Joseph Mulherin Unpacks DOL Final Rule Revising FLSA Domestic Service Regulations and Guidance on Shared Living Arrangements

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Joseph K. Mulherin (interviewed by Katarina E. Wiegele)

Joseph K. Mulherin (jmulherin@vedderprice.com) is a shareholder in Vedder Price's Chicago office. He advises employers nationwide on employment law issues, including wage and hour matters, and has extensive experience in single-plaintiff and class-action defense. He provides counsel and representation for employers in DOL audits, discrimination lawsuits and EEOC investigations. Mr. Mulherin is admitted to practice in federal court, including the U.S. Courts of Appeals for the Fifth and Seventh Circuits.

Bloomberg BNA:

[Editor's note: Due to the transformation of the home care industry, the growing demand for long-term home care and the professionalization of the home care workforce in recent decades, DOL's Wage and Hour Division issued a Final Rule revising 1975 FLSA domestic service regulations that defined “companionship services” and that implemented the companionship services and live-in domestic service employee exemptions (29 C.F.R. §§ 552.102, .6). WHD stated, “The major effect of this Final Rule is that more domestic service workers will be protected by the FLSA's minimum wage, overtime, and recordkeeping provisions.” On Mar. 27, WHD released an administrator's interpretation to clarify how the FLSA applies to domestic service workers in shared living arrangements (AI 2014-1).]

WHD's Final Rule expands the FLSA's minimum wage and overtime compensation protections by redefining “domestic service employment” (29 C.F.R. § 552.3) and “companionship services” (29 C.F.R. § 552.6) and precluding certain employers from asserting the companionship exemption. How did WHD revise these terms? Under the new rule, which employers can and cannot rely on the companionship exemption? (Please consider third-party employers (29 C.F.R. § 552.109) like home-care staffing agencies, joint employment with a third-party provider and individuals or families employing companionship providers.)

Mulherin:

Starting with the most significant change, in my opinion, WHD's Final Rule now makes it very clear that the “companionship services” and “live-in domestic service employee” exemptions are no longer available to third-party employers (e.g., home health care agencies). As a little background, Congress amended the FLSA in 1974 to provide coverage to domestic service workers, i.e., employees who work in individuals' homes, thus providing them with a guarantee of minimum wage and overtime for hours worked in excess of 40 in a workweek. In the same amendment, Congress established an exemption from the minimum wage and overtime requirements for those employees who provided “companionship services” to elderly people and/or to those with illnesses or conditions who required assistance to care for themselves. Congress also instituted an exemption from the overtime provisions (not the minimum wage requirements) for domestic service employees who lived permanently in the homes of the individuals for whom they were providing care or services.

In 1975, WHD issued regulations implementing the 1974 amendment, explicitly providing that third-party employers of home care workers could claim the “companionship services” and “live-in domestic service employee” exemptions. Thereafter, WHD changed its position on the scope of these exemptions on multiple occasions, much to the chagrin of the appellate courts. In the early and mid-1990s as well as the early 2000s, WHD unsuccessfully attempted to revise the regulations to make these exemptions inapplicable to private third-party employers. But in 2007, the DOL took the position before the U.S. Supreme Court that the companionship services exemption applied to third-party employers, a position that the Court adopted in Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 12 WH Cases 2d 1089, 2007 BL 30714 (2007).

WHD has seemingly changed course again, but this time they made it stick. In the Final Rule, WHD explains that the regulations have been interpreted in a manner that contravenes the original intent of the 1974 amendment to expand minimum wage and overtime protections to workers employed in private households. Accordingly, now only individuals receiving these services directly or the individual's family or household may claim the “companionship services” and “live-in domestic service employee” exemptions.

Additionally, WHD made some modifications in the Final Rule to narrow and modernize the definition of “companionship services.” The language now tracks what the WHD perceives to be the original congressional intent of the “companionship services” exemption, which is “elder babysitting” as opposed to work performed by trained professionals such as nurses. “Companionship services” now means providing “fellowship” and “protection” for an elderly person or person with an illness, injury or disability who requires assistance in caring for himself or herself. The term “fellowship” is narrowly defined as “engag[ing] the person in social, physical, and mental activities, such as conversation, reading, games, crafts, or accompanying the person on walks, errands, to appointments, or to social events.” The term “protection” is defined as being “present with the person in his or her home or to accompany the person when outside the home to monitor the person's safety and well-being.” Specifically excluded from the definition of “companionship services” are medically-related services that would typically be performed by trained professionals (e.g., nurses) and general domestic services performed primarily for the benefit of other members of the household. “Companionship services” can include the provision of “care” but only if the care is provided “attendant to and in conjunction with the provision of fellowship and protection and if it does not exceed 20 percent of the total hours worked per person and per workweek.” For example, a provider who helps a consumer bathe and dress each morning, prepares the consumer's meals and assists the consumer with preparing for bed in the evening but does not provide other services is not providing companionship services, as contemplated by the WHD.

In sum, the WHD's position is clear— the vast majority of home care workers, including all those employees working for third-party employers, must be paid the minimum wage for all hours worked and overtime for all hours worked in excess of 40 in a workweek.

