Employment Law

DOL Reissues Opinion Letters, Adopts ‘Primary Beneficiary’ FLSA Test

Why it matters

Reinforcing a shift in policy, the Department of Labor (DOL) reissued 17 opinion letters on a variety of topics under the Fair Labor Standards Act (FLSA) that had been withdrawn under the Obama administration. Renumbered FLSA 2018-1 through FLSA 2018-17, the letters cover issues ranging from the exempt status of specific job positions in certain industries to whether bonuses or other payments should be included in calculating employees’ regular rates. In other DOL news, the agency announced that going forward it will follow the U.S. Court of Appeals for the Second Circuit’s “primary beneficiary” test to determine whether interns are employees under the FLSA. “The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis,” the DOL said.

Detailed discussion

Under the Obama administration, the Department of Labor (DOL) stopped the practice of issuing opinion letters, which answer specific questions that have been submitted to the agency and provide guidance for employers. Instead, the agency published “Administrator’s Interpretations” on topics such as the line between employees and independent contractors and joint employment, both of which were withdrawn when Alexander Acosta took the helm as Secretary of Labor last year.

Now the Acting Administrator of the Wage and Hour Division (WHD), Bryan L. Jarrett, has reissued some of the opinion letters that were withdrawn in 2009. The agency did not provide an explanation for the resuscitation of the letters, simply stating that it “further analyzed” them and reissued them in verbatim text as “an official statement of the WHD policy and an official ruling for purposes of the Portal-to-Portal Act.”

The letters touch on a host of issues under the Fair Labor Standards Act (FLSA). Renumbered FLSA 2018-1 through FLSA 2018-17, the letters discuss the salary basis test for exempt status (in FLSA 2018-7 and FLSA 2018-14) as well as the exempt status for specific positions such as civilian helicopter pilots (FLSA 2018-3); client service managers of an insurance company (FLSA 2018-8); residential construction project supervisors (FLSA 2018-10 and FLSA 2018-17); and consultants, clinical coordinators and business development managers of a healthcare placement company (FLSA 2018-12).

Other letters cover whether a plumbing repair and service business qualifies as a retail or service establishment exempt from overtime pursuant to Section 7(i) of the FLSA (FLSA 2018-2), when certain bonuses or other payments should be included in calculating employees’ regular rate of pay under Section 7(e) of the statute (FLSA 2018-5, FLSA 2018-9 and FLSA 2018-11) and whether a nonprofit fire company and for-profit company are joint employers of the nonprofit volunteers (FLSA 2018-16).

The same day, the DOL also announced a change in policy with regard to the applicable test for determining whether interns and students are employees under the FLSA. Since April 2010, the agency has applied a six-factor test that must be met before an unpaid intern could be excluded from the pay requirements of the FLSA.

However, in the years since, multiple courts have passed on using the test, most notably the U.S. Court of Appeals for the Second Circuit in a 2016 case involving former interns for Fox Entertainment seeking wages and overtime under the FLSA. In Glatt v. Fox, the federal appellate panel reversed certification of a nationwide class and summary judgment on the issue of whether the interns were employees, expressly rejecting the district court’s use of the DOL’s “too rigid” six-part test.

Instead, the Second Circuit created a “non-exhaustive set of considerations” for courts to weigh when answering the question of whether the intern or the employer was the “primary beneficiary” of the relationship. Factors include whether an internship tied into academic coursework, whether an intern received academic credit for the position and whether the internship accommodates academic commitments by corresponding to the school calendar.

Courts across the country followed suit, using the Second Circuit’s test in lieu of the DOL’s factors. In addition to the Eleventh Circuit, the Ninth Circuit recently eschewed the DOL test in favor of Glatt.

That defection proved the final straw for the DOL, with the agency releasing an amended Fact Sheet #71 to track the primary beneficiary test. “[N]o single factor is determinative,” according to the fact sheet, and “whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

The test consists of seven factors:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Going forward, the DOL will conform to the primary beneficiary test used by the courts, the agency said. “The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.”

To read revised Fact Sheet #71, click here.

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Lack of Individual Claims Dooms PAGA Action

Why it matters

A settlement of individual claims for wage and hour violations put an end to a plaintiff’s Private Attorneys General Act (PAGA) claims, a California appellate panel has affirmed. Justin Kim asserted that Reins International violated the state’s Labor Code by classifying him as exempt from overtime pay as a “training manager” at the defendant’s restaurant. While his PAGA claims were stayed pending arbitration, he settled his individual claims, dismissing them with prejudice. The employer then moved for summary judgment on the PAGA claims, arguing that Kim was no longer an “aggrieved employee” under the statute. The trial court agreed, and the appellate panel affirmed. By accepting the settlement and dismissing his individual claims against the employer with prejudice, Kim had essentially acknowledged that he no longer had any viable Labor Code-based claims against Reins and therefore no longer met the definition of an “aggrieved employee” under PAGA, the court said.

