FLSA Litigation's Greatest Hits: Taking Care of Business, and Working Overtime

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By William D. Welkowitz

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Arguably, the most significant action on overtime regulations this past year came on June 30, 2015, when U.S. Secretary of Labor Thomas Perez announced the details of the DOL’s proposed rule to address overtime pay protections under the FLSA.1

Both employment law litigators and policy experts interviewed by Bloomberg BNA state that one of the most significant changes being proposed (besides raising the salary threshold for being exempt from overtime pay) involves specifically addressing the EAP (executive, administrative and professional employee) exemption and modernizing those rules to keep pace with the changing economy.

James Zouras, a partner at the employee-side litigation firm Stephan Zouras, LLP in Chicago, adds that “employers began abusively classifying convenience store managers, assistant fast food managers, and 'administrative’ office workers earning as little as $23,660 per year as 'exempt’ notwithstanding that they typically perform little, if any, genuine managerial or administrative duties.”

Change in the Duties Test

Those interviewed by Bloomberg BNA pointed to the potential shift from a qualitative to a quantitative duties test for the EAP exemptions as one of the most significant potential changes to the FLSA overtime rules.

Both Zouras and James Kan, a partner at the employee-side litigation firm Goldstein, Borgen, Dardarian & Ho in Oakland, Calif., say that this change would ensure that the primary duties test works as intended by only exempting from overtime pay employees who primarily perform executive, administrative and professional duties.

Currently, the qualitative duties test permits an employer to classify an employee as exempt from overtime even if that person spends 50 percent or less of the working time performing exempt duties, as long as those primary duties are the reason for the employee’s job.

Kan and Zouras say that a shift to a quantitative duties test from a qualitative one for the EAP exemptions would be significant because it potentially would restrict the overtime exemptions to those workers who actually spend more than 50 percent (or some other threshold level) of their time performing exempt duties. “Notably, a quantitative test would prevent employers from taking advantage of employees by giving them a slightly higher salary, a few seemingly exempt duties, and then working them on non-exempt duties 60 to 80 hours a week without overtime compensation,” Kan explained.

According to Kan, if the DOL were to adopt a quantitative primary duties test for EAP exemptions, the strategies of the DOL and the plaintiffs’ bar would not change significantly. “Both the DOL and the plaintiffs’ bar have long pursued overtime misclassification cases with a focus on the actual duties performed by workers, so a more quantitative primary duties test would be a logical extension of that type of investigation and analysis,” Kan said.

He also added that such a test would, however, allow the DOL and the plaintiffs’ bar to target employers that refuse to pay overtime to employees who purportedly have exempt primary duties, but actually spend a majority of their time performing non-exempt duties.

For class litigation, Zouras says these strategies would be compounded, as employee-side attorneys would require reliable methods of determining the amount of time a class of employees spent performing their duties. “Instead of simply figuring out what plaintiff employees were doing while working, attorneys would have to acquire evidence on how long each plaintiff employee spent performing each type of task,” Zouras explained.

Quantity Over Quality Not Necessarily the Best Approach

Trey Kovacs, a labor policy expert at the Competitive Enterprise Institute in Washington, DC, notes that while this change has not actually been proposed, the DOL is asking the public to comment on whether and how this change might best be made.

However, Kovacs pointed out that there are several problems with the quantitative duties test approach. In particular, he warned of the potential pitfalls of adapting an approach similar to the one currently in use in California.

The rule in California requires managers to devote at least 50 percent of their working time to EAP activities to be considered exempt from overtime rules

Kovacs said that such a change could create a huge headache for employers. “How is an employer supposed to determine how much non-EAP activity its managers perform? Month-to-month, the amount of non-EAP activity will change,” Kovacs inquired.

Another problem with the California primary duties test, according to Kovacs, is that it is possible that managers may perform EAP and non-EAP activity concurrently. “For example, a manager supervises a stocker while stocking shelves herself,” Kovacs explained. “Would the DOL count this activity as either EAP activity or non-EAP activity?”

Until the DOL puts forth a concrete proposal, Kovacs said, the answers to all these questions will remain unknown.

Kan, however, disagreed with this assessment of the California primary duties test, stating that it “has proven not only sustainable for employers, but also supplied courts with a more realistic guidance to apply with more consistent and predictable determinations for EAP exemptions.”

Zouras said that most importantly, the proposed changes make it more difficult for employers to classify certain low- and mid-level employees as exempt from the FLSA. “There will always be an imbalance between workers and employers for the simple fact that employers inherently possess more power, more knowledge and the motivation to cut costs by skirting the law,” Zouras stated.

The Employers Strike Back?

Gregg Fisch, a partner at the nationwide litigation firm Sheppard Mullin in Century City, Calif., suggests that there are methods already in practice that litigators could use to defend lawsuits based on the new regulations.

Fisch explained that because a quantitative duties test already exists in California under the applicable state law, many attorneys like himself have been addressing these issues for some time now. “I believe that we already apply the requisite strategies to defend against such claims and there would not need to be any change to the defense accordingly,” Fisch said.

