National Appliance and Electronics Retailer’s Sales Commission Policy Was Lawful – For the Most Part, Sixth Circuit Rules

In what may be viewed as a pyrrhic victory, now-defunct[1] “big box” electronics, appliance and furniture retailer hhgregg’s commission-with-draws compensation program generally was lawful under the FLSA, the Sixth Circuit Court of Appeals has held. However, its policy holding employees liable for any unearned draw payments upon termination of employment would violate the Act. Stein v. hhgregg, Inc., 2017 U.S. App. LEXIS 19908 (3rd Cir. Oct. 12, 2017). The Sixth Circuit has jurisdiction over Kentucky, Michigan, Ohio and Tennessee.

For decades, many retail companies have compensated their sales employees primarily through commissions, supplemented by “draw” payments in weeks where an employee’s commissions failed to provide sufficient compensation for the employee to earn minimum wage. Typically, under these plans the amount of the draw is then deducted from future earnings in weeks when the employee’s commissions exceed the applicable minimum wage.   For years, such draw-on-commission policies routinely have been recognized and accepted by the Department of Labor as a method of compensation for retail sales employees.  Specifically, Section 7(i) of the FLSA excludes retail or service employees from additional overtime pay if (a) the regular rate of pay of such employee is in excess of one and one-half times the applicable minimum wage rate and (b) more than half of the employee’s compensation is earned through commissions.  At issue was whether hhgregg’s draw-on-commission policies complied with DOL regulations.

Plaintiffs argued that by reducing future paychecks to recoup prior draw payments, hhgregg’s compensation policy was an unlawful “kickback” scheme because, in requiring such repayment, the company failed to deliver wages to the employees “free and clear,” as required under DOL regulations. The Sixth Circuit rejected this argument, noting that the “free and clear” requirement only pertained to wages that already had been delivered to the employee but, as a result of coercion or through a prior secret agreement, were immediately repaid to the employer.  Here, however, the recoupment comes from future commissions, that is, wages that have not yet been delivered.  This interpretation, and in general the validity of a draw-against commission pay system, has long been recognized by the DOL in its Field Operations handbook and several opinion letters, noted the Court of Appeals.

On the other hand, the company’s policy stating that upon termination of employment for any reason, an employee must “immediately pay [the company] any unpaid [draw balance]” could, if enforced as written, violate the FLSA, concluded the Sixth Circuit. Because, in theory, an employee could be required to repay commissions already delivered to him or her, those wages would not have been paid “free and clear” as required under the Act, particularly where, for example, the employee might owe thousands of dollars in draw payments.  The Court of Appeals noted that the aforementioned DOL opinion letters, on which it relied to validate the company’s regular draw-on-commission policy, explicitly noted that the no repayment of draws was expected on separation of employment.  Thus, on this basis, as well as on allegations that management tacitly, if not explicitly, approved off-the-clock work, the case was reversed in part and remanded.

If you have any questions about proper commission-based pay policies or any other wage and hour issues, please contact the Jackson Lewis attorney with whom you work.

[1]   hhgregg announced in April 2017 that it would be declaring bankruptcy and closing all of its brick-and-mortar stores.  However, it does appear that some version of the company has resumed operations solely through online sales.

California to Hold Direct Contractors Jointly Liable for Subcontractor’s Unpaid Wages and Fringe Benefits

Beginning with contracts entered into on or after January 1, 2018, direct (general) contractors in California will be held jointly liable for their subcontractors’ unpaid employee wages, fringe benefit or other benefit payments or contributions under Assembly Bill 1701, signed into law by Governor Jerry Brown on October 14th. This joint liability requirement is codified in Labor Code Section 218.7.

The law does not apply to individuals performing work under contracts with the State of California, special districts, municipalities or political subdivisions. Furthermore, the law does not provide a private right of action against the direct contractor.  Instead, the law may be enforced by the Labor Commissioner, joint labor-management cooperation committees or labor unions.  The Commissioner may recover unpaid wages and benefits through an administrative hearing, a citation or a civil suit, while joint labor-management cooperation committees and labor unions may recover damages solely through civil suits.  The latter two groups also may recover attorney’s fees and costs.  The statute of limitations for bringing a claim is one year, which begins to run when the completion of the direct contract is recorded, when cessation of work on the direct contract is recorded or when the actual work covered by the direct contract is completed, whichever is earlier.

