Sixth Circuit Recognizes Valid FLSA Claims for Unlawful Policy that Was Never Enforced

In case you missed it, last quarter a divided Sixth Circuit reversed an employer’s judgment on collective FLSA minimum and overtime wage claims based on a draw and sales commission compensation system.   Stein v. HHGregg, Inc. 873 F.3d 523 (6^th Cir. 2017).  In that case, the employer provided the employees with a variable draw against future sales commissions during weeks when they failed to earn enough sales commissions to cover the employer’s minimum and overtime wage obligations.  In weeks when the employees’ commissions exceeded their minimum wage entitlement, the excess was withheld as necessary to reimburse the employer for past draws.  The Court agreed that this system was lawful, did not constitute an unlawful kickback to the employer and did not violate the FLSA’s free and clear rules.  However, to the extent that the employer retained the right in its employment policies to require repayment of any such draws upon termination of employment, the policy by itself violated the FLSA even though there were no allegations that the employer had ever enforced it and not a single employee or plaintiff specifically alleged that they had ever repaid any draws upon termination of employment.   Further, the Court found that the employer violated the FLSA by permitting such sales employees to attend mandatory training meetings and conferences off the clock even though the complaint’s allegations never specifically alleged that any employee had failed to be paid under such circumstances.  In other words, the complaint had failed to specifically allege that any of the employees had been paid a draw (rather than a sales commission which exceeded the minimum wage) in weeks when they worked off the clock and intentionally underreported their working hours.  That the employees were able to keep future sales commission by not getting paid a draw for attending such sales/staff meetings did not reflect compliance with the FLSA, which requires that employees be paid minimum and overtime wages in the week that they were earned.

The procedural posture was that the plaintiffs had filed a complaint with the federal court in Cincinnati and the employer had moved to dismiss under Civil Rule 12(b)(6).  The District Court had relied solely on the allegations in the complaint, FLSA regulations and letter rulings, and the DOL’s Field Manual to find that the alleged compensation system was lawful.  The case has now been remanded for discovery and, probably, settlement. 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

DOL Reissues FLSA Administrator Opinion Letters That Had Been Withdrawn in March 2009

Back in the day, the Administrator of the Wage and Hour Division of the Department of Labor entertained requests for legal opinions from real-life employers about real-life FLSA problems and the Administrator would publish these letter opinions – with detailed factual situations --  for the edification of all.   These official pronouncements were entitled to some legal deference (albeit not as much as a formal regulation or rule) and fostered stability in national compensation practices and material for legal blogs like this one.  As previously reported here, in the waning days of the Bush administration, the DOL attempted to publish 36 such letters, but failed to get 18 of them postmarked before President Obama was inaugurated.  The DOL published them anyway in early March (but noted that the 18 were special and were being withdrawn in order to be reviewed, reversed or clarified).  Later that month, the DOL announced that it would not issue any more detailed letter opinions, and would instead, issue broad and non-specific Administrative Interpretations that did not address particular situations of real-life employers with real world questions.  In June 2017, the Trump DOL announced that it would return to issuing letter opinions and on January 5, 2018, it published 15 such letter opinions.  All of these merely formally re-stated the opinion letters from January 2009 that had been withdrawn by the Obama Administration in March 2009 (except for maybe one that has a faulty hyperlink).  Not all were in favor of the employer.  These letters addressed questions from the healthcare, staff placement, construction, public safety and other industries.

These letter opinions were signed by the Acting/Deputy Administrator.  They include:

◦          Two letters involved the healthcare industry.  Employers may make full-day deductions from the salaries of exempt employees in the amount of the hours that they employee was scheduled to work.  So, if a RN called off sick on Friday, when she had been scheduled to work 9.5 hours and had exhausted her PTO, then the employer may deduct 9.5 hours from her weekly salary.  (Similar result if she had only been scheduled to work 6 hours).

◦          This deduction may be from both the PTO bank and, once exhausted, the remainder from salary.

