Are Employers Willing to Risk Getting PAID?

(Updated 4/12/2018)

Last month, the DOL announced the Payroll Audit Independent Determination program (“PAID”), a self-auditing program designed to encourage employers to uncover and voluntarily report potential minimum wage and overtime violations and avoid the risk of penalties or liquidated damages that would be imposed if the Agency discovered the violations in the first instance.  We initially discussed the PAID program here.

This week, the WHD formally began the six month (or so) trial program and posted additional guidance, including a “Q & A” section, regarding the program on the DOL’s website, to provide further detail as the circumstances under which the program is (and is not) available and, presumably, to ease concerns that employers, who are contemplating participation in the program, might have.  Specifically, the WHD identifies the following eligibility requirements as to any proposed PAID self-audit:

  • The employer is covered by the FLSA;
  • The employees at issue are not subject to prevailing wage requirements under the H-1B, H-2B, or H-2A Visa programs; the Davis Bacon Act or related acts; the Service Contract Act; or any Executive Order;
  • Neither the WHD nor a court of law has found within the past 5 five years that the employer has violated the minimum wage or overtime requirements of the FLSA by engaging in the same compensation practices at issue;
  • The employer is not currently a party to any litigation (private or with the WHD) asserting claims involving the same compensation practices;
  • The WHD is not currently investigating the compensation practices at issue;
  • The employer is not specifically aware of any recent complaints by its employees or their representatives to the employer, the WHD or a state wage enforcement agency asserting FLSA violations of the compensation practices at issue; and
  • The employer has not previously participated in the PAID program to resolve potential FLSA violations from the same compensation practices.

In addition, DOL states that absent evidence of health or safety concerns (e.g. potential child labor violations), if it declines an employer’s request to participate in the program it will not use that request as a basis for a subsequent investigation.  But DOL acknowledged that PAID self-audit requests will be subject to Freedom of Information Act (FOIA) requests, which could result in unwanted publicity for and/or additional litigation against employers.

The guidance does not address potential parallel claims under state law, over which the DOL has no jurisdiction and, as Acting WHD Administrator Bryan Jarrett reiterated during a DOL-sponsored webinar on April 10th, the PAID program does not currently cover other potential claims (e.g. FMLA claims) regulated by the Agency.  The concern as to how, if at all, the PAID program would alleviate possible liability for parallel state law claims was underscored last week when New York Attorney General Eric Schneiderman announced that his office will continue to investigate such claims and seek full remedies under state law, regardless of whether an employer has separately participated in the PAID program.  Deriding the program as a form of amnesty, Schneiderman referred to it as “nothing more than a Get Out of Jail Free card for predatory employers.”  This week, in a letter to Secretary of Labor Alexander Acosta, Schneiderman was joined by the Attorneys General of nine other states and the District of Columbia, who likewise questioned the “troubling” nature of a program that allows employers in effect to obtain an “interest-free loan” without penalty by simply paying wages that it already owed to employees.  Moreover, expressed the Attorneys General, employers might be able to obtain global settlement agreements that encompass state law claims, even though resolution of those claims was not supervised by the DOL and even though the employer might, unbeknownst to it, be under a state investigation at the time.  This is particularly problematic, noted the Attorneys General, because many state wage and hour laws provide protections and remedies for employees greater than those available under the FLSA.

Jackson Lewis will continue to monitor the PAID program during its trial period and, to the extent possible, evaluate its efficacy as a beneficial employer alternative to potential wage and hour claims and Agency-initiated audits.  If you have any questions about this or any other wage and hour issue, please consult the Jackson Lewis attorney(s) with whom you regularly work.