Detailed discussion

As a “training manager” for Reins International, Justin Kim was classified as exempt from overtime requirements. He filed suit, alleging individual and class claims for wage and hour violations and seeking civil penalties on behalf of the state and aggrieved employees pursuant to the Private Attorneys General Act (PAGA).

Based on an arbitration agreement Kim signed when he began working for Reins in 2013, the employer moved to compel arbitration of his individual claims and stay the PAGA cause of action until arbitration was complete. The trial court granted the motion.

While arbitration was pending, Reins served Kim with an offer to compromise under Code of Civil Procedure Section 998. Kim accepted the offer, dismissed his individual claims with prejudice and dismissed the class claims without prejudice. Only the PAGA cause of action remained, and the court lifted the stay and set a date for trial.

The employer then filed a motion for summary judgment, arguing that because the plaintiff dismissed his individual causes of action against Reins, he was no longer an “aggrieved employee” under PAGA and could not maintain the PAGA cause of action.

After the trial court agreed and dismissed the suit, Kim appealed.

The appellate panel began with PAGA’s definition of an “aggrieved employee”: “any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.”

Kim failed to meet this definition, the court said.

“We hold that where an employee has brought both individual claims and a PAGA claim in a single lawsuit, and then settles and dismisses the individual employment causes of action with prejudice, the employee is no longer an ‘aggrieved employee’ as that term is defined in the PAGA, and therefore that particular plaintiff no longer maintains standing under PAGA.”

In order to bring an action under PAGA, an employee must have suffered harm. Pursuant to his allegations, Kim was an aggrieved employee at the time his complaint was filed, the panel wrote. But the statute was not intended to allow an action to be prosecuted by any person who did not have a grievance against his or her employer for Labor Code violations.

“Here, Kim initially asserted that he had been harmed by Reins’s alleged violations of the Labor Code,” the court said. “But by accepting the settlement and dismissing his individual claims against Reins with prejudice, Kim essentially acknowledged that he no longer maintained any viable Labor Code-based claims against Reins. As a result, following the dismissal with prejudice Kim no longer met the definition of ‘aggrieved employee’ under PAGA. Kim therefore did not have standing to maintain a PAGA action against Reins, and Reins’s motion to dismiss was properly granted.”

Kim argued that his dismissal of his Labor Code claims impacted only his PAGA standing and not that of other employees, or the state’s claim. The court agreed, noting that the dismissal did not reflect either the veracity of the PAGA allegations or the ability of any aggrieved employee in a position substantially similar to Kim’s to assert such PAGA claims. However, this did nothing to help the plaintiff’s claim, the court noted.

The plaintiff also told the court that affirming dismissal of the action effectuated a “backdoor PAGA waiver” in contravention of Iskanian v. CLS Transportation by effectively letting Kim’s arbitration agreement waive his right to pursue a PAGA claim.

“We disagree,” the panel wrote. “Kim’s lack of PAGA standing is unrelated to the court’s order to arbitrate the individual claims. … Kim’s acknowledgment that he no longer has any viable Labor Code claims against Reins—not the order relating to arbitrationis the fact that undermines Kim’s standing. The effect of arbitration on PAGA standing is not presented in this case, and we do not decide any such issue here.”

To read the opinion in Kim v. Reins International California, Inc., click here.

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#MeToo: California Considers Ban on Confidentiality Provisions

Why it matters

A California lawmaker has introduced legislation that would prohibit the use of confidentiality provisions in settlement agreements involving sexual assault, harassment or discrimination in the workplace. Sen. Connie M. Leyva (D-Chino), who sponsored the Stand Together Against Non-Disclosures (STAND) Act, said the measure would protect others from being victimized. “As we have clearly seen over the last few months, secret settlements serve one primary purpose: to keep sexual predators away from the public eye and continuing to torment and hurt innocent victims,” she said in a statement. SB 820, backed by the Consumer Attorneys of California and the California Women’s Law Center, would apply to both public and private employers. Related legislation is currently being considered at the federal level, with a bill that would prohibit arbitration agreements in cases involving sexual harassment and the inclusion of a provision in the Tax Cuts and Jobs Act to prohibit deductions for settlements or payments related to sexual harassment or abuse if the payment is subject to a nondisclosure agreement.

