Recently the Oregon legislature passed, and Governor Kate Brown signed, Senate Bill (SB) 1513, revising the Beaver State’s overtime rules for bakers. In addition, the legislature passed House Bill (HB) 4002, revamping the overtime entitlements for farmworkers. That bill is before Governor Brown, who is expected to sign it. As both laws first take effect at the beginning of 2023, employers in these industries should review their pay practices in the coming months to ensure future compliance.

Bakery Workers

Based on legislators’ stated concerns that bakery workers should not be penalized for refusing last-minute overtime obligations, the Oregon legislature passed SB 1513, limiting bakeries from imposing overtime on workers without at least five days’ notice. Effective January 1, 2023, any manufacturing establishment classified as a “bakery” by the North American Industry Classification System (NAICS) may not discipline an employee who refuses to work mandatory overtime unless the employer has provided at least five days’ advance notice. The advance notice must specify the anticipated shift’s date and time. The bill authorizes Oregon’s Bureau of Labor and Industries to investigate violations and enforce compliance.

Farmworkers

Traditionally, both federal and state law exempt agricultural workers from overtime requirements for work beyond 40 hours in a week, with only seven states providing for overtime pay for farmworkers. With the passage of HB 4002, Oregon would become the eighth such state if Governor Brown signs the bill into law. Proponents of the law assert that traditional overtime rules, typically excluding farmworkers, are outdated and unfair. Subject to certain exceptions, the bill extends overtime entitlements to agricultural workers, dairy employees, employees involved with raising livestock, bees, or fur-bearing animals, and some others. Overtime obligations are phased in under the new law, starting on January 1, 2023. During the first phase, which extends through 2024, covered employers must pay overtime at the rate of one and one-half an employee’s regular rate when the employee works over 55 hours in a week. For calendar years 2025 and 2026, the overtime requirement begins at 48 hours per week and, beginning in January 2027, the requirement will apply to all work in excess of 40 hours per week.

If you have any questions about these laws or any other wage and hour issue, please contact the Jackson Lewis attorney(s) with whom you regularly work.

A Miami restaurant’s mandatory 18% service charge did not constitute a “tip” under the Fair Labor Standards Act (FLSA) and therefore was properly applied toward satisfying the FLSA’s employee wage requirements, the U.S. Court of Appeals for the Eleventh Circuit recently held, affirming summary judgment in favor of the employer. Compere v. Nusret Miami, LLC, 2022 U.S. App. LEXIS 7293 (11th Cir. Mar. 18, 2022). The Eleventh Circuit has jurisdiction over the federal courts in Alabama, Georgia, and Florida.

The Law

Department of Labor (DOL) regulations defining what constitutes a “tip” expressly provide that mandatory service charges are not tips. The central characteristic of a tip is customer discretion: If the customer decides whether to leave a gratuity, and if so the amount of that gratuity, then it is considered a tip under FLSA regulations. Conversely, if the employer imposes a fee that the customer has no choice but to pay (unless, for example, the employer waives the fee to resolve a complaint about the service provided), the fee is not a tip and the employer may use it to satisfy its wage obligations.

The Lawsuit

Since its opening five years ago, Nusret Miami (“Nusret”), an upscale steakhouse in Miami, Florida, has added a mandatory 18% “service charge” to customer’s bills, after which it redistributes those charges to certain employees to cover the restaurant’s minimum and overtime wage obligations. The employees who receive a portion of the service charges are very well paid, sometimes earning in excess of $100,000 per year and, if the 18% fee constituted a legitimate service charge, then undisputedly the restaurant satisfied its minimum wage and overtime obligations to these employees.

