DOL Overtime Rules Blocked Nationwide by a Federal Court in Texas

usdepartmentoflaborLast week, the United States District Court for the Eastern District of Texas issued a decision enjoining the Department of Labor (DOL) from enforcing its new overtime rules. State of Nevada et al. v. U.S. Department of Labor et al., case number 16-cv-00731.

The new overtime rules were set to go into effect on December 1, 2016, causing many companies to scramble to adjust their compensation systems in compliance with the new minimum salary threshold for administrative, executive, and professional exemptions, which was going to jump from $23,660 per year to $47,476 per year on December 1st. 

The court’s injunction requested in early October in two parallel cases filed by business organizations and 20 states, enjoins the Department of Labor from enforcing the new overtime rules.  

Takeaway:  In light of this injunction, businesses who are not in compliance with the DOL new overtime rules, are not going to be in trouble come December 1, 2016.  However, since this is a temporary injunction, employers are not 100% in the clear, as the court may still enforce the rules when the final hearing  in the cases takes place.  Thus, the injunction grants a temporary reprieve, but companies should continue to monitor the situation, which may last anywhere from several months to several years.  

Bottom line is that the injunction will remain in effect until a final resolution of the merits is reached or there is further order of the court, the Fifth Circuit, or the United States Supreme Court. 

Leiza is a business and employment litigation attorney in Dallas, Texas. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

U.S. Supreme Court Employment Cases to Follow in 2015

SupremeCourtIn 2015, the U.S. Supreme Court is posed to rule on the following important employment law issues:

1. Integrity Staffing Solutions, Inc. v. Busk – must employers compensate employees for the time spent undergoing security screenings at the end of the workday under the Fair Labor Standards Act

The employees in this case allege that Integrity requires post-shift security screenings lasting up to 25 minutes, yet fails to compensate them for the time spent undergoing the screenings, which is a violation of the Fair Labor Standards Act (FLSA).

Integrity claims that it is immune from liability under the Portal-to-Portal Act of 1947, which provides that employers are not required to compensate for activities that are postliminary to an employee’s primary work activities.

The Ninth Circuit sided with the employees and ruled that the employees stated a plausible claim for relief because the security clearances were for Integrity’s benefit and necessary for the employees’ job performance. Specifically, the Court noted that the prevention of employee theft—a concern specific to the employees’ warehouse work duties—motivated the security clearances, thereby benefiting Integrity. Therefore, Integrity was required to compensate its employees for the time spent in the security screening.

UPDATE (12/9/2014) – The U.S. Supreme Court ruled that the time spent undergoing a security screening is not compensable under the FLSA.

2.  Young v. United Parcel Service, Inc. – must an employer accommodate a pregnant woman with work restrictions related to pregnancy in the same manner as it accommodates a non-pregnant employee with the same restrictions? 

UPS offered “light duty program” to workers who were injured on the job, but refused to provide any light duty accommodations to pregnant employees. Young challenged the policy and argued that the Pregnancy Discrimination Act (PDA) requires an employer to provide pregnant employees light duty work if it provides similar work to other employees in other circumstances.

The Fourth Circuit sided with UPS and ruled that: (1) the employer did not “regard” a pregnant employee as disabled under the Americans with Disabilities Act (ADA); and (2) employers are not required under the PDA to provide pregnant employees with light duty assignments so long as the employer treats pregnant employees the same as non-pregnant employees with respect to offering accommodations.

3.  EEOC v. Abercrombie & Fitch Stores, Inc. – does an employee have to provide a direct, explicit notice to the employer of the need for a religious accommodation? 

In this case, EEOC has alleged that Abercrombie violated Title VII when it failed to hire a prospective employee, Samantha Elauf, because of her religious practice without offering her a reasonable accommodation. Elauf, a Muslim, interviewed for a sales position at Abercrombie while wearing a black hijab (headscarf), a practice inconsistent with Abercrombie’s policy prohibiting sales employees from wearing black clothing or “caps.” Although the assistant manager interviewing Elauf assumed that Elauf wore her hijab because she was Muslim, Elauf did not say that she needed to wear it for religious reasons or request a religious accommodation. There was evidence that Abercrombie did not hire Elauf because of her attire.

