Fifth Circuit Rejects Argument that Class Action Waivers in Arbitration Agreements Violate the NLRA

I first wrote about the NLRB's decision that pre-dispute arbitration agreements waiving the right to assert claims as part of a class action violated federal labor law in January 2012 (post).  Back then, I thought it was prudent for employers to wait for the result of the the inevitable appeal that would follow before revising or throwing out their arbitration agreements containing class action waivers. 

The Fifth Circuit Court of Appeals held recently that D.R. Horton's pre-dispute arbitration agreement requiring the builder and its employees to arbitrate disputes on an individual, non-class action basis did not violate the NLRA.  The Court affirmed, however, the Board decision to the extent it required D.R. Horton to clarify to its employees that the arbitration agreements did not waive their right to file unfair labor practice charges with the National Labor Relations Board.

The takeaway from the Court's decision is that arbitration agreements with class action waivers are enforceable under the Federal Arbitration Act and employers may still consider these kinds of agreements as part of their alternative dispute resolution programs.  However, employers should clarify in those agreement that they do not eliminate the employee's right to file or pursue unfair labor practice charges with the National Labor Relations Board. 

You can access a complete copy of the opinion here

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Fifth Circuit Confirms Use of Fluctuating Workweek Method of Overtime Calculation in Misclassification Case

In settlement negotiations and trial of FLSA overtime misclassification cases, there is usually a disagreement between the parties as to how the unpaid overtime should be calculated. Attorneys representing employees typically want overtime calculated using a 1.5 times the regular rate of pay for each overtime hour that was worked. Attorneys representing companies typically want to utilize the “fluctuating workweek” method of calculating overtime. A recent case from the Fifth Circuit Court of Appeals confirms that the proper method of calculating unpaid overtime in a misclassification case if the use of the fluctuating workweek method.

In Ransom v. M. Patel Enterprises, Inc., fifteen executive managers of an Austin-based party retail store secured a jury verdict that they had been misclassified as exempt employees and where therefore entitled to unpaid overtime. After the issue of liability was resolved, the presiding judge assumed responsibility for calculating the damages. The judge determined that the fixed-salary paid to the employees was for a set 55 hour workweek. The judge then divided the number of total hours in the workweek by the employees’ salary to determine a regular rate of pay. Concluding that the hours worked in excess of forty per workweek were uncompensated, rather than compensated at straight time, the judge then multiple one and a half times the regular rate of pay times all hours worked in excess of forty per workweek. The Court of Appeals held that that this improperly inflated the amount of overtime the trial judge awarded.

Rather, the court of appeals held that the trial judge should have divided the employee’s weekly salary by the number of total hours worked in a the workweek to determine the regular rate of pay. Having determined the regular rate of pay, and applying the fluctuating workweek method of calculation, the Court explained that the trial judge should have then applied ½ of the regular rate of pay to only the overtime hours (i.e., the hours in excess of forty per week) to arrive at the unpaid overtime premium the misclassified employees were entitled to receive.

The takeaway from this case is that when a misclassified employee works fluctuating hours during the workweek, the amount of unpaid overtime should be calculated using the fluctuating workweek method of calculation. This decision has the effect of reversing the published opinion in In re EZ Pawn LP Fair Labor Standards Act Litig., 633 F.Supp. 2d 395 (W.D. Tex. 2008) that plaintiff lawyers frequently cite to support a more generous overtime calculation. You can review download the full opinion in Ransom v. M. Patel Enterprises, Inc. here.

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U.S Supreme Court Hold's Employer's Offer of Full-Relief to FLSA Plaintiff Moots Putative Collective Action

In what could become an important case for employers faced with FLSA wage and hour collective actions, the United States Supreme Court held that a named plaintiff who rejects an offer of judgment for full relief before any other party joins the action cannot continue to pursue the claims on behalf of the putative class because the dispute between the named plaintiff and employer has become moot.  

In Genesis Healthcare, the plaintiff was a registered nurse who brought suit on her behalf, and on behalf of all similarly situated individuals, alleging that her health care employer automatically deducted a thirty minute meal period even though the nurses were regularly required to work through their lunches or perform compensable work during those breaks. When served with the action, the employer made a offer of judgment (i.e., offering to let the court enter judgment against it) for the full amount of the plaintiff's individual claim ($7,500) plus reasonable and necessary attorney's fees as determined by the Court.  When the plaintiff did not respond to the offer, the employer moved to dismiss the action arguing to the court that the controversy was moot (i.e., there was not longer an actual dispute because the employer conceded judgment).  The trial court determined that since the offer fully compensated the plaintiff for her damages and no other party had joined the lawsuit as a party plaintiff, the dispute was moot and dismissed it.

The Third Circuit Court of Appeal reversed the trial court's judgment observing that while the named plaintiff's individual claims were moot, her collective action was not and that allowing an employer to strategically pick off named plaintiffs with strategic settlement offers would frustrate the goals of collective actions.

The U.S. Supreme Court majority held that when a named plaintiff rejects (or in this case ignores) an offer of judgment that offers full relief and no other potential plaintiff has joined the FLSA collective action, the dispute is moot and must be dismissed. In an unconventionally written dissent, Justice Kagan (joined by three Justices) criticized the majority opinion for side-stepping the real issue in the case.  In Justice Kagan's opinion, she explained that the real issue in the case was whether an ignored or rejected offer of judgment moots a controversy. 

Because the parties stipulated (and the Court assumed) that the offer of judgment constituted full relief thereby mooting the named plaintiff's individual claim, there are several issues that will need to be resolved by the lower courts.  For example, unanswered by Genesis Healthcare is what offer constitutes an offer of full relief in the context of a putative FLSA collective action.  Also unresolved is an apparent circuit split as to whether an unaccepted offer of judgment moots an entire dispute in such a case.  

You can download a complete copy of Genesis Healthcare Corp. v. Symczyk here.

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Fifth Circuit Holds Employer's Mandatory Travel Program Does Not Constitute Compensable Travel Time

Yesterday the Fifth Circuit Court of Appeals affirmed, a judgment for an employer who was sued by its employees for travel time that the employer did not include as working time.   Its a complicated set of facts and you can read Griffen v. S&B Engineers and Constructors, Ltd. here if you're interested.  While most employers don't have travel time issues nearly as complex as the Griffen case, it provides sufficient reason to review the general rules about when travel time constitutes working, compensable time for nonexempt employees. There are essentially four general rules:

  1. Regular Home-to-Work: Regular home-to-work commuting time is not compensable. Consequently, an employee’s travel time from the employee’s home to her regular place of business does not count as hours worked. However, where the employee’s workday begins and ends at home such as where the employee drives co-workers to work in a company-owned vehicle at the employer’s request or where the employee has to run errands on behalf of the employer on the way to work, such time might be compensable if it integral and indispensable part of the employee’s principal duties; is required by the employee and/or is more than de minimus.
  2. Special One-Day Assignment: Travel time spent in the commute to a one-day (non-overnight) special assignment in another city, away from the normal fixed location of work, may be considered working time. The employer should include the commuting time less that amount of time the employee normally spends commuting from home to the regular fixed location of work. 
  3. Travel as Part of the Job: Travel time for employee who must travel as part of their regular, principal duties are included as hours worked. For example, the hours that an employee who is tasked with visiting different locations of the employer or customers during the course of the business day, spends commuting between those locations are hours worked. The employer is generally permitted to deduct from those hours worked an amount of time equal to the average normal commute time immediately prior to the first visit of the day and after the last visit of the day 
  4. Overnight Travel: Travel time that takes an employee away from home overnight is called travel away from home. Travel time occurring during the employee’s regular work hours, whether on regular workdays or corresponding not work days is compensable. Travel time occurring outside those regular working hours is not compensable unless the employee is required to perform work while traveling. The DOL’s current enforcement position is to ignore travel time occurring outside the normal working hours as a passenger on a plane, train, automobile, boat or bus as working time unless the employee is required to work while engaged in such travel.

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A Broken Clock is Right Twice Per Day: Supreme Court of Texas Holds Lilly Ledbetter Fair Pay Act Does Not Apply to Claims under State Law

I wrote back in April 2010 that I thought the Houston Court of Appeals decision in Prarie View A&M v. Chatha applying the federal Lilly Ledbetter Fair Pay Act (“Ledbetter Act”) to claims arising under the Texas Commission on Human Rights Act (TCHRA) was wrongly decided. Last month the Supreme Court of Texas agreed with me and reversed the decision.

In Prarie View A&M v. Chatha, Dr. Chatha began her employment with the University in 1987 as an associate professor. In 2003, she applied for a promotion to full professor. Initially denied the promotion, Dr. Chatha was eventually promoted to in 2004. At that time, she complained that her salary was inequitable but was told that there were no funds available for a salary adjustment. Two years later, Dr. Chatha filed a charge of discrimination with the EEOC and Texas Workforce Commission alleging race and nationality-based pay discrimination. Under state law, a charge of discrimination must be filed within 180 days of the discriminatory act’s occurrence. At issue was when Dr. Chatha’s pay discrimination claim “occurred”. Did the claim occur when she was initially advised of the decision in which case her claim was untimely or was each subsequent paycheck she received a separate, new act of discrimination rendering her charge of discrimination timely? 