Detailed discussion

As the movement to end sexual harassment continues to make headlines, California Sen. Connie Leyva has proposed legislation to ban the use of secret settlements. Pursuant to Senate Bill 820, those accused of sexual assault, harassment or discrimination in the workplace would be prohibited from using a confidentiality provision as part of a settlement agreement.

The Stand Together Against Non-Disclosures (STAND) Act would cover both private and public employers, applying to agreements entered into on or after Jan. 1, 2019, and making them void as a matter of law and against public policy. The proposed legislation would also provide that a court may consider the pleadings and other papers in the record or any other findings of the court in determining the factual foundation of the causes of action.

Many of the high-profile reports of sexual harassment or assault that have come to light in recent months have included the use of such confidentiality agreements, Sen. Leyva noted.

“These perpetrators should not be allowed to endanger others or evade justice simply because they have a fat wallet at their disposal,” the lawmaker said in a statement. “SB 820 will not prevent people from mutually agreeing to settle, but it will simply prevent the perpetrator from requiring the victim to remain silent about the harassment as a condition of settlement. Everyone deserves to live and work free from sexual harassment, assault and discrimination. The STAND Act helps end the curtain of secrecy that has existed for far too long.”

The bill is currently under consideration by the Senate Judiciary Committee.

To read SB 820, click here.

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Employers Not Required to Explain Termination, Eighth Circuit Rules

Why it matters

Employers are not required to provide workers with an articulated basis for dismissal at the time of their termination, the U.S. Court of Appeals for the Eighth Circuit held, nor is the employer bound by the reasons that may have been provided. Rock-Tenn Converting Co. fired Aaron Rooney after his primary client complained of quality control and shipping problems. He was told the reason for his termination was “difficulties with interacting with coworkers and failure to support” the client, but he filed suit under Title VII, claiming that he was really fired for not being female or Jewish, like his supervisor. A district court granted summary judgment for the employer, and the federal appellate panel affirmed. The Eighth Circuit disagreed with Rooney that employers have a legal obligation to articulate nondiscriminatory reasons for an adverse employment action when that action is taken; instead, that burden is triggered under Title VII during litigation when an employee meets his or her burden of establishing a prima facie case of discrimination. Rock-Tenn’s later expansion upon the reasons for the plaintiff’s termination was perfectly legal, the court said.

Detailed discussion

Aaron Rooney was hired in March 2010 as an account executive in Rock-Tenn Converting Co.’s Bentonville, AR, office. Rooney was responsible for developing and selling in-store displays, with the Alcon account as one of his primary responsibilities.

In September 2013, Rooney got a new supervisor. Like his former supervisor, she was dissatisfied with Rooney’s communication skills. She was also concerned when Alcon began complaining about problems with quality control and shipping, and she directed Rooney to focus on Alcon. However, the problems with the Alcon account continued, and Rock-Tenn decided to fire Rooney.

Rooney was told he was fired because of “difficulties with interacting with coworkers and failure to support Alcon.” But he filed suit with a different explanation: that he was discriminated against for not being Jewish and for being a man. He claimed his former supervisor was “building a Jewish empire” that included his most recent supervisor and that he was replaced on the Alcon account by a Jewish employee. He also alleged his new supervisor made several remarks about how she “couldn’t wait until there’s more ladies in the office” and that he was replaced on other accounts by women.

A district court judge granted Rock-Tenn’s motion for summary judgment, and Rooney appealed to the U.S. Court of Appeals for the Eighth Circuit.

Before the federal appellate panel, Rooney argued that the district court erred by allowing the employer to expand on the grounds proffered for his discharge at the time of termination, accepting a “number of reasons” for his firing, primarily poor work performance. But the court rejected this “narrow” interpretation of the McDonnell Douglas framework.

“While it is true that the district court mentioned some of Rooney’s performance issues on accounts other than Alcon, the employer’s burden under the McDonnell Douglas framework to articulate non-discriminatory reasons for an adverse employment action does not arise when the adverse employment action is taken—rather, it is triggered during litigation, when an employee meets his burden of establishing a prima facie case of discrimination,” the court said.

“Title VII does not impose a legal obligation to provide an employee an articulated basis for dismissal at the time of firing, and an employer is certainly not bound as a matter of law to whatever reasons might have been provided. Instead, it is well-established that an employer may elaborate on its explanation for an employment decision.”