A group of tipped employees filed suit against the restaurant, asserting that Nusret failed to properly pay them minimum wage and overtime pay, and forced them to participate in an illegal tip pool with non-tipped employees, all in violation of the FLSA. The plaintiffs’ primary argument was that Nusret’s service charge was, in fact, a tip and therefore could not be used to satisfy the restaurant’s minimum wage and overtime obligations. In support of this argument, the plaintiffs asserted that Nusret failed to include the service charges in its gross receipts and failed to report the revenue for federal income tax purposes. The restaurant countered that the 18% fee was a legitimate service charge and that it properly had met its wage obligations under the FLSA. The district court agreed with the employer and granted it summary judgment.

The Appeal

On appeal, the Eleventh Circuit affirmed summary judgment for the restaurant. In support of its decision, the Court of Appeals cited 29 C.F.R. § 531.52(a), which explains that the critical feature of a tip is that the sole discretion lies with the customer as to whether it is to be given and, if so, in what amount. In this case, customers undisputedly had no say as to whether they had to pay Nusret’s 18% service charge. Moreover, DOL regulations specifically identify mandatory service charges as an example of a fee that is not a tip.

The Eleventh Circuit rejected the plaintiffs’ argument that the service charges had to be treated as tips unless Nusret included them in their gross receipts and reported them for tax purposes, finding this assertion to be “irrelevant.” The Court of Appeals likewise rejected the plaintiffs’ argument that the service charge was not mandatory because, for example, management could remove it as a means of resolving a customer complaint.  Reiterating that to constitute a tip, the discretion to pay it must lie with the customer and not the employer, in this case Nusret’s customers unarguably had no such discretion. Thus, the 18% fee was a legitimate service charge and the restaurant properly applied it to satisfying its wage obligations.

The Takeaway

The Eleventh Circuit’s ruling reaffirms that true service charges do not constitute tips under the FLSA and, in the case of retail or service establishments, may be used to satisfy an employer’s minimum wage and overtime obligations. Employers also should review state law, which may treat such charges as a form a tips regardless of who retains the discretion to impose or pay them, though such laws could be preempted by federal law.

If you have any questions about this decision or any other wage and hour issue, please contact a Jackson Lewis attorney.

Recently we reported on the efforts of the Restaurant Law Center (RLC), an independent public policy organization affiliated with the National Restaurant Association, to invalidate the Dual Jobs Final Rule published by the Department of Labor (DOL). To that end, in early February the RLC filed a motion for preliminary injunction in federal court in Texas to prevent the Final Rule from being enforced. Unfortunately for employers, on February 22, 2022, the court denied the motion. Thus, at least for the time being, the Dual Jobs Final Rule remains in effect.

The Dual Jobs Final Rule, which became effective in late December 2021, establishes limits on the amount of time tipped employees can spend performing work that is not “tip-producing” and still being paid at the reduced cash wage applicable to tipped employees under the Fair Labor Standards Act (FLSA). The new Final Rule revived the 20% (or “80/20”) Rule, with modifications, and added a “30-Minute” Rule, disallowing the tip credit when a tipped employee spends more than thirty continuous minutes performing work that is not considered tip-producing work. The previous administration had attempted to eliminate the 20% Rule.

In denying the RLC’s motion, the court concluded that the current Final Rule is not significantly different from the sub-regulatory guidance that the DOL had been applying for several decades, prior to the previous administration’s attempt to rescind its longstanding position, and further noted that several federal courts of appeal have upheld the validity of that previous guidance. The court also held that the RLC had failed to produce concrete evidence of the damages employers would suffer as a result of the Final Rule, proof of such damages being a necessary component to a motion for preliminary injunction. The RLC is contemplating whether it will file an appeal of the district court’s order. Such an appeal would be heard by the U.S. Court of Appeals for the Fifth Circuit.

Jackson Lewis will continue to monitor and report any further notable updates. In the meantime, employers with tipped employees should ensure that they are in compliance with the requirements of the Dual Jobs Final Rule, keeping in mind that state law may vary on this issue.

If you have any questions about the ruling, the Dual Jobs Final Rule, or any other wage and hour questions, please contact the Jackson Lewis attorney(s) with whom you regularly work.