The Houston Court of Appeals held that Dr. Chatha’s claim was timely reasoning that the federal Ledbetter Act applied to pay discrimination claims filed under state law because one of the general provisions of the TCHRA was to execute the policies of Title VII including its amendments and two federal district courts opinions had applied the Ledbetter Act to state law claims.

The Supreme Court of Texas reversed the court of appeals. The Court noted that while the federal and state laws are largely analogous and have historically be interpreted consistently, nothing required it to interpret state law identically with federal law. Additionally, the Court found no support in the plain language of the statute or its legislative history that the Texas Legislature intended amendments to Title VII be automatically incorporated into the TCHRA. Consequently, the Supreme Court held that the that Ledbetter Act did not apply to TCHRA claims and that pay discrimination claims brought under state law must generally be brought within 180 days of the date the claimant is advised of the compensation decision.

This is a more pyric victory for Texas employers than it is a meaningful one. Texas plaintiffs who desire to bring a pay discrimination claim over a decision that is older than 180 days still have a recourse. They can file those claims under federal law and avail themselves of the Ledbetter Act’s more forgiving definition of when a claim “occurs”. 

A full copy of Prarie View A&M v. Chatha is available here.

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Finally, Private Litigants Can Settle Bona Fide FLSA Disputes Without DOL or Court Supervision!

Some of you may be surprised to learn that conventional wisdom was that claims arising under the Fair Labor Standards Act (the federal law requiring the payment of minimum wage and overtime to most employees) cannot be released or waived without court or Department of Labor supervision. I certainly thought that until several years ago when I had to some in-depth research to enforce a settlement agreement releasing FLSA claims an employer entered with an employee. I learned then that the law was nearly as clearly developed nor black and white as I had initially thought.

Because of the uncertainty about the enforceability of the release of FLSA claims, employers wanting to settle threatened or pending FLSA claims have had to consider whether they wanted to seek DOL or court approval of the settlement. I have been told that some local offices of the DOL will not review or supervisor private settlement agreements between litigants and I have seen at least one court that likewise refused to do so. While Texas employers have had some limited judicial authority supporting enforcement of these private settlement agreements when bona fide disputes over wages existed (i.e,. one reported case), it was risky to seek the release of significant FLSA claims without seeking out and obtaining court approval of those settlements. 

A recent case from the Fifth Circuit provides the parties some comfort in recognizing that where there is a bona fide dispute over the hours worked or compensation due, private settlements of FLSA claims do not required DOL or court supervision. 

In Martin, union employees involved in the production of movie filmed in Louisiana filed a grievance with the union claiming that they had not been paid all contracted wages by the employer for the work they performed. The union investigated the employees’ grievance and concluded that it was impossible to determine whether the workers had worked on the days they claimed to work. The company and union negotiated a settlement of the disputed hours and the union entered the agreement on behalf of its members releasing the company for claims related to the disputed hours. The beneficiaries of the settlement received the contracted payments and cashed the checks for the disputed wages. Thereafter, some of the union members sued for additional wages they claimed they were owed. The Fifth Circuit, in a case of first impression, held that where there is a bona fide dispute over the hours worked or compensation owed, private settlement agreements releasing FLSA claims are enforceable and the parties need not seek DOL or court supervision for those releases to be valid.

You can download a copy of the opinion here.

Follow me on Twitter @RussellCawyer.

Paying Texas Employees Using Debit Cards

Some employers have experimented using debit card payroll systems to decrease their payroll processing and administration costs.  Frequently, Texas employers ask whether they can pay their Texas employees using debit cards.  The answer is "yes" but only with the employee consent.

Texas law provides that employees must be paid in one of four forms:

  1. In U.S. currency;
  2. By written instrument issued by the employer and negotiable on demand at full face value in U.S. currency;
  3. By electronic funds transfer; or
  4. In any other kind or form agreed to in writing by the employee.

According to the Texas Workforce Commission advises that Texas employers can pay their employees using debit cards so long as the employees agree in writing and the use of the debit card does not result in any fee charged to the employee.  Consequently, employer may be able to reduce their payroll processing expenses via debit card payments but they need to ensure that those means don't cost the employee anything and the employee agrees in writing to the form of payment.

Follow me on Twitter @RussellCawyer.

Fifth Circuit Holds 24 Hour Fitness Arbitration Agreement Illusory and Unenforcable

24 Hour Fitness operates health clubs and fitness facilities across the country.  As part of its operations, 24 Hour Fitness employs sales representatives.  As a condition of employment, employees are required to enter into arbitration agreements to arbitrate their employment disputes with their employer.  FLSA claims (i.e., overtime and minimum wage claims) are covered within the scope of the arbitration agreement.  John Carey was a sales representative for 24 Hour Fitness.  He signed a handbook acknowledgment containing the arbitration agreement.  Not only did the arbitration agreement require the arbitration of disputes, it further provided that disputes could not be brought as class actions or in representative capacities.  Unfortunately for the employer, the handbook also included a provision that permitted it to revise, delete or add to the handbook at any time and that it would communicate those changes to the employees through official written notices.  Nothing in the policy precluded the employer from applying changes to the arbitration agreement retroactively. 

After Carey's employment ended, he filed an FLSA collective action seeking unpaid overtime on behalf of all similarly-situated employees.  24 Hour Fitness moved the court to compel arbitration.  Carey, in response, argued that he agreement was illusory because the employer retained the right to unilaterally amend the agreement. 

The Fifth Circuit Court of Appeals found against the employer holding that its arbitration agreement was unenforceable.  The Court held that the arbitration agreement was illusory because: 1) 24 Hour Fitness retained the right to alter, amend or changes the policy at any time; 2) the policy did not foreclose the prospect of unilateral amendments to claims existing on or before the amendment; and 3) nothing in the policy precluded the employer from applying any of its changes retroactively.  As a result, 24 Hour Fitness will be left to defend Carey's lawsuit in Court, with a jury, and potentially as a collective action. 

The take-away form the opinion is that regardless of the type of ADR you use (e.g., arbitration, waiver of jury trial), if the agreement is contained in an employee handbook, ensure that the handbook's express contractual disclaimer contained in the handbook (You know, that provision that says nothing contained in this agreement is intended to create an express or implied contract) carves out those ADR procedures and specifically states that such provisions are intended to be contractual in nature; that the employer and employee are bound by such provisions and that neither party may alter or amend the contract unilaterally.  At a minimum, if the employer wants to retain the right to unilaterally amend the policy, it should state that the employer cannot amend it to apply retroactively to claims that existed prior to the amendment and notice to the employee. 

A full copy of Carey v. 24 Hour Fitness is available here

Follow me on Twitter @RussellCawyer.

 

End-of-Year Bonuses, the Regular Rate of Pay and Overtime

With many employers considering whether and when to pay end-of-year or holiday bonuses, I thought it was a good time to review the rules for when bonuses or other compensation must be included in the regular rate of pay for purposes of paying overtime.  This is one issue that still trips up Texas employers.

Nonexempt employees are entitled to overtime compensation at 1.5 times the regular rate of pay for most hours worked in excess of 40 per week.  In determining the regular rate of pay an employer is to include all compensation paid to an employee unless it falls into one of nine general statutory exclusions.  Many end-of-year holiday bonuses will  fall into a statutory exclusion.  However, where the bonus is dependent on hours worked, productivity or efficiency, the bonus should be included in the regular rate of pay for nonexempt employees. 

Assume an employee receives a $5,200 end-of-year bonus that should be included in the regular rate of pay.  Presumably, that bonus was earned in equal portions over the course of the year despite the fact that it is paid in one workweek at the end of the year.  One hundred dollars of the bonus will be attributed to each workweek in the year.  If an employee worked overtime in a workweek, $100 of the end of year bonus has not been included in the wages for that week for purposes of determining the proper overtime rate.  Consequently, the employer must go back and recalculate the overtime pay for the week to make-up the fractional underpayment.  These underpayments are usually small, but they provide an employer with potential overtime exposure and the costs of defending such a claim normally far exceed the unpaid overtime.  

The takeaway from this post is to remember that if an employer is making a bonus or other payment that is not specifically excluded from the regular rate of pay, the employer may need to go back and make overtime adjustment payments to nonexempt employees for the pay periods over which the overtime was earned and in which the employees worked overtime.  This can be complex to perform and is beyond the scope of this post but a labor and employment attorney Board Certified by the Texas Board of Legal Specialization can help you calculate this overtime adjustment.

Follow me on Twitter @RussellCawyer.

