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.
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.
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.
Last week, in Tyson Foods, Inc. v. Bouaphakeo et al., No. 14-1146, the United States Supreme Court ruled that class certification was appropriate in a wage and hour class and collective action, despite the lack of individualized evidence for the amount of uncompensated time worked by each class member. The Court instead allowed the employees to use a statistical expert who conducted representative time studies to determine the average number of minutes that the employees spent on pre-shift and post-shift activities. The Court rejected Tyson’s arguments against the use of representative sample averaging, including Tyson’s reliance on Wal-Mart Stores. Inc. v. Dukes, 564 U.S. 338 (2011), which denied certification in a nationwide Title VII class because liability and damages would require individualized proof.
Plaintiff employees in Tyson worked at Tyson Foods, Inc.’s (“Tyson”) pork-processing facility in Storm Lake, Iowa, in the “kill,” “cut,” and “retrim” departments. In the course of their duties, they were required to wear protective gear, the composition of which varied with the tasks that each worker performed on any given day. During the applicable class period, Tyson paid some employees for donning and doffing activities, but did not compensate others at all. Tyson did not record the amount of time that each employee spent donning and doffing.
Arguing that the time that they spent donning and doffing protective gear was an integral part of their hazardous work, Tyson employees filed a lawsuit in the United States District Court for the Northern District of Iowa (“District Court”). In their complaint, plaintiffs alleged that Tyson’s failure to compensate them for donning and doffing resulted in the denial of overtime compensation under the Fair Labor Standards Act (FLSA), 29 U.S.C. § 207(a), and the Iowa Wage Payment Collection Law, Iowa Code § 91A.3. Plaintiffs sought certification of their Iowa wage claims as a class action under Rule 23 of the Federal Rules of Civil Procedure (“Rule 23”), and of their FLSA claim as a “collective action” under 29 U.S.C. § 216.
To certify a class action under FRCP Rule 23, the trial court must find that “questions of law or fact common to class members predominate over questions affecting individual members.” The most significant issue in Tyson was whether the time spent donning and doffing protective gear was compensable work under the FLSA; a question common to the entire class. However, in order to recover damages, a second important question was whether each employee could prove the amount of time spent donning and doffing their equipment and whether that time constituted overtime work in any work week.
In opposition to plaintiffs’ class certification motion, Tyson contended that, because of the variance in protective gear that each employee wore, the employees’ claims were not sufficiently similar to be resolved on a class-wide basis. The District Court rejected that position and concluded that there were common questions susceptible to class-wide resolution, including (1) whether the donning and doffing of protective gear could be considered work under the FLSA; (2) whether such work was integral and indispensable to the plaintiff employees’ work; and (3) if compensable, whether such work was de minimis. The District Court accordingly certified a Rule 23 class of 3,344 employees with respect to plaintiffs’ claims under Iowa law, and a class of 444 opt-ins under the FLSA.
At trial, to establish Tyson’s liability for overtime, each employee was required to show that he or she worked more than 40 hours each week, inclusive of time spent donning and doffing. Because no records of time spent donning and doffing existed, however, plaintiffs relied on a study performed by an industrial relations expert, who conducted 744 videotaped observations, recorded the amount of time that various donning and doffing activities took, and calculated an average for each department. The data from this statistical sampling yielded an average of 18 minutes a day for the cut and retrim departments and 21.25 minutes for the kill department.
Relying on this data, plaintiffs furnished another expert who estimated the amount of uncompensated time worked by each employee by adding the average donning and doffing time to the compensable/recorded time reflected in plaintiffs’ existing time records. Using this methodology, plaintiffs’ expert estimated that 212 employees did not meet the 40-hour threshold and could not recover damages for unpaid overtime; the remaining class members, however, had potentially been uncompensated to some degree.
Crucially, Tyson failed to challenge the validity of the statistical sampling and analyses prepared by plaintiffs’ experts in a hearing under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and made no effort to rebut the evidence with an expert of its own. Instead, echoing its arguments in opposition to class certification, Tyson argued to the jury that the variable amount of time that it took employees to don and doff different varieties of protective equipment made the lawsuit “too speculative for class-wide recovery.” Ultimately, although the calculations of plaintiffs’ experts supported an aggregate award of $6.7 million dollars, the jury returned a verdict of only $2.9 million in damages for unpaid wages. A subsequent ruling on liquidated damages upped the total award to $5.8 million.