As a means of providing some protection to direct contractors, the law implements record-production requirements to assist them in auditing their subcontractors’ wage and benefits compliance. At the request of a direct contractor, a subcontractor must produce payroll records with sufficient information to determine whether the subcontractor is fulfilling its obligation to pay employee wages, fringe benefits and other benefits.  Also upon request, the subcontractor must provide contract-specific information, such as the project name; the subcontractor’s name and address; identification of the entity for whom the subcontractor is directly working; the anticipated start date, duration and estimated journeymen and apprentice hours of the subcontract; and contact information for its own subcontractors on the project.  A subcontractor’s failure to provide the requested information does not eliminate the direct contractor’s joint liability but does entitle the direct contractor  to withhold payment of sums owed to the subcontractor as “disputed” until the requested information is provided.

AB 1701 creates the potential for significant financial exposure to direct contractors, as it will require them to act as guarantors not only of their own employees’ wages and benefits, but those of their subcontractors’ employees, their sub-subcontractors’ employees, and so on. If you have any questions regarding compliance with this new law or any other wage and hour issue, please contact the Jackson Lewis attorney(s) with whom you work.

DOL Confirms New Overtime Rule Coming (Updated 10/31/2017)

The U.S. Department of Labor confirmed on October 30, 2017 that it intends to “undertake new rulemaking with regard to overtime.”  While the DOL simultaneously filed an appeal of the district court order holding the prior overtime rule invalid, the DOL stated it intends to request that the Fifth Circuit “hold the appeal in abeyance while the Department of Labor undertakes further rulemaking to determine what the salary level should be,” according to the statement made by the DOL.   The Obama-era rule set the salary level for the white collar exemptions at $47,476.  It is expected the new salary level will be in the low $30,000 range.   In July 2017, after the DOL published a Request for Information regarding a new overtime rule asking for public comment, more than 140,000 comments were received.  The next step is for the DOL to issue a proposed rule, and then then a final rule following a comment period.

In addition, the AFL-CIO has appealed the denial of its motion to intervene in the district court case, although its motive for doing so remains to be seen.  We will continue to report developments here.  Stay tuned…

DOL Confirms to OMB It Will Reverse Course on Yet Another Controversial Regulation, New Rule Will Reduce Restrictions on Tip Sharing

In recent years, one significant issue that has plagued industries employing tipped employees is whether the employers must ensure that tipped employees retain all of their tips even if the company is not using the employee’s tips to satisfy part of the minimum wage pursuant to the FLSA’s “tip credit” provision, 29 U.S.C. § 203(m). The provisions of Section 203(m) of the FLSA require, among other things, that tipped employees paid a tip credit rate retain all of their tips except for permissible tip pools.

In 2011, the DOL issued a regulation stating that, even if employers are not taking the tip credit with respect to tipped employees, those employers nevertheless must ensure that the tipped employees retain all of their tips. This interpretation prohibits, for example, the sharing of tips between front of the house employees and back of the house employees. The Ninth Circuit Court of Appeals upheld the DOL’s new regulation as consistent with Section 3(m) in Oregon Rest. and Lodging Ass’n v. Perez. Other courts across the country, however, had rejected the DOL’s 2011 regulation and held that employers do not have an obligation to ensure tipped employees retain all of their tips if the company is not taking a tip credit.  A circuit split ensued, and a petition for writ of certiorari is currently pending with the U.S. Supreme Court.

Earlier this year, the DOL announced that it planned to change course and rescind the 2011 regulation.  DOL took the first step this week. On October 24, 2017, DOL sent a proposed rule to to the Office of Management and Budget for review prior to issuing a formal proposed rule.  This regulation likely will now permit tip sharing between back of the house and front of the house employees, so long as a tip credit is not taken under Section 203(m). If a tip credit is taken, of course, then sharing of tips between tipped and non-tipped employees would still be prohibited.