IRS Provides Semi-Safe Harbor to Fix Independent Contractor Misclassification Problems

I am always skeptical when I hear a deal that sounds too good to be true.  Because of my healthy skepticism, I hope that I am unlikely to be scammed by the phishing e-mail advising me a foreign distant relative has left me a lot of money and I only need to send a few thousand dollars to an off-shore bank to release the funds (however I also probably won't return the phone call when I really win a legitimate lottery).  This was my thought when I read about the new IRS Voluntary Classification Settlement Program that lets companies that have misclassified employees as independent contractors to prospectively reclassify the workers as employees and only pay ten percent of the prior year's payroll taxes --with no penalties or interest.

This sounds like a pretty good deal.  Come clean and fix prior mistakes all while paying a fraction of the back taxes and no interest and penalties and a promise that the IRS won't audit prior financial years on this topic.  Some of you are probably saying "where do I sign up?"  (Of course, none of you have misclassified any employees as independent contractors.)

One downside to the IRS's program is while the government is showing some leniency by providing companies with a limited safe harbor to remedy prior mistakes, wage and hour plaintiff' lawyers are unlikely to be so forgiving.  Participation in the IRS program will be tantamount to admitting that the workers were misclassified as independent contractors and all the baggage that goes along with such a misclassification

Since companies rarely keep records of the hours worked by independent contractors, the newly classified employees can seek several years of unpaid overtime and the employer is unlikely to have any records to rebut the employees' claims of hours worked.  Moreover, to the extent companies have benefit or incentive plans in which employees participate (but independent contractors do not), companies may face claims for benefits or other incentives (bonuses, options, stock etc.) that were not provided to the misclassified contractors.

The IRS program is an interesting opportunity for companies with misclassified independent contractors to reclassify their workers with less downside to the company.  However, the program could have been more palatable (thereby likely getting better participation) had the IRS included such protections for companies from the other negative consequences that come along from a misclassification of employees as independent contractors such as providing immunity from overtime, benefit or incentive claims for the period of misclassification or providing that agreements with the IRS shall not be admissible in any proceeding involving the company.  Companies will need to weigh all of the benefits and consequences in deciding whether to participate in the Voluntary Classification Settlement Program.

Follow me on Twitter @RussellCawyer.

Court Enters Judgment Against Police Officers on Overtime Suit Against City

In a recent case out of the U.S. District Court for the Northern District of Texas, a federal judge entered summary judgment for the City of Fort Worth in an FLSA overtime case filed by four former police officers.   

In Clark v. City of Fort Worth, Texas, four retired City of Fort Worth police officers filed a FLSA putative collective action seeking to represent a class of current and former officers for unpaid overtime they claimed they worked when they provided security services for third-parties leasing City properties (e.g., events at the City owned convention center).  According to the plaintiffs, these off-duty hours providing security for sporting events and concerts on City property (but for non-City events) should have been added to their regular official law enforcement hours with any work over forty hours per week being paid at overtime rates.  The City moved for summary judgment arguing that the special detail exemption excluded those hours worked for the separate employers and that no overtime was due and owing.  There are only six reported cases involving the special detail exemption so this opinion is important if for no other reason than to add to the scant case law on the issue.

The special detail exemption applies to law enforcement and fire fighter employees who voluntarily perform work for separate and independent employers.  Under the exemption, the hours voluntarily worked for the separate and independent employer are excluded from the officer's hours worked on behalf of the the primary employer for FLSA overtime purposes.  In a well-reasoned opinion, the federal judge presiding over the case, concluded that the City has established its affirmative defense that the hours sued on were exempt under the special detail exemption and entered a judgment in favor of the City. 

You can download a copy of the Court's opinion here.

Follow me on Twitter @RussellCawyer.

Congress Hears Employer Suggestions on Modernizing the FLSA

Yesterday, the Congressional Education and the Workforce Subcommittee on Workforce Protections heard suggestions on how the FLSA can and should be modernized to better reflect the realities of the 21st Century Workforce.  The following summarizes the suggestions made by business and employer representatives on how the FLSA should be modernized:

  • Update the computer professional exemption by broadening the exempt computer-related duties such as securing, updating, maintaining and testing existing applications even if the duties do not include modifying the programming code.
  • Clarify the rule of what constitutes “de minimus” time that need not be compensated in the context of insignificant IT-related activities such as remotely checking e-mail, calendar and voice mails or checking a schedule change using PDA devices.
  • Expand the exemption for highly compensated commissioned inside sales people. Changes in technology and customer purchasing habits make a distinction between inside and outside sales representatives is artificial and outdated.
  • Remove disincentives for performance based bonuses by permitting employers to exclude performance-based bonuses from the regular rate of pay.
  • Allow for the preemption of state and local wage and hour laws or create a safe harbor for multistate employers operating in compliance with the FLSA.
  • Better define what constitutes “work” to account for the modern world where employees have 24 hour access to e-mail and their company’s computer systems through remote devices like PDA’s, laptops or remote computer access.
  • Provide more clarity, predictability and consistency in being able to determine whether a particular employee qualifies for the white collar exemption.

While these are all good, needed changes to the FLSA to update and modernize it, the proposed changes are unlikely to occur overnight and there are unlikely to be meaning changes proposed by the business community until there is a change in the administration. You can access a full webcast of yesterday's hearing here and the printed remarks of the witnesses here.

Other Resources

Congressional Subcommittee to Examine the Effect of the FLSA and the Modern Workforce

Congressional Hearing Examines Problems with Fair Labor Standards Act

Congressional Subcommittee to Examine the Effect of the FLSA and the Modern Workforce

This morning the Education and the Workforce Committee Subcommittee on Workforce Protections will examine whether the FLSA is outdated in today's modern workforce.  The hearing is entitled  “The Fair Labor Standards Act: Is It Meeting the Needs of the Twenty-First Century Workplace?”

According to the Subcommittee's media advisory:

Despite the broad impact of the [FLSA] on the American workforce, it is largely outdated and does not accurately reflect the realities of modern technology or today’s economy. The law has also created an environment of uncertainty with employers facing a patchwork of conflicting interpretations of the law and employees facing difficulty understanding their rights under the law.

As the committee continues to review laws and regulations affecting American workers, Thursday’s hearing will give members an opportunity to examine the effects of the Fair Labor Standards Act on the American workforce.

Representatives from the business and legal communities as well as workers' advocacy groups are expected to testify.  You can watch a webcast of the hearing beginning on July 14, 2011 at 9:00 a.m. CST here.

Governor Perry Closes Loophole on Theft of Service Law

Governor Perry signed SB 1024 eliminating a loophole that previously existed for a criminal theft of service charge.  Under prior law, a party obtaining services from another under a promise to pay could avoid a criminal charge of theft of service so long as the party was making minimal payments.  According to the bill's analysis:

Theft of wages occurs when employers fail to pay workers their promised wages. This is a frequent occurrence in Texas. In certain industries, such as construction, one in every five workers experiences wage theft. In addition, 50 percent of day laborers have experienced wage theft. The impact of this theft is widespread and has caused many workers to be unable to meet their family's basic needs. 

S.B. 1024 addresses instances when workers receive periodic or partial payment of wages. The bill also amends current law to maintain that a person commits theft of service if, with intent to avoid payment, that person fails to make full payment after receiving notice demanding payment if the compensation was to be paid periodically. The intent to avoid payment for a service may be formed at any time during or before a pay period, and the partial payment of wages alone is not sufficient evidence to negate the actor's intent to avoid payment for a service.

SB 1024 creates a criminal offense when the actor fails to make "full" payment after rendition of the services and further clarifies "that partial payment of wages alone is not sufficient evidence to negate the actor's intent to avoid payment for service."

The law takes effect September 1, 2011.

Follow me on Twitter @RussellCawyer.

Wage and Hour Rules for Unpaid Internships

Schools are out for the summer and many college and graduate students are looking for experience in what they hope will be their chosen careers.  Employer's looking to provide that experience through the use of unpaid internships must understand the rules that qualify an internship for "unpaid" status or unwittingly create potential wage and hour liability.  Last summer, the U.S. Department of Labor announced that it would crack down on employer's improper use of unpaid internships.  There is no reason to believe the DOL's interest in these kinds of investigations will be lessened this summer and so a refresher course is in order.

The Fair Labor Standards Act requires that employees be paid at least minimum wage for all hours worked.  The FLSA excludes from coverage those persons who work for another for their own advantage such as an unpaid internship.  The DOL has developed a six factor test for determining whether an internship qualifies for unpaid status.  The factors include:

  1. Whether the internship, even though including actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. Whether the internship experience is for the benefit of the intern;
  3. Whether the intern displaces regular employees, and works under close supervision of existing staff;
  4. Whether the employer providing the training derives no immediate advantage from the activities of the inter; and on occasion its operations may actually be impeded;
  5. Whether the intern is entitled to a job at the conclusion of the internship;
  6. Whether the intern understands that he is not entitled to wages for the time spent on the internship.