Relying on Wal-Mart v. Dukes and other authority, on appeal, Tyson strenuously argued that the amount of time spent donning and doffing protective gear varied from person to person and required individualized inquiries, thus rendering class treatment improper. Rejecting this argument, the Court ruled that Wal-Mart did not stand for the broad proposition that a representative sample is an impermissible means of establishing class-wide liability. Wal-Mart involved, in part, a claim that supervisors misused their discretion in hiring and promoting female employees. The employees could not point to a common policy and instead proposed using a “sample set of selected class members” to determine both liability and damages for the entire class. The Court rejected the Wal-Mart plaintiffs’ proposed methodology as “trial by formula.”
By contrast, the Tyson Court noted there was a common policy with respect to liability, and the time study could be introduced in each individual claim to determine that employee’s overall hours for the week. The Court further noted that, unlike Wal-Mart, the Tyson employees all worked in the same facility, did similar work, and were paid under the same policy. The Court also was influenced by the principle that Tyson’s failure to keep records should not be used against the employees. In this respect, the Court relied heavily on its opinion in Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 686-688 (1946), to hold that so long as “each class member could have relied on the sample to establish liability if he or she had brought an individual class action, . . . that sample [could serve] as a permissible means of establishing the employees’ hours” on a class-wide basis. Tyson, slip op. at 11.
Tyson does not necessarily erode the holding of Wal-Mart because, as the Court was careful to note, the two cases are so factually and legally different. However, in Title VII employment discrimination class actions, the courts may be open to smaller class actions involving employees who work in the same facility, perform similar tasks, or are supervised by common management.
Tyson’s ramifications for wage and hour class actions are far greater. The Tyson method of proving damages could be applied to other “off the clock” wage and hour class actions, such as pre-shift and post-shift administrative or maintenance work, missed lunch and meal breaks, security checks, or travel between job sites.
Finally, the Court assumed, without deciding, that the standards for certifying an FLSA collective action and a Rule 23 class action are the same. This may be significant because the relative sizes of the classes are different, with the FLSA collective action usually being much smaller. Several federal circuit courts of appeal have held that the standards for certifying an FLSA collective action and a Rule 23 class action are not the same. The Court may be forecasting that it will have to decide this issue in the future.
For further information about this alert, please contact the authors above or any member of our Labor and Employment Practice Group.
Last week the United States Supreme Court heard oral arguments in a donning and doffing class and collective action against Tyson Foods, Inc. (see full transcript of oral argument here) that has the potential to dramatically expand the certification of class and collective wage and hour “off-the-clock” actions.
The Fictional “Average Employee”
One of the primary issues in Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146, is whether the plaintiffs’ use of statistical averages in a Fair Labor Standards Act (“FLSA”) case was appropriate to certify a federal Rule 23(b)(3) damages class and to prove liability and damages at trial. The plaintiffs relied on expert testimony to prove that a class of more than 3,000 workers at an Iowa pork processing plant were owed overtime wages for time spent donning and doffing personal protective equipment and walking to and from their workstations. At trial, the plaintiffs used statistical evidence of the average donning, doffing and walking times for employees, resulting in a jury verdict against Tyson Foods in excess of $5.8 million. They relied on individual time sheets and average times calculated by their expert from more than 700 videotape observations of employees putting on and taking off protective gear and walking to their workstations.
Relying on the Supreme Court’s recent employer-friendly class action decisions in Wal-Mart Stores v. Dukes, 131 S. Ct. 2541 (2011) and Comcast v. Behrend, 133 S.Ct. 1426 (2013), Tyson Foods appealed the verdict to the Eighth Circuit Court of Appeals. It argued that the plaintiffs’ reliance on statistical evidence improperly “presume[s] that all class members are identical to a fictional ‘average’ employee,” which is contrary to the so-called “trial by formula” prohibition in Dukes and Behrend for determining classwide liability and damage.
A divided (2-1) panel of the Eighth Circuit disagreed with Tyson Foods’ positions. Based on a split in the circuits, the Supreme Court granted certification on (1) whether differences among individual class members may be ignored and a class action certified under Rule 23(b)(3), or a collective action certified under the FLSA, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample; and (2) whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the FLSA, when the class contains hundreds of members who were not injured and have no legal right to any damages.
Will Statistical Modeling Be Permitted to Show Classwide Violations Under the FLSA?
Some of the Justices, including the likely swing-vote, Justice Kennedy, appeared skeptical of Tyson Foods’ argument that the plaintiffs could not rely on statistical averages as the mechanism to demonstrate commonality and typicality among workers when there was evidence Tyson Foods did not keep accurate or adequate time records. Several Justices cited to the burden-shifting framework in off-the-clock cases established after Anderson v. Mount Clemens Pottery Co., 380 U.S. 680 (1946) (where the employer’s records are inaccurate or inadequate and the employee cannot offer convincing substitutes, the burden shifts to the employer to demonstrate the precise amount of work performed or to refute the inference to be drawn from the employee’s evidence). In addition, Justice Kennedy suggested that Tyson Foods might have waived arguments by not challenging the plaintiffs’ statistical experts at trial, by objecting to bifurcating the liability and damages phases of the trial, and by not seeking a special jury verdict for determination and apportionment of damages among class members.
