Will Overtime Rule Mean Less or More Litigation?

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By Ben Penn and Chris Opfer

June 24 — The Labor Department expects its overtime rule to reduce private claims, but attorneys on both sides of the wage-and-hour bar say the effect on litigation is tough to forecast.

Will the rule reverse the past decade's surge in overtime cases brought under the Fair Labor Standards Act? Seth Harris, a former Obama administration deputy labor secretary, told Bloomberg BNA: “I think that there are vectors pointing in different directions.”

Harris and other observers agree with top DOL officials that the rule will lessen employees' need to sue for unpaid time-and-a-half wages. By doubling the salary threshold below which workers are automatically eligible for overtime pay, the regulation is seen as creating certainty for employers in many cases about who is owed overtime. The new cutoff is $47,476, effective Dec. 1.

Wage and hour practitioners, however, say that other variables, such as publicity about the overtime rule, potentially unlawful reclassification strategies or other moves to reduce payroll costs, could lead to new employees stepping forward with FLSA lawsuits.

Now that the DOL and stakeholder groups are actively conducting outreach to educate the public about the rule changes, workers are much more aware of the issue than they might have been 18 months or two years ago, said Harris, who practices law at Dentons in Washington and teaches at Cornell University.

“I suspect that there are a larger number of people who are now asking themselves, ‘Well should I be getting overtime? Am I truly exempt or should I be treated differently?'—regardless if it’s the new rule that does it,” he said.

No Need for Duties Test

Courts continue to grapple with the question of whether workers are misclassified as overtime-exempt based on the FLSA's duties test, under revised rules issued in 2004.

The ambiguity of this test, which requires workers to perform specified executive and professional tasks to meet the exemption, is widely credited for increasing the FLSA court caseload.

Workers in overtime cases face inconsistent judicial interpretations of how much time they must spend on particular tasks to become overtime-eligible under the duties test. This has been seen especially in the retail and hospitality industries, two sectors whose workers the administration is singling out as benefiting from the rule.

The new rule, while not adjusting the duties test, does remove its applicability for millions of employees newly protected by the salary-basis test.

“If someone's paid less than” $47,476 per year, “it doesn't matter if they're the CEO of the company—they're not exempt,” Eric Magnus, a principal at management firm Jackson Lewis P.C. in Atlanta, told Bloomberg BNA. “It's a lot easier to prove that than to bicker around with opposing counsel,” he said.

The department estimates that more than doubling the salary threshold will make 4.2 million additional employees eligible for time-and-a-half their normal pay when they work more than 40 hours per week. The number of affected employees grows when those currently misclassified as exempt based on the duties standard are counted.

“I’m optimistic that over the course of time you’ll see less litigation from the private bar because when you have more clarity and you have a rule that is more fair and consistent with the letter and spirit of the FLSA, you have more compliance and less litigation,” Labor Secretary Thomas Perez told reporters when announcing the final rule May 17. “In the long-run, plaintiffs’ lawyers may not be happy because there are less cases to take.”

Less or More Litigation?

Perez's prediction comes amid a soaring number of private FLSA lawsuits in recent years. A November 2015 report from management law firm Seyfarth Shaw LLP found that federal courts saw 8,781 FLSA lawsuits filed in fiscal year 2015, a 7.6 percent increase from the prior year and a 450 percent boost over the previous 15 years.

Attorneys billing employer and employee clients by the hour have benefited from this trend. Some of them project that the caseload will continue to swell regardless of the overtime rule's new clarity.

“I think” the rise in wage-and-hour filings each year is “going to continue, if not significantly increase even more as a result of the new rules,” Michael Schmidt, vice chair of the labor and employment department at Cozen O'Connor in New York, told Bloomberg BNA.

Schmidt cited a few areas that could create more plaintiffs' claims during the transition to the rule changes—employers giving raises above $47,476 to keep workers exempt but without ensuring they perform the requisite job duties; off-the-clock cases in which workers feel pressured to work extra hours despite having their official schedule capped at 40 hours; and a smarter workforce with a greater likelihood to be informed about wage and hour laws.

No Outreach to Mom-and-Pops

The DOL's prediction that private enforcement will decline is contingent on broad outreach to ensure that all employers understand the revisions to the overtime exemptions. Employers will always be attempting to control labor costs. And no matter how simple the rule is to understand, not all employers will necessarily learn about it.

The administration's “analysis assumes that the Department of Labor is advising every private employer in America about how to comply,” said Jackson Lewis's Magnus, who teaches wage and hour law at the University of Virginia law school. “That is the furthest thing from what's going to happen,” he said.

It will be the mom-and-pop owners of a restaurant or retail store who are less likely to hear from the DOL or receive legal counsel, Magnus said.

Unlike lengthy FLSA cases with uncertain outcomes that are based on the duties test, the new overtime rule “creates an obvious group of potentially misclassified people,” he said. “Yes, there will be more claims, but I don't see a lot of protracted litigation because there's no gray area; you're either screwing it up or you're not.”

FLSA Highest Growth Area

Samuel Estreicher, a labor and employment law professor at New York University, told Bloomberg BNA there are factors aside from the 2004 revised overtime regulations that sparked the uptick in FLSA claims in recent years.

“I think the plaintiffs' bar has figured out a way of commodifying this litigation, and they've gotten the courts to be very receptive,” said Estreicher, who directs NYU's Center for Labor and Employment Law.

Estreicher said he considers wage and hour and sexual harassment litigation the nation's two biggest growth areas in employment law.

Focus on Hours Worked

A number of lawyers who represent workers in wage and hour cases told Bloomberg BNA they expect to see the focus shift from classification to whether or not workers are being paid for all their hours on the job.

Rachel Bien is a partner at Outten & Golden in New York, who in 2012 helped secure a $4.5 million settlement for marketing workers claiming that Amerigroup Corp. misclassified them as exempt from overtime requirements under the FLSA. Bien said she’s already seeing some businesses reclassify their workers as eligible for overtime pay under the new rule.

“I think we’ll see more off-the-clock claims, where basically even if you’re overtime-eligible, the company sends the message that overtime is really not permissible,” Bien said.

Several plaintiffs attorneys said employers may try to scrimp on overtime in a number of different ways. That includes capping hours and pressuring supervisors into refusing to sign off on hours after the fact.

Michael Hancock, previously a senior attorney in the DOL’s Wage and Hour Division and now of counsel at Cohen Milstein Sellers & Toll in Washington, said those types of cases may become more common if employers start responding to the regulation by switching salaried workers to hourly positions.

“When exempt salaried are converted to hourly, it’s often the case that those types of mistakes are being made,” Hancock said.

Daniel M. Hutchinson, a partner at Lieff Cabraser Heimann & Bernstein, told Bloomberg BNA he isn’t convinced the new rule will actually cut down on overtime litigation.

“Our hope is always that we will be put out of business and that no one winds up violating that law and we don’t have to bring litigation,” Hutchinson said. “My expectation is that there will be more litigation because there will be more people covered by the law and that usually means more people claiming that they’re not being paid properly.”

To contact the reporters on this story: Ben Penn in Washington at bpenn@bna.com and Chris Opfer in Washington at copfer@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

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