In March 2021, then-Governor Ralph Northam (D), backed by a full Democratic majority in the General Assembly (Virginia’s legislative body), signed the Virginia Overtime Wage Act, greatly expanding the State’s overtime requirements effective July 1, 2021. Prior to the Act, Virginia adopted the overtime requirements of the federal Fair Labor Standards Act (FLSA).

During the November 2021 elections, however, Republicans regained a 52-48 majority in the Virginia House of Delegates and a Republican Governor, Glenn Youngkin, was elected. Now, although the Senate remains under control of the Democrats by a three-member margin, Republican lawmakers in both houses are seeking to undo the Virginia Overtime Wage Act, via concurrent House Bill (HB) 1173 and Senate Bill (SB) 631.

The Virginia Overtime Wage Act

The Virginia Overtime Wage Act imposes several requirements that are not present under federal law.  For example, although both the FLSA and the Virginia Overtime Wage Act generally obligate employers to pay one and one-half times an employee’s regular rate of pay for hours worked in excess of 40 in a workweek, the Virginia Overtime Wage Act defines the regular rate of pay as one-fortieth (0.025) of all wages paid for the workweek for employees who are salaried or paid on some other regular basis. This requirement may preclude employers from paying traditionally non-exempt employees a fixed salary to cover wages for hours in excess of 40 in a workweek (including on a fluctuating workweek basis), requiring instead an hourly rate calculation for overtime pay for even these employees in most circumstances.

The Virginia Overtime Wage Act further provides for a three year statute of limitations for bringing claims, rather than the two-year limitations period under the FLSA, the latter allowing for an additional year only if the employee can show that the employer’s actions were “willful.” The Act further precludes the “good faith” defense available under the FLSA, instead mandating that all violations are subject to double damages, or even treble (triple) damages for “knowing” violations. Lastly, the Act authorizes class or collective actions which, typically, are not authorized under Virginia law.

For more on the Virginia Overtime Wage Act, see Virginia Enacts Overtime Wage Law.

HB 1173 and SB 631

The concurrently-filed bills would eliminate all of these new requirements and instead return Virginia to the overtime law that existed prior to the Virginia Overtime Wage Act, that is, by express reference to the FLSA.  How these bills will fare remains too close to call. Notably, seven House Democrats voted to pass HB 1173. If one Democratic Senator similarly broke ranks and voted to pass SB 631, a tie would be broken by the State’s Republican Lieutenant Governor, Winsome Sears.

Jackson Lewis will continue to monitor the bills and report any notable updates. In the meantime, if you have any questions about the bills, the Virginia Overtime Wage Act, or any other wage and hour questions, please contact the Jackson Lewis attorney(s) with whom you regularly work.

Several recent lawsuits have been filed in federal court, one challenging the Dual Jobs Final Rule published by the Department of Labor (DOL) that became effective in late December 2021, and two others filed this week by several state attorneys general challenging President Biden’s Executive Order requiring most federal contractors to pay a minimum wage of at least $15 per hour to their employees.

The Dual Jobs Final Rule established limits on the amount of time tipped employees can spend performing work that is not “tip-producing” and still being paid at the reduced cash wage applicable to tipped employees under the Fair Labor Standards Act (FLSA). The new Final Rule revived the 20% (or “80/20”) Rule, with modifications, and added a “30-Minute” Rule, disallowing the tip credit when a tipped employee spends more than thirty continuous minutes performing work that is not considered tip-producing work. The previous administration had attempted to eliminate the 20% Rule.

The lawsuit against the DOL was filed in a Texas federal court in December 2021, prior to the Final Rule’s effective date, by the Restaurant Law Center (RLC). The RLC is an independent public policy organization affiliated with the National Restaurant Association, the largest foodservice trade association in the world. Through the lawsuit, the RLC seeks to enjoin the DOL from enforcing the Final Rule and to have the Rule invalidated, asserting that it conflicts with the language of the FLSA and that the DOL exceeded its authority in promulgating it. Oral argument on the RLC’s motion for declaratory and injunctive relief was held on February 9, 2022.