◦          When calculating year-end non-discretionary bonuses that are based on a percentage of straight and overtime hours, the employer need not also include amounts which are not required to be included in the employees’ regular rate (such as travel expense reimbursement and discretionary bonuses).

◦          Certain business development, coordinator and consultant employees of medical temporary placement firm were exempt administrative employees.

◦          Certain project supervisors for home construction businesses are exempt when their duties involve more than mere inspection of work performed by subcontractors and include dealing with home owners, personnel management, budgeting, etc.

 NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Supreme Court Rejects Obama FLSA Regulation

This morning, in a curious decision, a divided Supreme Court rejected a 2011 FLSA regulation on a relatively narrow overtime pay exemption at 29 U.S.C. §213(b)(10)(A) for car dealership service advisors – those employees who meet with you when your car is making a strange noise and sell repair services to you at an extraordinary price.  Eninco Motorcars LLC v. Navarro, No. 15-415 (U.S. 6-20-16).

 

The statute covered  “any salesman, parts-man, or mechanic primarily engaged in selling or servicing automo­biles” at a covered dealership.  Even though no formal regulation had ever been enacted by the DOL on this provision, its initial 1970 interpretation at 29 C.F.R. §779.372(c)  – that service advisors (who do not sell cars or service cars) were non-exempt – was rejected by the federal courts. In 1978, an opinion letter conceded that services advisors could be exempt.   In 1987, the W&H Field Operations Manual stated that DOL would no longer challenge the service advisor exemptions.

 

 In 2008 – 21 years after the statute was passed, the DOL began formal notice-and-comment rulemaking and indicated that it would formally adopt the judicial interpretation of § 213(b)(10)(A).  However, with almost no explanation, the regulation ultimately adopted in 2011 took the same position as in 1970 – that service advisors were non-exempt because they did not sell cars.  29 C.F.R. §779.372(c)(1). The Supreme Court ruled that this 2011 regulation was not entitled to any judicial deference because the DOL failed to explain why it was changing a long-standing interpretation upon which numerous employers and employees had relied.  Accordingly, the case was remanded to the Court of Appeals to revisit the case, interpreting only the statute and not the regulation.  The dissent agreed that the regulation was procedurally deficient and would have reached the final question and interpreted the statute.

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

FLSA Issues Kick Off 2016

This week has brought two developments impacting FLSA compliance and claims.  First, the federal Department of Labor issued an Administrative Interpretation 2016-1 concerning joint employment.  Essentially, the AI describes when two businesses will become liable for wages and overtime worked by a shared employee even if that overtime was earned while working for the other employer.   It describes both horizontal (i.e., related) and vertical (i.e., staffing) relationships that can lead to joint employment.  Second, the U.S. Supreme Court issued a class action decision involving spam text messages, but the holding about offers of judgment and mootness of claims will be important to employers attempting to defend FLSA class actions by making offers of judgment (i.e., complete relief) to the class representatives.   Campbell-Ewald Co. v. Gomez, No. 14-857 (1-20-16).  The Court held that an offer of judgment rejected by the class representative does not moot the pending litigation claim, even if the offer was rejected before the certification of the class.  As discussed here a few years ago, if the rejected offer of judgment mooted the claim, then the FLSA case was left moot and was dismissed.   The Court left open for another day whether the result would be different if the defendant had actually deposited the amount of the offer into an account payable to the plaintiff and then the court entered judgement in that amount in the plaintiff’s favor.

In the Administrative Interpretation, the DOL summarized its position on when two or more employers may be held jointly liable for the FLSA obligations regarding an employee who works for each of the employers.  It describes one situation as horizontal joint employment when the two or more technically separate businesses are associated or related (through common ownership, management, contracts to share employees, etc.)  The focus of the analysis is on the relationship of the businesses with each other (because it is already clear that the worker is an employee of each entity)   This can happen, for instance, with restaurants and home health care, property management, etc. When joint employment is identified, each employer becomes jointly and severally liable for the employee’s wages for each week worked, including overtime wages, regardless of how many hours the employee worked for that particular entity.  See 29 C.F.R. §791.2(a).