A summary contained on the OMB website contained few details, stating only that the DOL’s 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)” and indicating that the DOL’s proposed rules “will propose to rescind the current restrictions on tip pooling by employers that pay tipped employees the full minimum wage directly.”

Keep in mind that, even if this regulation is adopted such that federal law would permit sharing of tips when the tip credit is not taken, state law could still nevertheless prohibit tip sharing even if a tip credit is not taken. Thus, it remains important, as always, to confirm compliance with state law before implementing any wage-and-hour practice, whether relating to tipped workers or otherwise. The law governing tip practices under the FLSA (as well as numerous state laws regulating gratuities) continues to develop, and employers of tipped workers in any industry permitting tipping must inform their business and employment practices by reference to current law in their jurisdictions.

New York Department of Labor Issues Emergency Minimum Wage Regulations Regarding Home Healthcare Attendants, Controverting Recent Appellate Court Rulings

Citing the need “to preserve the status quo, prevent the collapse of the home healthcare industry, and avoid institutionalizing patients who could be cared for at home,” the New York Department of Labor (NYDOL) has issued emergency regulations to ensure consistency with longstanding opinion letters issued by the Department and to clarify that time spent sleeping and on meal breaks is not compensable time for home healthcare aides who work shifts of 24 hours or longer at a client’s home.  The NYDOL expressly noted that the emergency regulations were necessitated by recent decisions of the First (Manhattan) and Second (Brooklyn) Departments of the Appellate Division, which had relied on the language of the existing regulations to hold that such time was in fact compensable.  Those decisions – Andryeyeva v. New York Health Care, Inc., 2017 N.Y. App. Div. LEXIS 6408 (N.Y. App. Div. 2nd Dep’t Sept. 13, 2017); Moreno v. Future Care Health Services, Inc., 2017 N.Y. App. Div. LEXIS 6462 (N.Y. App. Div. 2nd Dep’t Sept. 13, 2017); and Tokhtaman v. Human Care, LLC, 149 A.D.3d 476 (N.Y. App. Div. 1st Dep’t Apr. 11, 2017) – are the subject of continued appeals and were addressed in a recent Jackson Lewis article, which can be found here .

The emergency regulations reiterate that the Department interpets New York law consistently with the FLSA on this issue and provides renewed hope for the home healthcare industry, which continues to operate under the specter of financial ruin based on the appellate court decisions  – decisions which would require payment of minimum wages well in excess of the amounts received by home care agencies for their services, particularly those agencies implementing government-funded programs.  Because the revisions were made to the regulations on an emergency basis, they are in effect only until January 3, 2018.  However, the NYDOL intends to issue permanent regulations and has stated that it will be issuing a notice of proposed rulemaking in this respect.

If you have any questions on this or any other wage and hour issue, please contact the Jackson Lewis attorney with whom you work.

Second Circuit to Decide Whether Court Approval of FLSA Settlements Applies to Accepted Offers of Judgment

Seeking to resolve a split among the district courts in the Second Circuit, the Court of Appeals has accepted an interlocutory appeal to decide whether, in resolving cases involving FLSA claims, offers of judgment under Rule 68 require DOL or judicial scrutiny and approval.  Yu v. Hasaki Restaurant, Inc., 2017 U.S. App. LEXIS 20698 (2nd Cir. Oct. 23, 2017).

In 2015 the Second Circuit, adopting the position taken decades ago by the Eleventh Circuit in Lynn’s Food Stores, Inc. v. U.S. Department of Labor, 679 F.2d 1350 (11th Cir. 1982), held that dismissal with prejudice, pursuant to FRCP 41, of a pending FLSA lawsuit requires review and approval by either the DOL or a court.  Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2nd Cir. 2015).  Federal Rule of Civil Procedure 68, however, provides that if at least 14 days before trial, a defendant offers to resolve a case by having a judgment taken against it in the proposed amount and the plaintiff accepts the offer, “[t]he clerk must then enter judgment” against the defendant.  If the plaintiff rejects the offer of judgment and later loses the case, or obtains a judgment for less than what the defendant offered, the plaintiff must pay any costs the defendant incurred after making the offer.

