DOL Announces Minimum Wage Increase for Federal Contractors

On September 15, 2017, the U.S. Department of Labor (“DOL”) announced the 2018 minimum wage rate for covered federal contractors and subcontractors, as required by Executive Order 13658.

Beginning January 1, 2018, the minimum wage for covered contractors will increase from $10.20 per hour to $10.35 per hour. The minimum cash wage for tipped employees performing work on or in connection with a covered federal contract will also increase from $6.80 per hour to $7.25 per hour, effective January 1, 2018. If the worker’s tips combined with the required cash wage of at least $7.25 per hour do not equal the minimum rate, then the contractor must increase the cash wage paid to a tipped employee to bring him or her up to $10.35 per hour.

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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).

DOL Exemption Rules to Take Effect December 1, 2016

By Stephanie Dodge Gournis, Dennis M. Mulgrew, Jr. and Shavaun Adams Taylor

Making good on a 2014 directive from President Obama “to modernize and streamline” existing overtime regulations, the Department of Labor (DOL) today published its highly anticipated Final Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. As expected, the Final Rule (which becomes effective December 1, 2016 ) more than doubles the current $455 weekly minimum salary required for employees to qualify for “white collar” exemptions to the minimum wage and overtime requirements under the Fair Labor Standards Act (FLSA). The DOL expects its new Final Rule to extend minimum wage and overtime protections to more than 4.2 million Americans and increase employee wages by $12 billion over the next 10 years.

Key Changes under the DOL’s Final Rule

The FLSA requires that covered employees be paid minimum wage for all worked hours and overtime at a rate not less than one and one-half their regular rate of pay for all hours worked in excess of 40 hours in a single workweek. To qualify for exemption from the FLSA’s minimum wage and overtime requirements, an employee must be paid a predetermined minimum weekly salary (not subject to reduction based on variations in quality or quantity of work) and primarily perform certain job duties qualifying for one or more of the standard executive, professional or administrative “white collar” exemptions to the FLSA.

In June 2015 the DOL issued a Proposed Rule which gave employers a preview of the likely revisions to the exemption regulations. Today’s Final Rule differs from the DOL’s 2015 Proposed Rule in certain key areas.

Significant changes under the DOL’s Final Rule include the following:

Increase in the Salary Basis Requirement.

The Final Rule increases from $455 to $913 (or $47,476 annually) the minimum weekly salary level necessary for employees to qualify for a white collar exemption under the FLSA. This minimum weekly salary automatically will adjust every three years to a rate equaling the 40th percentile of full-time salaried workers in the nation’s lowest-wage Census region (currently the South). Minimum salary adjustments under the Final Rule will be published at least 150 days before their effective dates, with the first adjustment being effective January 2020. The minimum salary increase in the Final Rule is slightly lower than that contemplated in the Proposed Rule, with the DOL citing to public comments expressing concerns that the regulations should account for salaries paid in lower cost-of-living regions.

Increase in the Salary Requirement for the Highly Compensated Employee (HCE) Exemption.

The Final Rule increases from $100,000 to $134,004 the minimum total annual compensation necessary for a “highly compensated employee” to qualify for exemption under the FLSA. This minimum annual compensation also automatically will adjust every three years to an amount equal to the 90th percentile of full-time salaried employees nationally. Although the compensation increase in today’s Final Rule is larger than contemplated in the Proposed Rule, the change simply is due to an increase in the 90th percentile threshold from 2013 to the fourth quarter of 2014.

Automatic Triennial Updating.

The Proposed Rule contemplated updating the salary thresholds annually using either a wage index (i.e., a fixed-percentile approach using Current Population Survey data) or a price index (i.e., the CPI).  As noted above, the Final Rule has adopted the fixed-percentile approach, with updates to occur every three years rather than annually. Employers that submitted comments said they “strongly opposed” using a fixed-percentile method, arguing that it would result in the “ratcheting” of salaries – that is, with each successive salary update, employers would be expected to convert lower-earning exempt employees to hourly status; those employees would be removed from the CPS data; and the salary threshold would thus rapidly accelerate with each increase. The DOL largely discounted these concerns, finding a lack of historical evidence of “ratcheting” in analyzing data from the last salary increase in 2004. Nonetheless, the DOL did respond to employer comments that an annual update would be unduly volatile and would not provide sufficient notice, and instead adopted triennial updating.

Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement.

Employers now will be allowed to use nondiscretionary bonuses and incentive pay to satisfy up to 10 percent of the DOL’s new salary standard, provided such bonuses/incentives are paid on at least a quarterly basis. Employers also will be able to “catch-up” by quarterly bonus and incentive payments the salary of any exempt employee that falls short of the minimum salary requirement by an amount of up to 10 percent.

Duties Tests.

Surprisingly, the DOL’s Final Rule makes no substantive changes to the standard duties tests required for the executive, administrative and professional exemptions. Although the DOL sought public comments on this issue, the DOL ultimately declined to adopt any changes to the standard duties tests.

Over the next six months, covered employers will need to review exempt positions to ensure compliance with DOL’s new standards. A few suggestions include:

Review Salary Minimums.

Employers may choose to increase the salaries of employees who fall below the DOL’s new $917 weekly minimum, or reclassify employees as nonexempt and take steps to ensure employees are paid a minimum wage and overtime premium in accordance with FLSA standards.

Review Employer Criteria for Establishing Exemption Status.

Employers can expect DOL enforcement initiatives in 2017 (and beyond) to focus on exemption status. Employers are well advised to use the DOL’s Final Rule as an opportunity to review the exemption classifications of all exempt positions to ensure compliance with FLSA standards.

Provide Education and Training to Key Employees.

Employers should consider investing in education and training of front-line managers and human resources representatives tasked with implementing new exemption standards. Employers also should consider development of a communication strategy and action plan for reclassification of affected employees.