Management Attorneys Discuss Trends in DOL Enforcement, Defense Tactics and New Overtime Rules

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In a November 2016 interview, Isabel Crosby and Jayde Ashford Brown suggest defense litigation strategies and examine hot wage-hour topics, including intern-employee classification, independent contractor status, class-action waivers in arbitration agreements and the Labor Department’s new overtime rule slated to take effect Dec. 1.

PDF version of report Isabel CrosbyJayde Ashford Brown

Isabel Crosby & Jayde Ashford Brown (interviewed by Katherine C. Parris)

Bloomberg BNA:

Certain industries have experienced increased scrutiny as the Labor Department continues to emphasize enforcement of wage-hour laws. Wells Fargo is one company being investigated by the Department.

In addition to this agency investigation, Wells Fargo employees have filed a class action in Mirza v. Wells Fargo N.A., D.N.J., No. 2:16-cv-07381, complaint filed 10/17/16, alleging violations of federal and state wage laws.

What link, if any, is there between enforcement efforts by federal, state and local agencies and the increasing number of wage-hour cases filed in the courts?

Crosby and Ashford Brown:

We’re seeing an uptick in both DOL investigations and wage and hour litigation. There is almost certainly a link between the two. In fact, according to a recent study that compared wage and hour settlement data to investigation data from the DOL, researchers found that nearly 60 percent of the companies with a wage and hour settlement in the context of litigation between 2007 and 2015 also had been investigated by the department.

The increased scrutiny from both federal agencies and plaintiffs’ attorneys coupled with, in many cases, high dollar recoveries likely has had the impact of creating a more educated workforce that’s much more likely to seek enforcement of federal and state wage and hour laws.

Employers should regularly conduct internal audits with inside or outside legal counsel to ensure that workers are properly classified and properly paid and that all applicable wage laws are being followed. Such audits not only have the impact of reducing investigations and lawsuits but also can provide a good defense to minimize potential damages if litigation arises.

Bloomberg BNA:

At times, defense attorneys may seek to remove wage-hour class actions to federal court. What are some strategic reasons for removal? For remaining in state court?

Crosby and Ashford Brown:

Every case should be individually reviewed, as there’s no one-size-fits-all strategy for wage and hour litigation. However, we commonly advise clients to remove wage and hour cases to federal court if possible because federal judges typically have greater judicial resources and enhanced experience with wage and hour issues and the intricacies of managing complex class or collective actions.

In considering removal, it’s important to consider not only the judge to whom the case is assigned but also judicial precedent in the state versus federal court, which might ultimately have an impact on a merits-based decision.

Bloomberg BNA:

In Morris v. Ernst & Young, No. 13-16599, the Ninth Circuit in a 2-1 decision adopted the National Labor Relations Board’s position that the National Labor Relations Act precludes class-action waivers in employment arbitration agreements.

There is currently a circuit split on this issue. The Ninth Circuit’s Morris ruling was similar to the Seventh Circuit’s decision in Lewis v. Epic Systems, No. 15-02997. On the other hand, the Fifth Circuit in D.R. Horton Inc. v. National Labor Relations Board , No. 12-60031, rejected the NLRB’s position, as did the Second and Eighth circuits.

What impact may these cases have on defense litigation in general?

Crosby and Ashford Brown:

The Morris and Lewis decisions likely will have a significant impact on defense litigation. Because employers in the judicial districts of the Ninth and Seventh circuits no longer will have the cushion of class-action waivers, litigation may very well increase.

Employers with multi-state operations now will be required to adhere to differing standards, which likely will require implementation of new policies and practices. It also may lead to more individualized employment agreements for workers in different jurisdictions, such that defense attorneys have one more argument to contest certification motions.

The Morris decision symbolized a victory for the NLRB in its battle against class-action waivers. It’s no secret that since the D.R. Horton case, the board hasn’t relented in its efforts to strike down arbitration agreements that prevent employees from filing class-action claims. We can expect the Morris decision to further propel the NLRB’s attempts to strike down arbitration agreements containing class-action waivers in other circuits.