Department of Labor Issues Initial Guidance on Tip Pooling Amendment

This week the Department of Labor issued new guidance, in a “Field Assistance Bulletin,” on the recent amendment to the FLSA regarding tip sharing.  The recent amendment to the FLSA (which was included in the omnibus budget bill) bars “supervisors or managers” from retaining tips but expressly allows tipped workers to share tips with non-tipped workers, so long as the employer does not take a tip credit and the individuals participating in the tip sharing are not managers or supervisors.   The amendment, however, contains no definition of the terms “supervisor” or “manager.”  The new guidance explains that, for purposes of the new amendment to the FLSA, a “supervisor or manager” is an individual who performs the duties of an exempt manager under the FLSA’s “executive” exemption.

Under DOL regulations, to satisfy the duties test for the executive exemption, three requirements must be met:  (1) the employee’s primary duty must be management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; (2) the employee must customarily and regularly direct the work of two or more other employees; and (3)  the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

Under the DOL guidance, whether an employee is paid on a salary basis is not relevant to whether they can participate in sharing tips. Thus, if a manager performs the duties of an exempt employee under the executive exemption but is not paid on a salary basis, the individual still could not share in tips received by employee, even though they may be non-exempt because they fail to satisfy the salary basis test.  The DOL has stated its intention to “proceed with rulemaking in the near future to fully address the impact of the 2018 [FLSA] amendments” which, hopefully, will provide further clarification as to how the executive exemption duties test will be applied in the tip-pooling context.

Jackson Lewis will continue to monitor developments related to the new tip-pooling law.  Additionally, employers should review state-law requirements and their interaction with the FLSA.   If you have any questions about this or any other wage and hour issue, please consult the Jackson Lewis attorney(s) with whom you regularly work.

Supreme Court Exempts Automobile Service Advisors from Overtime, Rejects ‘Narrow Construction’ Principle under FLSA

After years of litigation, this week the Supreme Court concluded that service advisors who work in an automobile dealership are exempt from overtime under the FLSA.  Much more profoundly, the Court unequivocally rejected the principle, a longstanding bane to employers, that FLSA exemptions should be “narrowly construed” due to the Act’s status as a “remedial” statute.  Encino Motorcars, LLC v. Navarro, 2018 U.S. LEXIS 2065 (Apr. 2, 2018).  A full review and analysis of the Court’s opinion can be found here.

 

Wisconsin Legislature Preempts Local Enactment of Wage and Hour Regulations

Joining more than two dozen other states that have barred local enactment of minimum wage or other employment laws, on March 22, 2018 the Wisconsin legislature passed Assembly Bill 748, intended to promote statewide uniformity in the regulation of employment practices. AB 748 prevents local governments and municipalities from enacting and enforcing their own ordinances relating to various employment matters, including several areas pertaining to wage and hour law.  Governor Scott Walker is expected to sign the Bill into law in the near future.  In addition to precluding local counties and municipalities from enacting ordinances regulating “labor peace” agreements, requiring more stringent occupational licensing, or mandating employer provision of pension or other benefits, AB 748 prohibits local jurisdictions from enacting laws:

  • Regarding employee work hours and overtime, including shift schedules.  However, certain ordinances regulating business operating hours or the work hours of certain traveling sales  crew workers are excluded;
  • Prohibiting employers from requesting salary history information from prospective employees;
  • Establishing minimum wages for local government employees, contract employees or employee work that is funded by financial assistance from the local governmental unit.  This provision supplements existing Wisconsin law, passed more than a decade ago, prohibiting local jurisdictions from enacting minimum wage laws related to private employers; or
  • Regulating “wage claims or collections.”  Investigation of disputes regarding such claims will remain the purview of the Wisconsin Department of Workforce Development.

Notably, in a last-minute amendment to the Bill, local counties and municipalities will not be precluded from enacting and enforcing employment discrimination laws that provide greater protection than those provided under Wisconsin law.

For more information on AB 748 or any other wage and hour issue, please contact the Jackson Lewis attorney(s) with whom you regularly work.

