Tag Archives: Fair Labor Standards Act

June 21, 2016

Supreme Court Avoids Deciding Whether Car Dealership Service Advisors Are Exempt From Overtime Pay

The U.S. Supreme Court rejected the Department of Labor’s (DOL’s) 2011 rule that stated that “service advisors” at car dealerships are not exempt under the Fair Labor Standards Act (FLSA), but declined to take the final step by declaring them exempt under the FLSA. Instead, the Court sent the case back to the Ninth Circuit Court of Appeals to analyze whether service advisors are exempt under the applicable FLSA provision without regard to the DOL’s 2011 regulation. Encino Motorcars, LLC v. Navarro, 579 U.S. ___ (2016).

Duties of Service Advisors

At issue are the “service advisors” in a car dealership’s service department. These advisors typically greet the car owners who enter the service area, evaluate the service and repair needs of the vehicle owner, recommend services and repairs that should be done on the vehicle, and write up estimates for the cost of repairs and services before the vehicle is taken to the mechanics for service.

While service advisors do not sell cars, and they do not repair or service cars, they are essential in the sale of services to be performed on cars in the Service Department. Consequently, the issue is whether they fall within the FLSA exemption for salesmen, partsmen, or mechanics. The case before the Court involved numerous service advisors who sued their employer alleging, among other things, that the dealership failed to pay them overtime wages.

DOL Had Flip-Flopped On Exempt Status

In 1970, the DOL took the view that service advisors did not fall within the salesman/mechanic exemption and should receive overtime pay. Numerous courts deciding cases challenging the DOL’s earlier interpretation, however, rejected the DOL’s view and found service advisors exempt. After the contradictory rulings, the DOL changed its position, acquiescing to the view that service advisors were exempt from overtime pay. In a 1978 opinion letter, as confirmed in a 1987 amendment to its Field Operations Handbook, the DOL clarified that service advisors should be treated as exempt.

After more than 30 years operating under that interpretation, the DOL flip-flopped again in 2011. After going through a notice-and-comment period, the DOL adopted a final rule that reverted to its original position that service advisors were not exempt and were entitled to overtime. It stated that it interpreted the statutory term “salesman” to mean only an employee who sells automobiles, trucks, or farm implements, not one who sells services for automobiles and trucks, as service advisors do.

Dealerships were understandably unhappy with the final rule and continued to challenge the DOL’s position in court. As cases went up on appeal, the Fourth and Fifth Circuit Courts of Appeals ruled that the DOL’s interpretation was incorrect. The Ninth Circuit disagreed, ruling instead to uphold the agency’s interpretation. Those contradictory decisions led the Supreme Court to take on the issue in the Encino Motorcars case. Read more >>

November 16, 2015

Overtime Pay Changes May Be Delayed Until Mid-to-Late 2016

By Mark Wiletsky

The Department of Labor (DOL) does not expect to issue its final rule changing the overtime exemptions until mid-to-late 2016, according to a recent report in the Wall Street Journal. The report states that Solicitor of Labor, Patricia Smith, provided the new timeline at an American Bar Association Labor and Employment Law conference in Philadelphia last week. The final rule is expected to greatly expand the number of employees who are eligible for minimum wage and overtime pay. If the final rule is delayed until mid-to-late next year, the changes probably won’t go into effect until sometime in 2017.

Why The Delay?

In March 2014, President Obama directed the DOL to update its regulations defining which white collar employees are exempt from the minimum wage and overtime pay requirements of the Fair Labor Standards Act (FLSA). It took over a year – until July 6, 2015 – for the DOL to issue its proposed changes. The proposed rules raise the salary threshold for white collar exemptions to the 40th percentile of weekly earnings for full-time salaried workers nationwide, or an estimated $970 per week/$50,440 per year. The salary threshold for highly compensated exempt employees would go up from $100,000 to about $122,148 per year. The proposed rules include a mechanism for automatic annual increases to the salary thresholds. See an earlier blog post for a more detailed explanation of the proposed changes.