The Tenth Circuit sided with Abercrombie and explained that plaintiffs claiming religious discrimination based on a failure to accommodate ordinarily must prove that they informed the employer that they engage in a particular practice for religious reasons and require an accommodation. It rejected the EEOC’s position that Title VII may be satisfied by notice short of an explicit communication from the applicant. The Tenth Circuit’s decision is in tension with decisions of the Seventh, Eighth, Ninth, and Eleventh Circuits, which have adopted the EEOC’s position that the element of notice is established where the employer has actual knowledge of an employee or applicant’s religious practice even if there is no an explicit request for an accommodation.

Leiza Dolghih frequently advises employers on how to handle troublesome employees, assists with responding to EEOC charges, and litigates employment disputes. For more information, e-mail Leiza.Dolghih@GodwinLewis.com.

When Can a Franchisor Be Liable for Overtime and Minimum Wage Violations at a Franchisee’s Business?

Earlier this month, the Fifth Circuit Court of Appeals addressed when a franchisor might be liable for its franchisee’s overtime and minimum wage violations as a “joint employer” under the Fair Labor Standards Act (FLSA).  Given the recent rise in the FLSA litigation and rather sizable penalties and damages awards assessed against the violators, Orozco v. Plackis serves as a reminder to franchisors that the more control they retain over their franchisees’ employees the more likely they are to share liability under the FLSA.

In this case, Craig Plackis owned several Craig O’s restaurants around Austin, Texas. In 2005, he entered into a franchise agreement with the Entjers to open a location in San Marcos. In 2011, Ben Orozco, a cook at the San Marcos location, filed a lawsuit against the Entjers and their company alleging that he was not paid overtime or minimum wages as required under the FLSA. After the Entjers settled, Orozco added Craig Plackis as a defendant alleging that the franchisor was also his employer.  The jury agreed with Orozco, but the Fifth Circuit reversed after finding that there was legally insufficient evidence for a reasonable jury to find that Plackis was Orozco’s employer.

Under the FLSA, covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009, and overtime pay at a rate not less than one and one-half times the regular rate of pay for hours worked above 40 hours in a workweek. The FLSA defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. §203(d).

Often, when an employee works for a subsidiary, a franchise, or a professional employer organization (PEO), the question arises which entity is considered the employer for purposes of the FLSA. The courts, therefore, use the “economic reality test” to answer that question.  They look at “whether the alleged employer: (1) possessed the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” A party need not establish every element in every case, and the dominant theme in the case law is that those who have operating control over employees within companies may be individually liable for the FLSA violations committed by the companies. In joint employer contexts, each employer must meet the economic reality test.

Did the franchisor possess the power to hire and fire employees? 

Orozco testified that the Entjers, and not Plackis, hired him and had the authority to fire him.  He also failed to introduce any evidence showing that Plackis ordered the Entjers to pay Orozco a particular amount or work for a specific number of hours.  Furthermore, Orozco’s attorney admitted during oral argument that there was no direct evidence to support that Plackis had authority to hire or fire Orozco.

Regardless, Orozco argued that the following indirect evidence could have supported the jury’s finding that Plackis was the employer:  (1) several employees worked at both the San Marcos location and the location owned by Plackis; (2) Plackis provided advice to the Entjers regarding how to improve the profitability of the San Marcos location, which resulted in the Entjers adjusting the schedule of their employees.  The Fifth Circuit found such indirect evidence legally insufficient to show “power to hire and fire” on behalf of the franchisor.

Did the franchisor supervise and control employees’ work schedule and conditions? 

Orozco argued that because the Entjers changed their employees’ schedule after a meeting with Plackis, the original franchisor had the authority to supervise or control employees’ work schedule and conditions at the San Marcos location. However, aside from the temporal connection between the meeting and the changes in the schedule, Orozco failed to introduce any other evidence of control.  To the contrary, both the Entjers and Plackis testified that the franchisor’s advice to the franchisee was non-binding, and Orozco himself admitted that Plackis did not set his schedule and never discussed his responsibility or position.

Importantly, the Fifth Circuit explained that the mere fact that the franchisor trained the owners of a particular franchise or reviewed their employees’ schedule in order to increase the franchisee’s profitability, or met with the franchisees and their shift managers frequently, did not mean that the franchisor controlled employees’ work schedule and conditions.