The following facts may be relevant when analyzing the degree of association between, and sharing of control by, potential horizontal joint employers:

·        who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have any common owners);

·        do the potential joint employers have any overlapping officers, directors, executives, or managers;

·        do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);

·        are the potential joint employers’ operations inter-mingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for);

·        does one potential joint employer supervise the work of the other;

·        do the potential joint employers share supervisory authority for the employee;

·        do the potential joint employers treat the employees as a pool of employees available to both of them;

·        do the potential joint employers share clients or customers; and

·        are there any agreements between the potential joint employers.

Of course, merely because an employee holds more than one job does not make his or her employers joint employers. “Joint employment does not exist, however, if the employers “are acting entirely independently of each other and are completely disassociated” with respect to an employee who works for both of them. 29 C.F.R. 791.2(a).”

The AI describes a second situation  -- called vertical joint employment -- where there is an intermediary employer which supplies workers to a client and the economic realities show that the client exercises sufficient control over the worker to make that worker economically dependent on it and, thus, its employee for purposes of the FLSA.   Unlike horizontal relationships, the analysis in vertical relationships is on the economic realities of the relationship between the worker and the client to determine whether the employee is economically dependent on the client.   These situations arise for instance in construction (when a subcontractor supplies employees to the general contractor), in agriculture (when laborers are supplied to a grower) and in warehouses (when workers are supplied to the operator or owner of the warehouse) and medical (where nurses are placed by a staffing agency). 

The AI lists the following factors are relevant in determining the economic realities and economic dependence:

A.     Directing, Controlling, or Supervising the Work Performed. To the extent that the work performed by the employee is controlled or supervised by the potential joint employer beyond a reasonable degree of contract performance oversight, such control suggests that the employee is economically dependent on the potential joint employer. The potential joint employer’s control can be indirect (for example, exercised through the intermediary employer) and still be sufficient to indicate economic dependence by the employee. See Torres-Lopez, 111 F.3d at 643 (“indirect control as well as direct control can demonstrate a joint employment relationship”) (citing pre-1997 MSPA regulation); Antenor, 88 F.3d at 932, 934; 29 C.F.R. 500.20(h)(5)(iv). Additionally, the potential joint employer need not exercise more control than, or the same control as, the intermediary employer to exercise sufficient control to indicate economic dependence by the employee.¹⁷

B.     Controlling Employment Conditions. To the extent that the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay, such control indicates that the employee is economically dependent on the potential joint employer. Again, the potential joint employer may exercise such control indirectly and need not exclusively exercise such control for there to be an indication of joint employment.

C.     Permanency and Duration of Relationship. An indefinite, permanent, full-time, or long-term relationship by the employee with the potential joint employer suggests economic dependence. This factor should be considered in the context of the particular industry at issue. For example, if the work in the industry is by its nature seasonal, intermittent, or part-time, such industry condition should be considered when analyzing the permanency and duration of the employee’s relationship with the potential joint employer.

D.     Repetitive and Rote Nature of Work. To the extent that the employee’s work for the potential joint employer is repetitive and rote, is relatively unskilled, and/or requires little or no training, those facts indicate that the employee is economically dependent on the potential joint employer.

E.      Integral to Business. If the employee’s work is an integral part of the potential joint employer’s business, that fact indicates that the employee is economically dependent on the potential joint employer. Whether the work is integral to the employer’s business has long been a hallmark of determining whether an employment relationship exists as a matter of economic reality. See, e.g., Rutherford Food Corp. v. McComb, 331 U.S. 722, 729-30 (1947).

F.      Work Performed on Premises. The employee’s performance of the work on premises owned or controlled by the potential joint employer indicates that the employee is economically dependent on the potential joint employer. The potential joint employer’s leasing as opposed to owning the premises where the work is performed is immaterial because the potential joint employer, as the lessee, controls the premises.

