Donald Trump’s Labor Secretary Revokes Obama-Era DOL Joint Employer and Independent Contractor Guidance

By Philippe A. Lebel

On June 7, 2017, U.S. Secretary of Labor Alexander Acosta announced that the U.S. Department of Labor (DOL) is withdrawing two major pieces of informal guidance issued during the Obama administration, pertaining to joint employment and independent contractors under the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201 et seq.

The two Administrator Interpretations Letters were issued by the former head of the DOL’s Wage and Hour Division, David Weil. The first guidance letter, Administrator’s Interpretation No. 2015-1, took an aggressive position regarding misclassification of employees as independent contractors. It stressed that the “economic realities” of worker-employer relationships were paramount—i.e., whether, as a matter of economic reality, a worker was dependent on the putative employer—and suggested that most workers should be classified as employees. Although it relied on case law, the Administrator Letter provided additional refinements and, significantly, de-emphasized consideration of “control”—a major element under most common law tests.

The second letter, Administrator’s Interpretation No. 2016-1, pertained to joint employment relationships. It relied largely on regulations promulgated under the Migrant and Seasonal Worker Protection Act, 29 U.S.C. §§ 1801 et seq., and also focused heavily on “economic realities.” The joint employer guidance took a very expansive approach to the entities that potentially could be held liable for wage and hour violations.

The DOL issues Administrator Interpretations Letters to provide cross-industry guidance on wage and hour laws and regulations. Administrator Interpretations Letters are not—strictly speaking—“binding” on courts, although they are generally entitled to deference. Although the two at-issue Administrator Interpretations Letters were in place for a relatively brief period, they were nonetheless influential. Notably, Administrator’s Interpretation No. 2015-1 was cited by U.S. District Court Judge Edward Chen in the O’Connor v. Uber Technologies, Inc. class action pending in the Northern District of California.

In withdrawing the two Obama-era Administrator Interpretations Letters, Secretary Acosta did not indicate whether the DOL under the Trump administration would issue further guidance on joint employment or independent contractors, but this certainly sends a signal that the current administration may take a much narrower view of what constitutes an employer-employee relationship. In a news release, the DOL stated that withdrawal of these two letters “does not change the legal responsibilities of employers under the Fair Labor Standards Act and the Migrant and Seasonal Worker Protection Act, as reflected in the department’s long-standing regulations and case law.”

It remains unclear what the lasting implications of the withdrawal will be. We will continue to monitor developments on the federal and state levels regarding joint employment and independent contractor issues.

Federal Court Permanently Enjoins DOL’s Persuader Rule

By Cheryl D. Orr and Ramon A. Miyar

A federal district court in Texas has issued a permanent injunction blocking implementation of the U.S. Department of Labor’s (“DOL”) controversial “Persuader Rule,” which was promulgated under the Labor Management Reporting and Disclosure Act of 1959 (“LMRDA”).[1]

The LMRDA imposes public reporting obligations on employers and consultants who enter into agreements to persuade or influence employees’ exercise of their collective bargaining rights.  For more than 50 years, the DOL interpreted the LMRDA’s “Advice Exemption” as exempting from the statute’s onerous reporting requirements indirect “persuader activities” by labor relations consultants, including attorneys. The DOL’s Persuader Rule, however, which took effect on April 25, 2016, removed indirect persuader activities from its definition of exempt advice, thus subjecting confidential attorney-client communications and agreements to the LMRDA’s public reporting requirements.

Following the publication of the Persuader Rule on March 26, 2016, businesses and states filed three lawsuits seeking to enjoin nationwide implementation of the rule.[2] On November 16, 2016, in National Federation of Independent Business v. Perez (Case No. 5:16-cv-00066), Judge Samuel R. Cummings of the United States District Court for the Northern District of Texas made permanent a preliminary injunction invalidating the Persuader Rule.  Absent a successful appeal to the Fifth Circuit Court of Appeals, the injunction relieves employers and their attorneys from the obligation to comply with the more onerous reporting requirements of the revised Persuader Rule, and leaves in place the previous, longstanding interpretation of the Advice Exemption.

Background

The DOL promulgated the Persuader Rule under Section 203 of the LMRDA.  The LMRDA requires employers and labor relations consultants, including attorneys, to publicly report details regarding agreements (and concomitant fee arrangements) where the purpose of the agreements (or fee arrangements) is “directly or indirectly to persuade employees concerning their rights to organize and bargain collectively.”  29 U.S.C. § 433(b).   Section 203(c) of the LMRDA, however, expressly exempts from its disclosure requirements activities that constitute giving “advice” to the employer or agreeing to represent an employer before any judicial or administrative tribunal, or in the course of collective bargaining negotiations. Id. § 433(c).