Bloomberg BNA:

In AI 2014-1, WHD addressed home care providers in shared living programs. What does the guidance offer in analyzing whether an employment relationship exists a) between a home care provider and consumer or b) between a home care provider and a third party? Do you think the final rule will precipitate new litigation on employee/independent contractor classifications?

Mulherin:

As explained in AI 2014-1, whether an employment relationship exists in shared living situations depends on the particular facts concerning the arrangement between the individual receiving the services and the provider of those services and/or the third party (state or private agency) involved in administering the services. Recognizing the inherent complexity involved in this determination, the AI identified and discussed three types of shared living arrangements: (1) those in which the provider lives in the home of the individual receiving the care/services; (2) those in which the individual lives in the provider's home; and (3) those in which the provider and individual receiving the care move into a new home together.

AI 2014-1 states that whether an employment relationship (or conversely an independent contractor relationship) exists is dependent on multiple considerations, including the degree of control exercised by the individual receiving the services, the relative investment of the parties in the arrangement, the provider's opportunity for profit and loss, the permanency of the relationship, etc. This determination, however, often boils down to figuring out whether the individual or provider is “in charge”—which party determines the provider's schedule and how the provider goes about delivering care.

With regard to the first group, AI 2014-1 contemplates that there is a presumption that an employment relationship exists when a provider moves into the residence of the individual for whom he/she is providing care. From WHD's perspective, when the provider moves in with the individual receiving the care, it is typically the individual who controls the schedules, gives orders to the provider and has invested in the living arrangement. Thus, while WHD recognized that there may be some arrangements where a provider moves in with the individual that do not result in an employment relationship, WHD states that “it will often be the case” that such an employment relationship results.

Conversely, with respect to the second group, WHD recognizes that, in most circumstances, when an individual moves into the home of a health care provider, no employment relationship is created. These types of arrangements are referred to as “adult foster care” arrangements and are often funded in whole or in part by federal and local government agencies. WHD explains that in these types of arrangements, the individual is integrated into the provider's home and is subject to a determination by the provider as to routines and schedules of the house. The provider is, therefore, frequently an independent contractor because he/she exercises control over the situation, as opposed to taking orders from the individual receiving care, and typically makes investments in the living space to provide the care. Of course, if the individual moves in with the provider but controls the relationship, an employment relationship could result. And, because the provider is not living in the individual's home, the in-home domestic service exemption discussed above cannot apply. The employee must be paid the minimum wage and overtime.

The third group, where the provider and consumer move into a new home together, also involves a determination as to which party controls the relationship and residence. Along with the various control factors described above, WHD will consider who located the home, arranged to buy or lease it, furnished the common areas and maintains and pays the rent or mortgage. WHD explains that if a provider moved into the home to become an adult foster care provider, then an employment relationship is unlikely. However, if the individual and provider move in together and the individual has primary control over the residence, then the provider is likely an employee.

Further complicating the issue, WHD asserts that, depending on the facts, an employment relationship may exist between the provider and the individual and/or the provider and a third party, such as a governmental entity or private agency. Indeed, the provider could be an independent contractor for purposes of his/her relationship with the individual but an employee if a third party oversees the arrangement. Generally, the more control and influence a third party has over the provision of care and/or living and working conditions, the more likely it is that the third party is the sole employer or joint employer of the provider. WHD nevertheless recognizes that in most situations where the individual lives in the provider's residence, the relevant third party, often a government agency, has limited oversight over the provider. Thus, a third-party employment relationship would not be created under those facts.

Significantly, if a third party is deemed to be an employer, the third party must pay the provider the minimum wage and overtime for all hours worked in excess of 40 in a workweek. As detailed above, the third party may no longer claim the in-home domestic service exemption or companionship services exemption (even though the individual in a joint employer relationship can claim the exemptions, if applicable).

Bloomberg BNA:

For nonexempt live-in domestic service employees, what constitutes work hours? What might parties do to avoid disputes over on-duty and off-duty time?

Mulherin:

“Hours worked,” as summarized by WHD in AI 2014-1, is “time spent performing tasks for the benefit of the employer or waiting to perform such tasks.” WHD, for example, would consider as compensable work hours all time spent by a home care worker bathing a consumer or time spent waiting at the doctor's office to drive the individual home after an appointment.

Notwithstanding WHD's broad definition of hours worked, WHD recognizes that determining whether an activity engaged in by in-home workers is compensable can be very tricky. Accordingly, consistent with prior guidance, under WHD's Final Rule, employers and live-in domestic service workers can (attempt to) avoid disputes about what constitutes hours worked by entering into “reasonable agreements” that define what specific tasks are part of the employment arrangement. WHD advises these agreements should make very clear what specific activities are not considered work, such as sleep time, meal time and other periods in which the employee is free to make effective use of his/her own time. For example, WHD provides that if the employee is only expected to assist the individual employer in dressing and bathing in the morning and evening, then the agreement should explicitly say so. Otherwise, there could be confusion over, for example, whether time spent by the employee at a friendly dinner or social activity with the individual employer is compensable.