If the internship meets all six factors, it may qualify for unpaid status.  However, the DOL takes a very narrow view of this exemption and believes that very few "for profit" employers can properly offer these programs.  The DOL has published a Fact Sheet on Internship Programs under the FLSA.  You can download the Fact Sheet here.

Other posts about unpaid internships:

Unpaid Internships May be a Problem:  Are they Employees or Not?

Unpaid Internships:  Do they Violate the FLSA?

When to Pay Summer Interns:  FLSA Guidance You Need to Know

6th Circuit Tosses DOL's Internship Test (Cautionary Note:  The Fifth Circuit (which includes Texas) has not tossed the DOL's internship test).

DOL Publishes Smart Phone Time Keeping App

Today the U.S. Department of Labor announced publication of a time keeping App for smart phones --the DOL -Timesheet.  Employees can download the free App through iTunes and can be used with the iPad, iPhone and iTouch.  The App is an electronic timesheet that allows employees to record their hours worked and calculate the amount of wages (including overtime) the employee may be owed by the employer.

The App allows employees to track multiple employers; input time manually or start and stop work time automatically; track meal period and other breaks and can even e-mail reports of the hours worked that are already converted into Excel format.  Finally, the App contains a glossary explaining common wage and hour terms and even a function to contact the Department of Labor.  DOL Timesheet is programmed for FLSA compliance; however, I would expect state wage and hour divisions or enterprising wage and hour class action counsel to develop similar Apps that would apply state wage and hour laws.

DOL Timesheet is another example (like the private attorney referral program --Bridge to Justice) of the Department's attempt to make it easier for employees to pursue claims against employers for wage and hour violations.  Employers must be vigilant to ensure that they are properly paying employees for all hours worked and at appropriate rates of pay for those hours.

Oral Complaints of Wage and Hour Violations Sufficient to Provide Protection from Retaliation

The Fair Labor Standards Act is the federal law that requires most employers to pay a minimum wage and overtime.  The FLSA also includes an anti-retaliation provision that prohibits an employer from discharging any employee who has "filed a complaint" under the FLSA because of that complaint.  The issue at the high court in Kasten v. Saint-Gobain Performance Plastics Corp., was whether an oral complaint constitutes the "filing of a complaint" under the anti-retaliation provisions of the FLSA.

Kasten filed his suit after his employment ended claiming that he was retaliated against for making oral complaints about the Company's placement of time clocks that Kasten believed had the effect of preventing workers from receiving credit for time spent for donning and doffing work-related protective gear.  In other words, Kasten alleged that he made complaints to his employer that employees were not being paid for all working time as required by the FLSA.  Kasten apparently never put his complaints in writing.  The trial court dismissed Kasten's claim holding that Kasten failed to engage in legally protected activity under the FLSA because the Act did not cover oral complaints. 

The U.S. Supreme Court reversed the judgment against Kasten and held that the FLSA's statutory language prohibiting retaliation for filing a complaint includes oral as well as written complaints. The Court arrived at its decision by interpreting the statutory phrase itself and by taking into account the remedial purpose of the anti-retaliation provisions.  Consequently, when an employee makes an oral complaint about an FLSA violation, he or she has filed a complaint for purposes of the FLSA's anti-retaliation provisions and can bring a suit alleging that he or she was discharged in violation of the Act.

A full copy of the Court's opinion in Kasten v. Saint-Gobain Performance Plastics Corp. can be accessed here.

 

Fifth Circuit Holds that FLSA Action Is Improper Forum for Employer to Seek Set-Off Against Wage and Overtime Claims

Employers often consider asserting counterclaims against employees who file lawsuits against them.  Most lawyers representing employers counsel against filing counterclaims except in exceptional cases (e.g., an employee’s theft of trade secrets or breach of a covenant not to compete). However, where an employer pays an employee valuable severance benefits in return for a release or a covenant not to sue, the employer may consider avenues to recoup the benefits paid to a former employee who breaches that agreement and sues the employer.  A recent opinion from the Fifth Circuit explains an employer should not generally seek a set-off against damages in a claim seeking unpaid wages or overtime under the Fair Labor Standards Act (FLSA) in the FLSA action. 

In Martin v. Pepsi, Martin was an hourly route settlement clerk for Pepsi for approximately five years. During this time she was paid overtime for the hours she worked in excess of forty hours per week. She was promoted to route settlement supervisor and her manner of compensation was changed to a weekly salary. When Martin was laid off she was provided with nearly $23,000 in severance payments in return for a complete release of claims and a promise not to file any lawsuits or other claims against Pepsi arising from her employment or termination of employment.  After pocketing the severance money, Martin sued Pepsi for unpaid overtime under the FLSA and asserted state law claims for fraudulent misrepresentation and punitive damages under state law. Pepsi moved to dismiss Martin’s claims arguing that the trial court lacked jurisdiction. The crux of the argument was that because Pepsi was entitled to an off set for the severance payments made to Martin due to her broken promise not to sue Pepsi and the amount of the set-off exceeded the unpaid overtime and liquidated damages Martin could recover, there was no controversy for the court to decide. The trial court agreed and dismissed Martin’s case. 

 

In reversing the trial court’s dismissal, the Fifth Circuit held that counterclaims seeking damages or set offs against recovery in FLSA cases are not permitted unless the money being set-off can be considered wages that the employer pre-paid to the plaintiff-employee. In Martin, the money that was sought to be set-off against the FLSA overtime was the severance benefits paid in return for a release of claims.

 

Martin does not appear to foreclose an employer’s ability to maintain a state court lawsuit for breach of contract arising from an employee’s breach of a contract not to sue in return for severance payments. For example, the employer might sue for recession to have the plaintiff return any severance benefits paid to him or for the attorney’s fees and costs incurred in defending a lawsuit the plaintiff promised he would not file. What is clear is that a counterclaim in the FLSA suit or an affirmative defense seeking a set off against FLSA damages is not the proper way to seek a return of the severance benefits paid to a plaintiff who promised not to sue the employer.

Police Sergeant Sues for Overtime Based on Time Spent Reading and Responding to E-mails

Last year I wrote about the risks associated with providing company issued cell-phones or PDA's to nonexempt employees.  Since that post, there continues to be lawsuits filed seeking unpaid overtime for the off-the-clock time nonexempt employees spend reading and responding to work-related e-mails.  The most recent example is that of a police sergeant for the City of Chicago who filed a collective action on behalf of all similarly-situated police officers who were provided PDA's by the City and who were required to review and respond to work-related e-mails after hours.  A copy of the complaint can be downloaded here.

Company's providing their non-exempt employees with PDA's should carefully review their policies and procedures to ensure that they have defensible positions in the event they are confronted with an overtime suit based on the time spent reading and responding to e-mails after hours.  Some considerations that I proposed last summer include:

  • Do not provide nonexempt, hourly employees with company issued phones capable of reading or responding to e-mail (i.e., smart phones). 
  • Purchase a technology solution that captures the amount of time the user spends reading and responding to e-mail and pay nonexempt employees for that time.
  • If the employer does not intend to pay for this off-hours review of e-mails, it should clearly set out its expectations that employees should not read and review those messages outside regular work hours.  For example, implement policies that prohibit employees from reading and responding to e-mails outside of regular working hours; require employees to leave company issued smart-phones at work; require employees to program the smart phones to turn themselves off during non-working hours. 
  • Limit the employees that are provided with company issued cellphones to those who have a legitimate business need to be routinely contacted outside of business hours and limit that outside contact for matters where it is necessary.
  • Pay employees who submit time for the non-business hours review of e-mail and then discipline the employee for violating the employer's policy prohibiting business use of company cellphones outside working hours (if the employer has implemented such a policy).

Employers need to be proactive to ensure that the efficiencies provided by technology are not swallowed by the inconvenience and costs associated in the defense of overtime lawsuits

Facts Make the Difference in Misclassification Cases

Lawyers prosecuting and defending wage and hour misclassification cases (i.e., exempt/nonexempt and employee/contractor) will emphasize how fact intensive these inquiries can be.   The importance of factual distinctions in litigating misclassification cases is demonstrated by two cases recently decided by the Fifth Circuit.  In Cromwell v. Driftwood Electrical Contractors, a panel of the court of appeals held that workers performing cable splicing work in New Orleans were not independent contractors and were employees entitled to overtime.  Contrast Cromwell with Thibault v. BellSouth, where a different panel of the court concluded that a cable splicer performing the same work in the same geographic area under similar circumstances, was an independent contractor not entitled to overtime.  This table summarizes some of the relevant facts in Cromwell and Thibault. 

  Cromwell Thibault
Length of engagement 11 Months 3 Months

Schedule
Two week shifts (84 hours per week) with 1 day off Two week shifts (84 hours per week) with 1 day off
Pay Fixed hourly rate (straight time) Fixed hourly rate (straight time)
Assignments Received daily assignments from BellSouth Contractor Received daily assignments from BellSouth Contractor
Tools and Materials Supplied by worker Supplied by worker
Insurance Workers provided vehicle insurance but Company provided workers compensation  BellSouth Contractor provided the workers compensation
Side Income Splicing was primary business Owned a business in another state
Court Conclusion Employee entitled to overtime Contractor not entitled to overtime.