Meanwhile, this week the attorneys general of Arizona, Idaho, Indiana, and Nebraska filed suit in federal court in Arizona, alleging that Executive Order (EO) 14026 is an improper attempt to get around Congress’s rejection of the same minimum wage increase in a COVID-19 relief package. The next day, the attorneys general of Louisiana, Mississippi, and Texas filed a similar suit in a Texas federal court. At least one other lawsuit, by a Colorado river outfitter subject to EO 14026, has been filed challenging the Executive Order.

EO 14026, issued in April 2021 and effective January 30, 2022, raises the minimum wage for the affected federal contractors from $10.95 an hour to $15.00 an hour, with annual increases. The current minimum wage was established under the Obama Administration. According to the lawsuits filed by the attorneys general, the Executive Order covers about 20% of the U.S. labor force and would make the cost of impacted contracts prohibitive.

Jackson Lewis will continue to monitor and report any notable updates on these developments. If you have any questions about these issues or any other wage and hour questions, please contact the Jackson Lewis attorney(s) with whom you regularly work.

Last week, Senator Rand Paul (R-Ky.) was absent from the meeting of the Health, Education, Labor and Pensions Committee – and that spelled good news for the Biden Administration’s nominee to head the Wage and Hour Division (WHD) of the Department of Labor, Dr. David Weil. The nomination of Dr. Weil, who previously held the same position under the Obama Administration, had been stuck in committee since the Summer of 2021, with previous votes resulting in ties along party lines. However, with Senator Paul’s absence, Weil squeaked by on an 11-10 vote. His nomination will now go to the full Senate for consideration.

Dr. Weil, who currently is a professor at Brandeis University, has faced considerable opposition from members of the Republican party and the business community, including the U.S. Chamber of Commerce, who believe, among other criticisms, that his views on the independent contractor analysis are antithetical to a successful “gig” economy. Perhaps most notably, Weil was at the helm of the WHD in 2016 when the DOL published a Final Rule that would have more than doubled the minimum salary to qualify for the Executive, Administrative, and Professional overtime exemptions (a.k.a. the “white collar” exemptions), from $23,660 to $47,476 per year. That Final Rule was struck down by a Texas federal judge shortly before going into effect and a new Final Rule was issued under the following administration, raising the minimum annual salary to a relatively more modest $35,568, where it currently stands.

Regardless of whether Dr. Weil receives full Senate approval, it appears that the DOL will seek to increase the current minimum salary for exempt employees. As we previously reported, last summer Secretary of Labor Marty Walsh testified before the House Education and Labor Committee that the DOL is reviewing the current Overtime Final Rule and that he believes the current minimum salary level is “definitely too low.” New Secretary of Labor Hints at Increased Minimum Salary for Overtime Exemptions. Consistent with that statement, in the DOL’s Fall 2021 Unified Agenda of Regulatory and Deregulatory Actions, the Agency stated that the “WHD is reviewing the regulations at 29 C.F.R. § 541, which implement the exemption of bona fide executive, administrative, and professional employees from the Fair Labor Standards Act’s minimum wage and overtime requirements,” with a primary goal of the review to engage in rulemaking to update the salary level requirement. In its Statement of Regulatory Priorities, the DOL added that “WHD will propose updates to the overtime regulations to ensure that middle class jobs pay middle class wages, extending important overtime pay protections to millions of workers and raising their pay.” The proposed increase may be issued as early as this Spring. It remains to be seen whether such a proposed increase would be of the magnitude that Dr. Weil and the Obama DOL published five years ago and, if so, whether it would face the same flurry of legal challenges.

Jackson Lewis will continue to monitor and report any updates on this development. If you have any questions about the anticipated exempt salary increase or any other wage and hour questions, please contact the Jackson Lewis attorney(s) with whom you regularly work.

