Recall Alert: The Service Advisor Exemption The Courts Just Can’t Fix

In what Yogi Berra might describe as a case of “déjà vu all over again,” the U.S. Court of Appeals for the Ninth Circuit issued a January 9th decision holding that dealership service advisors are not exempt from overtime requirements under the Federal Fair Labor Standards Act (“FLSA”).  In short, the Court ruled service advisors, who were historically exempt under a dealership-specific exemption, must now be paid overtime for hours over 40, unless another exemption applies.

What was the ruling? 

As you may recall, this same Court made a similar ruling in 2015, but the U.S. Supreme Court reversed the earlier ruling in a June 20, 2016 decision that sent the case back to the Ninth Circuit.  This protracted legal back-and-forth revolves around an interpretation of whether the U.S. Congress intended service advisors to be included within the FLSA’s exemption for certain automobile dealership positions and the weight that courts should give to the U.S. Department of Labor’s historical interpretation that service advisors were exempt.

Specifically, the FLSA expressly exempts certain dealership employees from the requirement to pay overtime (1.5 times the hourly rate for hours worked over 40).  This exemption applies to, “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers.”  29 U.S.C. § 213(b)(10) (2016).  From 1978 to 2011, the U.S. Department of Labor interpreted this exemption to apply to dealership service advisors (as salesman of services), however, in 2011, the Department reversed course and issued a new rule that applied the exemption only to “salesman”, meaning service advisors would have to be paid overtime.

Since the Department of Labor issued this rule, dealerships have been challenging it, arguing the Department of Labor overstepped its bounds by changing course so dramatically and misinterpreted the FLSA.  When the U.S. Supreme Court weighed in in 2016, it ruled only that the Ninth Circuit improperly gave too much weight to the Department of Labor’s interpretation, without deciding whether the Court’s interpretation was correct.  The U.S. Supreme Court sent the case back to the Ninth Circuit with guidance on the level of deference it should give to the Department of Labor.  Now, the Ninth Circuit weighed in again and decided, without giving any weight to the Department of Labor, the FLSA is clear enough on its own that its exemption does not extend to service advisors.  According to the Ninth Circuit, the FLSA is meant to exempt workers who sell cars, not services.

Where does it apply? 

This decision applies to Courts in the Ninth Circuit (Alaska, Arizona, California, and Hawaii) and is binding on those courts.  While it contradicts earlier decisions by courts in the Fourth (Maryland, South Carolina, North Carolina, Virginia, and West Virginia) and Fifth (Louisiana, Mississippi, and Texas) Circuits and the Supreme Court of Montana, those decisions are now in question.  As far as the U.S. Department of Labor is concerned, dealerships should be prepared for the Department to enforce the FLSA in a consistent manner on a nation-wide basis by requiring service advisors to be paid overtime.

What is next? 

Unfortunately, this new decision is not likely to end the debate.  For now, the Ninth Circuits ruling allows the U.S. Department of Labor to interpret the FLSA consistent with its 2011 rule and for it to require service advisors to be paid overtime for hours worked over 40.  However, there will likely be another appeal to the U.S. Supreme Court and there may even be new legislation to extend the exemption to the service advisors.  Moreover, with the new administration and new Secretary of Labor, the Department of Labor may, once again, change course.

What should dealerships do? 

First, dealerships need to assess whether, in fact, their service advisors are working in excess of 40 hours per weekly pay period.  Second, if the service advisors are exceeding 40 hours, dealerships should evaluate their pay plans and staffing structure to determine the scope of their potential overtime obligations and options for mitigating them.  For instance, even if the dealership-specific exemption does not apply to service advisors, certain service advisors on compliant commissioned pay plans may fall within other FLSA exemptions.

Ultimately, dealerships should buckle up for a bumpy ride.  In spite of multiple attempts, courts, legislators, and the Department of Labor have not been able to fix the ambiguity with any certainty (if this were a new car, it would be a lemon), but Flaster Greenberg can help and, to learn how, we invite you to contact Ken Gilberg, Adam Gersh, or any member of Flaster Greenberg’s Labor and Employment Practice Group.

Crash Course: The Intersection of Race Relations, Employee Relations, and Social Media

Race relations have taken center stage in our 2016 presidential election and in our headlines, so naturally topics of race relations have permeated the workplace.  This raises important issues for employers, especially when faced with employees who openly protest racial discrimination in society at large because such protests may be controversial and increasingly public due to the proliferation of social media.  Most important, employers need to know federal anti-discrimination and anti-retaliation protections may be interpreted by courts to extend to certain types of employee informal protests of discriminatory employment practices, including making complaints to management, writing critical letters to customers, protesting against discrimination by industry or society in general, and expressing support for co-workers who have filed formal charges.