For over 50 years, the DOL has interpreted “advice” to exclude communications exclusively between the employer and labor relations consultants (including attorneys), provided: (1) the employer could review, revise, and/or reject the information from the labor relations consultant; and (2) the consultant did not directly communicate with or disseminate materials to employees.[3]  Thus, an attorney’s indirect persuading activities, including, for example, recommending policy changes or ghost-writing talking points or scripts intended for use by the employer for persuader activities, were deemed to fall outside the scope of the LMRDA’s reporting requirements.

Under the revised rule, which took effect on April 25, 2016, and applied to all consultant agreements and arrangements entered into after July 1, 2016, the DOL significantly narrowed the scope of the advice exemption, such that indirect persuader activities no longer fell within the exemption.  As a result, confidential communications occurring exclusively between attorney and client intended to assist the employer with persuasive activities were potentially rendered subject to the reporting requirements of the LMRDA.[4]

The Court’s Injunction

On June 27, 2016, the Perez Court issued an order granting plaintiffs’ request for a nationwide preliminary injunction precluding the DOL’s implementation of the Persuader Rule. As set forth in detail in our prior blog post regarding the preliminary injunction, the Court concluded that that there was a substantial likelihood that the DOL Persuader Rule was invalid on several grounds.  Specifically, it held that:

  • The Persuader Rule violates the Administrative Procedures Act insofar as the language of Section 203(c) of the LMRDA is clear and unambiguous, and the DOL’s interpretation of the LMRDA violates the basic canons of statutory interpretation.[5]
  • The DOL’s new interpretation of the Advice Exemption is arbitrary, capricious, and unreasonable because it sets aside, without adequate explanation or analysis, a longstanding (i.e., 50-year-old) interpretation of the Advice Exemption, and contains reporting requirements that “are inconsistent with and undermine the attorney-client relationship and the confidentiality of that relationship.”[6]
  • The Persuader Rule violates the First Amendment rights of employers by imposing, without a compelling government interest, content-based burdens on employers’ ability to obtain legal advice, and on lawyers’ ability to give legal advice.[7]
  • The Persuader Rule violates the Due Process Clause of the Fifth Amendment because it is unconstitutionally vague.[8]
  • The Persuader Rule violates the Regulatory Flexibility Act (RFA) because the DOL “artificially excluded important costs of its implementation from consideration,” including the significant reporting burdens imposed on consultants.[9]

In a brief order issued on November 16, 2016, pursuant to its authority under 5 U.S.C. § 706(2), the Court set aside as unlawful the Persuader Rule, and converted its preliminary injunction to a permanent injunction with nationwide effect. The Court based its holding on, and incorporated by reference, its detailed reasoning in the June 27, 2016, order granting Plaintiffs’ request for a preliminary injunction.

At present, the ultimate fate of the Persuader Rule is uncertain.  Although the Northern District of Texas’s preliminary injunction is currently on interlocutory appeal before the United States Court of Appeals for the Fifth Circuit (Nat’l Fed’n of Indep. Bus. v. Perez, No. 16-11315 (5th Cir. Aug. 29, 2016)),  the permanent injunction presumably mooted that appeal, making it unlikely the Fifth Circuit will hear the matter before the incoming Trump Administration assumes power in January 2017.  Observers will be watching closely to see whether the DOL takes steps to contest the ruling under the new administration.


[1] 81 Fed. Reg. 15,924 et seq.

[2] National Federation of Independent Business v. Perez (Case No. 5:16-cv-00066, N.D. Tex.); Associated Builders and Contractors of Arkansas v. Perez (Case No. 4:16-cv-169, D. Ark.); Labnet Inc. v. United States Dep’t of Labor, 2016 U.S. Dist. LEXIS 81884, at *20-*21, Case No. 16-CV-0844 (D. Minn. June 22, 2016).

[3] 81 Fed. Reg. at 15925.

[4] Indirect persuader activities commonly undertaken by attorneys that might have been subject to reporting under the new Persuader Rule included: (1) behind-the-scenes planning, directing, or coordinating of the persuasive activities of supervisors or managers; (2) drafting or providing persuader materials to employers to disseminate to workers; (3) providing “off-the-shelf” and pre-prepared materials to the employer for use in persuading employees with respect to their collective bargaining rights; (4) conducting union avoidance seminars, and (5) developing or implementing personnel policies calculated to influence collective bargaining or organizing activities.

