables and a five-burner cooking range.”  Plaintiff, a delivery person and one of the restaurant’s two employees, alleged both types of FLSA coverage: enterprise and individual coverage.  He alleged New China House was an FLSA-covered enterprise which did $500,000 of business annually, and that in any case he was individually covered by the FLSA due to his involvement in interstate commerce, because he drove a car manufactured out-of-state to make local deliveries for the restaurant, and used a cell phone connected to a broader network of phone towers.

As concerned enterprise coverage, in granting summary judgment to the restaurant, Judge Pamela Chen assumed “that the amounts which accrued in China House’s bank account were derived entirely from its cash sales, and that the restaurant covered all of its expenses in cash before depositing the remainder in its bank account; and factor[ed] in the highest estimates for its costs and non-cash sales, as supported by the evidence [to] . . . conservatively approximate the restaurant’s gross sales.”  These amounts, the highest potential sales figures supported by the evidence, fell far below the $500,000 cutoff.  As concerned Li’s own interstate activity, Judge Chen noted that the “mere fact that Li drove a car, which happened to be manufactured outside of New York, to make deliveries within New  York does not establish his engagement in an interstate activity.”  The same logic applied to the cell phone: its business use was intrastate, and not a basis for individual coverage.

The Li decision is a victory on the merits, but highlights that even a non-covered entity can incur significant legal costs in proving such.  Small employers (many of whom may be covered by state wage-and-hour provisions) must set compensation practices with these issues in mind.

Interpreting Oracle, California Court Limits Application Of State Wage Laws Vis a Vis Out of State Employees

The California Supreme Court’s 2012 decision in Sullivan v. Oracle signaled, but did not conclusively rule, that no circumstances could support a California Labor Code claim by an employee working outside the State of California.  However, a new California federal court decision emphatically holds that the application of California’s Labor Code should end at the state’s borders.  Cotter v. Lyft, Inc., 2014 U.S. Dist. LEXIS 109444 (N.D. Cal. Aug. 7, 2014).

In Cotter, plaintiffs sought to represent a class of all individuals who provided driving services as independent contractors for the defendant asserting claims under the California Labor Code, regardless of the states in which they drove.  The court sua sponte (i.e., on its own) asked for a briefing on the appropriateness of such claims and ultimately rejected them, ruling “the idea that the wage and hour provisions [of the California Labor Code] do not apply to people who perform work exclusively  in other states finds support in the provisions themselves,” as well as in Sullivan and other recent authority.  Further, observed Judge Vince Chhabria, California’s labor law did not necessarily provide the most favorable protection to putative plaintiffs, as plaintiffs’ counsel argued, because certain other states’ laws provide for a higher minimum wage rate.  Finally, the Judge rejected the notion that the choice-of-law provision in defendant’s contract with its drivers, which designated that California law applied to its terms, provided out-of-state signees with claims under California law, because such an interpretation conflated “statutory claims that exist independent of the contract with claims that arise from the agreement itself.”

Plaintiffs’ counsel continue to push for expansive application of all wage-and-hour laws.  Large employers must analyze the scope of potential state labor law coverage of their various operations.   Employers also must always consider the unforeseen implications of choice of law provisions in employee agreements.

Illinois Enacts Pay Card Legislation

Joining the ranks of states which have enacted a specific statute to address the payment of wages via payroll debit card, Illinois Governor Pat Quinn last Wednesday signed legislation regulating payroll debit card practices in the state.  The new law is generally consistent with the Illinois Department of Labor’s recent historical enforcement practice, in that it forbids making use of the cards a condition of employment, and preserves an employee’s right to demand payment of wages via paper check or direct deposit payment.  Employers also must obtain written consent from employees paid through a payroll card program, and the program cannot be linked to forms of credit such as overdraft fees, cash advances or loans against future wages.

“HB 5622 does little to modify the law in Illinois; it simply codifies and clarifies it.  Most of its provisions are consistent with informal interpretations the Department had already provided, and common sense approaches we have been recommending to employers for years,” observed Chicago-based Jackson Lewis Shareholder Neil Dishman.