Specifically, 42 U.S.C. § 1981 (“Section 1981”) was enacted to deter racial discrimination in the formation and enforcement of contracts, and also prohibits retaliation, both in and out of employment.  In interpreting Section 1981, the courts of Pennsylvania, New Jersey, and Delaware, among others, held that its protections extend to prohibit retaliation that punishes an individual for opposing conduct that violates Section 1981, whether that individual or some third party was the victim of the § 1981 violation.  In other words, an employee who protests discrimination may have anti-retaliation protections even when the forms of protest may be controversial and even if the employee was not individually a victim of the discrimination that is the subject of the protest.

In a recent employment case, L Brands/Victoria’s Secret Stores, LLC (“Victoria’s Secret”) terminated a district manager for what it perceived to be racist Facebook posts.  As an example, the employee used her Facebook feed to repost a picture depicting a person wearing a Ku Klux Klan-reminiscent white, hooded robe with the Los Angeles Clippers logo and the number 42, and was captioned “Game 5 in LA is Free Sheet Night…Donald Sterling Bobble head doll night too!,” a reference to the headlines about racist actions of Sterling, the Clippers’ owner at the time. When Victoria’s Secret was notified about the posts, it investigated and terminated the employment of the district manager.  The district manager brought suit under Section 1981 alleging she was the victim of retaliation for protesting discrimination by Sterling and others on Facebook.  Victoria’s Secret won the case (at least at the trial level) by showing that, irrespective of the district manager’s subjective intent, the message of the post was so unclear that no reasonable jury could find that this image objectively complained about or protested incidents of race discrimination prohibited by Section 1981.  In this case, the court’s decision rested on its finding that there was no clear connection between the alleged protected conduct and a contractual right and, in any event, the court found no reasonable person could have believed that the underlying incident complained about constituted unlawful discrimination.  As the court further explained, an “oblique reference” to or “mere mention of race” or race-based discrimination does not constitute protected opposition to violations of Section 1981, rather it must be an objectively identifiable protest of discriminatory practices in the formation and/or enforcement of contracts.

Employers can take little comfort in Victoria’s Secret’s win, however, because it was essentially based on the Court’s determination that the content of the district manager’s post was not clear enough to trigger anti-retaliation protections.  Arguably, the result would have been much different if the employee were clearer about her own feelings and tied them to a contract, even if her form of protest was offensive to Victoria’s Secret and its customers.

The takeaway:  Employers must be cautious and should consult with counsel before disciplining employees for conduct that could be construed as protesting discrimination, even when the employee’s conduct appears offensive on its face.

Questions? Let me know.

Delaware District Court Refuses to 86 Employees’ Wage & Hour Suit

Restaurant owners need to be on high alert about how they pay servers for “side work” after a recent federal court decision in Delaware that put a fork in a motion to dismiss a waitress’s overtime pay lawsuit against her restaurant employer.  The server is seeking to recover for alleged violations of wage and hour laws due to the way she was compensated for work other than directly serving patrons. Given the facts and the widespread use of the challenged practice, this may be a fertile ground for class action lawsuits by servers against restaurants subject to the Fair Labor Standards Act (“FLSA”),waitress wage and hour which generally includes restaurants with $500,000 in gross revenue.

The case, McLamb v High 5 Hospitality, arises because a server at a Buffalo Wild Wings alleges the restaurant violated her rights under the FLSA by, among other things, failing to pay her minimum wage, even though, based on the number of hours she worked, her pay exceeded the applicable minimum wage.  In this case, Buffalo Wild Wings, like most others, paid the server less than minimum wage ($2.25/hour in this case) under the FLSA’s “tip credit” provision.  According to the server, her shifts included both tip-eligible work (e.g., serving) and work that was not eligible for tips (e.g., side work  including cleaning, re-stocking, opening, closing and rolling silverware).  The server claims she regularly spent in excess of 20% of her working time performing work that was not eligible for tips.  The server claims she essentially had dual jobs and was not paid minimum wage for her side work.  Her employer argued her claim should be dismissed because, under a “work week analysis”, tips received by a tipped employee count towards their minimum wage regardless of the nature of their duties.

