Fair Labor Standards Act (FLSA)

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The U.S. Department of Labor (“DOL”) has finally announced its proposed new rule for overtime eligibility under the Fair Labor Standards Act. The DOL’s Thursday announcement proposes to increase the salary threshold to $35,308 per year, an increase from $455 to $679 per week.

This blog previously covered the stops and starts of the Obama-era DOL to set an even higher salary threshold of $47,476 (read here and here). The new proposed rule also changes other aspects of that ill-fated effort, such as no automatic adjustments in the salary threshold.

DOL’s Notice of Proposed Rulemaking will be subject to a 60-day comment period prior to taking effect. However, once again, there could be legal challenges, which we will monitor on this blog – stay tuned.

In Morin v. Innegrity, LLC, the South Carolina Court of Appeals permitted a member of an LLC that was performing services for the LLC to recover unpaid wages under the South Carolina Payment of Wages Act (SCPWA or the Act).  Though the parties did not raise the issue, the case presented an interesting question about whether the protections of the Act extend to service members of an LLC.  (Note that in the ensuing discussion “LLC” is used interchangeably with “partnership” and “member” with “partner.”)

The purpose of the SCPWA is “to protect employees from the unjustified and willful retention of wages by [an] employer.”[1]  The Act, however, does not define “employee” and unhelpfully defines an “employer” as “every person, firm, partnership, association, [or] corporation . . . employing any person in [South Carolina].” Predictably, when lawmakers drafted the SCPWA they did not address the treatment of partners as employees.

The Wage and Hour Division of the United States Department of Labor, on the other hand, is clear that partners are not employees of their partnerships under the Fair Labor Standards Act (FLSA), the federal equivalent to the SCPWA.  In its Field Operations Guide, the Wage and Hour Division states that “[an] employment relationship [does not] exist between a bona fide partnership and the partners of whom it is composed . . . since [the partners] cannot be said to be employed by an employer separate and distinct from themselves.” Accordingly, partners cannot recover against their partnerships under the FLSA.

Because there is not guidance on the treatment of partners under the SCPWA, the Act’s general provisions apply.  Specifically, section  41-10-80(c) provides that for “any failure to pay wages due to an employee . . . the employee may recover in a civil action an amount equal to three times the full amount of the unpaid wages, plus costs and reasonable attorney’s fees . . . .”  Therefore, to recover under the SCPWA an individual must be an “employee” earning “wages.”  Fortunately, the Act does define “wages.”  So ignoring, momentarily, the thorny partner-as-employee issue, let us consider how a partner might earn “wages” from her partnership.

The SCPWA broadly defines “wages” as “all amounts at which labor rendered is recompensed, whether the amount is fixed or ascertained on a time, task, piece, or commission basis . . . .”  The Act is silent about whether payments made to partners can be wages.  From an income tax perspective partners cannot earn W-2 wages from their partnerships.  Instead, they are paid in one of three ways.    For returns on investments in a partnership, partners receive a “distributive share.”  Because a distributive share is not earned for performing services, it is not a “wage,” and partners owed a distributive share cannot recover under the SCPWA.

Partners that do perform services for their partnership are paid either “707(a) payments” or “guaranteed payments for services.”  Partners earn “707(a) payments” for services performed for a partnership outside of the partner’s capacity as partner—e.g., a partner at a law firm being paid to perform services other than legal services for the firm.  Alternatively, partners that perform services for a partnership in their capacity as partners typically receive pre-arranged, fixed payments called “guaranteed payments for services.”  These payments are called “guaranteed payments” because they are contractually required to be paid regardless of the income of the partnership.  While neither form of payment is a “wage” for tax or FLSA purposes, both 707(a) payments and guaranteed payments for services probably are “wages” under the SCPWA definition as each payment is an amount “[for] which labor rendered is recompensed.”

In any event, even a partner earning “wages” for services performed for her partnership cannot recover under the SCPWA unless she is also an “employee” of the partnership.  Though the Act itself is silent, our Supreme Court in two unanimous opinions has stated explicitly that “[w]orking partners are not employees.”  Daniels v. Roumillat, 264 S.C. 497, 502 (1975); Marlow v. E.L. Jones & Sons, Inc., 248 S.C. 568, 771 (1966).  Ordinarily such plain guidance would bind a lower court, and so perhaps the Court of Appeals would have rendered a different decision had the parties brought these cases to its attention.