Since the Cheeks decision, district courts in the Second Circuit facing potential FLSA settlements have been split over whether Rule 68 provides a procedural workaround to the Cheeks requirement that FLSA settlements be approved by the DOL or a court.  The Court of Appeals’ decision in Yu should provide some clarity in this foggy area.

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

Pump the Breaks: Employers Cannot Bypass Obligation to Compensate Employees for Short Rest Periods

Refusing to compensate employees for short breaks is prohibited by the FLSA, the Third Circuit has confirmed. Thus, an employer’s “flexible time” policy, under which employees were not paid if they logged off of their computers for more than 90 seconds, fails to comply with the Act when employees take breaks of twenty minutes or less, even if the policy allows the employee to log off whenever desired and for any length of time. Secretary, U.S. Dep’t of Labor v. American Future Systems, Inc., 2017 U.S. App. LEXIS 19991 (3rd Cir. Oct. 13, 2017).

American Future Systems publishes and distributes business publications and sells them through its sales representatives, who are paid an hourly wage and receive bonuses based on the number of sales they generate per hour while logged onto the company’s computer system. Under the company’s flexible time policy, the sales representatives are permitted to log off of their computers at any time, for any duration and for any reason.  While the policy was intended to maximize employees’ freedom to take breaks as needed, because they are not paid if they log off for more than 90 seconds, in practice employees constantly face the dilemma of foregoing pay when taking brief breaks to, for example, use the rest room, fetch a cup of coffee or mentally recover from what may have been a demanding sales call.

The DOL brought suit against the company, asserting that the flexible time policy violated 29 C.F.R. § 785.18, which states that “[r]est periods of short duration, running from 5 minutes to 20 minutes . . . are customarily paid for as working time” and “must be counted as hours worked.” The district court agreed and granted the DOL’s motion for partial summary judgment in this respect. On appeal, the employer argued the time spent by sales employees logged off of their computers under the company’s flexible time policy does not constitute work and that the district court erred in adopting the bright-line short break rule embodied in Section 785.18.

Rejecting these arguments, the Third Circuit reaffirmed the longstanding FLSA regulation that, while the Act does not require an employer to provide employees with breaks (although several state laws do), if the employer chooses to do so, breaks lasting up to twenty minutes are considered compensable hours worked. The Court of Appeals was unpersuaded – and unamused – by the company’s semantic argument that the time at issue was “flexible time” and not a “break” as defined by the FLSA, noting that the protections of the Act “cannot be negated by employers’ characterizations that deprive employees of rights” to which they are entitled.  The Third Circuit also rejected the employer’s argument that a fact-specific analysis should be applied to whether a short break is compensable under the FLSA and the DOL’s interpretive regulation.  On the contrary, the Court of Appeals confirmed that Section 785.18 sets forth a bright-line rule for employers and to hold otherwise would establish a “burdensome and unworkable” administrative regimen.

American Future Systems is a caution to employers that neither the DOL nor the courts will abide by blatant efforts to circumvent the protections of the FLSA. If you have any questions or concerns about this development, or any other wage and hour issues, please contact the Jackson Lewis attorney with whom you regularly work.

Intern or Employee? When “Take Your Children to Work” Day Backfires

In late April each year, tens of millions of employees and millions of employers participate in Take Your Sons and Daughters to Work Day. Of course, the vast majority of the child participants are elementary school kids, or perhaps young teenagers, who visit their parents’ workplaces for a few hours and then return to their everyday lives.  But what happens when the “child” is actually a young adult who, under the guise of a training internship, arrives with his father at the workplace every day for over a year?  As one employer recently learned, that so-called trainee might in fact be deemed an employee, to whom the minimum wage and overtime pay requirements of the FLSA apply.