The U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of a plaintiff’s Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL) overtime pay claims in federal court, after she previously had obtained relief for substantially similar claims in small claims court. Simmons v. Trans Express, Inc., 2021 U.S. App. LEXIS 32032 (2d Cir. Oct. 26, 2021). The Second Circuit has jurisdiction over the federal courts in New York, Connecticut, and Vermont.

The Underlying Lawsuits

Plaintiff Charlene Simmons, a former driver for defendant Trans Express, filed suit against the company in small claims court in Queens, New York, claiming she was entitled to “monies arising out of nonpayment of wages.” The case subsequently was referred to a small claims arbitrator, who awarded the plaintiff $1,020, which the company paid. Shortly thereafter, the plaintiff filed suit in New York federal court, asserting violations of the FLSA and NYLL arising out of the same non-payment of wages, as well as compensation for the company’s failure to provide her with certain notices required by state law. On motion by Trans Express, the district court dismissed the plaintiff’s lawsuit on the basis of res judicata, that is, that her claims were barred by her prior recovery in small claims court.

The Appeal

On appeal to the Second Circuit, the plaintiff contended that New York City Civil Court Act § 1808 prevented any preclusive effect of her small claims award. Section 1808 states:

A judgment obtained under this article shall not be deemed an adjudication of any fact at issue or found therein in any other action or court; except that a subsequent judgment obtained in another action or court involving the same facts, issues and parties shall be reduced by the amount of a judgment awarded under this article.

Given the language of this provision, the Second Circuit certified the question to the New York Court of Appeals (the highest court in New York) of whether Section 1808 bars application of the claim preclusion doctrine (res judicata) to recoveries in small claims court. Answering in the negative, the New York Court of Appeals held that although “‘[S]ection 1808 abrogates . . . the common-law issue preclusive effect of small claims judgments,’ ordinary rules of claim preclusion apply to the judgments of the small claims court.” The Second Circuit then affirmed the dismissal of the plaintiff’s claims.

First, the Court of Appeals rejected the plaintiff’s argument that claim preclusion, as an affirmative defense, cannot form the basis of a dismissal on the pleadings unless all of the elements of the defense are apparent from the face of the pleadings (i.e., the plaintiff’s judicial complaint). On the contrary, the Second Circuit noted, the district court is permitted to consider documents of  which it may take judicial notice, such as the summons and judgment sheet from the plaintiff’s small claims court case. Notably, those documents showed that the plaintiff filed her small claims court case “to recover monies arising out of nonpayment of wages,” and that she was awarded $1,020 for “unpd. OT” which, the Second Circuit added, was “obviously a notation for unpaid overtime.”

Moreover, given that New York applies a “transactional” approach to the claim preclusion doctrine, it was clear that the wage claims plaintiff was asserting in federal court arose out of the same transaction as her small claims court lawsuit, and therefore were barred. The transactional approach provides that “the claim preclusion rule extends beyond attempts to relitigate identical claims . . . [to] all other claims arising out of the same transaction or series of transactions.” Here, the Court of Appeals held that it had “little difficulty concluding” that the federal court claims and small claims court claims were “nearly identical ‘in time, space, origin, [and] motivation.’” The Second Circuit further joined the conclusion of several other circuit courts, that nothing in the FLSA barred the application of the claim preclusion doctrine.

If you have any questions about this decision or any other wage and hour issue, please contact a Jackson Lewis attorney.

Although it may have intended for a customer charge to be treated as an administrative overhead fee separate from gratuities paid to its employees, a country club’s reference to the amount as a “service charge” in some documents necessarily required that the amount retained be paid to the employees, the Supreme Judicial Court of Massachusetts recently held. Hovagimian v. Concert Blue Hill, LLC, 2021 Mass. LEXIS 507 (Mass. Aug. 23, 2021). The Supreme Judicial Court is the highest appellate court in Massachusetts.