California Supreme Court Adopts State Agency Formula for Calculating Overtime Value of Flat-Sum Bonus, Rejecting Federal View

The California Supreme Court has held that, under state law, when an employee earns a flat-sum bonus during a pay period, the overtime pay rate will be calculated using the actual number of non-overtime hours worked by the employee during the pay period. Alvarado v. Dart Container Corp., 2018 Cal. LEXIS 1123 (Cal. Mar. 5, 2018).

In so holding, the Court reversed a lower court of appeal decision that had rejected policy guidance issued by the California Department of Labor Standards Enforcement (DLSE). Please find the rest of this article in our Publications page here

U.S. Department of Labor Announces Self-Audit Program

Mistakes happen.  But when those mistakes result in a violation of the Fair Labor Standards Act, what is an employer to do?  Pay twice the amount of wages owed to cover both back wages and an amount equal to liquidated damages? Hope no one notices?  Well, thanks to the Wage and Hour Division (WHD) of the DOL, another option is now available to provide “make whole” relief to the employees and a binding release of FLSA claims for the employer, without the agency penalties and without the liquidated damages that may provide nothing more than a windfall to employees who have received all wages due.   The WHD has announced a new pilot program designed to encourage employer self-reporting of potential minimum wage and overtime violations.  Under the Payroll Audit Independent Determination (“PAID”) program, an employer who uncovers potential wage violations during a self-audit may voluntarily report those findings to the WHD, which will work with the employer to pay any wages due to employees without the additional risk of the penalties or liquidated damages the agency might impose were it to initiate the audit.  The WHD intends to operate the program for approximately six months and then undertake an assessment of its effectiveness.

Under the PAID program, if an employer discovers any non-compliant, or even questionable, minimum wage or overtime practices (including, for example, misapplication of the “white collar” or other exemptions), it can provide to the WHD the identity of the affected employee(s), the relevant timeframe and a calculation of the wages owed.   The WHD may agree with the employer’s determinations or may arrive at its own calculations, after which it will notify the affected employees and provide them with a summary of the wages owed and the settlement terms.  If the employee executes the settlement agreement, the employer will have to pay the wages due no later than the next regular pay period.

While the intent of the PAID program is to resolve potential wage and hour claims more expediently – with less financial cost to employers than if the same issues were uncovered during an agency audit and with faster payment of the wages to the affected employees –  participation in the program is not without risks to employers.  Many employers are wary of proactively contacting a federal agency with the admission of an error.  Employees are also not obligated to accept the proposed settlement terms simply because the WHD has endorsed them.  An employee, for example, might consult his or her own attorney, resulting in an increased, rather than decreased, prospect of litigation.  That risk is magnified if a significant number of employees are implicated, as the possibility of a viable collective or class action likely would bolster the interest of a plaintiff’s attorney.

In addition, because any settlement will be limited to the potential wage violations and timeframe at issue, the employer will not have the opportunity to obtain a general waiver and release as part of the settlement terms.  Notably, employers may not use the PAID program to resolve issues already being investigated by the WHD; that already are the subject of litigation or arbitration (whether actual or threatened); or about which the employer already has been contacted by an employee’s attorney or other representative to settle.

Nevertheless, in industries that currently are, or routinely have been, the focus of WHD audits, or for companies that already have identified substantial wage and hour risks in their workplace, the PAID program provides an option to employers to address and resolve wage and hour compliance issues without fear of the substantial penalties and liquidated damages ensuing from an agency-initiated audit.

Jackson Lewis will continue to monitor the PAID program as the DOL provides additional information.  If you have any questions about this or any other wage and hour issue, please consult the Jackson Lewis attorney(s) with whom you regularly work.

Pennsylvania Governor Seeks to Expand Overtime Pay to Currently Exempt Employees

Frustrated by years of unsuccessful efforts to raise the minimum wage through the state’s Republican-controlled legislature, and in response to the recent federal court invalidation of the Obama-era DOL’s rule that would have doubled the minimum salary requirement for the executive, administrative and professional exemptions (i.e. the “white collar” exemptions) under the FLSA, Pennsylvania Governor Tom Wolf has proposed an increase in the minimum salary under corresponding state regulations for employees to satisfy the white collar exemptions.  Under current state law, the minimum salary requirement for these exemptions is only $250 per week, meaning that it has no practical impact, as the minimum salary requirement under the FLSA is $455 week or $23,660 a year.