At the motion to dismiss stage, the Court rejected the restaurant’s argument relying, in part, on a U.S. Department of Labor Field Operations Handbook, which states “[W]here the facts indicate that specific … tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance, no tip credit may be taken for the time spent in such duties.”  While this is only a trial level case in the preliminary motion to dismiss stage (where the plaintiff has a low burden to survive dismissal), it is significant that the Court is leaving open the possibility that failing to pay minimum wage to servers for side work that exceeds 20% of working time may be an FLSA violation even when the employee earned minimum wage under a “work week analysis.”  This is consistent with the holdings of other courts as well.  The case could have implications in Pennsylvania and New Jersey, as they are part of the federal Third Circuit, which includes Delaware.

To be on the safe side, restaurant employers who are subject to FLSA and use the tip credit provision should consider either keeping the time servers spend on side work below 20% of working time — and documenting that fact as well as they can — or paying servers separately for side work at a minimum wage. 

Questions? Let me know.

Where There’s Smoke It’s Still OK To Fire: Three Things Employers Need To Know About Pennsylvania’s New Medical Marijuana Law

medical marijuana blog post

Employers in Pennsylvania will soon begin feeling the effects of Pennsylvania’s new Medical Marijuana Act (MMA), which rolls out on May 17th and provides new rights for employees who become certified medical marijuana patients.  As Pennsylvania joins more than 20 states that already allow medicinal marijuana, including neighbors New York, New Jersey and Delaware, employers should be reviewing their policies and procedures to make sure they are hip to the new law.

First, employers will be relieved to know the MMA, which does not extend to smokable forms of the drug, contains no requirement that employers accommodate the use of medical marijuana during working hours or in the workplace.  Specifically, the MMA provides, “the Act shall in no way limit an employer’s ability to discipline an employee for being under the influence of medical marijuana in the workplace or for working while under the influence of medical marijuana when the employee’s conduct falls below the standard of care normally accepted for that position.”  The MMA also recognizes the concerns employers may face if their workers are performing safety-related tasks and expressly prohibits certified users from performing certain sensitive jobs while “under the influence” of medicinal marijuana (defined as 10 nanograms of active tetrahydrocannabis per milliliter of blood in serum for the purposes of certain safety-related activities), including: (1) operating or being in physical control of chemicals which require a permit issued by the federal government, state government, federal agency or state agency; (2) operating or being in control of high-voltage electricity or any other public utility; (3) performing any employment duties at heights or in confined spaces, including, but not limited to, mining; (4) performing tasks that the employer deems life-threatening to either the employee or any employees of the employer; and (5) performing any duty that could result in a public health or safety risk.

The more complicated issue the MMA presents but does not directly address is how the 10 nanograms of active tetrahydrocannabis per milliliter of blood standard for certain safety-related tasks applies to other working conditions, especially when employees test for lower concentrations but still appear impaired.  This should not present a novel problem for employers who have long been disciplining employees who are impaired from taking prescription medicines at work.  As in those instances, employers will have to resort to more traditional methods of identifying whether an employee reasonably appears to be under the influence of marijuana while working and make disciplinary decisions accordingly.

Second, employers should know the MMA prohibits employers from discriminating against employees or candidates on the basis that they are certified to use medical marijuana.  This means Pennsylvania employers may be liable if they take adverse employment actions against employees who are certified to use medical marijuana, essentially requiring employers to treat medical marijuana in a manner consistent with the way employers treat more traditional medical interventions.  Where, however, the use of medical marijuana conflicts with federal law, the MMA does not require employers to “commit an act that would put the employer or any person acting on its behalf in violation of Federal law.” MMA §2103(b)(3). For example, an employer would not be required to accommodate medicinal marijuana use if such accommodation violates federal Department of Transportation regulations.

Third, the MMA does not require employers to alter their current drug screening policies.  A positive test for the presence of marijuana can still justify discipline if the employee does not have a valid prescription and/or if the employee’s use conflicts with an applicable federal law.  With that said, employers should reassess whether they want to continue to screen job candidates for marijuana in light of the MMA, as, among other things, (1) the law bars blanket rejections of certified medical marijuana users and (2) an employee’s positive medical marijuana test will often lead an employer to discover a disability about which it was otherwise unaware, creating a potential avenue of liability.  Of course, drug testing for marijuana relating to accidents and impairment on duty will continue to be important.

Finally, employers should understand that it will take months and years to fully determine how the MMA will impact the workplace, including whether the “under the influence” standard will be more narrowly applied and the extent to which certifications from other states will give rise to employee rights in Pennsylvania.  The Pennsylvania Department of Health (“DOH”) is required to promulgate full regulations within 18 months, and, in the more immediate term, the DOH will publish temporary regulations no later than November 17, 2016.  So employers should expect the hits to keep coming as further guidance, rules and interpretations help clear the smoke surrounding the MMA.

To learn more about the information presented in this alert, we invite you to contact Adam Gersh, or any member of Flaster Greenberg’s Labor and Employment Practice Group.