Background

In Massachusetts, an employer that collects a tip or other gratuity is required to remit the total proceeds of that charge to the wait staff and service employees in proportion to the services provided. Mass. Gen. Laws Ann. ch. 149, § 152A. Under this law, which commonly is referred to as the Tips Act, the term “service charge” is defined as “a fee charged by an employer to a patron in lieu of a tip . . ., including any fee designated as a service charge, tip, gratuity, or a fee that a patron or other consumer would reasonably expect to be given to a [tipped employee] in lieu of, or in addition to, a tip.” Any fee determined to be a “service charge” must be given to the wait staff employee(s) providing the services, as such a charge is one that a patron reasonably would assume to be proceeds paid to such employee(s) for the services they provided.

The Lawsuit

In this case the defendant, operating as Blue Hill Country Club, hosts banquets and other events that involve food and beverages. When a patron desires to hold such an event, they first execute an “Event Contract” with the club, setting forth the general provisions of the event, such as deposit and payment schedule, menu options, and pricing. The Event Contract also provides that the patron will be charged a 10% gratuity, to be paid to the wait staff, and an additional 10% “administrative” or “overhead” charge that is kept by the club. Once the details are ironed out, the patron signs a “Banquet Event Order Invoice,” setting forth items such as the number of anticipated guests, the food and beverage selections, and other instructions for the event’s managers. After the event, the patron receives a final bill with all the actual charges set forth. However, whereas the initial Event Contract referred to the club’s additional 10% surcharge as an administrative or overhead fee, the Banquet Event Order Invoice and the final bill documents failed to distinctly identify this fee, placing it instead under the category of “service charges and gratuities” or “service.”

In May 2018, banquet servers filed suit against the club, asserting that the designation of this 10% fee as a service charge required that it be paid to the employees and that the club unlawfully had retained it. Upon cross-motions by the employer and the plaintiffs, the trial court dismissed the case in favor of the club, on the grounds that the “safe harbor” provision of the Tips Act allowed the employer to retain the proceeds from the disputed charge. The Tips Act’s safe harbor provision permits an employer to “impos[e] on a patron any house or administrative fee in addition to or instead of a service charge or tip,” but only if the employer gives the patron a sufficient “designation or written description” of the fee. The plaintiffs appealed and the Appeals Court affirmed the dismissal on the same grounds.

On further appeal, the Supreme Judicial Court concluded that the plain meaning of the Tips Act required the club to remit the disputed charge to the employees. As an initial matter, the high court considered the classification of the disputed charges. Citing longstanding contract law principles, the court noted that any ambiguities in a contract must be construed against the drafter – here, the club. If the employer wanted to retain the additional surcharge as an administrative fee, then it carried the burden of ensuring that all of the contractual documents accurately described the surcharge accordingly. In this case, the club failed to do so in all of its documentation, categorizing the fee instead as a service charge in some documents provided to patrons which, under Massachusetts law, must be remitted to the wait staff.

Moreover, the club could not avail itself of the Tip Act’s safe harbor provision because its own description of the fee at issue was as a “service charge,” at least in some documents provided to patrons. The Court also found particularly relevant that the fee was mislabeled on the final invoice received on the heels of the event’s conclusion, the time when a patron would be most likely to make a decision related to tipping. Conversely, the event contract, which contained the proper language sufficient to invoke the Tips Act safe harbor, had been signed months before the event and the patron could not be expected to base his/her tipping decision on a contract signed months earlier. Accordingly, the Supreme Judicial Court reversed and remanded the case, with direction to enter judgment in favor of the plaintiffs.

The Takeaway

The Supreme Judicial Court’s holding confirms that the best practice for restaurants, hotels, and other hospitality industry employers is to ensure that  event contracts, and all other related documents presented to patrons, consistently, accurately, and specifically describe any administrative fees that the employer intends to both assess and retain. Otherwise, those fees ultimately may be recharacterized as a form of service charge or gratuity that must be paid to the servers and other wait staff.