G.     Performing Administrative Functions Commonly Performed by Employers. To the extent that the potential joint employer performs administrative functions for the employee, such as handling payroll, providing workers’ compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials required for the work, those facts indicate economic dependence by the employee on the potential joint employer.

See 29 C.F.R. 500.20(h)(5)(iv).

 

In Gomez, the Court addressed the issue which is passed on in 2013 in Genesis HealthCare Corp., 569 U. S., at ___, and adopted Justice Kagan’s dissenting opinion from that case:

We hold today, in accord with Rule 68 of the Federal Rules of Civil Procedure, that an unaccepted settlement offer has no force. Like other unaccepted contract offers, it creates no lasting right or obligation. With the offer off the table, and the defendant’s continuing denial of liability, adversity between the parties persists.

However, the Court left open the possibility that a claim could be mooted by the offer of complete relief:

We need not, and do not, now decide whether the result would be different if a defendant deposits the full amount of the plaintiff ’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount. That question is appropriately reserved for a case in which it is not hypothetical.

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Finds Industrial Worm Farming Fits Within FLSA Agricultural Exemption

I will start this article with a disclaimer.  I’m a committed gardener and grew up in an agricultural community.  So, the fact that the Sixth Circuit issued a reported decision last week finding --  unremarkably —that worm farming is an agricultural activity for purposes of the FLSA exemption is pretty funny to me.  Barks v.  Silver Bait LLC, No. 15-5175 (6^th Cir. 10-2-15).    I would not have believed that this could be seriously debated.  And, indeed, the DOL and trial court reached the same conclusion, although it is unclear to me why this case went to trial and was not resolved on summary judgment.  Nonetheless, if you are interested in gardening or agriculture, this decision is still fascinating as it describes industrial bait worm farming on a scale that I had never before imagined.  From an employment law perspective, the Court confirmed that the agricultural exemption is not subject to the same narrow construction as the white-collar exemptions.  The FLSA’s definition of “agriculture” encompasses the entire field of agriculture, including both primary farm activities (i.e., growing, feeding, harvesting, etc.) and secondary farming activities (such as market preparation).  Accordingly, the employees of the worm farm were not entitled to overtime compensation except for a four-week period when the employer was engaged in wholesaling activities.  

According to the Court’s opinion, the employer imports from Europe several one-ton truckloads of baby worms every year, feeds and raises them, and then annually sells approximately 21 tons of bait worms once they are large enough to package and sell.  During an isolated four-week period, the employer received, packaged and sold adult bait worms and this was found to be non-exempt wholesaling activity by the Department of Labor because they did not feed or raise the worms which were sold.  However, that period was not the subject of the litigation.   The plaintiffs filed suit seeking unpaid overtime compensation.

The FLSA exempts “employees employed in agriculture.”  The Act defines agriculture as follows:

“Agriculture” includes farming in all its branches and among other things includes the cultivation and tillage of the soil, dairying, the production, cultivation, growing, and harvesting of any agricultural or horticultural commodities (including commodities defined as agricultural commodities in section 1141j(g) of Title 12), the raising of livestock, bees, fur-bearing animals, or poultry, and any practices (including any forestry or lumbering operations) performed by a farmer or on a farm as an incident to or in conjunction with such farming operations, including preparation for market, delivery to storage or to market or to carriers for transportation to market.

29 U.S.C. § 203(f).  Unlike statutory exemptions, the FLSA definitions section is not subject to a narrow construction.  Accordingly, the Supreme Court held in 1955 that this “embraces the whole field of agriculture” and later described the agricultural exemption as “far-reaching.”   The definition includes primary agricultural activities, such as growing, feeding, harvesting, etc., and also secondary agricultural activities, such as storage, delivery, market preparation, etc.