[1] Mathis v. Brown & Brown of S.C., Inc., 389 S.C. 299, 698 S.E.2d 773, 783 (S.C.2010) (quoting Rice v. Multimedia, Inc., 318 S.C. 95, 456 S.E.2d 381, 383 (S.C.1995)).

By now, most, if not all, of you are familiar with the Supreme Court’s decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), which upheld the validity of waivers of FLSA collective actions in arbitration agreements. The United States District Court for the District of South Carolina recently issued an order expanding on Epic Systems. Continue Reading Utilizing Arbitration Agreements Effectively

The 2018 federal appropriations bill signed into law on March 23rd includes an addition to the Fair Labor Standards Act (FLSA) stating that “[a]n employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.” The amendment also nullifies certain regulations issued by the Department of Labor in 2011, including regulations which prohibited an employer from using an employee’s tips as part of an invalid tip pool even where the employer was paying the employees the full minimum wage without utilizing a tip credit. Continue Reading Congress Addresses Who Can Share Tips

On January 5, 2018, the United States Department of Labor announced that, going forward, it would utilize the “primary beneficiary” test for determining whether interns are employees under the FLSA, consistent with recent rulings from appellate courts. Its updated Fact Sheet #71, a copy of which is linked here, explains the test, which examines “the ‘economic reality’ of the intern-employer relationship to determine which party is the ‘primary beneficiary of the relationship.” Fact Sheet #71 outlines 7 factors that courts should apply on a fact specific basis in making this determination, with no single factor being dispositive:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

This test replaces the older 6 factor test contained in Fact Sheet #71, which some courts had rejected as too rigid. While this guidance from the DOL is persuasive, rather than binding, authority, it should be noted that a version of the “primary beneficiary” test was already being applied by the Fourth Circuit Court of Appeals, at least in the context of whether trainees constitute employees. The adoption of this test by the DOL provides additional support for the application of it by the Fourth Circuit Court of Appeals and District Court for the District of South Carolina.

Late Tuesday, November 22nd, a federal judge issued an order that effectively pauses the new “overtime rules” that had been scheduled to take effect December 1, 2016. The ruling enjoins the Department of Labor from implementing or enforcing the new “overtime rules” on a nationwide basis “pending further order” of the court. It is important to remember that the ruling is not final. Rather, it is a preliminary injunction that suspends the new rule during the litigation or further order form the court.

It is very likely that the rule will ultimately be enforced because its promulgation could be found to be within the Department of Labor’s authority granted to it by Congress when the Agency was created. For more on the power of administrative agencies, see this post. However, at least for the time being, employers are granted a reprieve from the new rule. Thus, employers may continue to follow the “old” rules for now if they choose. But, what should you do? This is a tougher question that will depend largely on your particular situation. There is no one-size-fits all approach. If you have not notified your employees of changes that will be made to their pay or their classification status, then you may wish to hold off on implementing any changes until further notice.

On the other hand, if you have already implemented changes to comply with the new rules, such as raising salaries to maintain exempt status, you should carefully consider whether it is prudent to leave those changes in place, despite this ruling. There are many factors that should be weighed, such as employee morale and South Carolina state law on providing notice of decreasing an employee’s pay. For those employees that have been reclassified as “non-exempt” you may want to continue classifying those employees as exempt for the time being.

South Carolina is one of 21 states that have joined in a federal lawsuit filed in Texas contending that the “President is trying to rewrite [the Fair Labor Standards Act].” To recap, the rule in question is actually an amendment to the FLSA’s salary basis test increasing the minimum salary amount for exempt employees from $23,660 to $47,476 annually.  The proposed change, effective December 1, 2016, will amend the current rule found at 29 C.F.R. §541.600.It was proposed by the Wage and Hour Division of the Department of Labor (DOL).  [Please see prior posts from August 8, 2016, May 18, 2016 and June 30, 2015 regarding details of the amendment to the rule.]

The position taken in the litigation is interesting in light of the fact that this amended rule, like many of the rules issued by administrative agencies, was adopted by the DOL pursuant to recognized procedures under the Administrative Procedures Act. Federal administrative agencies are permitted to promulgate rules when they have received a statutory grant from Congress to do so.  While Congress passes more general statutes, Congress often also creates administrative agencies charged with creating more detailed regulations to carry out the aims of the statutes through rulemaking. The public is informed of the Proposed Rules reported in the Code of Federal Register before they take effect and is permitted to provide comments for a specific period of time.  Once the comment period has expired, the Proposed Rule becomes a Final Rule with varying degrees of changes to the Final Rule.  Assuming the administrative agency issuing the Final Rule was granted the authority to do so in its enabling statute, courts are likely to give wide deference to the agency’s regulations.