The Fifth Circuit also found that the franchise agreement stating that the Entjers had to follow “policies and procedures promulgated by the franchisor for ‘selection, supervision, or training of personnel,” was insufficient to support a finding that Plackis fired or hired employees or supervised or controlled their work scheduled or employment conditions.

Did the franchisor determine the rate and method of payment? 

Orozco testified that Plackis did not control his rate of pay and the Entjers set his rate and method of payment.

Did the franchisor maintain the employment records? 

Orozco conceded that Plackis did not maintain his employment records.

CONCLUSION:  Things worked out well for the franchisor in this case, but consider the following statement by the Fifth Circuit: “We do not suggest that franchisors can never qualify as the FLSA employer for a franchisee’s employees; rather, we hold that Orozco failed to produced legally sufficient evidence to satisfy the economic reality test and thus failed to prove that Plackis was his employer under the FLSA.”  Had Plackis maintained the employment records for the San Marcos location or directed the Entjers regarding how much they should pay their employees or what work schedule they should implement at their franchise location, the outcome of this case could have been different.

Thus, to avoid a potential exposure under the FLSA as a “joint employer” with its franchisees, a franchisor should make sure that the franchise agreement makes it clear that the franchisees and not the franchisor control the hiring and firing process, employees’ work schedule and conditions, determine the rate and method of payment, and maintain the employment records for their operations. Also, the franchisor should make it absolutely clear that any type of training, advice or guidance that it provides to the franchisees is non-binding and cannot be interpreted as an expression of control over their employees.

For more information regarding minimum and overtime wage requirements, contact Leiza Dolghih.

The Fifth Circuit Triples an Overtime Payment Award; Says the Fluctuating Workweek Method Was Not Warranted in a FLSA Misclassification Case

Last Friday, the Fifth Circuit in Black v. SettlePou, PC ruled that the Northern District of Texas erred in applying the Fluctuating Workweek (FWW) method of calculating an overtime payment award where there was no evidence that the employee had agreed to the flexible work hours. The Court of Appeals remanded the case and ordered a recalculation of damages using 1 1/2 times the regular hourly rate of pay instead of 1/2 under the FWW, which would result in a tripling of the actual and liquidated damages.

Black was employed as a legal secretary and paralegal at SettlePou, P.C. from 2005–2010. She was first hired as a non-exempt legal secretary, then promoted to a paralegal, but remained a non-exempt employee, as defined by the Fair Labor Standards Act, 29 U.S.C. §§ 201–19 (FLSA), earning overtime at 1 1/2 regular rate of pay. In 2007, SettlePou informed Black that she was to begin supervising one of their legal secretaries, therefore, she would be reclassified as exempt, making her ineligible for overtime pay as an exempt employee. Immediately following her reclassification Black complained both verbally and in writing to her supervisor and to the human resources department stating that she thought she should be paid overtime for her extra hours worked.  After she was terminated in 2010, she filed a suit against SettlePou on behalf of herself and all other similarly situated paralegals for violations of the FLSA.

The jury found that SettlePou had willfully violated the FLSA by misclassifying Black as exempt and the she was owed 274 hours of overtime pay. Apparently, when Black was promoted to a supervisor position, she was told that she would be given supervisory authority, but was never actually given one.  Thus, she continued to perform the same duties, but was now ineligible for overtime.

The district judge calculated the amount of overtime premium due to Black by multiplying her 274 overtime hours by one-half of her hourly pay rate.  Black filed a motion to alter or amend the judgment, arguing that the district court should have used 1 1/2 times the regular hourly rate of pay instead of 1/2 in its calculation of damages, but the district court denied the motion.

In overruling the district court, the Fifth Circuit explained that “[t]he FWW method of calculating overtime premiums in a misclassification case is appropriate when the employer and the employee have agreed that the employee will be paid a fixed weekly wage to work fluctuating hours,” and that the existence of such agreement is a question of fact.  The record evidence in this case – both the parties’ initial understanding and their course of conduct – showed that there was no such agreement between Black and her employer because:

  • SettlePou’s Human Resources Director testified that she was unaware of any fluctuating workweek agreement with Black
  • Black testified that her understanding was that she would be compensated with a fixed weekly wage for working a regular schedule of 37 1/2 hours
  • the payroll records showed that Black was being compensated for full time employment, which was defined in the Employee Handbook as 37 1/2 hours per week
  • the Employee Handbook only stated that exempt employees would not be compensated for overtime, but did not explain that the full-time paralegals like Black were expected to work a fluctuating work week or overtime

The critical issue in this case, was “not only whether SettlePou paid Black a fixed salary for varying hours, but whether SettlePou and Black had agreed that a fixed salary would compensate her for all of the hours she worked each week.” The fact that Black complained to the Human Resources Director and her supervisor about having to work overtime without receiving overtime payment, showed that she did not agree to compensation based on the fluctuating work week.