Bloomberg BNA:

Do you anticipate the Supreme Court will take up this issue?

Crosby and Ashford Brown:

The circuit split caused by Lewis v. Epic Systems was notable enough to spark talk of Supreme Court review, and the Ninth Circuit’s Morris ruling increases this pressure significantly.

The Supreme Court has repeatedly enforced class-action waivers under the Federal Arbitration Act. However, despite that fact, the board continues to take the position that such waivers violate the NLRA. The issue seems right for Supreme Court review.

Bloomberg BNA:

California state courts aren’t bound by the Ninth Circuit’s decision. Rather, they’re bound by Iskanian v. CLS Transportation, No. S204032 (Cal. 2012).

Do defense attorneys employ different litigation strategies in state and federal courts in light of this? If so, how do the approaches differ?

Based on Morris, do you think employers in the Ninth Circuit might reconsider removing actions to federal court?

Crosby and Ashford Brown:

The California Supreme Court’s decision in Iskanian v. CLS Transportation rejected arguments previously made by the board and upheld the use of class-action waivers in employment arbitration agreements.

Because the decision is binding on California state courts, defense attorneys will have a greater likelihood of success in defending class-action waivers at the state level. Accordingly, defense attorneys litigating within the Ninth Circuit will have to balance these interests in determining whether to remove litigation to federal court.

Bloomberg BNA:

In Wang v. Hearst Corp., S.D.N.Y., 1:12-cv-00793 (S.D.N.Y. Feb. 2012), the district court applied the Second Circuit’s intern-employee test to claims under the FLSA and New York wage law, finding that interns working for Hearst Corporation weren’t “employees” within the meaning of federal and state law.

Does this decision provide new guidance to litigators defending intern claims?

Crosby and Ashford Brown:

The U.S. District Court for the Southern District of New York’s recent decision in Wang was a natural progression of the new guidance articulated by the Second Circuit last fall in Glatt v. Fox Searchlight Pictures Inc., Nos. 13-4478 & 134481 (2d Cir. 2015). In Glatt the Second Circuit departed from the DOL’s six-factor intern test, adopting a more flexible seven-factor “primary beneficiary” test for determining whether interns must be paid for work they perform.

Wang applied the Second Circuit’s test, considering whether the “tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer’s operation.” In its individualized inquiry, the district court considered the individual circumstances applicable to each of the six named plaintiffs.

Ultimately the court reached the same conclusion with respect to each plaintiff, i.e., that they weren’t employees. But its detailed factual inquiry will prove useful for defense attorneys who seek to defeat conditional certification with respect to interns’ claims. Application of the new test suggests that internships must be scrutinized on an individualized basis, such that class treatment may be inappropriate.

In addition to the above, the Wang court extended the “primary beneficiary” test adopted in Glatt to include not only claims under the FLSA but also claims asserted pursuant to New York state wage laws.

Bloomberg BNA:

Do you believe other courts will adopt this test or a similar one?

Crosby and Ashford Brown:

Two district courts in the Seventh Circuit have followed Glatt and have adopted the “primary beneficiary” test. In a recent decision, the Eleventh Circuit also agreed with the Second Circuit’s observation that the DOL’s six-factor test is too “rigid” for the modern-day educational internship, instead adopting the “primary beneficiary” test ( Schumann v. Collier Anesthesia, P.A., No. 14-13169 (11th Cir. 2015)).

The modified test is intended to address the changing demands of higher education, which often require students to perform work in exchange for college credit, as well as the increased expectations many companies have for a workforce with more practical, hands-on knowledge and experience.

Based on these public policy considerations, we believe courts are likely to continue to weigh the practicalities of both tests and may modify precedent by either adopting the “primary beneficiary” test or a modified version of that test.

Bloomberg BNA:

The New York Department of Labor recently decided that two former Uber drivers classified as independent contractors were entitled to unemployment benefits from the transportation technology company.