Independent Contractor or Employee? The DOL Weights In.

The U.S. Department of Labor is offering its two cents on the big dollar distinction between employees and independent contractors, and it is saying, “most workers are employees under the FLSA’s broad definitions.”   This new advice is consistent with DOL’s continuing campaign to “crack down” on what it deems misclassification of employees as independent contractors  and is important because determining whether an individual is an independent contractor or an employee is one of the most vexing issues employers face, in large part because getting wrong can be so costly.

The DOL’s position is set forth in Administrator’s Interpretation No. 2015-1, released on July 15, 2015, and issued by David Weil, Administrator of the Department of Labor’s Wage and Hour Division (WHD).  The snappy title of the Interpretation is “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.”  While the Interpretation does not overtly change DOL policy and is not per se binding on employers or the courts, employers should evaluate their classifications based on this guidance and see how they measure up.  

In support of its conclusion that most workers are employees, the Interpretation focuses on the so-called “economic realities test” (one of the tests used to determine whether a worker is an employee).  The economic realities test, as its name suggests, focuses heavily on the extent to which a worker is economically dependent on the employer – the greater the dependence , the more likely the worker will be found to be an employee. The test examines six factors: 

  1. The nature and degree of the alleged employer’s control as to the manner in which the work is to be performed;
  2. The alleged employee’s opportunity for profit or loss depending upon his or her managerial skill;
  3. The alleged employee’s investment in equipment or materials required for his task, or his or her employment of workers;
  4. Whether the service rendered requires a special skill;
  5. The degree of permanency and duration of the working relationship; and
  6. The extent to which the service rendered is an integral part of the employer’s business.

In this latest guidance, the DOL emphasizes the sixth factor – whether the work is “integral to the business” of the employer.  The Interpretation advocates applying the “integral to the business” prong  through the lens of the FLSA’s definition of the term “employ” (which means to “suffer or permit to work,” 29 U.S.C. § 203(g)) in a way that  broadly construes a worker’s contributions to the business of the employer as integral.

Although this Interpretation is not controlling on the courts, our Supreme Court has recognized that Administrator’s Interpretations reflect a body of experience and informed judgment to which courts and litigants may properly resort for guidance.  Employers also should keep in mind that, while the Interpretation is limited to the independent contractor classification under the FLSA, other federal and state statutes and regulations also govern the classification of employees in relation to taxes, workers compensation coverage, unemployment insurance, and other issues.  Employers obviously need to consider all applicable laws, regulations and guidance when determining whether to classify a worker as an independent contractor, but, in light of this Interpretation should:

  • Evaluate job descriptions and duties to determine whether they are likely to be deemed “integral to the business”;
  • Analyze whether the work independent contractors are performing goes beyond the scope of their stated duties and could be considered integral; and
  • Assess whether workers currently treated as employees may be considered independent contractors due to the non-integral nature of their work.

Questions? Let me know.

EEOC Finds Existing Workplace Protections Extend to Sexual Orientation

The U.S. Equal Employment Opportunity Commission (EEOC) has ruled that discrimination against an employee  based on his or her sexual orientation can constitute sex discrimination under existing civil rights laws, adding to a wave of legal developments favoring protections for the LGBT community. The EEOC’s evolution of its interpretation of existing laws is especially noteworthy as it comes as Congress considers Employment Non-Discrimination Act (ENDA) and the Equality Act of 2015, both of which extend workplace protections to workers based on sexual orientation and gender identity. 

The EEOC ruling, issued on July 15, 2015 in Complainant v. Foxx, broke new ground when it reversed an EEOC Agency’s dismissal of a sexual orientation complaint and  found all types of discrimination based on sexual orientation are forms of sex discrimination prohibited by Title VII of the Civil Rights Act of 1964.  For decades, the EEOC and the courts found no Title VII protections based on sexual orientation alone.  In recent years, however, the EEOC and some courts have extended Title VII protections to sexual orientation and gender identity discrimination when the discrimination can be characterized as arising out of sex-based stereotypes.  The Foxx decision takes this one step further. 

In Foxx, a federal air traffic controller based in Miami contended he was denied a promotion because he was gay.   In evaluating the scope of Title VII protections, the  EEOC noted Title VII does not exclude “sexual orientation” discrimination from its definition of discrimination based on “sex,” and the EEOC found that there can be no basis to draw  a distinction between the two.   Going forward, the EEOC directed, “Agencies should treat claims of sexual orientation discrimination as complaints of sex discrimination under Title VII and process such complaints through the ordinary . . . process.”   