Evidence of a “substantial” shift in an employer’s explanation for a decision may be evidence of pretext, but an elaboration is not, the panel added.

Rock-Tenn simply provided additional examples of Rooney’s poor performance with clients other than Alcon. This supplemental explanation was not evidence of a substantial shift, the court said, and “there is no contradiction between the explanation given to Rooney at the time of his termination and the non-discriminatory reasons for termination that Rock-Tenn articulated during this litigation.”

Further, Rooney failed to offer sufficient evidence that Rock-Tenn’s proffered reasons for firing him were pretexts for discrimination. The employer provided multiple examples of Rooney’s failures with regard to the Alcon account, and “[n]othing in Rooney’s argument rebuts, or even mitigates, Rock-Tenn’s evidence of repeated errors and omissions on the Alcon account, and there is nothing in Rooney’s argument to suggest that Rooney was not responsible for the mismanagement.”

The panel was also unclear on how Rooney was affected by any alleged discrimination on the basis of either religion or gender, with the record lacking any evidence that gender bias was connected to his termination or that Jewish employees were treated more favorably.

“In sum, the district court did not err in concluding that Rock-Tenn articulated legitimate, non-discriminatory reasons for firing Rooney, and that he was unable to show the reasons proffered by Rock-Tenn were pretexts for discrimination,” the Eighth Circuit concluded, affirming summary judgment for the employer.

To read the opinion in Rooney v. Rock-Tenn Converting Co., click here.

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California Appellate Court Hikes Burden for FEHA Expert Fees

Why it matters

Employers who win Fair Employment and Housing Act (FEHA) cases in California can be reimbursed for fees and costs—including expert costs—only if they can prove that the plaintiff’s case was frivolous, a California appellate panel recently held. The dispute involved claims for discrimination, harassment and retaliation based on an employee’s membership in the Church of Jesus Christ of Latter-day Saints, as well as nonpayment of wages and whistleblower retaliation. After a five-week trial, the jury returned a verdict in favor of the employer, and the trial court awarded the defendants, as prevailing parties, $54,545.18 in costs, $29,097.50 in expert witness fees and $97,500 in attorney fees. However, the trial court denied the employer’s request for attorney fees with regard to the plaintiff’s FEHA claims, finding that the claims were not frivolous. Both parties appealed, and the appellate panel reversed the $83,642.68 award of costs and expert fees, ruling that the FEHA reimbursement provision found in Section 12965(b) trumped the more general fee-shifting provisions in Section 998(c) of the Code of Civil Procedure. The decision creates a split of authority among the California appellate courts on the issue of FEHA expert witness fees and puts employers on notice of the potential uphill battle to establish that the plaintiff’s claims were frivolous in order to recover costs, attorney fees and even expert witness fees in FEHA cases.

Detailed discussion

J. Brent Arave was the managing director of Merrill Lynch’s Desert Inland Empire Complex and a member of the Church of Jesus Christ of Latter-day Saints. In September 2010, a third party conducted an anonymous employee satisfaction survey on behalf of Merrill Lynch. The results of the survey ultimately led to Arave’s resignation and lawsuit alleging violations of the Fair Employment and Housing Act (FEHA) for discrimination, harassment and retaliation based on his religion, as well as nonpayment of wages and whistleblower retaliation.

The defendants made an offer to compromise under Section 998 for $100,000. Arave did not accept and the case proceeded to summary judgment, where the trial court dismissed some of his claims. A jury found for the defendants on all remaining counts after a five-week trial. The trial court then awarded the defendants, as prevailing parties, $54,545.18 in costs, $29,097.50 in expert witness fees and $97,500 in attorney fees spent on defense of the plaintiff’s wage claims. The court denied the employer’s request for attorney fees on Arave’s FEHA claims, determining that the claims were not frivolous.

Both parties appealed. While the California appellate court upheld the jury verdict and the determination that Arave’s FEHA claims were nonfrivolous, it reversed with regard to the trial court’s award of costs and expert witness fees.

The court began with the denial of attorney fees on Arave’s FEHA claims. Under Section 12965, the defendants were entitled to such fees only if they showed the FEHA claims were objectively without foundation when the plaintiff brought them or if he continued to litigate the claims after it became clear they were objectively without basis, the court explained.

Arave claimed that multiple employees attempted to get him to apologize for his religion, an assertion that all the defendants denied, meaning the plaintiff knew his claim was objectively baseless, Merrill Lynch told the court. But the court disagreed, finding that the evidence was not entirely one-sided and that the jury could have found in Arave’s favor. “That they did not do so does not indicate his claim was frivolous,” the panel wrote.