[5] Nat’l Fed’n of Indep. Bus. v. Perez, No. 5:16-CV-00066-C, 2016 WL 3766121, at *28 (N.D. Tex. June 27, 2016).

[6] Id. at *30.

[7] Id. at  *34-35.

[8] Id. at *36.

[9] Id. at *37-39.

National Preliminary Injunction Blocks New FLSA Salary Test from Taking Effect on December 1, 2016

By Mark E. Terman and Gerald T. Hathaway

A federal court issued a national preliminary injunction prohibiting the Department of Labor’s new salary rule for Executive, Administrative, Professional, Outside Sales and Computer Employees from taking effect. The final rule, published on May 23, 2016 would have gone into effect on Dec. 1, 2016. We wrote about this previously and at this time, recommend that employers suspend, but not cancel their implementation plans.

The rule mandated that employees falling under the executive, administrative or professional exemptions must earn at least $913 per week ($47,476 annually), which would more than double the currently existing minimum salary level of $455 per week. In State of Nevada v. U.S. Dep’t of Labor, No. 4:16-cv-731 (E.D. Tex. filed November 22, 2016) District Court Judge Amos L. Mazzant III (appointed by President Obama) ruled that the Department of Labor cannot impose the new salary requirement as a condition of exempt status of executive, administrative or professional (“EAP”) employees because the plain language of the Fair Labor Standards Act focuses on the duties of exempt EAP employees, and not their level of pay.

The U.S. District Court for the Eastern District of Texas implemented a two-step process of evaluating the authority of the DOL to issue the new salary level, based on the Supreme Court’s 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 834 (1984).  The court stated that under the Chevron standard, the court must first assess whether Congressional intent with respect to how exempt employees are to be defined was clear (if it was, a regulation cannot contradict that clear intent).  The second step of the Chevron standard applies only if the Congressional intent was not clear, in which case the court would defer to the agency’s regulation unless it were “arbitrary, capricious, or manifestly contrary to” the FLSA.  Slip op. at 9.

Regarding the first step of the Chevron analysis, the court noted that the central section of the FLSA that creates the exemption, Section 213(a)(1), “provides in relevant part, that ‘any employee employed in a bona fide executive, administrative, or professional capacity … as such terms are defined and delimited from time to time by the regulations of the [DOL]’ shall be exempt from minimum wage and overtime requirements.”  Slip op. at 9.  The court assessed the plain meanings of the words, “executive,” “administrative,” and “professional,” as those terms were understood when the FLSA was originally passed, and cited the 1933 edition of the Oxford English Dictionary.  Slip op. at 10-11.  The court did not see a salary reference in those definitions, and noted that the use of the words “bona fide” as a qualifier to the terms “executive, administrative, or professional capacity” applied to the tasks actually performed by those exempt employees.  Slip op. at 11.  Thus the court concluded that “Congress intended the EAP exemption to depend on an employee’s duties rather than an employee’s salary.”  Slip op. at 12.

Over the DOL’s arguments to the contrary, the court held that “nothing in the EAP exemption indicates that Congress intended the Department to define and delimit with respect to a minimum salary level.”  Slip op. at 12.

The court at footnote 2 of its decision said it was “not making a general statement on the lawfulness” of the existing salary tests, but “is evaluating only the salary-level test as amended under the Department’s Final Rule.”  Slip op. at 12 n.2.  While the court made this limitation, surely this court’s ruling will find its way in the defense of the hundreds of FLSA cases currently pending.

As of now, employers need not implement the new salary requirements, or convert exempt employees to non-exempt status on December 1.  Surely, emergency appeals will follow, and the 5th U.S. Circuit Court of Appeals may weigh in on the matter soon.

In his injunction decision, Judge Mazzant also noted that he considered briefs already filed on an expedited motion for summary judgment led by the U.S. Chamber of Commerce.  Odds seem good that his ruling on that motion, which is still pending, will be consistent with his injunction decision.

We will keep you posted as further developments occur.

 

Ruling Postponed on Whether the DOL Exemption Rules will be Enjoined Before December 1, 2016

By Mark E. Terman and Gerald T. Hathaway

Since our November 10 Post, Will the DOL Exemption Rules Be Enjoined Before December 1, 2016?, federal District Court Judge Amos L. Mazzant, III heard nearly 3.5 hours of argument today on the Emergency Motion for Preliminary Injunction to stop nationwide implementation of the Department of Labor’s May 16, 2016 Final Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.  If not enjoined, this Final Rule will require that, by December 1, 2016, employees be paid a weekly salary of at least $913 (annually, $47,476) to maintain “white collar” exemption from overtime and other federal Fair Labor Standards Act requirements, as long as the employees’ duties satisfy the exemption rules too.