The FLSA was passed by Congress in 1938, and the Wage and Hour Division of the Department of Labor was created to administer the FLSA. 29 U.S.C. §204.  The amendment to the salary basis test and the Final Rule in this instance is no different.  The DOL published a Notice of Proposed Rulemaking (NPRM) on July 6, 2015, providing an opportunity for all who wished to comment on the proposed amendments to do so by September 4, 2015.  The DOL then issued its Final Rule on May 18, 2016, having made a number of changes from the Proposed Rule to the Final Rule.

It will be interesting to see if the Texas federal court finds that the DOL has exceeded the authority granted to it by Congress, and what any appellate court rulings thereafter might be. My recommendation to employers is that they proceed with their plans to comply by December 1, 2016, and not assume this will result in them not having to do so.

South Carolina is joined by Alabama, Arizona, Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, Texas, Utah and Wisconsin.

We have closely monitored and continued to receive inquiries regarding the new rules that will take effect on December 1, 2016, regarding who is exempt from the Fair Labor Standards Act’s overtime rules. As the effective date looms, the clock is ticking for employers to ensure they will be in compliance under the new rules, which are forcing many employers to make changes. Determining the best option for compliance depends on a number of case specific factors, and understanding the new rule is essential for choosing the best option.

Background

Though we know many of our readers are well-versed in FLSA exemptions, some background information puts the new rules in context. The most commonly used exemption to the FLSA’s overtime requirement is for executive, professional, and administrative (“EAP”) employees.  To qualify for the exemption, the employee must 1) be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work (the “salary basis test”), 2) be paid a certain salary level (the “salary level test”), and 3) primarily perform certain duties as defined in the regulations (the “duties test”).  In addition, the regulations exempt certain highly compensated employees (“HCEs”) who earn above a higher total annual compensation level.  The distinction for HCEs is that the duties test is significantly less stringent than under the standard salary level.

The new rule changes only the salary level test and salary basis test, as discussed below.

Updated Salary Levels

Under the former rule, an employee had to be paid at a rate of at least $455 per week ($23,660 annually) to qualify under the EAP exemption. Under the new rule, the employee must be paid at a rate of at least $913 per week.  Moreover, the new rule provides that the salary level will be automatically updated every three years to the 40th percentile of the weekly earnings of full-time nonhourly workers in the lowest-wage Census Region.  The first update will be effective January 1, 2020, and the updated amount will be posted at least 150 days prior to that date.

In addition, the new rule updates the total annual compensation for HCEs from $100,000 to $134,004. This automatically increases every three years based on the 90th percentile of full-time salaried workers nationally.

Use of Nondiscretionary Bonuses, Incentive Payments, Commissions

Under the former rule, employers could not use bonuses or incentive payments to count toward the salary level. The new rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the $913 standard salary level.  These must be paid quarterly or more frequently.  At the end of each quarter, if the employee has not been compensated at the minimum standard salary level for the quarter (i.e., 13 times the weekly salary amount of $913) when accounting for salary and nondiscretionary bonuses / incentive payments, then the employer can pay the deficiency in one final payment.  Significantly, that payment must be made no later than the first pay period after the end of the quarter.

The word nondiscretionary is emphasized because employers cannot use discretionary bonuses to satisfy any portion of the $913 standard salary level. Discretionary bonuses are those which are entirely in the employer’s discretion and not pursuant to any preannounced standards.

A notable distinction exists for HCEs. Under both the old rule and new rule, HCEs must be paid the standard salary level on a salary basis, and employers may not use bonuses or incentives to satisfy any portion of the standard salary level.  Nondiscretionary bonuses and incentives may be used to satisfy the total annual compensation requirement for HCEs.  Thus, under the new rule HCEs must be paid at least the rate of $913 weekly without accounting for any nondiscretionary bonuses or incentive payments.  The 10% rule does not apply to HCEs.  However, nondiscretionary bonuses and incentive payments may be used when accounting for the total annual compensation requirement of HCEs.

Factors to Consider in Evaluating Options

The new rule has forced employers to make decisions, particularly regarding employees currently treated as exempt and who earn between $455 and $913 per week. As an initial matter, employers should consider whether the employee meets the applicable duties test.  The Department of Labor estimates there are 732,000 U.S. wage and salary workers who currently earn between $455 and $913 per week and have been improperly treated as exempt because they fail the duties test.  For employers who have one of these employees, perhaps the new rule can be viewed as an “opportunity” to reclassify the employee as non-exempt and ensure that the employee is properly being paid overtime.