After the proposed rules came out in July, businesses and organizations flooded the DOL with an estimated 290,000 comments. Solicitor Smith reportedly told the ABA conference attendees that the large volume of comments and the complex nature of the changes were the cause of the delay in issuing the final rules. Another explanation could be politics and the desire to wait to issue the new rules until after next year’s presidential election.

Next Steps

Employers may have more time to prepare for the expected overtime pay changes, but the timing remains uncertain despite the Solicitor’s comments. Plan to review the employees you currently consider to be exempt and note those positions and persons that are being paid close to the salary threshold. Those will be the ones who may no longer be exempt after the salary thresholds go up. Although no changes to the duties requirements were part of July’s proposed rule, the DOL asked for comments on the duty rules. Accordingly, the FLSA white collar exemption duty requirements could change after the final rules come out. We will keep you posted on any new developments.

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July 20, 2015

Unpaid Internships Permitted Under New Test

By Brad Williams

A federal circuit court has adopted a new test permitting employers to use unpaid interns where the “tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer’s operation.” In Glatt v. Fox Searchlight Pictures, Inc., 2015 WL 4033018 (2nd Cir. July 2, 2015), the U.S. Court of Appeals for the Second Circuit rejected a stringent and outdated six-part test promoted by the Department of Labor (DOL) for determining whether “interns” are actually “employees” within the meaning of federal wage and hour law. Glatt will have a significant impact on intern-initiated litigation, including by making class or collective actions more difficult to prosecute in jurisdictions that adopt the test.

Background to Glatt

Internships have become a hot-button topic in recent years. In 2010, the DOL issued “Fact Sheet #71” to educate private sector, for-profit employers about unpaid interns and to dissuade their use. Derived from a 1947 U.S. Supreme Court case that addressed the use of “trainees” hoping to become railroad brakemen, the Fact Sheet listed six criteria that the DOL believed must be satisfied for interns to be excluded from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime requirements. Most notably, these criteria included requirements that employers derive “no immediate advantage” from interns’ activities and that interns not “displace” regular employees (e.g., by preventing their hiring, or by absorbing overtime hours). The DOL took the position that all six criteria must be satisfied for the “trainee” / “intern” exception to apply. However, because most employers receive at least some benefit from unpaid interns, the DOL’s rule would effectively preclude all private sector, for-profit businesses from using unpaid interns, except in unusual cases involving bona fide educational programs and job shadowing.

Based largely on the DOL’s position, interns initiated a wave of class and collective actions across the country alleging that they had been wrongly classified as “interns” rather than “employees.” Despite ambiguity in the controlling case law, employers settled many of these lawsuits at great expense and out of fear that satisfying the DOL’s six-factor test would prove impossible. For instance, Condé Nast settled a class action involving 7,500 interns for $5.8 million in 2014, and Saturday Night Live settled a similar lawsuit involving thousands of interns for $6.4 million that same year. Other employers elected to discontinue their internship programs altogether to avoid the threat of litigation.

Case Law Response to DOL’s Six-Factor Test

Despite employers’ capitulation in the face of class and collective action threats, the actual test for distinguishing between “interns” and “employees” under the FLSA has always been ambiguous. Although the DOL has long promoted its six-part test, it has vacillated in opinion letters and other administrative guidance regarding whether all six criteria must be satisfied. For their part, courts have afforded the DOL’s test some deference, but have rarely held that all six criteria must be met. Instead, they have considered the “totality of the circumstances” or the “economic realities” of interns’ and employers’ relationships in determining whether interns (or similar workers) are actually “employees.” Many of these cases are based upon U.S. Supreme Court cases like Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947), and Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290 (1985). Other courts – most notably the U.S. Court of Appeals for the Sixth Circuit in Solis v. Laurelbrook Sanitarium & Sch.. Inc., 642 F.3d 518 (6th Cir. 2011) – have eschewed the DOL’s six-part test altogether, favoring a “primary beneficiary” test which looks at which party receives the primary benefit of an internship. In Solis, the Sixth Circuit concluded that the “primary beneficiary” test was supported by Walling v. Portland Terminal Co., 330 U.S. 148 (1947), the very same 1947 U.S. Supreme Court case on which the DOL purported to base its six-factor test.