The Court took the matter under advisement, projected that a ruling will be issued Tuesday, November 22, and if the motion is denied, a further hearing will be set on November 28 (the same day a motion for summary judgment, led by the US Chamber of Commerce, is also set in the action).

This really is coming down to the wire for employers who should be prepared to implement changes to comply with the Final Rule if it is not enjoined.

The action is, State of Nevada, et al. v. DOL (USDC, Eastern District of Texas, case No., 4:16-cv-00731-ALM).  The Court’s Minute Entry today is here.

Will the DOL Exemption Rules Be Enjoined Before December 1, 2016?

By Mark Terman and Gerald T. Hathaway

The Department of Labor’s May 16, 2016 Final Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees require that, by  December 1, 2016, employees must be paid a weekly salary of at least $913 (annually, $47,476) to maintain “white collar” exemption from overtime and other federal Fair Labor Standards Act requirements, as long as the employees’ duties satisfy the exemption rules too.  We wrote about this previously.

Last month, twenty-one states, led by Nevada and Texas, filed an emergency motion to enjoin implementation of the Final Rule in a federal court action commenced the month before.  State of Nevada, et al. v. DOL (USDC, Eastern District of Texas, case No., 4:16-cv-00731-ALM).  At its core, the action challenges DOL authority to increase the salary threshold and set automatic increases, and whether the Final Rule infringes on state government employer’s sovereignty.  This blog post does not analyze the merits of this action, but instead updates our clients and friends on its status given that we are now just a few weeks away from December 1.

The Court granted expedited consideration and briefing, and set a hearing for oral argument on the injunction motion for November 16, 2016 at 9:00 a.m.

Also pending is a motion for expedited summary judgment led by the US Chamber of Commerce.  Briefing is underway on a rapid schedule.  The Court’s October 31, 2016 Order states that if a hearing becomes necessary, it will be scheduled for November 28, 2016.

We’ll monitor the case and update our blog if Court Orders issue impacting the December 1 deadline.

In the meantime, employers should assume that the Final Rule will not be enjoined and be ready as of December 1 to:  (1) retain exempt classification of employees by paying the new minimum salary amount (assuming their duties also satisfy the exemption requirements), or (2) reclassify some or all employees as non-exempt, pay regular and overtime hourly rates of pay, and follow other FLSA requirements applicable to non-exempt employees.

Assuming that the Trump administration will want to reverse the Final Rule, that process will be complicated and slow due to the date this regulation became final and the regulatory process needed to accomplish reversal.

Seventh Circuit: Tipped Employees Can Perform Limited Non-Tipped Work At The Tip Credit Rate Of Pay

By William R. Horwitz

The U.S. Court of Appeals for the Seventh Circuit issued a significant decision last week addressing the compensation of tipped employees who perform non-tipped work.  In Schaefer v. Walker Bros. Enterprises, 2016 WL 3874171 (7th Cir. July 15, 2016), a restaurant server in Illinois pursued a class and collective action alleging, among other things, that his employer violated state and federal wage and hour laws by failing to pay servers minimum wage for the time they spent on non-tipped duties.  The Seventh Circuit affirmed summary judgment dismissal of the lawsuit.  The Court held that an employer may compensate a tipped employee at the reduced “tip credit rate” of pay for:  (1) limited non-tipped work incidental or related to tipped work; and (2) other negligible non-tipped work.  The decision provides helpful guidance to restaurant employers regarding the types of duties that tipped employees may perform at a reduced rate of pay.

The Facts

Robert Schaefer worked as a server at three Original Pancake House restaurants in Illinois.  Schaefer and other servers spent most of their time performing tipped work, such as “taking customers’ orders and delivering food.”  However, they also “spent some of their time doing non-tipped duties.”  In this regard, “[t]hey were required to wash and cut strawberries, mushrooms, and lemons; prepare applesauce and jams by mixing them with other ingredients; prepare jellies, salsas, and blueberry compote for use; restock bread bins and replenish dispensers of milk, whipped cream, syrup, hot chocolate, and straws; fill ice buckets; brew tea and coffee; wipe toasters and tables; wipe down burners and woodwork; and dust picture frames.”

According to Schaefer, these non-tipped tasks rotated among the servers.  Overall, servers estimated spending between 10 and 45 minutes daily on these tasks, depending on which tasks were assigned on a given day and the server’s “experience and aptitude” at performing them.  Because Schaefer and other servers were tipped employees, the restaurants paid them below the standard minimum wage.  Schaefer argued that the restaurants were required to pay the servers at least the standard minimum wage for the time they spent performing non-tipped work.