The Department of Labor also estimates that 4.2 million workers are properly being treated as exempt under the current rule and earn between $455 and $913 per week, meaning that they will become non-exempt under the new rule absent intervention by the employer. For these employees, generally speaking, employers must decide between raising the salaries to meet the new salary level, or ensuring that the employee is properly paid overtime for all hours worked in excess of 40 hours in a workweek.

There are various means of accomplishing the latter. There is a common misconception that nonexempt employees must be paid on an hourly basis.  While there are certain advantages to that method of payment for non-exempts, it is not mandatory and non-exempt employees may be paid on a salary basis so long as the employee is being paid minimum wages, overtime, and proper records are kept.  Employers also may choose to ensure the employee does not work overtime, through adjusted work schedules or other means.  Of course this does not alleviate employers from paying overtime when it is worked.  Thus, employers who choose this course must ensure that proper policies, procedures, and practices are in place to ensure that these employees are not working overtime.  Whether employers choose to pay overtime or seek to avoid the employee working overtime, employers must ensure that proper record-keeping are in order to track the employees hours.

A cost analysis is likely to weigh heavily in determining the employer’s best option, and a thorough audit to determine how many hours the employee works in a workweek is essential in that analysis.  Counsel can be very valuable in assisting with such an audit and providing ideas on available options, as well as auditing whether or not the employee meets the duties test in the first place.  Even if the employer does not seek that assistance, employers would be wise to consult counsel regarding any planned changes to evaluate whether the changes are in compliance with the FLSA and other employment laws.

After much anticipation (as discussed previously on our blog here), the final rule regarding the salary threshold for exempt executive, administrative, professional and outside sales and computer employees under the Fair Labor Standards Act was announced today.  The good news is that the rule does not go into effect until December 1, 2016, so employers have time to assess and comply.  The difficult news for employers is that the threshold, while slightly lower than originally anticipated, is still more than double the previous salary requirement for classifying employees as exempt.  The final rule also includes an automatic increase.

As of December 1, 2016:

  • Exempt employee salary level is $47,476 (current threshold is $23,660)
  • Total annual compensation level for highly compensated employees (HCEs) is $134,004 (current threshold is $100,000)
  • Salary level will automatically increase every three years based on the 40th percentile of the weekly earnings of full-time salaried workers in the lowest-wage Census region (the South) beginning January 1, 2020 (HCEs will also automatically increase based upon the 90th percentile of full-time salaried workers nationally)

The final rule does not include any changes to the duties tests for exempt employees. However, your salaried employees must meet the duties test and be paid at least the annual salary set by the new rule in order to be exempt from overtime regulations. More information on the final rule can be found at the Department of Labor’s website at https://www.dol.gov/whd/overtime/final2016/index.htm.

Employers must quickly review those employees classified as exempt and determine if a salary adjustment will be needed or if the salaried employee needs to be reclassified come December 1, 2016. Employers need to review their current policies regarding overtime, communicate changes effectively with their employees and properly train the non-exempt employees and their managers who will be affected by this new change.  Additionally, employers need to be prepared to handle the three-year automatic hike and consider changing annual reviews and compensation changes to be timed with the January 1st timeline.

tipThe plethora of litigation against restaurants for alleged improper tip practices continues.  Follow this link to see new litigation brought against a restaurant for requiring tipped employees to perform non-tipped work.

If a restaurant takes a tip credit, those employees who are paid pursuant to the tip credit cannot perform non-tipped work more than 20% of the time.   (The DOL has indicated that an employee’s status will be viewed on the basis of his activities over an entire workweek.  See DOL Opinion Letter, 1997 WL 998047 (Nov. 4, 1997).)  In other words, if a tipped employee is performing related duties not directed at tips, then the related duties can be compensated pursuant to the tip credit as long as those related duties only comprise 20% or less of the employee’s time.  No tip credit may be taken for time spent on unrelated duties, and a tipped employee must be paid full minimum wage for such duties.

For example, a waitress may be employed in a dual job.  If she customarily and regularly receives at least $30 a month in tips for her work as a waitress, then she is a tipped employee only with respect to employment as a waitress. While a tip credit can be taken for the time worked in the tipped position, she must be paid at least minimum wage for those hours spent working in the non-tipped position.  Such a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses. These are considered related duties in an occupation that is a tipped occupation even though they are not by themselves directed toward producing tips.

You can find helpful guidance on assessing and using tip credit here.