Turning to ordinary costs and expert witness fees, the appellate panel found the trial court applied the wrong standard in awarding them to the defendants.

A prevailing defendant cannot recover ordinary costs on FEHA claims “unless the court finds the action was objectively without foundation when brought, or the plaintiff continued to litigate after it clearly became so,” the court noted, citing the California Supreme Court decision in Williams v. Chino Valley Independent Fire District.

As the appellate panel affirmed the trial court’s finding that Arave’s FEHA claims were not objectively without foundation, it follows that the “defendants were not entitled to recover ordinary costs incurred in defending Arave’s FEHA claims, so we will reverse the order granting those fees.”

Merrill Lynch may not walk away totally empty-handed, however, as the court noted the holding in Williams does not preclude the defendants from obtaining ordinary costs on Arave’s wage claim. Unable to differentiate those costs on the existing record, the panel remanded the issue to the trial court.

Considering the award of postsettlement offer expert witness fees under Code of Civil Procedure Section 998(c), the appellate panel held that a defendant who prevails on a FEHA claim may recover expert witness fees under Section 12965(b) only when the plaintiff’s case is found to be frivolous.

Section 12965(b) permits the trial court, in its discretion, to “award to the prevailing party reasonable attorney’s fees and costs, including expert witness fees.” Case law has interpreted the FEHA statute to permit prevailing defendants to recover only if they show that the plaintiff’s FEHA claims are frivolous. In 2010, the California Supreme Court established that standard with regard to attorney fees, extending it in 2015 in Williams to ordinary litigation costs.

The appellate panel extended the reach of the frivolous standard even further, this time to expert witness fees, finding that the “plain language” of Section 12965(b) treats expert witness fees as a category of costs. “Though the statute does not say explicitly that expert witness fees sought by prevailing FEHA defendants are subject to the frivolity standard, that is true of requests for attorney fees and ordinary costs as well,” the court said.

Allowing cost shifting without the frivolous standard could discourage even potentially meritorious suits by plaintiffs with limited financial resources, the panel noted. “Expert witness fees, which can run much higher than ordinary costs, raise precisely the same concerns, and we see no basis in the statute, our case law, or public policy for treating them differently,” the court said.

This conclusion did not end the inquiry, however, as the court still needed to decide whether Section 998(c) overrides this limitation in situations where one party has made and the other party has rejected a settlement before trial.

“There is a conflict between Section 998(c) and Section 12965(b) as applied in this case,” the appellate panel wrote. “Section 12965(b) precludes the trial court from exercising its discretion to award defendants expert witness fees because plaintiff’s FEHA claims were not frivolous. However, Section 998(c) purports to authorize the trial court to exercise its discretion and award defendants at least a portion of their expert witness fees because they offered to settle for an amount greater than the verdict. We resolve the conflict in favor of the FEHA provision, which the Legislature enacted as part of a comprehensive statutory scheme designed to encourage victims of discrimination in employment or housing to seek relief.”

Because Section 12965(b) provides for the award of attorney fees, ordinary costs and expert witness fees in FEHA actions in a way that conflicts with the generally applicable provisions for such awards, the court held that the later, more specific FEHA provisions control.

Nothing in Section 998(c) warrants treating expert fee costs as a special case, the court said, and a trial court may consider whether the plaintiff rejected a reasonable settlement offer in deciding whether to award expert witness fees in a case where the defendant prevailed after trial against a frivolous FEHA claim.

The panel recognized its decision created a split among the California appellate courts but found the contrary authority not to be persuasive, as “we believe allowing Section 998(c) expert fee awards to defendants who are not entitled to expert witness fees under Section 12965(b) impermissibly undermines the effectiveness of FEHA.”

“Prospective plaintiffs with meritorious claims trying to decide whether to attempt to vindicate their rights would not be able to predict their exposure,” the court wrote. “Any attorney advising a prospective plaintiff would have to acknowledge they may lose even a very strong suit and end up being compelled to pay defendant tens of thousands of dollars in expert witness fees. Indeed, if we accepted defendants’ position, our decision would be an object lesson for all future FEHA plaintiffs on the risks of bringing colorable discrimination claims.”

The panel reversed the order awarding $29,097.50 in expert witness fees and $54,545.18 in ordinary costs (with some of this award potentially still available as applied to the plaintiff’s wage claims on remand).

To read the opinion in Arave v. Merrill Lynch, click here.

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