The Lawsuit

Schaefer filed a lawsuit in the U.S. District Court for the Northern District of Illinois, asserting claims under the Fair Labor Standards Act (“FLSA”) and the Illinois Minimum Wage Law.  He sought to pursue the FLSA claims as a collective action and the state law claims as a class action under Rule 23 of the Federal Rules of Civil Procedure.  The District Court certified the lawsuit as a class action on behalf of about 500 servers and conditionally certified the collective action.  However, the District Court ultimately granted the defendants summary judgment and dismissed the lawsuit.  Schaefer appealed.

The Law

Employers must generally pay non-exempt employees at least the standard minimum wage.  However, both Illinois and federal law allow employers to pay employees who customarily receive tips a reduced minimum wage (known as the “tip credit rate”) with the expectation that tips will make up the difference.  Under Illinois law, an employer must pay tipped employees at least 60% of the regular minimum wage.  (The current tip credit rate in Illinois is $4.95 per hour.  The current tip credit rate under federal law is $2.13 per hour.)

With respect to the work that tipped employees perform, U.S. Department of Labor regulations distinguish between “dual jobs” and “related duties.”  See 29 C.F.R. §531.56.  According to the regulations, an employee who is dual-employed in a tipped occupation and a non-tipped occupation is entitled to receive the regular minimum wage when performing the non-tipped occupation but is only entitled to the reduced minimum wage – or “tip credit rate” – when performing the tipped occupation.  In contrast, an employee who performs non-tipped duties incidental to his or her tipped occupation is not deemed to have “dual jobs” and, as long as the non-tipped duties do not exceed 20% of his or her total work time, is only entitled to receive the tip credit rate.

The Department of Labor’s Field Operations Handbook states that an employer may pay the tip credit rate for time that tipped employees spend on duties related to their tipped occupation, even if that time is not spent on work that produces tips.  For example, a server who occasionally spends time washing dishes may be compensated at the reduced minimum wage, as long as that duty is incidental to the regular duties of the employee and the employee spends no more than 20% of his or her time performing that work.

The Decision

The Schaefer Court observed that the 10 to 45 minutes that servers spent on work other than serving customers amounted to between 2% and 9.4% of their time, far less than the 20% maximum permitted for non-tipped work incidental or related to tipped work.  Schaefer argued that the time he and other servers spent on work other than serving customers was not incidental or related to the tipped worked.  In support of this argument, Schaefer asserted that, at other restaurants, untipped personnel perform this work.  The Seventh Circuit rejected this argument.

According to the Seventh Circuit, “making coffee, cleaning tables,” “ensuring that hot cocoa is ready to serve and that strawberries are spread on the waffles” are generally the type of activities that both the regulations and the Department of Labor handbook deem to be related to a tipped server’s work.  The Seventh Circuit further stated that the fact that untipped employees at other restaurants perform some of these tasks does not necessarily render them unrelated to tipped work.

Nonetheless, the Seventh Circuit characterized certain duties that Schaefer and other servers performed as “problematic.”  In this regard, the Court focused on “wiping down burners and woodwork and dusting picture frames.”  The Court explained that “cleanup tasks cannot be categorically excluded” from tipped work, but acknowledged that these particular tasks “do not seem closely related to tipped duties.”  In any event, the Court quoted the U.S. Supreme Court’s assertion that the FLSA does not convert judges into “time-study professionals.”  The Seventh Circuit explained that Schaefer and other servers spent “negligible” time on these duties.  According to the Court, “the possibility that a few minutes a day were devoted to keeping the restaurant tidy does not require the restaurants to pay the normal minimum wage rather than the tip‑credit rate for those minutes.”[1]

Thus, the Court affirmed summary judgment in favor of the defendants.

Conclusion

Restaurant employers often face lawsuits alleging wage and hour violations, frequently involving the compensation of tipped employees.  Although potential exposure in this area is usually small on an individual employee basis, plaintiffs typically pursue these lawsuits as class and collective actions, driving potential exposure vastly higher.  The Schaefer decision demonstrates that employers can minimize their risk by limiting the non-tipped duties that tipped employees perform.


[1] Schaefer also challenged the notice that the restaurants provided to tipped employees regarding their compensation, but that challenge, which the Court rejected, offers little guidance to employers today because it focused on the law before the Department of Labor issued a May 2011 regulation clarifying the requirements.  See 29 C.F.R. §531.59(b).