District Court Decisions in Glatt and Hearst

The Glatt case was originally filed in 2011 in New York by former interns of Fox Searchlight Pictures who had worked on the film Black Swan. A similar lawsuit was filed in 2012 in New York by former interns of Hearst Corp. who had worked on magazines including Harper’s Bazaar and Marie Claire. Both cases were high-profile and amongst the first wave of intern-initiated lawsuits to work their way through the courts. Both were closely watched by employers concerned about the legality of internships.

In 2013, the district court in Glatt held that two of plaintiffs were “employees” rather than “interns”/ “trainees” under the FLSA and state law. The court applied a version of the DOL’s six-factor test but did not expressly hold that all six factors must be satisfied. The court also granted class and conditional collective action certifications to a third plaintiff.

Also in 2013, the district court in Hearst held that the magazine interns were not “employees” under the FLSA and state law based on a “totality of the circumstances” test. The court denied the plaintiffs’ motion for class certification. Because Glatt and Hearst addressed the same issues, but reached different results, they were eventually consolidated for argument on appeal to the U.S. Court of Appeals for the Second Circuit.

Second Circuit’s Adoption of “Primary Beneficiary” Test in Glatt

On July 2, 2015, the Second Circuit issued its long-awaited decision in Glatt. That same day, it issued a summary order in the companion case, Hearst. In Glatt, the court rejected both the DOL’s six-factor test, and the plaintiffs’ insistence that they were automatically “employees” of Fox Searchlight Pictures because the company had received an “immediate advantage” from their work. The court found the DOL’s six-factor test unpersuasive, and afforded it virtually no deference because it was based upon the DOL’s reading of Walling, which the Second Circuit concluded it was equally competent to construe (along with other U.S. Supreme Court cases).

Accepting Fox Searchlight Pictures’ argument, the Second Circuit adopted a “primary beneficiary” test, holding that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” Although not fully articulated in the court’s decision, this test is supported by both a defensible reading of Walling, and later U.S. Supreme Court cases mandating consideration of the “totality of the circumstances” and the “economic realities” of the parties’ relationships. To help lower courts apply the new test, the Second Circuit listed seven non-exclusive factors to consider in determining whether an intern or an employer is the “primary beneficiary” of an internship:

The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Because the district court in Glatt had not expressly considered these factors, the Second Circuit vacated the lower court’s decision and remanded for further proceedings. Given its holding in Glatt, the Second Circuit also vacated the district court’s decision in Hearst and remanded for further proceedings.

Glatt’s Impact in the Second Circuit and Beyond

Glatt’s “primary beneficiary” test is more favorable to employers than the DOL’s six-factor test. The fact that employers receive some benefit from interns’ work no longer means that internships are automatically illegal. In addition, the individualized assessment required to determine whether an intern – as opposed to an employer – benefits more from an internship under the test means that class and collective actions might now prove impossible to certify. In fact, the Second Circuit vacated the district court’s class and conditional collective action certifications in Glatt, and affirmed the district court’s denial of class certification in Hearst. This strongly suggests that class and collective actions may no longer be appropriate vehicles for resolving intern classification disputes in jurisdictions that apply the new test. To the extent that Glatt or Hearst proceed in the courts below, the defendants will likely face liability only as to individual interns, not entire classes.