The parties agreed that the defendant employer was in the business of growing and raising worms.  The plaintiffs unsuccessfully attempted to argue that worms are not like livestock, poultry or fish, and should not be considered an agricultural commodity.  However, while “raising worms is not a traditional subject of agriculture [it] still falls within the margins of the term’s ordinary meaning as involving the production of animals useful to man and the preparation of products for man’s use.”  Worms would superficially appear to be an agricultural commodity, but the FLSA regulations exclude activities related to certain naturally occurring commodities, such as “the gathering or harvesting of wild commodities such as mosses, wild rice, burls and laurel plants, the trapping of wild animals, or the appropriation of minerals and other uncultivated products from the soil.” 29 C.F.R. § 780.114.  While Christmas trees, and pine moss are an agricultural commodity covered by the FLSA exemption, peat moss is not.  Bees are expressly covered, but worms are never mentioned in the statute or the regulation.  Thus, gathering wild worms to sell for fish bait might arguably not be an agricultural commodity, but raising imported baby worms would seem to be covered.   

The Court ultimately relied on the common sense and traditional meaning of farming to find raising worms to be a covered agricultural activity.  While the worms were being raised for fish bait instead of for human consumption, that distinction was immaterial.  Lots of produce is raised to feed livestock instead of people and that does not affect its characterization as agricultural.  Moreover, the worms were being raised on a traditional (yet industrial) farm.  The employer “houses the worms, feeds them, monitors their growth, and eventually harvests them.”  

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Ohio Appeals Court Orders Double Damages and Attorneys Fees for Successful Minimum Wage Claim

Yesterday, the Cuyahoga County Court of Appeals reversed the denial of liquidated double damages and attorneys’ fees to two successful plaintiffs who sued for denial of both minimum wage and overtime compensation under Ohio law.  Porter v. AJ Automotive Group, Inc., 2015-Ohio-3769.   The Court found that the employer bore the burden of proving that it was exempt from Ohio’s wage laws and it had not argued that it was exempt.  Therefore, the plaintiffs were entitled to liquidated damages and attorneys’ fees under their minimum wage claim under Ohio Revised Code § 4113.14 and Ohio Constitution Article 34a and to their unpaid overtime compensation under §4113.03.

The plaintiffs worked as car washers for the defendant employer.  They sued for unpaid minimum wages and overtime compensation under state and federal law.  The employer argued that they were tipped employees and that it was not subject to the Fair Labor Standards Act because it did not meet the sales volume or enterprise test.   The trial court concluded that the defendant was not an “employer” under federal or state wage laws, but used its equitable power to award the plaintiffs unpaid minimum wages and overtime compensation.  However, it denied them liquidated damages and attorneys’ fees. They appealed.

On appeal, there was no dispute about the amount of wage liability or applicability of the FLSA.   The trial court had concluded that the plaintiffs failed to prove that the defendant was a statutory employer under §4113.02(D), which is the overtime compensation statute and includes everyone as an employer, except businesses with gross annual sales of less than $150,000.   However, the Court agreed with the Franklin County Court of Appeals that the employer – not the plaintiff – bears the burden of proving its exemption from the statute by proving its sales meet the annual threshold.   Moreover, the defendant had never raised or argued any defense that it was not an employer under Ohio law.   Finally, the minimum wage statute at §4113.14 incorporates by reference the FLSA definition of employer, which is “’any person acting directly or indirectly in the interest of an employer in relation to an employee * * *.’ 29 U.S.C. 203(d).”

 

Accordingly, the Court found that the plaintiffs were entitled to the full remedies of ORC §4114.14 and §34a, which includes liquidated damages of twice the amount of unpaid minimum wages and attorneys’ fees.  (Ohio’s overtime compensation does not provide for liquidated damages).  

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

DOL Issues Administrative Interpretation that Most Workers are Employees, Not Independent Contractors

Yesterday, the Department of Labor issued an  Administrative Interpretation 2015-1  concerning the common misclassification of employees under the Fair Labor Standards Act as independent contractors.  While Administrative Interpretations do not have the weight of regulations, they are afforded some deference by courts.  More importantly, in this case, the Interpretation does not break much new ground in terms of how the Sixth Circuit has applied the economic realities test which controls whether a worker is an employee or independent contractor.   What is troubling, however, is that the DOL indicates that it will apply to the same test to determine whether an individual is a statutory employee or an owner, partner or LLC member (who are often paid, if at all, only out of the profits of a business even when they are not majority owners).  “In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor.”