If you have any questions about this decision, the Massachusetts Tips Act, or any other wage and hour issue, please contact a Jackson Lewis attorney.

Although the employer’s pay system for its auto repair technicians was complicated and at times redundant, it nevertheless constituted a bona fide commissions compensation method subject to exemption from the overtime pay provisions of the Fair Labor Standards Act (FLSA), the Seventh Circuit Court of Appeals has held. Reed v. Brex, Inc., 2021 U.S. App. LEXIS 23573 (7th Cir. Aug. 9, 2021). The Seventh Circuit has jurisdiction over the federal courts in Illinois, Indiana, and Wisconsin.

The Commissioned Salesperson Exemption

The FLSA generally requires that employees be paid overtime, at a rate of at least one and a half times their regular rate of pay for all hours worked beyond 40 in a week. 29 U.S.C. § 207(a)(1). However, this requirement does not apply to employees working in retail or service establishments, if their regular rate of pay is at least one and a half times the statutory minimum wage and more than half of their compensation comes from bona fide commissions on goods or services. Id. § 207(i). The term “commission” is not defined in the FLSA, and litigation has arisen from time to time about whether employees are truly being paid on a commission basis, particularly when the compensation system is not a straight percentage based on sales. According to DOL regulations, if “commissions vary in accordance with the employee’s performance on the job,” he or she may qualify for the exemption, 29 C.F.R. § 779.416(b), whereas a commission is not “bona fide” if the employee “always or almost always earns the same fixed amount of compensation for each workweek.” Id. § 779.416(c).

Background

The latest case to grapple with the issue involves Brex, which operates a chain of auto-repair shops in Illinois and Missouri and where the plaintiffs worked as auto repair technicians. Brex’s pay system for its technicians is a bit complicated. It begins with calculating total receipts for repairs and sales during a pay period. That number is divided by hours worked to yield an average “hourly production” rate. That rate is then converted to an hourly wage, which typically is about 16 to 17 percent of the hourly production rate. The hourly wage may be increased slightly (e.g., by 50 cents), depending on whether the technician has obtained certain repair certifications, and it is then multiplied by the number of hours the technician worked during the week to obtain his or her base wages. On top of those wages, the technician is paid a set amount for each tire installed during the pay period, an amount that increases if the technician installs a certain minimum number during the pay period. If in a given pay period a technician’s production falters, the company applies an hourly wage equal to one and a half times the applicable state minimum wage, rounded up, thereby guaranteeing that the employee’s pay satisfies the first requirement of the commissioned salesperson exemption. Company records undisputedly showed that the commissions pay system was applied about 84% of the time, with the alternative minimum pay system applying the rest of the time.

The Lawsuit

The plaintiffs alleged the company’s pay system is not a bona fide commissions plan because it incorporates the employee’s hours worked into so many steps; because the company’s description of the pay plan makes reference to “hourly” wages; and because the plan does not discourage the company from requiring its technicians to work long hours, as historically has been a purpose of the FLSA. Following discovery, the trial court granted summary judgment to Brex, and the plaintiffs appealed. In affirming summary judgment for the company, the Seventh Circuit noted that the undisputed facts show that Brex pays each technician, including the plaintiffs, based on his or her actual sales and therefore the plan is a valid commissions pay system.

As to the pay plan referring to and incorporating what are described as “hourly wages,” the Court of Appeals reiterated that “the nomenclature is not determinative.” In reality, while “[t]he formula is convoluted, [] it is mathematically identical to paying a straight commission. First multiplying and then dividing by the same number (hours worked) is equivalent to multiplying by one.” Furthermore, the fact that technician pay is partially a function of hours worked does not create a triable issue of fact, the Seventh Circuit added. “Obviously, to some extent, technicians who work more hours are likely to have more repair opportunities and therefore make more money.” Moreover, as was the case here, “small hourly bonuses for certification do not convert an employee’s pay into a standard wage[,] so long as ‘more than half his compensation … represents commissions on goods and services.’”