In Axel v. Fields Motorcars of Florida, Inc., 2017 U.S. App. LEXIS 19524 (11th Cir. Oct. 6, 2017), the plaintiff’s father, who worked as a wholesaler for the employer, approached the general manager of the dealership about finding a job for his son who, with a poor employment record, a DUI arrest and a drug history, apparently was having difficulty finding work.  The general manager declined to hire the son but agreed to allow him to “shadow” his father without compensation, with the open-ended possibility that he would replace his father upon the latter’s retirement.  For over a year, the son would arrive at work with his father and observe his father’s activities throughout the morning.  However, during the afternoons, he would spend several hours posting cars for sale on an internal auto auction website, on e-Bay and on Craigslist; research cars for sale at auction; and purchase cars from other dealerships, all under the guidance of the used car manager.  This pattern continued for about fifteen months, at which time the father’s employment was terminated and the son likewise stopped coming to work.  The son then sued the employer, claiming that he was in fact an employee and was entitled to pay under both the FLSA and the Florida Minimum Wage Act (FMWA) for the time he was working at the dealership.  The plaintiff estimated that during his 15-month tenure, he worked in excess of sixty (60) hours per week.

The district court granted summary judgment to the employer, concluding that the plaintiff was not an employee and therefore not entitled to wages under either federal or state law.  On appeal, the Eleventh Circuit Court of Appeals vacated the summary judgment ruling and remanded the case for further consideration.  In doing so, the Court of Appeals relied on the seven “non-exhaustive” factors it had set forth in Schumann v. Collier Anesthesia, P.A., 803 F.3d 1199 (11th Cir. 2015), and which it had borrowed from the Second Circuit’s decision in Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d 376 (2nd Cir. 2015), in determining whether the “primary beneficiary” of the relationship was the employer, in which case the individual would likely be deemed an employee, or the intern/trainee, in which case the FLSA’s protections would not apply.

After agreeing with the district court that three of the factors were irrelevant to the unique circumstances of the case, the Court of Appeals noted that two of the factors – the extent to which the intern and employer clearly understand that there is no expectation of compensation and the extent to which the intern and employer understand that the internship is conducted without entitlement to a paid position at the conclusion of the internship – weighed in favor of finding an actual internship, given that both parties clearly understood there was no expectation of compensation during the training or of a guaranteed position following its conclusion. Moreover, the Eleventh Circuit held that another of the factors – “the extent to which the internship’s duration is limited to the period during which the internship provides the intern with beneficial learning” – “[did] not clearly cut one way or the other,” given that the nature of the goals of the training, and whether they were ever accomplished, was unclear.  However, given that the only possible end date ever discussed – and an indefinite one at that – was the retirement of the plaintiff’s father, and further given that the plaintiff allegedly was working 60 hours per week, the Court of Appeals suggested that the length of the training may have been excessive.

With respect to the remaining factor – the extent to which the intern’s work complements, rather than displaces, the work of paid employees – the Court of Appeals pointed to the fact that the plaintiff was spending a considerable amount of his work time performing retail sales tasks under the direction of managers outside of the wholesaling arena in which his father worked, tasks that may have been displacing the work of those managers or other employees.   Ultimately, the Eleventh Circuit concluded that it lacked sufficient information regarding the amount of time plaintiff devoted to wholesaling tasks under the tutelage of his father versus the retailing tasks he performed at the direction of others, but noted that “the proper outcome may not be an ‘all-or-nothing’ determination.”   Thus, the case was remanded to the district court for further consideration.

The Axel case provides cautionary guidance to employers who may be considering some type of informal internship or training arrangement under the belief that the participants in such a program are not employees subject to the same wage laws.  If you have any questions about an internship or training program in your workplace, or any other wage and hour issues, please contact the Jackson Lewis attorney with whom you regularly work.

Here’s a Tip, Minnesota: Discharging Employees for Refusing to Share Gratuities is Prohibited

Discharging an employee for refusing to share tips is illegal under the Minnesota Fair Labor Standards Act (MFLSA), according to the Supreme Court of Minnesota.  Burt v. Rackner, Inc., 2017 Minn. LEXIS 629 (Minn. Oct. 11, 2017).  In Burt the plaintiff, who was employed as a bartender, was told that he needed to give more of his tips to the bussers or there would be consequences.  The plaintiff failed or refused to do so and was discharged on the express basis that he was not properly sharing tips with other staff members.  The plaintiff sued and, on motion by the employer, the state district court dismissed the complaint, holding that the MFLSA does not provide a private cause of action for wrongful discharge, as no such language is set forth in the statute.  The court of appeals reversed, concluding that the MFLSA “unambiguously provides that the employee may seek wrongful-discharge damages, including back pay and other appropriate relief” for any violation of the Act, including the tip-sharing provision.