As faithful readers may recall, the FLSA employs the broadest possible test of who is covered under the Act. 

The FLSA’s definition of employ as “to suffer or permit to work” and the later-developed “economic realities” test provide a broader scope of employment than the common law control test. . . . . Instead, the FLSA defines “employ” broadly as including “to suffer or permit to work,” 29 U.S.C. 203(g), which clearly covers more workers as employees.”

A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of “employ” under the Act, most workers are employees under the FLSA. The application of the economic realities factors must be consistent with the broad “suffer or permit to work” standard of the FLSA.

As mentioned, the DOL has indicated an intent to also police how business owners, partners and limited liability company members compensate themselves:

While most misclassified employees are labeled “independent contractors,” the Department has seen an increasing number of instances where employees are labeled something else, such as “owners,” “partners,” or “members of a limited liability company.” In these instances, the determination of whether the workers are in fact FLSA covered employees is also made by applying an economic realities analysis.

That being said, the DOL recognizes that the economic realities test has been accepted by the courts and provides a number of examples of how it has been and, in its opinion, should be applied.   

In undertaking this analysis, . . . . no single factor is determinative.  . . .The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee. . . .The application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers, as evidenced by the Act’s defining “employ” as “to suffer or permit to work.”

The labels attached by the parties are deemed “irrelevant” by the DOL, as is the employee’s tax status:

 . . . the economic realities of the relationship, and not the label an employer gives it, are determinative. Thus, an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status. . . . Likewise, workers who are classified as independent contractors may receive a Form 1099-MISC from their employers. This form simply indicates that the employer engaged the worker as an independent contractor, not that the worker is actually an independent contractor under the FLSA.

The factors of the economic realities test typically include:

               (A) the extent to which the work performed is an integral part of the employer’s business;

               This factor examines whether the work performed is an integral part of the employer’s business? “If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer.”

Example: For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.

In contrast, the same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor.

               (B) the worker’s opportunity for profit or loss depending on his or her managerial skill;

               This factor examines whether the worker’s managerial skill affects his or her opportunity for profit or loss.  For instance, a “worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and do little to separate employees from independent contractors—both of whom are likely to earn more if they work more and if there is more work available.”

Example: A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available and his willingness to work more. This lack of managerial skill is indicative of an employment relationship between the worker and the cleaning company.

In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.

               (C) the extent of the relative investments of the employer and the worker;

               This factor examines how the worker’s relative investment compares to the employer’s investment.

Example: A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.

A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. She regularly (as opposed to on a job-by-job basis) purchases material and equipment to provide cleaning services and brings her own equipment (vacuum, mop, broom, etc.) and cleaning supplies to each worksite. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works. These types of investments may be indicative of an independent contractor.

 
               (D) whether the work performed requires special skills and initiative;

               This factor examines whether the work performed requires special skill and initiative. 

A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent. “[T]he fact that workers are skilled is not itself indicative of independent contractor status.”  . . . The technical skills of cable installers, carpenters, construction workers, and electricians, for example, even assuming that they are special, are not themselves indicative of any independence or business initiative.  . . . Only carpenters, construction workers, electricians, and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors.

Example: A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly-skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.

In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

               (E) the permanency of the relationship; and

Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. . . . Most workers are engaged on a permanent or indefinite basis (for example, the typical at-will employee). Even if the working relationship lasts weeks or months instead of years, there is likely some permanence or indefiniteness to it as compared to an independent contractor, who typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer.

Example: An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.