MORAL OF THE STORY:  First, make sure your employees are classified correctly as exempt or non-exempt.  Second, if you expect employees to work flexible hours, make sure that they are made aware of that, preferably in writing, and that the compensation system reflects this arrangement. It won’t hurt to have employees sign a statement acknowledging that they are expected to work fluctuating hours.  Third, make sure that your employee handbooks, employment applications, payroll records, and other paperwork associated with the fluctuating work week positions reflect the specific nature of that arrangement. Finally, make sure that the human resources department is knowledgeable about any fluctuating work week positions.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

The Supreme Court Renders an Important Pro-Employer Decision

In the past two weeks, both the United States Supreme Court and the Fifth Circuit Court of Appeals have rendered decisions that will add roadblocks to certain employee lawsuits.  Last week, the Supreme Court decided Genesis Healthcare v. Symczykwhich I have previously identified as a case to watch in 2013 (here).

In Genesis Healthcare v. Symczyk, the Court held that when an employee brings a collective action under the Fair Labor Standards Act (FLSA) against an employer, and the employer makes an offer of judgment to the employee under Federal Rule of Civil Procedure 68 prior to class certification, if such offer fully settles the employee’s individual claim, the collective action becomes moot as well.

In this case, Symczyk, a nurse, brought a collective action on behalf of herself and “other employees similarly situated” and alleged that the medical center violated the FLSA by automatically deducting 30 minutes of time worked per shift for meal breaks for certain employees, even when the employees performed compensable work during those breaks.  When Genesis Healthcare answered the complaint, they simultaneously served upon Symczyk an offer of judgment under Rule 68.

The District Court found that this offer of $7,500 provided Symczyk a complete relief on her individual damages claim, and, since no other individuals had joined her lawsuit, the case was rendered moot.  The Third Circuit Court of Appeals reversed the District Court and held that while the individual claim had become moot, the collective action had not.  The Court explained that allowing defendant employers to “pick off ” named plaintiffs with strategic Rule 68 offers before class certification, would frustrate the goals of collective action under the FLSA.

The Supreme Court, however, reversed the Third Circuit Court of Appeals and found that where a judgment offer under Rule 68 completely satisfies the named employee’s individual claim, and the class has not yet been certified, both the individual claim and the collective actions are rendered moot.

HOW WILL THIS AFFECT EMPLOYERS AND EMPLOYEES?

Now, anytime an employee brings a collective action under the FLSA against an employer, all the employer has to do to get the collective action dismissed, is to make a Rule 68 judgment offer prior to the class certification, and the collective action will be mooted, if the district court finds that the amount of the judgment offer fully satisfies such employee’s individual claim.  Note, however, that the federal circuit courts are split about the question the Supreme Court did not decide: whether an unaccepted offer of judgment moots the named plaintiff’s FLSA claim (and thus the collective claim). The four dissenting members of the Court said “no.”  The Rule 68 offer strategy will work only in those judicial circuits that find an unaccepted offer of judgment to moot the claim.

The Court’s decision makes it more difficult for employees to bring the FLSA collective actions because they are now forced – prior to class certification – to either identify a sufficient number of class members or claim a sufficiently large amount of damages so that the employer is not willing to make a Rule 68 offer or the employer’s offer is not large enough to satisfy all the individual claims.

The Court specifically pointed out that the judgment offers under Rule 68 might not work in class actions governed by Federal Rule of Civil Procedure 23.  Thus, employees might want to try to bring lawsuits that allege both a collective action under FLSA as well as Rule 23 class actions, or bring only state-law claims as class actions.

It will be interesting to see if, as a result of this decision, the Congress attempts to amend the FLSA to close the loophole created by Rule 68 offers that many employers are now sure to use to dismiss collective actions brought under the FLSA.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.