On petition for review, the Supreme Court affirmed.  The Court noted that Section 177.24 of the Act provides that “[n]o employer may require an employee to contribute or share a gratuity” and although an employee may voluntarily agree to share tips, he must do so “without employer coercion or participation.”  Threatening to discharge, or actually discharging, an employee for failing to do something – in this case, tip sharing – constitutes coercion, the Court held.  Although the Act does not contain language expressly forbidding discharge for violations of the tip-sharing provision, and although it does include a specific remedy for violation of the provision (restitution of any diverted tips, plus double damages and attorney’s fees), the Supreme Court nonetheless concluded that because the statute includes a “broad, private cause of action for any violation,” it was unreasonable to interpret the statute in such a way that prohibits mandatory tip-sharing yet would allow the discharge of an employee who refused to abide by the prohibited conduct.

As a result, Minnesota employers should proceed cautiously when implementing a tip-sharing policy and program to ensure that participation in any such program is strictly voluntary and that no employee is pressured into participating or subjected to adverse action for declining to participate.  If you have any questions or concerns about this development or your specific business needs, please contact the Jackson Lewis attorney with whom you regularly work.

Supreme Court Grants Certiorari (Again) to Address Circuit Split on FLSA Automobile Dealer Exemption

After effectively “punting” on the issue last year, the U.S. Supreme Court has again granted certiorari to resolve a circuit split regarding whether “service advisors” at automobile dealerships are exempt from receiving overtime under an exemption for “salesmen, partsmen, and mechanics” under the FLSA.  Encino Motorcars, LLC v. Navarro, No. 16-1362 (U.S. Sep. 28, 2017).  In 2016, the Supreme Court ruled that the Ninth Circuit had wrongly relied on a 2011 Department of Labor regulation in concluding that such service advisors were not exempt from overtime under the FLSA.  Because the DOL’s position on the exempt status of service advisors vacillated over time and the 2011 regulation, which found service advisors to be non-exempt, had without justification reversed the Agency’s position established just three years earlier, the regulation was not entitled to deference under the standards established by the Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  Therefore, held the Court, the Ninth Circuit should not have relied upon the regulation in reaching its decision.

However, rather than proceeding to resolve the split established by the Ninth Circuit’s decision, which conflicted with prior decisions by the Fourth and Fifth Circuits, the Supreme Court remanded the case to the Court of Appeals to re-evaluate the application of the exemption without reference to, or consideration of, the 2011 regulation. On remand, the Ninth Circuit reached the same result, again holding that service advisors are not covered by the exemption but now relying on an examination of the statutory text and legislative history.  Navarro v. Encino Motorcars, LLC, 845 F.3d 925 (9th Cir. 2017).  This time around, the Supreme Court is expected to resolve the underlying issue of whether the service advisers are entitled to overtime, providing needed certainty to employers.

Having even greater implications than resolution of the applicability of the automobile dealer exemption to service advisors, however, may be the Ninth Circuit’s continued reliance on the “narrow construction” principle when it comes to interpreting FLSA exemptions in general.  In ruling service advisers were not covered by the exemption, the Ninth Circuit relied on the alleged “longstanding rule that the exemptions in § 213 of the FLSA are to be narrowly construed against employers seeking to assert them.”  But in the 2016 decision remanding the case, Justices Thomas and Alito criticized the Court of Appeals for using this to put a thumb on the scale, referring to it as “made up canon” of construction and instructing the Ninth Circuit “not to do so again on remand.”  The Ninth Circuit ignored this warning.  The arrival of Justice Gorsuch to the Bench may finally provide the votes needed to address the validity and scope of the “narrow construction” principle, often a plague for employers.

We will continue to follow developments in this case.  If you have any questions regarding the FLSA’s exemptions or any other wage & hour questions, please contact the Jackson Lewis attorney(s) with whom you work.

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