Category Archives: Fair Labor Standards Act

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.

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.

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.

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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