Glatt’s new test is currently only the law in the Second Circuit, which covers Connecticut, New York, and Vermont. However, the test for distinguishing between “interns” and “employees” remains in flux in many jurisdictions, and other federal circuit courts may adopt similar tests as more intern-initiated lawsuits work their way through the courts. For instance, the U.S. Court of Appeals for the Tenth Circuit – which covers Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming – currently applies a “totality of the circumstances” test based on Reich v. Parker Fire Prot. Dist., 992 F.2d 1023 (10th Cir. 1993). However, like Glatt, Reich recognized that the DOL’s six-factor test was unpersuasive, and the case contains language consonant with Glatt’s “primary beneficiary” test.
The Tenth Circuit may eventually adopt a more favorable standard if and when it revisits intern classification. Regardless of how the case law develops, however, Glatt plainly illustrates the weakness in the DOL’s six-factor test, and shows that employers may profitably resist intern class or collective actions, even when it requires making new law.

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July 15, 2015

Independent Contractors: New DOL Interpretation Focuses on Economic Dependence of Workers

By Brad Cave

If you hire workers as independent contractors, you need to review that status with fresh eyes in light of a new Administrator’s Interpretation issued by the U.S. Department of Labor (DOL). In his July 15th Interpretation, Wage and Hour Division Administrator David Weil stresses that most workers are employees under the Fair Labor Standards Act (FLSA), not independent contractors. Multiple factors still come into play when determining independent contractor status but the DOL ultimately will look to whether the worker runs his or her own independent business or instead, is economically dependent on the employer.

Broad “Suffer or Permit to Work” Standard

The FLSA defines “employ” as “to suffer or permit to work.” According to Administrator Weil, this broad definition will encompass most workers. He notes that the definition had roots in state child labor laws which sought to ferret out employers who used children as laborers illegally.

He also cites Supreme Court and federal court cases that state that the “suffer or permit to work” standard has broad applicability and extends to the farthest reaches in order to achieve the goals of protecting workers under the FLSA.

Economic Realities Test

Noting that courts have developed a multi-factor “economic realities” test to determine whether a worker is an employee or an independent contractor, the Administrator’s Interpretation goes through each factor, providing examples and cases that help in the analysis. While the factors haven’t really changed, here are some important distinctions made in this Interpretation:

A contract setting forth an independent contractor relationship “is not relevant” in determining whether the worker is properly classified as an independent contractor; the actual working relationship is what matters, not the label given to it by the parties.
The individual’s opportunity to make a profit or realize a loss on the job must include whether the individual’s managerial skills result in that profit or loss; in other words, a worker’s willingness or ability to work more hours or work more efficiently is not enough to suggest independent contractor status, instead the individual must be making managerial decisions about hiring assistants, purchasing materials, advertising, etc., in order to support independent contractor status.
The worker’s investment in tools, equipment and doing the job must be compared to the employer’s investment; a worker who provides a few essential tools to do the job may not be enough to contribute toward independent contractor status; instead, the worker’s investment must be significant, particularly when compared to the entity’s investment in the job.
Being highly skilled in a particular type of work is not sufficient in suggesting independent contractor status as many employees are highly skilled in the services they provide to their employer; instead, an independent contractor must include “business-like initiative.”
The degree to which the entity controls the work of the individual should not play an oversized role in the analysis; many workers today are not under constant supervision of their employers but that lower degree of monitoring and control does not make them independent contractors.

The Administrator’s Interpretation establishes that no single factor in the economic realities test is determinative and each factor should be analyzed in terms of whether the worker is economically dependent on the employing entity or is truly in business for him- or herself.

Time to Review Your Independent Contractor Classifications

The DOL has made misclassification of employees a high priority for the past few years and with this Administrator’s Interpretation, it is signaling its intent to crack down even further on businesses who classify workers as independent contractors. We suggest that you review the Interpretation, study the examples and then audit your independent contractor relationships to determine whether your classifications will pass DOL scrutiny. In difficult cases, consult with your employment counsel for guidance. Conducting the review yourself and making any necessary changes will go a long way in avoiding headaches and potential liability should the DOL appear at your door for an audit. And, keep in mind that this Interpretation does not carry the force of law. The Administrator’s view will undoubtedly be challenged in court as the DOL ramps up its aggressive posture.