On the other side, Justices Alito and Roberts questioned whether the use of averaging is appropriate when the job positions and equipment used by workers were undisputedly different among the workers included in the class, and where it was undisputed that some workers did not perform the activities in question and therefore suffered no injury. Justice Alito asked, “How can you separate the employees who were injured from the employees who were not injured” or “how much time the employees were entitled to” except in “a very slap-dash fashion?” The Chief Justice echoed this point, stating “once the jury rejects plaintiffs’ “average statistics, . . . there’s no way to tell whether everybody who’s going to get money was injured or not.”
The Tyson Foods case highlights the difficulties employers continue to face when determining whether their workers’ “preliminary” (time spent before the principal work begins) and “postliminary” activities (time spent after the principal work ends) are compensable in the first place under the FLSA. As Justice Alito asked at oral argument, “What do you think an employer should do about recordkeeping when the employer believes that certain activities need not be counted under the FLSA? . . . Is it supposed to keep two sets of records?” The answer, according to the DOJ’s attorney, is that “Mt. Clemens . . . make[s] clear that the employer is stuck with its mistake . . . .”
Tyson Foods also shows that despite the Court’s decisions in Dukes and Comcast, which many commentators predicted would be the death knell of employment class actions, courts continue to certify classes where the plaintiffs can muster enough evidence (including statistical “averages” through qualified experts) to overcome the presumption of individualized differences among class members. Further, while the lack of accurate time records is not an insurmountable obstacle to defeating an employee’s claim that he or she (or a group of workers) did not receive overtime for compensable time worked in excess of 40 hours, it could provide an opening under the Mt. Clemens standard for employees to take advantage of “relaxed” standards of proof (“just and reasonable inference”) to show wage violations under the FLSA, which ultimately could allow them to avoid early dismissal and get to a jury.
Wage & Hour class actions are being filed at a pace that dwarfs almost all other types of litigation. With a myriad of federal and state laws and regulation, employers not only need to take steps to minimize the risk of a suit, but also must be prepared to defend themselves. Launch the brief video below to hear how Labor and Employment Group partners Cheryl Orr and Stephanie Gournis are helping employers involved in employment class actions, as well as helping companies to minimize the risk of litigation.
As cleanup from the Nor’easter that pummeled the East Coast last week continues, and the prospect of more snow looms, we hope that you and your families, as well as your businesses and employees, are safe and warm and that the lights are on. As this has been one of the more problematic winters in recent memory, we wanted to remind employers of some of their obligations before, during and after a storm.
Unless your agreements or policies provide otherwise, you are generally not required to pay non-exempt employees when they are not working. Therefore, if your business is closed and your employees do not report to work, you are not obligated to pay non-exempt employees. However, make sure that these employees are not checking work e-mails, communicating with supervisors about work-related issues or otherwise working from home, because non-exempt employees are entitled to receive pay for these activities even if they do not physically report to work.
Note that some states require an employer to pay employees for reporting to work, even if the business closes and the employer sends them home. For example, a New Jersey employer must pay employees who report to work at least one hour of pay. A New York employer must pay employees who report to work at least four hours of pay (or the number of hours in the scheduled shift if it is less than four hours). With regard to exempt employees, they are generally entitled to receive their full salaries, even if the business is closed – at least if the shutdown lasts for less than a week. If a business is closed for an entire week and an exempt employee performs absolutely no work during that time, the employer is generally not required to pay the employee for the week.
When a business is temporarily closed, the employer can require exempt employees to use accrued vacation time for the time off, but this requirement should be set forth clearly in the Employee Handbook and any employment contracts.
After a storm passes, employees whose homes remain without power, who are repairing damage to their property or whose children’s schools remain closed, may seek additional time off from work. While an employer that can afford to do so may allow additional flexibility to these employees in order to give them peace of mind and boost their loyalty and morale, these requests may otherwise be handled pursuant to the employer’s contracts and policies.
In addition to the above general points, employers should also be aware of state laws that affect certain employees and certain industries. For instance, in New York and New Jersey, the prohibition against mandatory overtime for health care personnel includes an exception for a declared state of emergency. New Jersey also provides protections for employees who miss work because of their responsibilities as volunteer first responders.
Extreme weather and natural disasters that disrupt business create big headaches for employers and employees. We recommend clear and consistent communication with your employees to avoid confusion about your expectations. Also, maintaining sound employment policies and consulting with counsel when issues arise is critical for avoiding additional headaches resulting from ensuing workplace legal liability.