Although some states have enacted legislation and/or issued formal guidance regarding this increasingly common payroll debit card practice, in many states the law is unclear.  Multi-state employers must analyze the wage payment options available to them in all jurisdictions in which they do business and seek legal counsel as needed.

Governor Cuomo Convenes Wage Board To Assess Minimum Wage and Related Regulations Applicable To Tipped Employees; Industry Watching and Waiting (and Preparing to Comment)

When the New York legislature enacted minimum wage legislation last year resulting in the series of increases  to the minimum wage currently underway, legislators reached a temporary agreement not to increase the cash wage applicable to most tipped workers under New York State’s Wage Orders ($5.00 per hour under the Wage Order applicable to the Hospitality Industry), thereby  increasing the “tip credit.”  Last week, Governor Cuomo convened a new wage board to analyze the status of tipped worker wages and make recommendations regarding potential increases.

Some States do not permit any tip credit against wages under state law, whereas under federal law, tipped workers can be paid a cash wage of $2.13 per hour ($5.12/hour tip credit).  New York worker advocates have urged for the elimination of any tip credit in New York, arguing that tips are a separate transaction between a customer and a service person which are not intended as a substitute for an employer-paid wage.  Business and employer groups counter both that tip income is substantial (and as such should be recognized in the minimum wage scheme), and that a non-incremental increase which eradicates the tip credit entirely or greatly reduces it would constitute a sea change not affordable by the overwhelming majority of smaller industry employers already preparing to cope with changes necessitated by the Affordable Care Act, as well as other increased operating costs.

The Wage Board has been given a February 2015 deadline to conduct the necessary public hearings and report its findings.  Industry groups, individual industry employers and employee advocacy groups all will have an opportunity to make submissions to the Wage Board once it narrows and focuses its areas of specific inquiry.  We will apprise of further developments in this area.

Second Circuit Finds Audit Associates Are Exempt Professionals

Affirming a highly-publicized 2012 decision from Southern District of New York Judge Colleen McMahon, the Court of Appeals for the Second Circuit ruled last week that audit associates employed by “Big Four” accountancy KPMG qualified for the learned professional exemption from overtime under the FLSA.  Pippins v. Kpmg Llp, 2014 U.S. App. LEXIS 13997 (2d Cir. July 22, 2014).

In Pippins, the Circuit analyzed whether audit associates exercised “discretion and judgment” demonstrating the use of “advanced knowledge,” and whether, as a group, they did so in the recognized profession of accounting by utilizing advanced knowledge customarily acquired through prolonged academic instruction.  As concerned the use of discretion and judgment requiring use of advanced knowledge, the Court determined that “Plaintiffs’ own description of their work indicates that they collected and analyzed information from clients and produced written work product requiring judgment analogous to that exercised by [employees found to be learned professionals in other contexts], and that the[y] . . . did more than tabulate data or maintain books.”  To characterize this work as not requiring discretion and judgment, in the Court’s view, was “to confuse being an entry-level member of a profession with not being a professional at all.”

As to whether the advanced knowledge was acquired through prolonged academic instruction, because the record demonstrated that substantially all of the audit associates had relevant accounting degrees and were on the cusp of qualifying for the CPA credential, the Court concluded that this prong of the test was met.  The Court framed the “critical inquiry [a]s not whether there might be a single Audit Associate who does not satisfy a specific set of academic requirements, but whether the ‘vast majority’ of Audit Associates required a prolonged, specialized education to fulfill their role as accountants.”  In the case at bar, KPMG established the Audit Associates’ “formidable educational qualifications [rendering] it . . . indisputable that the vast majority of Audit Associates received such an education.”

Pippins is a welcome decision for the industry and reiterates the core principles of the learned professional exemption:  the need to exercise professional judgment in a duly recognized profession obtained through prolonged academic instruction.  Employers classifying workers as learned professionals must analyze the nature of the profession, the requisite educational prerequisites and the professional judgment exercised in the role.

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.