Finally, the Seventh Circuit addressed the plaintiffs’ “unusual alternative argument that they were paid too much.” In asserting this argument, the plaintiffs relied primarily on the applicable regulations’ use of the phrase “a guarantee or draw against commissions” in the DOL regulations, which they read as containing alternative words with the same meaning. Under their interpretation, the company’s alternative wage floor is prohibited “because the regulations define any wage ‘guarantee’ as a draw against future commissions that requires reconciliation in subsequent pay periods.” Therefore, they asserted, because the company did not “claw back” its technicians’ guarantee payments in subsequent pay periods, “all compensation up to the guarantee was actually fixed hourly wages even in weeks where the guarantee did not apply” and the company’s plan would not satisfy the exemption’s requirement that more than half of an employee’s income must come from commissions.

Rejecting this argument, the Seventh Circuit noted that under the statute, a “draw” and a “guarantee” are not in fact one and the same: “The plain meaning of the Act allows employers to implement either a guarantee or a draw, which are two distinct arrangements.” DOL regulations permit employers to provide employees with “periodic payments, which are described variously in retail or service establishments as ‘advances,’ ‘draws,’ or ‘guarantees,’” as a means of offsetting the fluctuations common in commissioned sales arrangements, and those regulations further allow – but do not require – employers to “claw back” such payments if they exceed actual commissions. Moreover, the regulations explicitly provide that such guaranteed payments may operate as an alternative minimum floor within a bona fide commissions system, as long as there is no evidence that, as a means of avoiding overtime pay, the employer has implemented a sham “guaranteed commission” that employees rarely, if ever, can exceed. Adopting the plaintiff’s interpretation, noted the Court of Appeals, would lead to an “improbable, even perverse, outcome,” as

[t]he entire point of the [FLSA] is to require or encourage employers to pay their employees more, not less. Yet [the plaintiffs] say that Brex should have paid them less by docking their pay during weeks of plenty to compensate for the lean weeks. The statute and regulations do not require us to find that an employer violates the Act by paying its employees more than necessary. We will not strain to read them to arrive at that odd result.

If you have any questions about this decision, the commissioned salesperson exemption, or any other wage and hour issue, please contact a Jackson Lewis attorney.

On April 27, 2021, President Biden issued Executive Order 14026, raising to $15 per hour — with increases to be published annually — the minimum wage certain federal contractors must pay workers performing work “on or in connection with” a covered Federal contract or subcontract. The types of contracts impacted include those covered by the Service Contract Act, the Davis-Bacon Act, certain concession contracts, and certain contracts related to federal property and the offering of services the general public, federal employees and their dependents. The current minimum wage is $10.95 per hour, established by Executive Order 13658 during the Obama Administration.

On July 21, 2021, the Department of Labor (“DOL”) announced the much anticipated Notice of Proposed Rule Making (“NPRM”) detailing the proposed regulations to implement the new minimum wage requirements. The NPRM is scheduled to be published in the Federal Register on July 22, 2021, with the new requirements intended to be effective January 30, 2022. However, contracting agencies are encouraged to implement the new minimum wage requirements in existing contracts.

While the NPRM is substantially similar in key areas to the final regulations implementing Executive Order 13658, it is notably more expansive in critical areas, including coverage of “new contracts,” expanded coverage of geographic areas, and limitations on exclusions of tipped subminimum wage workers.  Most importantly, the NPRM proposes coverage of the same types of contracts as those covered by Executive Order 13658, but for the most part all such contracts likely will be subject to coverage on or after January 30, 2022, including those never covered by Executive Order 13658 requirements.

For more information about the NPRM, and what contractors should do now to prepare, please see our client alert here: Proposed Regulations Implementing $15 Hourly Federal Contractor Minimum Wage Executive Order