Another editor has worked intermittently with fifteen different publishing houses over the past several years. She markets her services to numerous publishing houses. She negotiates rates for each editing job and turns down work for any reason, including because she is too busy with other editing jobs. This lack of permanence with one publishing house is indicative of an independent contractor relationship.

               (F) the degree of control exercised or retained by the employer.

According to the DOL, the “worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.”  As an example, “an employer’s lack of control over workers is not particularly telling if the workers work from home or offsite.”

Example: A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship. 

Another registered nurse who provides skilled nursing care in nursing homes is listed with Jones Nurse Registry in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

DOL Releases Long-Awaited Regulatory Proposals Governing Overtime Compensation Exemptions and the New Salary Basis Test

This morning, the Department of Labor released its long-awaited proposals to revise the Fair Labor Standards Act regulations governing the entitlement to exemption from overtime compensation.  As expected, the DOL proposes to increase the minimum salary which would qualify a position for an overtime exemption (i.e., exempt jobs) from $455/week (or $23,660/year, which is beneath the poverty rate for a family of four) to $921/week (or $47,892).  (Interestingly, the DOL’s website indicates that the new annual salary would be $50,440 and not the amount listed in its proposed regulations).   Thereafter, and somewhat like Ohio minimum wage law, the DOL proposes to peg the minimum salary amount to “the 40th percentile of weekly earnings for full-time salaried workers” so that the minimum salary level would increase annually.   The DOL also proposes to raise the exempt salary rate for highly compensated workers from $100,000/year to $122,148/year (with a similarly escalator clause pegged at the 90^th percentile), but proposes no other changes to the highly compensated exempt worker regulations.  While the DOL is not currently proposing to modify the duties test for exempt positions, it is inviting comments on whether it should do so in order to further limit the amount of non-exempt work which may be performed by exempt employees.

The DOL discusses for many pages why it substantially increased the minimum salary.  In short, it contends that the 2004 FLSA regulations combined the lower salary level for the traditional long duties test with short duties test (which typically required a higher minimum salary level) to create the standard duties test and, therefore, short-changed many exempt employees.  It also criticizes how the 2004 salary level was set differently than in past years and that it relied on regional instead of national data.  The current proposal also chose a salary level that made the minimum wage approximately same ratio to the minimum exempt salary as it had been in 1958 and 1970.

The DOL notes that many employers prefer to pay their salaried employees a significant portion of their compensation through non-discretionary bonuses and incentive payments to give the employees a sense of ownership in their work and to improve their performance.  Historically, the FLSA regulations have not considered these payments as part of the salary basis test (except for highly compensated employees).  However, the DOL is considering including these bonus and incentive payments into the new salary basis test, so that employers do not entirely eliminate these pay-for-performance systems.  However, if it were to adopt such revisions, the DOL would only permit 10% of such bonuses to be considered as part of the mandated $921 weekly salary amount needed to meet the overtime exemption and would require that such bonuses be paid out weekly or monthly, instead of merely annually or quarterly as most of them currently are.  (This, of course, reflects that most of the bureaucrats making the rules have been paid by the government with steady tax income so long that they have no understanding of how the real world works in the private sector).   The DOL also would not permit “catch up payments” as are currently permitted for highly compensated exempt employees.

Likewise, the DOL seeks comments about whether to include commission payments in the salary level test on the grounds that they are similar to nondiscretionary bonuses.

The proposed new regulation still would not consider discretionary bonuses as part of the salary level test and would still exclude room and board, etc. from the calculation.  It would similarly exclude “payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits.”  It also maintains separate tests for the movie industry and American Samoa.  In addition, certain professions remain outside the salary basis tests, including lawyers, judges, physicians and academic administrative personnel.

All in all, the only surprise in the proposed regulations was that the DOL did not modify the 2004 standard duties test for exempt positions.  The proposed minimum salary rate has been whispered in employment law sectors and the news media for many months.  However, employers should remain vigilant in case the DOL changes its position about the duties test and whether and how it will permit incorporation of bonuses, commissions and incentive payments into the salary basis test.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.