The Top FLSA Litigation Issues of 2016—Part I

Secretary of Labor Thomas Perez

For more than a decade, courts across the country have seen an explosion in the number of claims filed under the Fair Labor Standards Act. The volume of recent filings—especially in the collective action context—continues to raise complex considerations for regulators, courts and practitioners.

In a recent Bloomberg BNA webinar, Louis Pechman of the Pechman Law Group discussed this year’s top FLSA litigation issues with U.S. Magistrate Judge Steven M. Gold, Outten & Golden’s Jahan Sagafi and Colin Dougherty of Fox Rothschild LLP. 

My coverage will describe the panel’s detailed discussion in two blog posts. Part I covers recent case law developments on class-action waivers in arbitration agreements, the flurry of activity in response to the Labor Department’s updated white collar regulations and increased enforcement efforts related to independent contractor misclassifications and joint employer liability.

Part II will address strategies for navigating Rule 68 offers of judgment and the Tyson Foods decision. Judge Gold offers practitioners valuable insights on drafting effective FLSA pleadings and smoothing the settlement approval process. 

DOL Focus on Independent Contractor Misclassifications

According to Dougherty, the misclassification of employees as independent contractors “is one of the issues that is exploding and will continue to grow” due to the DOL’s aggressive misclassification initiative. He notes that 37 states have entered into formal memoranda of understanding in partnership with the DOL to tackle misclassification. 

“In no uncertain terms, the Federal DOL’s position is that it’s the rare exception that a 1099 is properly classified and that they are seeking out [violators]—for a number of reasons—not the least of which is the tax benefit that the government will receive if the classification is changed,” Dougherty said.

For this reason, defense counsel is seeing increased litigation and client contact on this issue. Dougherty noted that the initiative is causing everyone to get serious and to do a “deep-dive” reexamination of their policies. Companies are starting to realize that a prior lack of government scrutiny isn’t a defense—employers are on the hook and must be able to properly prove 1099 status.

“For the company, the implications of misclassification can be huge—unpaid back taxes, unpaid overtime, unpaid minimum wages, liquidated damages, attorney’s fees and even injunctive relief,” Dougherty said.

Sagafi added that industries historically reliant on independent contractors as a significant portion of their workforce face particular scrutiny from both the government and the plaintiffs’ bar.

Although the analysis may change slightly between the federal circuits, Dougherty said that courts generally are using the economic realities test described in a DOL memorandum.

In reviewing economic reality factors, it’s important to look at how plaintiffs have treated their income and expenses for tax purposes, Judge Gold added. It may be probative to the analysis, for example, if they have taken deductions consistent with independent contractor status but are making allegations that they are employees. 

“The fact that tax treatment may not ultimately be dispositive doesn’t mean that it’s irrelevant,” he said.

Increasing Scrutiny of Joint Employment Relationships

Often intertwined with the independent contractor issue are questions of joint employment. According to Sagafi, union lobbying over frustrations with the “tempification” of work forces in tech support, fast-food franchises and staffing companies has finally achieved traction with the Obama administration and the DOL. 

“Perma-temps” loaned out to clients for long periods of time can easily become employees of the client company as well as the formal employer, Sagafi said. Dougherty agreed that the concept of the “fissured workplace” has gained traction, with staffing and operations entities getting rolled up to include the highest corporate entities in the pyramid. 

Adding these entities provides plaintiffs with additional avenues for discovery and access to the deepest pockets and may even trigger indemnification obligations from defense clients. According to Doherty, this trend “puts an affirmative obligation on companies to review and to be sure that what’s happening under their flag is proper.”

Pechman noted an increase in cases where a franchisor “mothership” is brought in because of its role in controlling franchisees. For those on the management side, the world is getting much scarier for the franchisor-franchisee relationship. On the one hand, you want control, but the more control exhibited feeds further into the joint employer issue, he said.

Although cases against larger corporations get more press, Judge Gold said the majority of cases in the courts are brought against smaller businesses such as family owned restaurants, car washes and supermarkets. 

The decision to add individual owners and managers as defendants may increase the judgment-worthiness of a case where the business itself doesn’t have significant assets. However, Judge Gold warned that adding such defendants can have a significant impact on the “temperature” of litigation where long term personal and family relationships are intermingled with a case.

Class Waivers in Arbitration Agreements on Shaky Ground

According to Sagafi, another key development this year is that the NLRA’s “concerted activities” argument against class-action waivers in arbitration agreements has suddenly achieved traction in the circuit courts.

He cautioned, however, that not all circuits are in agreement. “There is a clear circuit split, and these cases are clearly going to the Supreme Court.”

“This is illustrative of how the tide is turning on arbitration,” Sagafi said. He noted that the election will have a huge impact and pointed to analysis suggesting that Judge Garland—if nominated to the Supreme Court—would probably vote with the liberal justices on these issues. The question remains, however, whether such a Supreme Court would fully adopt the Seventh Circuit’s substantive right argument or take a middle-ground approach similar to that used in the Ninth Circuit.

Dougherty is advising management clients to vet the pros and cons of arbitration agreements but to be firm in whatever decision they make. Though arbitration may be cheaper and faster, agreements may not always be enforceable. Even if they are, he notes that employers likely are losing the right of appeal. 

DOL White Collar Regs and the “New Normal”

The DOL recently published a final rule revising regulations implementing the FLSA's white-collar exemptions, raising the overtime exemption salary thresholds and rendering millions of employees newly eligible for overtime. 

Dougherty said that the new regulations are “causing clients to really scramble, examine, and drive to review whether people can be exempt from overtime. It’s having a trickle-down effect on a number of different issues.” Barring a dramatic shift in the composition of the government, “this looks like our new normal.”

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