Despite the similarities of the work, subtle differences in the facts resulted in different outcomes.  In misclassification cases over overtime exemptions or employee/contractor status, facts matter.

Full copies of Cromwell and Thibault can be accessed here and here.

Fifth Circuit Holds Cable Splicer was Independent Contractor, Not an Employee

In another cable splicer misclassification case arising in the aftermath of hurricane Katrina, the Fifth Circuit affirmed a trial court decision that Louis Thibault was an independent contractor rather than an employee. Therefore, he was not entitled to overtime under the FLSA.

Thibault owned a business in his home state of Delaware selling picnic tables, storage tables and golf carts. He also owned several rental properties and realized a small income from racing automobiles.  When hurricane Katrina seriously damaged the telephone infrastructure of BellSouth’s grid, Thibault and his friend Bill Peek, drove their RV to Louisiana to perform splicing work on behalf of BellSouth to rebuild the grid.  Peek was an experienced cable splicer but Thibault had never worked as a splicer.  He did have prior experience as a naval aircraft mechanic and according to him easily learned mechanical tasks if shown how to do the task.  Peek taught Thibault the basics of splicing in one evening and Thibault was able to learn the remainder of what he needed to know on the job.

Once in New Orleans, Thibault and Peek worked 14 days shifts (13 days on with 1 day off) 84 hours per week; received a fixed hourly wage ($68 per hour) and were required to provide their own trucks and tools.  BellSouth decided what jobs would be done daily and assigned BellSouth contractors to distribute the assignments. Thibault received his daily assignments from the BellSouth contractor. 

Thibault had intended to work 6-7 months and then return to his home in Delaware. After only three months; however, he was laid off. He earned $51,628 during the three month period. After he was released he sued BellSouth and its contractors for unpaid overtime claiming he was an employee rather than an independent contractor. The trial court concluded that Thibault was an independent contractor and granted summary judgment for the defendants.

A panel of the Fifth Circuit Court of Appeals affirmed the trial court decision. Applying the economic realities test, the panel found Thibault was not an employee. Significant to its decision was the fact that:

  • Thibault owned his own business and therefore did not work exclusively for BellSouth and its contractors;
  • Thibault intended to work on 7-8 months and then return to Delaware;
  • Defendants considered him an independent contract and many other splicers also considered themselves contractors;
  • Splicing required little skill and initiative as evidenced by the fact Thibault learned it in one evening;
  • Thibault continued to oversee his primary business during the three months he performed splicing work.

In the panel’s opinion, there was insufficient evidence in the summary judgment record to create a genuine issue of material fact that Thibault was an employee. 

Austin Enacts Mandatory Rest Breaks for Construction Industry

Effective July 29, 2010, the City of Austin requires employers in the construction industry to provide at least ten minute rest breaks to their employees for every four hours worked.  The ordinance applies to all employers engaged in work associated with construction projects including alteration, demolition, building excavation, maintenance and renovation of structures or sites.

Employees working less than 3.5 hours or who spend more than half of the work time engaged in indoor administrative or secretarial activities are not required to be provided rest breaks. Rest breaks required under this ordinance must be completely free from all working activities and cannot be combined with an employee's regular meal period.  Employers are also required to display postings describing the rest break requirements at every construction site in English and Spanish.  The City will prescribe the size, content and locations of signs required by the ordinance under separate rule.

The ordinance provides for a civil penalty of up to $500 for each violation (but only after the employer continues to violate the ordinance after being notified of the offense, in writing, by a City representative).  The ordinance also carries Class C misdemeanor criminal penalties for persons failing to provide required rest breaks and for failing to post required signage.  Strict liability applies to violations and each day that a violation occurs is a separate offense.  Enforcement will be handled on a complaint basis.  The law provides a City enforcement mechanism but does not expressly provide for a private right of action.

A draft of the ordinance can be accessed here.

DOL Clarifies Definition of "Son or Daughter" under FMLA

The U.S. Department of Labor has "clarified" the reach of the FMLA by offering an interpretation of the meaning of "son or daughter" under the FMLA.  Under the FMLA regulations, a "son or daughter" is defined as:

a biological, adopted, or foster child, a stephchild, a legal ward, or a child of a person standing in loco parentis, who is either under age 18, or age 18 or older and 'incapable of self care because of a mental or physical disability' at the time that FMLA leave is to commence.

The new Administrator's interpretation (and first issued under the FMLA) provides some examples where the the Department would find a parental relationship despite the absence of of a biological or legal relationship such as:

  • where an employee provides day-to-day care for his or her unmarried partner’s child (with whom there is no legal or biological relationship) but does not financially support the child;
  • where an employee who will share equally in the raising of a child with the child’s biological parent would be entitled to leave for the child’s birth ;
  • where an employee who will share equally in the raising of an adopted child with a same sex partner, but who does not have a legal relationship with the child, would be entitled to leave to bond with the child following placement, or to care for the child if the child had a serious health condition, because the employee stands in loco parentis to the child.

You can access a complete copy of the Administrator's interpretation here.

DOL Issues Administrator's Interpretation on Definition of "Clothes" and Whether Changing Clothes is a Principal Activity

The Department of Labor's Wage and Hour Division issued its second Administrator's Interpretation.   The Administrator Interpretations are issued by the Division in areas where it believes it is useful to clarify the law as it relates to an entire industry, a category of employees, or to all employees.

Administrator's Interpretation No. 2010-2 discusses the Fair Labor Standards Act's exclusion from work time for certain preliminary and postliminary activities like changing clothes.  The FLSA excludes from compensable time the time spent "changing clothes or washing at the beginning or end of each workday" if that time is excluded from compensable time pursuant to "the express terms or by custom or practice" under a collective bargaining agreement.  Interpretation 2010-2 provides that exclusion from compensable time "does not extend to protective equipment worn by employees that is required by law, by the employer, or due to the nature of the job."  Consequently, the Division takes the position that time spent changing into or out of protective equipment required by law, the employer, or the nature of the job is compensable under the FLSA.

Second, the Interpretation offers the Division's opinion on whether whether noncompensable clothes changing can be a principal activity under the Portal to Portal Act rendering all subsequent activity compensable.  The Portal to Portal Act clarifies what activities are intended to be compensable work time such as work occurring before and after the employee's regular work activities.  Any activity that occurs after the employee's first principal activity and before the last principal activity is compensable.  For example, once an employee performs the first principal activity of the work day, all subsequent activity (e.g., waiting time) is compensable until the last principal activity of the workday.  It is the opinion of the Administrator that changing clothes, even if noncompensable, may be a principal activity such that it can make subsequent activities such as walking and waiting compensable.

You can download the full Administrator's Interpretation here

Fifth Circuit Holds Employer Used Per Diem as Ruse to Avoid Proper Overtime Rate

The Fifth Circuit Court of Appeals affirmed that an employer willfully violated the FLSA by excluding “per diem” from the employee’s regular rate of pay and thereby avoiding increased overtime wages. In Gagnon v. United Technisource, Inc., the employer separated the plaintiff’s compensation into straight time, an hourly per diem payable up to the first 40 hours worked each week, and an hourly overtime rate. After a year of employment, the employee received a “raise” for which the employer increased both the per diem and overtime rate by $1, but not the regular rate of pay.

The employee sued for unpaid overtime under the FLSA, while the employer argued that the overtime rate already exceeded that required and that the per diem should not fall under the regular rate of pay because it equaled reimbursable expenses. Rejecting those defenses, the Court agreed that a per diem could be excluded, but reasoned a legitimate per diem would not vary based on number of hours worked. The employer also tried to offset the back overtime wages by the amount of expenses saved when the employee moved closer to work. The employee’s change in address would have resulted in fewer per diem expenses, but the Court reasoned that since the hourly per diem should have been included in regular rate of pay in the first place, the employer could not offset the overtime pay owed.

 

Texas employers should review their methods of calculating overtime rates to ensure compliance with the FLSA, and specifically to ensure that per diem pay is included in the regular calculation. Failure to properly calculate these rates may render employers vulnerable to significant liabilities in the form of back overtime wages, attorney fees, costs, and liquidated damages. 

 

The Editor thanks Chandler Craig, a third year law student at the University of Texas who is clerking for the firm, for drafting this post.

U.S. Department of Labor Issues Revised Child Labor Regulations

The U.S. Department of Labor has issued revised regulations dealing with child labor in non-agricultural employment.  The new regulations take effect on July 19, 2010.  The new regulations specify the kinds of employment that minors may perform and the hours in which they can perform the work.  Any Texas employer employing individuals age 18 or younger should closely review these new child labor regulations to ensure that the child workers are engaged in appropriate activities.  You can access a full copy of the revised regulations here.