A change to the state regulations would require approval only by a five-member board that currently has a Democratic majority (including the Governor himself), effectively bypassing the Republican legislature.  Under the proposal the first salary increase, to $31,720 per year, would be implemented in 2020.  Subsequent increases the following two years would raise the minimum salary threshold to nearly $48,000 by 2022.  While the approval process could take more than a year, if enacted the impact is expected to be monumental, affecting approximately 460,000 currently exempt workers in Pennsylvania.  Should these changes take place, Pennsylvania would join other states, such as New York and California, which have implemented a minimum salary requirement for the white collar exemptions exceeding that required by the FLSA.

Jackson Lewis will continue to monitor the status of the proposed regulation. If you have any questions on how the proposal impacts your current workforce or any other wage and hour questions, please contact the Jackson Lewis attorney(s) with whom you work.

Supreme Court (Re)hears Oral Argument on Application of Automobile Dealer Exemption to Service Advisors

Last week the Supreme Court heard – for the second time – oral argument in Encino Motorcars, LLC v. Navarro.  At issue is whether “service advisors” at dealerships are covered by what’s known as the “automobile dealer” exemption set forth in Section 213(b)(10)(A) of the FLSA.  That exemption excludes from overtime any “salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.”  Salesmen who sell cars are covered, as are the mechanics who service them.  But are service advisors (those who sell services and act as the liaison between the customer and mechanic) “primarily engaged in” selling or servicing automobiles?

A little history first.  The 213(b)(10)(A) exemption was enacted in 1966.  In 1970, the DOL issued a regulation stating service advisers were not covered by the exemption and, therefore, were eligible for overtime pay.  Several courts, including the Fifth Circuit Court of Appeals and a number of district courts, however, disagreed and refused to follow the DOL regulation.  As a result, in 1978 the DOL abandoned the regulation in an opinion letter and stated that service advisors are covered by the exemption.  Both the DOL and the courts applied the exemption to service advisors for more than 30 years.  In 2011, however, when a Bush-era regulation finally codifying the exemption was proposed, the DOL, now under the Obama Administration, reversed course, issuing a final rule returning to its 1970 position that service advisors are not covered by the exemption and thus are eligible for overtime pay.  Despite the fact that the final rule offered little explanation for the dramatic change in position, the Ninth Circuit Court of Appeals deferred to the DOL’s final rule when the issue first came before it in Encino Motors in 2015.

In 2016, the Supreme Court reversed the Ninth Circuit’s decision, concluding that the Court of Appeals erred in deferring to the DOL regulation because the DOL provided no reasoned explanation for its change in position.  The Supreme Court did not resolve, however, the merits of the issue.   Rather, the Court remanded the case to the Ninth Circuit for it to determine in the first instance whether the exemption applied to service advisors, without reference to the DOL’s regulation.  On remand, the Ninth Circuit reached the same result (service advisors are not exempt), albeit relying instead on a detailed examination of the statutory text and legislative history of the exemption.   So, the case came back to the Supreme Court to review that decision:  whether service advisors are exempt under the 213(b)(10)(A) exemption.

The defendant automobile dealership argues that service advisors are “salesmen” primarily “engaged in servicing” automobiles because the definition of “servicing” or “engaged in” is broad enough to cover not only those doing the actual repair work but those involved in providing the overall service.  Plaintiffs argue this is a stretch and that interpreting the statute this way leads to an unnatural reading of the statute.