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December 12, 2014

Supreme Court Says No Pay For Security Screening Time

Supreme Court Says No Pay For Security Screening Time

By Brad Williams

Should employers pay employees for time spent in mandatory, post-shift security screenings designed to deter theft? Not according to a recent Supreme Court decision.

On December 9, 2014, the Supreme Court unanimously held in Integrity Staffing Solutions, Inc. v. Busk, No. 13-433 (2014), that post-shift, anti-theft security screenings are not compensable work time under the Fair Labor Standards Act (FLSA). The decision reversed a Ninth Circuit decision holding that workers in two Amazon.com warehouses were entitled to pay for periods spent waiting for, and being screened at, security checkpoints after their shifts had ended. The workers claimed that they spent roughly twenty-five minutes per day in such screenings, which included removal of their wallets, keys, and belts.

Splitting from other courts to have considered the issue, the Ninth Circuit held that such time was compensable because the workers’ post-shift screening activities were necessary to their principal work activities, and were performed for the benefit of their employer. However, the Ninth Circuit’s understanding of compensable work time under the FLSA echoed that in earlier judicial decisions that had been expressly overruled by Congress.

Specifically, in response to a flood of litigation caused by the earlier decisions, Congress had passed the Portal-To-Portal Act in 1947 to clarify that employers are not obligated to pay employees for activities which are “preliminary” or “postliminary” to the principal activities they are employed to perform. As such, time spent before or after a worker’s “principal activities” is not compensable unless it is spent on activities that are themselves “integral and indispensable” to the worker’s principal activities. Regulations interpreting the Portal-To-Portal Act had long held that activities like checking into and out of work, or waiting in line to receive paychecks, is not compensable work time.

In its December 9th ruling, the Supreme Court reaffirmed that just because an activity may be required by, or may benefit, an employer, does not mean that it is a compensable “principal activity,” or is “integral and indispensable” to a principal activity. The warehouse workers’ employer did not employ the workers to undergo security screenings; it employed them to retrieve products from warehouse shelves and to package the products for shipment to customers. The security screenings were also not “integral and indispensable” to the warehouse workers’ principal activities because their employer could have eliminated the screening requirement altogether without impairing the workers’ ability to perform their jobs.

In reaching its decision, the Supreme Court stated a new definition of “integral and indispensable” activities to guide lower courts. An activity is now “integral and indispensable” to an employee’s principal work activities if it is an “intrinsic element of those activities and one with which the employee cannot dispense if he is to perform his principal activities.” Examples include time spent by battery-plant employees showering and changing clothes because chemicals in the plant are toxic to humans. It also includes time spent by meatpacker employees sharpening knives because dull knives cause inefficiency and other problems on the production line.

The Supreme Court’s decision gives employers much-needed certainty regarding the compensability of certain “preliminary” or “postliminary ” activities. It clarifies that most employers may continue performing uncompensated pre- and post-shift security or anti-theft screenings without fear of successful FLSA collective actions. The decision is particularly relevant to employers in the retail industry, who regularly conduct anti-theft screenings, and to other employers who are increasingly performing security screenings in an era of heightened concerns over terrorism.

Because the FLSA sets minimum standards for wage and overtime payments, states may set higher standards for compensable work time, including with respect to “preliminary” or “postliminary” activities. Unions may also bargain with employers to make such activities compensable. But the Supreme Court’s recent decision helps push back on the tide of FLSA collective actions filed by employees claiming that certain activities are compensable because they are essential to their jobs. The decision also follows a similar Supreme Court decision in January 2014, Sandifer v. U.S. Steel Corp., No. 12-417 (2014), in which the Court held that time spent by union-employees donning and doffing personal protective equipment was not compensable. Taken together, these decisions suggest a concerted judicial effort to address the explosion of FLSA collective actions.