Texas Employers Must Provide Breaks for Breastfeeding Mothers

Since at least 1995 Texas law has provided that women has a right to breastfeed in public in any place in which they are legally authorized to be.  Last week, the health care reform signed by the President amended the Fair Labor Standards Act to require covered employers to provide reasonable break time for nursing mothers to express breast milk for nursing children.  The FLSA is the federal law that requires most employers to pay minimum wages and overtime for hours worked in excess of forty per week.

The new law provides that:

  • Employers must provide reasonable break time for an employee to express breast milk for her nursing child for one year after the child's birth;
  • Provide a place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public, which may be used by an employee to express breast milk;
  • Break time is unpaid in Texas (unless of course the employee is an exempt employee entitled to full salary in workweeks where any work is performed).

The law does not apply to employers with 50 or fewer employees if "the requirements would impose an undue hardship by causing the employer significant difficulty or expense when considered in relation to the size, financial resources, nature or structure of the employer's business."

Wage & Hour Division Concludes that Most Mortgage Loan Officers Do Not Qualify for Administrative Exemption

As I wrote yesterday, the Wage & Hour Division of the U.S. Department of Labor has ceased issuing detailed, fact-specific opinion letters.  In the first of the Administrative Interpretations the Division will issue in lieu of opinion letters, the Division has concluded that most mortgage loan officers will not qualify for the administrative exemption to the overtime provisions of federal law.

For purposes of the Administrator's Interpretation, mortgage loan officers includes employees typically having job titles of mortgage loan representative, mortgage loan consultant and mortgage loan originator.  The interpretation outlines the typical duties performed by the employees as receiving internal leads; contacting potential customers; receiving contacts from customers generated by direct mail or other marketing activity; collecting required financial information from customers (including income, employment history, assets, investments, home ownership, debts, credit history, prior bankruptcies, judgments and liens); assessing loan products available for customers and discussing those products with customers; and completing and forwarding completed documents to underwriters or loan processors for closing.

Based on a lengthy review of the typical duties of a mortgage loan officer and the case law analyzing such positions, the Administrator concluded that the typical mortgage loan officer has the primary duty of making sales for their employers and therefore do not qualify for the administrative exemption.  You can access and review the full interpretation here.

Wage and Hour Division Changes How it Gives Guidance

The U.S. Department of Labor's Wage & Hour Division announced it will no longer issue fact-specific definitive opinion letters in response to questions submitted by individuals and organizations.  According to the Division, its opinion letters provide only limited guidance to broad categories of employers and employees where slight factual differences in the facts assumed in the letter could result in a different outcome. 

In the future, the Division intends to issue Administrative Interpretations to "set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision in issue"  and to "clarify[] the law as it relates to an entire industry, a category of employees, or to all employees."

The Division will continue to respond to requests for opinion letters with references to statutes, regulations, interpretations and cases that relevant to the request but without analysis of the specifics facts presented. You can access the Divisions new Administrative Interpretations page here.

Deductions from Exempt Employee Salaries for Snow-Related Absences

As a light dusting of snow falls on much of North and West Texas, I thought it was a good time to review the rules regarding deductions from exempt employee salaries for weather-related absences.  Employees qualifying for the white collar exemptions (e.g., professional, administrative and executive exemptions) are generally entitled to receive their entire salary for any workweek where they perform work, regardless of the amount of work performed during the week (like most things, there are some exemptions not addressed here). 

When an employer closes its business for less than a full week due to weather-related conditions such as snow, the employer must pay the exempt employee the full salary for the week.  In this case, while the employer must pay the exempt employee the full salary for the workweek, nothing prohibits the employer from deducting that period of time from the exempt employee's PTO or vacation bank --so long as the employer's written policies do not prohibit it from doing so.  If an exempt employee has exhausted all available PTO or vacation, the employer should still pay the full salary for the workweek under this situation.

Conversely, where the workplace is open for business and the exempt employee elects not to report to work for a full day because road conditions are treacherous, the employer may reduce the exempt employee's salary for the workweek for the period of full day absences caused by weather.  An absence under these circumstances constitutes an absence for personal reasons.  An employer could also pay the employee and deduct the time from the employee's PTO or vacation balance.  An employer should not, however, deduct from the exempt employee's salary a partial day deduction (e.g., where the employee reports late for work due to road conditions).  Treating exempt employees' pay for absences occasioned by weather-related absences is important because failing to do so may jeopardize the employees' eligibility for exempt status.

DOL Opinion letters here and here.

Companies Using Independent Contractors Beware: State and Federal Taxing Authorities Becoming More Aggressive in Challenging Those Classifications

Companies using independent contractors to perform work normally performed by employees beware; state and federal governmental taxing authorities are challenging those classifications in an effort to increase tax revenue on wages that are not properly reported.  According to a recent article by the Associated Press, "the Internal Revenue Service and 37 states are cracking down on companies that try to trim payroll costs by illegally classifying workers as independent contractors rather than as full employees." 

In September 2009, the IRS announced that it would (beginning in February 2010) audit at least 6,000 randomly-selected companies to investigate employment tax compliance.  Among other things, one of the areas targeted is worker misclassification as independent contractors. Companies may misclassify workers for a variety of reasons.  Companies have greater tax withholding obligations and employment tax liabilities with respect to employees.  Moreover, independent contractors are not entitled to overtime compensation, unemployment insurance and other employee benefits.  It is estimated that classification as an employee rather than independent contractor may add up to 30 percent to the labor cost of the worker.  The Government Accountability Office estimates that employee misclassification results in an estimated underpayment of $2.72 billion in social security, unemployment insurance and income taxes by companies annually.  

The 2011 federal budget proposes up to $3.8 trillion in spending measures to eliminate legal incentives for employers to misclassify employees, such as using budgeted funds to investigate, prosecute and penalize employers misclassifying employees as independent contractors and provide states with competitive grants to boost enforcement initiatives targeting misclassification.  There is also legislation introduced in Congress, the Taxpayer Responsibility, Accountability and Consistency Act of 2009, designed to make it more difficult to classify workers as independent contractors and to increase penalties for such misclassification. 

Secretary of Labor Hilda Solis also announced that her Department will hire more than 90 new wage and hour investigators and enforcement personnel to target worker misclassification.  According to Secretary Solis:

When employees are misclassified as 'independent contractors,' they are deprived of benefits and protections to which they are legally entitled. For example, independent contractors do not receive overtime and are ineligible to receive unemployment benefits. The FY 2011 budget includes an additional $25 million for a Misclassification Initiative to target misclassification with 100 additional enforcement personnel and competitive grants to boost states' incentives and capacity to address this problem.

With heightened Executive and Legislative enforcement efforts, companies using independent contractors should be sure their relationships have been vetted and are in strict compliance with the labor and tax laws.  The Departments of Labor and Treasury will surely be watching and scrutinizing those relationships.

Other Related Links:

Bill Would Make it Harder to Qualify Workers as Independent Contractors

Proper Classification of Workers as Employees or Independent Contractors May Reduce Litigation Exposure

Fifth Circuit Affirms Donning and Doffing Judgment for Employer

There has been a significant amount of litigation against employers over the compensability of work time for putting on and taking off safety-related clothing and equipment prior to the start of a shift but necessary for the work to be performed.  For example, Pilgrim's Pride Corporation recently agreed to pay $1 million in back wages to settle a donning and doffing case with the U.S. Department of Labor.  

The U.S. Court of Appeals for the Fifth Circuit (the federal appellate court hearing appeals from Texas, Mississippi and Louisiana) recently affirmed a trial court judgment in favor of McWane, Inc. (a cast iron pipe and fitting manufacturer) in a Fair Labor Standards Act collective action filed on behalf of 2,100 employees. The lawsuit sought unpaid wages for time spend putting on and taking off safety gear before and after employees' scheduled shift (i.e., hard hats, steel-toed boots, safety glasses and ear plugs). This is commonly referred to as donning and doffing pay. 

Employees at McWane worked at ten different plants. Three of the plants had collective bargaining agreements (CBA) that expressly excluded donning and doffing time from compensable time. The remaining seven plants had CBAs that were silent on the issue of donning and doffing pay. Employees were paid based on “line time,” which measures shift working time as starting when the first item hits the processing line and ends when the last item leaves the processing line. None of the plants had ever paid (in over 40 years) employees for pre-shift donning and doffing time and the issue had never been previously discussed at union meetings or during contact negotiations (and union officials and employees admitted that they never knew pre- and post-shift changing time was potentially compensable under the FLSA). 

 

The Fair Labor Standards Act generally requires that employees receive overtime pay for all hours worked in excess of 40 hours per week at one and one-half times the regular rate of pay. An exception exists for time spent changing clothes if it has been excluded by custom or practice under a bona fide collective-bargaining agreement. The McWane employees argued that donning and doffing was subject to exclusion as time worked only when it has been affirmatively bargained away in the labor contract, and therefore no waiver existed in this case because the union representatives did not have knowledge of the right to compensation for this changing time nor any knowledge of or agreement to a policy of nonpayment for that time.