So what did the recent oral argument reveal? That it’s probably a close decision, along the usual philosophical lines.  While Justices Kagan, Breyer, Ginsburg and Sotomayor appear to be against extending the exemption to service advisors, Chief Justice Roberts seemed to accept the notion that service advisors can be “engaged in” the servicing of automobiles even though they do not perform the actual repairs.  Justices Alito and Thomas previously asserted, in their dissents in the Court’s 2016 remand opinion, that service advisors satisfied the exemption.  That means the decision may come down to Justice Kennedy (as it often does in close decisions) and newly-arrived Justice Gorsuch.

The decision may require a lengthy lesson on grammar  to answer the precise question (the statute was not well drafted) and even grammarians might disagree.   But the case could have broader implications if the Court addresses another issue dangling on the periphery of the case:  the viability of the so-called “narrow construction” principle, i.e. the assertion that exemptions should be narrowly construed against the employer and applied only when they do so plainly and unmistakably.  The Ninth Circuit historically has relied on this canon and did so again on remand in ruling in favor of the employees.  But the defendants have asked the Court to cast this so-called rule of construction aside, a canon it has not cited in its last few cases addressing the FLSA.  And if the Court does address it, the decision could have positive, wide-ranging implications for employers when courts subsequently analyze other exemptions under the FLSA.  Only Justice Gorsuch mentioned the canon during the oral argument.

Stay tuned….

It’s Cut and Dry: Ninth Circuit Adopts “Primary Beneficiary” Analysis, Concludes Cosmetology and Hair Design Students Were Interns, Not Employees

Former students at a cosmetology and hair design school with locations in California and Nevada were interns and not employees entitled to wages under the FLSA or state law, the Ninth Circuit has held.  Benjamin v. B&H Education, 2017 U.S. App. LEXIS 25672 (9th Cir. Dec. 19, 2017).  In so concluding, the Ninth Circuit adopted the non-exhaustive, multi-factor “primary beneficiary” test established by the Second Circuit in Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528 (2nd Cir. 2016) (discussed at length here], concluding that this test “best captures the Supreme Court’s economic realities test in the student/employee context and that it is therefore the most appropriate test for deciding whether students should be regarded as employees under the FLSA.”

In applying the factors set forth in Glatt, the Ninth Circuit found that each of the seven enumerated factors supported a determination that the plaintiffs were the “primary beneficiaries” of their time spent in the clinical settings required for licensure by the respective states – and therefore were not employees – despite the fact that the school derived some income from individuals receiving the salon services.  Those factors included an acknowledgment by the students that they would not be paid for their clinical services; they received hands-on training and academic credit for their efforts; their clinical work was coordinated with their academic schedules; the clinical work satisfied the practical hours required prior to taking state licensing exams and ended once a sufficient number of such hours was achieved; they did not displace paid employees of the school; and they had no expectation of employment with the school after graduation.

Finally, the Court of Appeals likewise held that the students were not employees with respect to claims under California or Nevada law.  While Nevada’s definition of “employee” mirrors that of the FLSA, and therefore made for an easy dismissal of claims under that state’s law, California’s definition focuses on the employer’s “right of control” of an individual’s wages under the applicable wage order.  Nevertheless, the Ninth Circuit concluded that “the California Supreme Court would have no reason to look to the wage order definition” because the plaintiffs “were never hired by any entity as an employee. They are not entitled to be paid any wages.”  Thus, the “right of control” analysis is inappropriate in such a school setting, the Court of Appeals held.  Rather, it opined that the California Supreme Court “would instead apply a test more similar to the FLSA primary beneficiary test” because it “is better adapted to an occupational training setting than the [more rigid] DOL factors [rejected in Glatt].”

With its decision in Benjamin, the Ninth Circuit joins not only the Second Circuit in adopting the “primary beneficiary” analysis, but the Eleventh Circuit as well, which adopted the analysis in Schumann v. Collier Anesthesia, P.A., 803 F.3d 1199 (11th Cir. 2015). By contrast, in a recent case with facts substantially similar to those of Benjamin, the Seventh Circuit rejected the DOL’s approach but declined to adopt any particular test. Hollins v Regency Corp., 2017 U.S. App. LEXIS 15076 (7th Cir. Aug. 14, 2017) (discussed here).