The EEOC’s ruling binds the EEOC’s agencies but does not bind the courts,.  Nonetheless, state and federal courts routinely look to EEOC rulings for guidance in interpreting the Civil Rights Act and other federal anti-discrimination laws enforced by the EEOC.  In many states, including New Jersey, state laws already protects employees from discrimination based on sexual orientation and gender identity, so expansions of Title VII would have less impact on employers in those states. 

While the future is never certain, employers should expect state law and federal laws to increasingly protect employees from discrimination based on sexual orientation and gender identity, especially in light of the U.S. Supreme Court’s 2015 ruling recognizing same-sex marriage as a constitutionally-protected right.  Employers therefore should re-evaluate their anti-discrimination policies, identify any gaps relating to sexual orientation and gender identity, and consider expanding their policies and training, as needed, to protect employees from such discrimination. 

Questions? Let me know.

Employers Should Not Go Overboard On Proposed Changes to Overtime

Benny Frank ClockDespite last week’s alarmist press reports, employers can hold off on calling their payroll providers and authorizing overtime for previously exempt managers.  When President Barak Obama disrupted the news cycle by proposing changes to the overtime rules under the Fair Labor Standards Act, as is too often the case when the press reports on legal developments, many of the press reports covering the topic glossed over important details even suggesting that the President had changed the rules.  The President’s proposed rules have a number of hurdles to overcome before they transform overtime and there is significant opposition that may in fact limit or refine the proposed rules changes.

What is proposed?

Since 2004, federal law treated salaried workers who earn at least $23,660 and meet certain “white collar exemption” requirements as exempt from overtime.  Salaried employees who meet the white collar exemption need not be paid overtime, or even minimum wage, no matter how many hours they work.  For employees to be exempt from overtime, they must meet both the salary and the duties test, which means workers whose annual salary is less than $23,660 do not qualify for the white collar exemption and must be paid both minimum wage and overtime, even if they are otherwise white collar workers.

Under new rules proposed by President Obama, the threshold will move to $50,440 as early as 2016 and be adjusted annually based on the pay of the 40th percentile of full-time U.S. workers, although alternate methods of computing an ongoing adjustment are also being considered. If this rule is implemented in 2016, it would mean salaried employees whose annual earnings are less than $50,440 would not qualify for the white collar exemption even if they otherwise met the criteria for white collar employees.  Additionally, under the proposal rule changes, those classified as “highly compensated employees”  must earn at least $122,148 (rather than the current $100,000) in total annual compensation to be automatically exempt from overtime. This sweeping change is being touted as an income equality measure to combat employer’s practices of using the white collar exemption to avoid paying overtime to low level managers.  In essence, if adopted, the new rule will mean employees who earn between $23,660-$50,440 and were not overtime eligible will have to be paid for overtime if they work more than 40 hours in a workweek.

What is next?

The proposal is not ready to be adopted by the Department of Labor.  The Department of Labor is accepting comments from interested parties, including employers, for 60 days and considering additional changes which may materially affect which employees must be paid overtime.  For instance, the Department of Labor may refine other non-salary aspects of the white collar exemption tests.  Additionally, business groups and elected officials who oppose this change are vowing to fight it with legislation and litigation, which may delay its implementation.

What should employers do now?

First, employers should be sure that they are properly using the white collar exemption even for employees with salaries above the current threshold.  Employers need to remember that a salary that meets the threshold does not in and of itself make an employee exempt from overtime.   There are specific tests for executive, administrative, professional, computer, outside sales and highly compensated employee exemptions that depend on the duties these employees perform and recent court rulings have refined and narrowed the application of these tests.  Employers who have questions or concerns about compliance should consult with their counsel and consider a wage and hour audit to determine if they are currently in compliance with applicable federal and state laws regarding overtime pay.

Second, employers should plan for an increase in the salary threshold.  Even if this rule change is not fully implemented, employers should expect that the threshold will increase from its current level.  Employers, with the guidance of counsel, should begin to analyze how to best structure their workforces in light of coming changes.  For example, employers should be evaluating whether it makes more business sense to start paying more employees overtime or hire more staff or restructure certain aspects of their workforces.

Third, employers should be careful not to forget about compliance with applicable state wage laws, which differ from the federal law and will not automatically change, even if the federal law does.

In sum, employers should expect that, one way or the other, the white collar exemption will be narrowed and more employees will be eligible for overtime.  Now is the time for employers to ensure their current payroll practices and policies comply with the Fair Labor Standards Act and state law, but they can hold off on making any sweeping payroll changes until the new regulations are finalized and adopted, and the nuances of the new rules are ironed out.

Questions? Let me know.

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