According to Fisch, the major difference in legal strategy with the quantitative test is that defendants have to analyze the amount of time that the plaintiff spends on each of his or her tasks each day. “In other words, we have to consider all of the employee’s job duties and how much time is spent performing each job duty, so the initial investigation requires a more elaborate analysis and the deposition of the plaintiff needs a thorough exploration of what exactly he or she does each day,” Fisch explained.

Zouras, on the other hand, said that employers will likely push back against the proposed rules, much like they did against previous amendments. He opined that challengers may try to attack the constitutionality of the amendments, to which the DOL can counter by using many similar arguments it has made in the past.

“For example, the DOL can point to the legislative history of the FLSA, which is a remedial statute, in support of the new rules, which supports increasing the minimum salary requirement for the white collar exemptions,” Zouras pointed out. He further noted that “the DOL can also rely on congressional intent, which supports the notion that only true professional, managerial and administrative workers were meant to be covered by the white collar exemptions, as opposed to lower-level supervisors at fast food chains or retail convenience stores who barely satisfy the exemption’s requirements and were never intended to be exempt from the FLSA.”

In addition, Kan pointed out the DOL’s authority to implement new rules and regulations to clarify the scope and application of the FLSA under the Administrative Procedure Act.

Proper Agency Deference

According to Kan, such rule changes would be entitled to deference in accordance with the Supreme Court’s 1984 decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council2 regarding deference to an agency interpretation of a statute and subsequent rulemaking in following that interpretation.

The question of Chevron deference is a two-step analysis. First, the court determines whether Congress spoke directly to the question at issue. If so, the court defers to the plain meaning of the statute. If Congress did not address the issue in question in the statute itself, then the court must determine if the agency's response to the statute is based on a “permissible” interpretation of the statute. If so, then the court defers to the agency interpretation.

“When rules are subject to full public notice and comment procedures, such as the ones here, they constitute a reasonable exercise of the DOL’s authority and thus, are subject to Chevron deference by courts,” Kan explained.

In addition to Chevron, the DOL can also argue that its new rules are entitled to deference under the 1944 Skidmore v. Swift & Co.3 decision, which gives deference to an agency's interpretation of a statute announced in more informal agency papers, such as an opinion letter or fact sheet, and is still considered good case law today.

Further, the Third Circuit Court of Appeals has directly addressed the issue of the DOL interpreting the professional exemption in Reich v. Gateway Press, Inc.4 In its opinion, the court ruled that the DOL’s interpretation regarding who could be properly classified under the professional exemption is entitled to a certain level of deference.

Kan also pointed out the D.C. Circuit Court of Appeals’ ruling in Home Care Ass'n of Am. v. Weil5 this past August, which unanimously affirmed the validity of the DOL’s final rule under Chevron regarding home care workers. The rule was challenged by an association of home care companies.

The DOL could reasonably argue that the combination of these precedents, two of which are considered cornerstones of administrative law, provide the requisite authority for the agency to issue the new rules.

Future Federal Action and Litigation

Initial estimates projected the new rules to be implemented by the DOL in July 2016. However, Secretary Perez said in a Dec. 16, 2015 Bloomberg BNA interview that he anticipates the final rule to be issued in the spring, while others both within and outside the administration say that the rule might not be implemented until late 2016 or later due to legal challenges to the rule.6

Kovacs pointed out that highly contentious rules often take longer to finalize than projected, and that the DOL has to review over 300,000 comments on the rule submitted by the public.

As for the future of litigation surrounding the issue, Kan says that the amount of federal litigation will depend largely upon employer compliance with the applicable laws and rules. “Assuming widespread compliance, the federal litigation should decrease as the number of exempt salaried workers will decrease accordingly,” Kan stated. “A realistic salary level should be a bright-line test that will reduce needless litigation. Likewise, the adoption of a quantitative duties test would provide courts and parties with a realistic guidance that should result in consistent and predictable determinations of exemption status.” However, Kan also said that if employers resist compliance, overtime litigation may increase in the short term until greater compliance occurs.

Zouras, on the other hand, anticipates no decrease in the number of FLSA overtime actions filed in federal court in the future given the financial motivation employers have to avoid payment of overtime. “The FLSA is a fast and ever-evolving area, and I expect no change in this trend in the years to come,” Zouras said.

In any case, Fisch advised employers to stay on top of these changes and alter their pay practices accordingly. “As with many other changes to the wage-and-hour rules, class action litigation almost certainly will result,” Fisch stated. “Those employers who fail to promptly take action and ensure that their employees are paid consistent with the new rules run the risk that the misclassified workers will bring action for the violations.”

1 Notice of Proposed Rulemaking, Department of Labor, Wage and Hour Division, 7/6/15, 80 Fed. Reg. 38, 516.

2 467 U.S. 837, 104 S. Ct. 2778 (1984).

3 323 U.S. 134, 65 S. Ct. 161 (1944).

4 13 F.3d 685, 1 WH Cases2d 1313 (3d Cir. 1994).

5 799 F.3d 1084, 25 WH Cases2d 289 (D.C. Cir. 2015).

6 Perez 'Confident' Overtime Rule to Come by Spring, Daily Labor Report, 12/17/15, p. A-13.