Benjamin provides additional support and guidance to employers assessing an existing or contemplated internship program. If you have any questions about internships or other wage and hour issues, please contact the Jackson Lewis attorney with whom you work.

Hearst Interns Were “Primary Beneficiaries” of Program and Not Employees, Second Circuit Affirms

Several former interns of the Hearst Corporation, one of the world’s largest magazine publishers, were just that: unpaid interns, not employees entitled to minimum wage or overtime under the FLSA, the Second Circuit has held.  Wang v. Hearst Corp., 2017 U.S. App. LEXIS 24789 (2nd Cir. Dec. 8, 2017).  The Second Circuit has jurisdiction over New York, Connecticut and Vermont.

Each of the five plaintiffs worked at one of Hearst’s magazines in an unpaid internship.  It was undisputed that there was no promise or other expectation of compensation during or subsequent full-time employment following these internships, and each internship required its participants to receive pre-approval for college credit, although ultimately not all of the plaintiffs received such credit.  Each of the plaintiffs also admitted that as part of their internship, they performed tasks and gained valuable experience related to their professional pursuits, primarily in the journalism or fashion industries, but argued many of the tasks they performed were menial, did not advance their degrees and displaced the work of paid employees.

In concluding that the summary judgment record established that these individuals were indeed interns and not employees, the Court of Appeals reviewed the “totality of the circumstances” of the plaintiffs’ internships, in light of the multi-factor analysis it set forth last year in Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528 (2d Cir. 2016).  Those non-exhaustive factors include:

(1)        the extent to which the intern and employer clearly understand that there is no expectation of compensation;

(2)        the extent to which the internship provides training similar to that given in an education environment, including clinical or other hands-on training;

(3)        the extent to which the internship is tied to the intern’s formal education program through integrated coursework or credit;

(4)        the extent to which the internship accommodates the intern’s academic calendar;

(5)        the extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;

(6)        the extent to which the intern’s work complements, rather than displaces, that of paid employees; and

(7)        the extent to which the intern and employer understand that there is no entitlement to employment following the internship.

In Wang, Factors 1 and 7 were not in dispute.  Noting that its opinion in Glatt expressly included vocational benefits and “practical skill development in a real-world setting,” the Court of Appeals rejected the plaintiffs’ argument that the internship was not in an “education environment” as set forth in Factor 2, as well as the plaintiffs’ argument that because they already possessed some of the skills they used during the internship, they were not receiving “beneficial” learning, as required by Factor 5.  As to Factor 3, the internships of all but one of the plaintiffs occurred around, and in coordination with, their academic calendars, and the remaining plaintiff intentionally postponed beginning graduate school to undertake the internship following college graduation.  That the internship included a requirement to earn credit “generally is more telling than whether credit was actually rewarded in that individual’s case,” noted the Second Circuit.  Similarly, with respect to Factor 4, the Court of Appeals noted that Hearst accommodated the plaintiffs’ academic schedules when such a schedule existed.

Finally, as to Factor 6, the Court of Appeals agreed that the fact the interns completed some work otherwise performed by paid employees weighed in their favor but noted that this factor is not dispositive.  Reiterating its rejection in Glatt of the DOL’s position that conferral of tangible benefits on the employer mandates the finding of an employer-employee relationship, the Second Circuit added that “[it] is no longer a problem [in classifying an individual as an intern] that an intern was useful or productive.”

Wang provides further practical guidance to employers who have implemented, or are contemplating the implementation of, an internship program, and the potential for such interns to be deemed employees entitled to FLSA protections.  Those fashioning unpaid internship programs should benchmark them against this and other appellate guidance.

If you have any questions about internships or other wage and hour issues, please contact the Jackson Lewis attorney with whom you work.

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