The Final Rule also makes clear if the employee's sleep time, meal periods or other periods of free time are interrupted, the interruption must be counted as hours worked. More generally, a home care employee would have a good argument that he/she is engaged in compensable work for what would otherwise be considered free time if he/she is interrupted so frequently that he/she cannot use his/her time for his/her own benefit. From the defense perspective, some employers have been successful in arguing in litigation that brief interruptions to an employee's free time are de minimis and non-compensable. But the courts have been anything but consistent on the definition of de minimis activities. Stay tuned as the Supreme Court may provide some guidance on the parameters of the de minimis doctrine next term when it considers whether time spent by Amazon employees in security screening at breaks and shift-end is compensable.

Employers should take note that an agreement between the employer and employee is not reasonable if it approximates the number of hours an employee will be required to work even if the agreement is based on the parties' understanding of the requirements of the position and live-in arrangement. If the employee spends more time working than was anticipated, the employee must be paid. In other words, employers cannot use reasonable agreements to improperly limit the number of hours paid.

Bloomberg BNA:

What changes did WHD make to regulatory provisions governing employer's recordkeeping requirements (29 C.F.R. §§ 552.102, .110)? What new obligations does the rule impose?

Mulherin:

Under the Final Rule, employers of nonexempt domestic service workers (including live-in domestic employees) must now maintain an accurate record of hours worked (in addition to keeping a copy of the parties' reasonable agreement). The parties may not simply rely on the agreement above as they could in the past. However, this requirement need not be onerous for employers. As in other employment arrangements, the employer may require the employee to record his or her hours worked and to submit the time records to the employer. Indeed, in the event of a dispute, the employee's record of his/her own work hours is oftentimes the best defense against a minimum wage/overtime lawsuit.

A mild warning for employers—in home-care work arrangements, there will undoubtedly be situations where the employee is working without the employer's knowledge, e.g., because the employer is sleeping. Thus, it is critical that employers require their employees to accurately self-report all actual work hours. In my experience, employers can unnecessarily draw the DOL's and/or plaintiffs' bar's attention by simply assuming that employees are working exactly eight (or some other even number) hours each day in every workweek (i.e., “straight 8s”). If an employee works more than eight hours, the employee must be paid for those hours.

Bloomberg BNA:

WHD delayed the effective date of the Final Rule until Jan. 1, 2015. As employers review existing policies and practices, what steps should they take to ensure FLSA compliance?

Mulherin:

As the Supreme Court recognized in Long Island Care at Home, Ltd. v. Coke, as long as WHD's interpretive guidance does not cause unfair surprise and WHD follows the notice-and-comment rulemaking requirements, the revised regulations will have the force of law. Here, recognizing the significance of the regulatory revisions (and presumably learning from employer challenges to WHD's abrupt change to the exemption status of mortgage loan originators in 2010 (AI 2010-1)), WHD gave employers some time to adjust their policies and practices. (Because many states' laws already provide overtime coverage for in-home care employees, the employers in those states already should have procedures in place.) Those employers that ignore the new rules and continue to treat in-home care workers as exempt after January 1, 2015, will be taking a serious risk that could result in a DOL audit and/or class-action litigation.

Bloomberg BNA:

On Apr. 28, the Senate voted to confirm David Weil as the DOL's WHD administrator. Dr. Weil was the principal investigator on a May 2010 report entitled, “Improving Workplace Conditions through Strategic Enforcement: Report to the Wage and Hour Division Strategic Enforcement.” Based on the recommendations of this report and Dr. Weil's prior experience in academia, what concerns might employers have about the new administrator's enforcement priorities and strategies and about his experience in regulating the business community? What industries are potential targets for increased scrutiny and how might they prepare for audits and compliance issues?

Mulherin:

Mr. Weil is a very well-respected educator and researcher, and employee advocacy groups were very excited about his confirmation. Notwithstanding, I do not expect Mr. Weil's confirmation to result in a significant change in the overall enforcement initiatives of the WHD. WHD has been very aggressive and effective in pursuing wage and hour initiatives on behalf of lower-paid employees and independent contractors for years. I am confident, based on Mr. Weil's philosophy and writings, that the DOL will continue this focus in earnest.

However, based on Mr. Weil's writings, I could see the DOL focusing more of its resources on the specific industries that were identified in Mr. Weil's report as being laden with wage and hour violations, e.g., service (restaurants and hotels), retail, home health care, construction, janitorial businesses, etc. But, frankly, I do not think that any such increased focus would come as a surprise to employers in these industries. The DOL has already collected millions of dollars in back wages from employers in these industries, and those employers have been frequent targets of private class-action litigation for years.

As a general practice, employers in all industries should be conducting periodic internal audits, ideally with the assistance of counsel (lest you lose the attorney/client privilege), to identify whether any policies or practices exist that could subject the employer to a costly DOL audit or class-action lawsuit. Based on the results of these audits, employers should be able to determine what changes, if any, need to be made. Employers should know, however, that while correcting any unlawful policies or practices cuts off future liability, it will not eliminate past liability. Nevertheless, counsel can provide guidance to employers to help them best implement and communicate policy changes to employees.