 

The Fifth Circuit rejected these arguments and sided with other courts of appeals to hold that “even where negotiations never included the issue of non-compensation for changing time, a policy of non-compensation for changing time that has been in effect for a prolonged period of time, and that was in effect at the time the CBA was executed, satisfies the [FLSA’s] requirement of ‘ a custom or practice under a bona fide’ CBA.” The Court further held that burden of establishing the absence of a custom or practice under a CBA is on the plaintiff employees and is not an affirmative defense on which the employer bears the burden of proof.

 

Access the opinion here: Allen v. McWane, Inc., No. 08-41037 (5th Cir. 2010)

Going "Undercover" to Determine How Corporate Policies Play Out in the Workplace

Last night CBS launched its new series "Undercover Boss" following the Super Bowl.  The premise of the semi-reality series is the president of a large company goes undercover as a rank-and-file employee to work for the company and get a bottom-to-top look at how the company operates.  [Spoiler Alert --Don't read further if you have the show DVR'd to watch later].  Last night's episode exemplified a situation where appropriate and legal policies formulated at the corporate level sometimes get contorted or twisted at the tactical level.

In last night's episode the President and COO of Waste Management (Larry O'Donnell) went to work undercover as a new employee in various operations of his company over the course of a week.  At a recycling plant operated by Waste Management, the company apparently had a policy requiring employees to take exactly a thirty minute meal period.  It was unclear from the show whether the policy was required by state law, but an employee had to clock-out for exactly thirty minutes.  If the employee clocked in a minute late, local management, docked the employee for 2 minutes of pay.  Presumably, if the employee clocked in 5 minutes late, she would be docked 10 minutes of pay.  In any event, it is unlikely that Waste Management's Human Resources or Legal Departments encouraged or condoned the application of the policy in this manner given the potential that such docking of work time (depending on the state and whether the total time docked is de minimus) could result in a wage and hour violation . 

The lesson employment lawyers and human resources personnel can take away from "Undercover Boss" is that there is often a difference in how a policy is designed to work and how it actually works in practice.   When investigating a potential legal claim to answer a complaint or draft a statement of position to the EEOC, it is often important to talk to the people who are actually responsible for implementing company policies to determine how they really operate in the field rather than relying on middle or senior management who may only know how the policies are supposed to work.  Failing to do so can cause employers to make misrepresentations to governmental agencies or courts and can lead to accusations that the employer either doesn't know what is going on in the workforce or to claims that the stated reasons for taking some action against an employee are pretextual or false. 

Bill Would Make it Harder to Qualify Workers as Independent Contractors

I've written several posts on the potential pitfalls that may befall a company that mistakenly classifies workers as independent contractors.  You can see those posts here and here.  A recent bill introduced in Congress would make it even more difficult to classify workers as independent contractors and would require companies to file more information with the IRS when independent contractor status is claimed.

In summary, the Taxpayer Responsibility, Accountability and Consistency Act of 2009 would:

  • Increase the penalties applicable for the filing of a tax return with inaccurate information;
  • Provide that a company would only have a reasonable basis for classifying the worker as an independent contractor, for purposes of the safe harbor provision, when the company has classified no other worker holding a substantially similar position as an employee since December 1977; acts based on a written determination addressing the employment status of the individual or an individual holding a substantially similar position; or concluded an examination of whether the individual (or an individual holding a substantially similar position) should be treated as an employee.
  • Allow individuals the right to petition the Secretary of Treasury for a determination of their independent contractor status.

The Act, if passed, would apply to all payments that occurred beginning one year after passage.

Fifth Circuit Reverses Judgment for Company that Classified Employees As Independent Contractors

Recently I wrote about the risks posed by misclassifying employees as independent contractors.   In an unpublished opinion, the U.S. Court of Appeals for the Fifth Circuit (the federal appellate court that hears appeals from Texas) reversed a summary judgment awarded in favor of a company that had classified two cable splicers who performed post-Katrina telecommunications repair work for an AT&T contractor as independent contractors.  In reversing the judgment for the company, the Court remanded the case to the trial court for a determination of the damages the "employees" are entitled to recover.  A copy of the opinion can be accessed here.

Two cable splicers brought an action under the Fair Labor Standards Act seeking unpaid overtime that they were not paid due to their classification as independent contractors rather than employees.  The individuals worked for the Driftwood Electrical Contractors for 11 months following Huricane Katrina.  Theyworked twelve days on and one day off.  Twelve-hour days were the norm.  They were paid a fixed hourly wage for their work.  Each day they reported to the BellSouth location to receive their assignments unless they had not completed their jobs from the prior work day. They were given prints describing the type of work needed and were instructed by BellSouth supervisors to follow certain general specifications.  Neither cable splicer was trained by BellSouth or Driftwood and the splicers controlled the details of how they performed their assignment.  During this 11 month period, the splicers worked exclusively for the Driftwood Electrical.

To emphasize how fact intensive the independent contractor/employee analysis is, consider the following:  the cable splicers provided their own trucks, testing equipment, connection equipment, insulation equipment and hand tools totaling $16,000 and $50,000 in value.  They were also responsible for their own vehicle liability insurance and employment taxes.  The company, on the other hand, provided workers' compensation insurance and liability insurance for the cable splicers' work.

It appears that the most significant aspect in the Court's determination that the individuals were employees rather than individual contractors was the fact that they worked exclusively for the company for 11 months rather than in a temporary, project-by-project, on-again-off-again relationship.  Consequently, the Court concluded that as a matter of economic reality, the cable splicers were economically dependent on the company they worked for and were not in business for themselves.  Therefore, they were employees rather than independent contractors and were entitled to be paid overtime for their work.   

Proper Classification of Workers as Employees or Independent Contractors May Reduce Litigation Exposure

Employers have long been challenged by a variety of wage and hour litigation such as misclassification cases and off-the-clock overtime cases.  One of the latest trends in wage and hour litigation is attacking a company's classification of its workers as independent contractors instead of employees.  Because independent contractors are not entitled to certain aspects of benefits provided to employees, misclassification can result in liability in several forms., including:

  • Potential tax exposure from federal and state taxing authorities (i.e., unemployment tax, FICA, FUTA);
  • Claims that misclassified contractors should be entitled to participate in employer benefit plans covering employees (e.g., stock option plans, health and benefit plans);
  • Claims that misclassified contractors are entitled to overtime compensation.

In Texas, the test for determining independent contractor status is a multifactor analysis that centers around the economic realty of the relationship.  The focus is on whether the worker is, as a matter of economic reality, dependent on the alleged employer in business for himself.   This inquiry includes whether the employer has the right to control the progress, details, and methods of operations of the work.  A nonexclusive list of factors that are usually considered in this analysis include: 

  • the degree of control exercised by the alleged employer;
  • the extent of the relative investments of the work and the alleged employer;
  • the degree to which the worker's opportunity for profit or loss is determined by the alleged employer;
  • the skill and initiative required in performing the job;
  • the permanency of the relationship.

No one factor is determinative. If a court or taxing authority determines that the independent contractor was misclassified, the employer may be responsible for failing to provide the benefits the employee would have otherwise enjoyed had he been properly classified as an employee (e.g., participation in certain employee benefit plans and unpaid overtime).  Depending on the size of the workforce and the work it engages in, these sums can be significant.  Consequently, companies making extensive use of independent contractors should review these relationships carefully to ensure that the workers are properly classified and incorporate changes in the relationships that enhance the ability to defend that classification.

Balancing Employee Efficiency with Overtime Risk: Hourly Employees Use of Smart Phones for Work

Employees frequently stay connected with work through company issued smart phones.  Smart phones, like the iPhone, Blackberry, and Treo, allow employees to have access to their work e-mails, calenders and contacts --in addition to making and receiving calls.  In my practice, a smart phone is incredibly useful in staying in touch with my client's needs when I'm in court or out  of the office.  However, with every advance in technology, come employment law challenges.

As recently reported in the WSJ.com, several lawsuits have been filed seeking damages for unpaid work time spent reading and responding to e-mails and customer complaints outside of regular business hours.  For example,T-Mobile USA Inc. was sued in July 2009 by three current and former employees for unpaid working time claiming they were required to use their T-Mobile issued phones to read and respond to message outside of working hours. (View the Complaint here).  In March 2009, CB Richard Ellis Group, Inc. was sued by a maintenance worker for unpaid work time after hours that included reading and responding to e-mails on his company-issued smart phone.  (View the Complaint here). 

Jon Hyman at the Ohio Employer's Law Blog argues that even if employees use smart phones for isolated and sporadic short-term reading and responding to business e-mails, that time is not necessarily compensable time.   Hyman argues that:

Most messages can be read in a matter of seconds or, at most, a few short minutes.  The Fair Labor Standards Act calls such time de minimus, and does not required compensation for it.  "Insubstantial or insignificant periods of time beyond the scheduled working hours, which cannot as a practical administrative matter be precisely recorded for payroll purposes, may be disregarded."