What are your thoughts on this decision? What impact, if any, could this decision have in the context of wage-hour litigation?

Crosby and Ashford Brown:

Independent contractor classifications are seeing increased scrutiny across the country. That’s particularly the case since the DOL issued its guidance in the summer of 2015 stating that most independent contractors are actually employees.

Although the New York Department of Labor’s decision is limited to the workers’ eligibility to unemployment payments, worker advocates now have additional ammunition to add to their growing artilleries in arguing that the same logic should be extended to others who are labeled as independent contractors.

Such a result could lead to liability for employers with respect to overtime pay and/or minimum wage payments, in addition to a host of other potential liabilities including tax penalties and liability for failure to extend coverage pursuant to the Affordable Care Act, to name just a few.

Bloomberg BNA:

What are some other noteworthy FLSA litigation developments?

Crosby and Ashford Brown:

The DOL’s regulations related to the FLSA white-collar exemptions, as revised under the final rule issued in May 2016, are scheduled to take effect Dec. 1, 2016. The new rule provides a new salary test for the current overtime exemption threshold and increase the threshold for the highly-compensated employee exemption. Many employers have been steadily preparing by auditing their pay practices for compliance with the new requirements.

Although we’re on the eve of the compliance deadline, some states and employers are continuing to resist compliance. On Sept. 20, 2016, more than 50 business groups and 21 states filed suit in the Eastern District of Texas seeking injunctive relief to halt enforcement of the new rule.

The litigants contend that the DOL is exceeding its congressional delegation of authority with respect to the salary basis test, the highly-compensated employee exemption level and indexing. The petition also alleges that the new rules are being imposed without proper observance of the Administrative Procedure Act.

We’re closely watching this litigation and expect that the court may issue at least a preliminary finding prior to the Thanksgiving holiday. It further remains to be seen what, if anything, president-elect Donald Trump and the Republican majority might do to roll back the Obama administration’s executive orders and other rulemaking applicable to federal wage laws.

[Editor's Note: Following this interview on Nov. 22, 2016, Judge Amos Mazzant in the U.S. District Court for the Eastern District of Texas barred the department from implementing the new overtime rule, granting a nationwide injunction to block the rule before it went into effect ( Nevada v. DOL, E.D. Tex., No. 4:16-cv-00731, motion granted 11/22/16).]

Bloomberg BNA:

What wage-hour trends are gaining momentum on both the state and federal levels?

Crosby and Ashford Brown:

We’re seeing a trend with local action to increase minimum wage at the state (and sometimes municipal) levels throughout the country. Some of these increases are as high as 60 percent, and the new legislation will benefit an estimated more than two million workers across the country. Employers with multi-state operations must be vigilant about tracking such legislation to ensure workers are properly compensated at their various locations.

We’re also seeing many employers proactively increasing the salary levels of many employees in order to comply with the new federal overtime rules discussed above. For example, in order to avoid the complexities of reclassifying employees, some employers are simply raising salary minimums in order to bring employees to the proper salary exemption level and avoid making overtime payments.

It’s important, however, to ensure that such employees meet not only the salary basis test to qualify for an exemption but also the applicable duties tests.

Isabel Crosby is a partner at Andrews Kurth Kenyon’s Dallas office. She advises and advocates for employers at all stages of the employment relationship and when litigation arises. Ms. Crosby has a national practice, appearing in both state and federal courts and in administrative actions before state and federal agencies. She’s a frequent speaker and author on various employment law topics, including the Fair Labor Standards Act. Ms. Crosby also has been recognized as a Texas Rising Star by Texas Monthly magazine since 2014.
Jayde Ashford Brown is an associate at Andrews Kurth Kenyon’s Dallas office. She represents employers in labor and employment matters arising under federal and state law, including the FLSA, American Disabilities Act, Family and Medical Leave Act, Age Discrimination in Employment Act, Title VII and the Texas Labor Code. In addition to litigating, she counsels clients on best practices related to employment policies, employee classifications and compliance with various federal and state employment laws.

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