Hyman's point is a good one; however, can this time be precisely recorded for payroll purposes?  Redwood Technologies, for example, has a smart phone application (Momentum) that allows the user to capture time spent reading and responding to e-mails and time spent on the telephone.  It allows the user to allocate that time to different client accounts.  Although this same technology could be used by employers to capture the time nonexempt, hourly employees spend reading and responding to e-mails.  This may not resolve the administrative impracticality of determining which e-mails are personal or business related, I suppose that there are applications out there which would allow an employer to capture this time if it was so inclined. 

While is remains to be seen whether the time spent reviewing and responding to e-mails outside of normal business hours will be recoverable in an FLSA lawsuit, some commentators have suggested implementing polices to either pay employees for this time or to prohibit (by policy) employees from using company issued smart phones outside of working hours.  The following is a menu of options employers may consider in deciding how to deal with the issue of providing company issued smart phones to nonexempt, hourly employees. 

  • Do not provide nonexempt, hourly employees with company issued phones capable of reading or responding to e-mail (i.e., smart phones). 
  • Purchase a technology solution that captures the amount of time the user spends reading and responding to e-mail and pay nonexempt employees for that time.
  • If the employer does not intend to pay for this off-hours review of e-mails, it should clearly set out its expectations that employees should not read and review those messages outside regular work hours.  For example, implement policies that prohibit employees from reading and responding to e-mails outside of regular working hours; require employees to leave company issued smart-phones at work; require employees to program the smart phones to turn themselves off during non-working hours. 
  • Limit the employees that are provided with company issued cellphones to those who have a legitimate business need to be routinely contacted outside of business hours and limit that outside contact for matters where it is necessary.
  • Pay employees who submit time for the nonbusiness hours review of e-mail and then discipline the employee for violating the employer's policy prohibiting business use of company cellphones outside working hours (if the employer has implemented such a policy).

If the lawsuits referenced above conclude with successful results for the employees (or in class certification), employers can expect to see many more of these kinds of cases filed. 

U.S. Department of Labor Guidance on Furloughs

The U.S. Department of Labor recently issued guidance via answers to some Frequently Asked Questions regarding work furloughs.  The FAQs can be found here.  I've previously written on employer use of furloughs.  You can read that post here.

Richard Tuschman at the Florida Employment and Immigration Law Blog also has a good post on furloughs that explains some of the potential legal pitfalls furloughs can cause.  You can find his post here.

Vacation Pay not Automatically Due and Owing on Termination of Employment

In many states, an employee's accrued, but unused vacation time must be paid on termination of employment.  However, under longstanding Texas law, an employee is not entitled to be paid for accrued, but unused vacation, on termination of employment unless the employee has a written agreement with the employee to do so or employer has a specific written policy that it requires vacation be paid on termination.  

The Texas Payday Act defines "wages", in relevant part as "vacation pay, holiday pay, sick leave pay, parental leave pay, or severance pay owed to an employee under a written agreement with the employer or under a written policy of an employer."  Therefore, vacation pay (and holiday, sick or parental leave pay for that matter) that is not paid under a written agreement or policy of the employer that provides that unused vacation is paid on termination does not constitute wages under Texas law and is not required to be paid on termination.

Minimum Wage Set to Increase

On July 24, 2009, the federal minimum wage will increase to $7.25 per hour.  All Texas employers covered by the Fair Labor Standards Act --i.e., employers engaged in any industry affecting commerce, must pay at least the new minimum wage beginning on July 24, 2009.

Severance Payments to Texas Employees Should Deduct for Child and Spousal Support Orders

With the increased number of layoffs and reductions in force, many Texas employers are paying out large amounts of severance payments and wages in lieu of notice. Employers making these payments must not forget to comply with any court orders they have received regarding the deductions or garnishments from employee wages on these payments. A Texas employer that has received a spousal or child support order from a court must be sure to deduct the amount set forth in the order from any severance payments or wages paid in lieu of notice.

For example, if a child support order requires the employer to deduct $150 per month from the employee’s wages and the employer promises to make a 6 month severance payment to the employee, the employer must deduct $900 from the severance payment to comply with the court order. Since this wage deduction is made pursuant to a court order, no written authorization from the employee is necessary.

 

For more information on compliance with spousal and child support orders in the context of severance payments, see the Texas Attorney General website.

Texas Employers May be Required to Give Employees Paid Time Off to Vote

As we approach local elections, it is good to remember that Texas law may require an employer to provide an employee with paid time off to vote.  The Texas Election Code makes it a Class C misdemeanor for an employer to refuse to allow an employee to be absent from work on election day for purpose of attending the polls to vote.

An employer is not, however, required to allow time off to vote if the polls are open on election day for voting for two consecutive hours outside of the employee's working hours.  For example, if you have an employee that regularly works 8:30 a.m. to 5:30 p.m. with a one-hour lunch break, an employer may have to give that employee time off from work on election day to attend to the polls and vote. In Texas, the election polls are generally open from 7:00 a.m. until 7:00 p.m. 

Because the term "penalty" means a loss or reduction in wages, an employer should provide paid time off for the employee to attend the polls to vote if the polls are not open on election day for at least two consecutive hours outside the employee's working hours.

An employer can avoid this interruption and the payment for otherwise nonworking time by rescheduling work schedules on election day so that employees have two consecutive hours off while the polls are open (e.g., reschedule the employee to work 8:00 a.m. to 5:00 p.m. on election day). 

 

Houston Jury Finds Restaurant Tip Pool was Unlawful

Most wage and hour lawsuits in Texas focus on an employer's alleged misclassification of an employee as exempt from overtime.  However, a recent jury verdict from a federal court in Houston teaches that even in a highly unregulated wage and hour state like Texas, there are other wage and hour provisions employers must comply with and that can lead to expensive and protracted litigation.

The Lawsuit

On March 25, a federal jury in Houston, Texas awarded 55 employees $270,000 plus interest and attorneys fees.  The employees in this collection action were current and former waiters and waitresses working for the Chili's food chain who were required to contribute a percentage of their tips into the restaurant tip pool.  That tip pool allocated one percent of the total pool to "food expediters."    Food expediters are employees that set up trays of food and condiments that servers take out to customers.  The expeditors could be paid a salary or paid a higher hourly wage than the Texas waiters who are paid $2.13 per hour.  This dispute centered primarily around whether food expeditors were tipped employees under the Fair Labor Standards Act and whether the Chili's tip pool requiring the tipping of expeditors was voluntary.

Tipped Employees and Tip Pooling Arrangements

Tipped employees are employees that customarily and regularly receive at least $30 a month in tips.  Tip pools requiring tipped employees to contribute a portion of their wages to a tip pool that is shared with other normally-tipped employees (e.g., bartenders and bus boys) are legal as long as a tipped employee is not required to contribute more than 15 percent of his or her wages to the pool and the pool is not shared with non-tipped employees.  Tip pooling with non-tipped employees must be completely voluntary and each tipped employee must determine for himself whether and how much to contribute to the pool.  If the tip pool includes non-tipped employees and is not voluntary it is an unlawful deduction from wages.

The Verdict

In the lawsuit, the employees alleged that Chili's mandatory tip pooling arrangement that included typically non-tipped employees (i.e., the expediters) was an illegal deduction from wages.   A Houston jury agreed and awarded the servers the damages that resulted from these alleged illegal deductions.  And while the employees will only obtain an average of approximately $4,900 each from a final judgment, the significant cost to the employer will be in the court awarded attorney's fees that have not yet been determined and will likely be high six figures or more.  According to Dave Faries at the Dallas Observer's Food Blog (City of Ate), Chili's parent company has announced that it will appeal the jury verdict.

Because the defendant in this case was a national restaurant chain I expect the verdict will prompt more lawsuits against restaurant chains challenging their tip pooling arrangements.

DOL Announces Intent to Hire 250 Additional Wage & Hour Investigators

Following a GAO report that concluded that the Department of Labor inadequately investigated complaints from low-wage and minimum wage workers who claimed that their employers failed to pay the federal minimum wage, required overtime, and failed to pay employees their last paycheck the DOL has reacted. 

This week, Secretary of Labor Hilda Solis  announced that the DOL Wage and Hour Division would increase the number of investigators at its field offices by 150 to refocus the department on its enforcement responsibilities.  Since Texas has three field offices of the forty-five nationwide, on a prorata basis, Texas could see a net increase of ten investigators.

Additionally, Secretary Solis announced the intent to hire 100 new investigators to enforce the compliance of contractors receiving assistance under the American Recovery and Reinvestment Act. This renewed emphasis on enforcement efforts and an increased number of investigators will undoubtedly result in more frequent and active DOL investigations.  Texas employers should ensure that their classifications of employees as exempt are accurate and that their pay practices comply with the Fair Labor Standards Act to avoid being targeted by a more active DOL.