Employment Law

In This Issue


D.C. Circuit Flips DOL’s Flip-Flop On Mortgage Loan Officers

Mortgage loan officers may qualify for the administrative exemption from the overtime wage provisions of the Fair Labor Standards Act, the D.C. Circuit Court of Appeals held July 2, striking down a 2010 Administrator’s Interpretation from the Department of Labor.

The court’s opinion reverses a reversal by the DOL, which had been challenged by the Mortgage Bankers Association. In 2006 the agency issued an opinion letter that determined that mortgage loan officers “with archetypal job duties” qualified for the administrative exemption of the FLSA. The employees at issue typically assist prospective borrowers in identifying and then applying for various mortgage offerings.

But just four years later DOL Deputy Administrator Nancy J. Leppink issued an Administrator’s Interpretation – the first ever from the agency – taking the opposite position: “‘employees who perform the typical job duties’ of the hypothetical mortgage loan officer ‘do not qualify as bona fide administrative employees,’” she declared.

Representing more than 2,200 real estate finance companies with more than 280,000 employees nationwide, the Mortgage Bankers Association filed suit against the DOL, arguing that the Administrator’s Interpretation had not been promulgated through the notice and comment rulemaking procedure as required by the Administrative Procedure Act. A federal district court judge disagreed, granting summary judgment for the agency.

But on appeal the D.C. Circuit reversed and vacated the Administrator’s Opinion. Quoting prior precedent, the three-judge panel said that when “an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish [under the APA] without notice and comment.”

The DOL argued that the mortgage loan officers had not demonstrated “substantial and justifiable” reliance upon the 2010 position and, therefore, failed to plead a required prong of the statutory analysis.

Not so, said the three-judge panel. Plaintiffs must establish only two elements: definitive interpretations and a significant change. “[T]here is no discrete reliance element. Reliance is just one part of the definitiveness calculus,” the court wrote, acknowledging that the formula “is more art than science. Courts must weigh the role reliance plays on a case-by-case basis to ascertain its value.”

Because the DOL conceded at oral argument the existence of two definitive – and conflicting – agency interpretations and the new position was clearly a significant change, the court’s decision was made easier.

Reversing the district court’s order dismissing the Mortgage Banker Association’s motion for summary judgment, the court vacated the 2010 Administrator’s Interpretation.

“If the DOL wishes to readopt the later-in-time interpretation, it is free to do so,” the panel added. “We take no position on the merits of their interpretation. DOL must, however, conduct the required notice and comment rulemaking.”

To read the decision in Mortgage Bankers Assoc. v. Harris, click here

Why it matters: A clear victory for the Mortgage Bankers Association – and mortgage loan officers – the D.C. Circuit’s decision is beneficial to employers in one regard: it clarifies the official position of the DOL with regard to the administrative exemption for such employees, which currently is its 2006 opinion letter that classified them as exempt. It also sets a clear standard to be applied when agencies decide to change an official position, making a quick change of heart harder to do. As the panel noted, however, the DOL is free to switch gears on the matter if it follows the required notice and comment rulemaking procedure. As a result, this ruling will not likely be the last word on this issue.

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N.Y.’s Highest Court Takes On Starbucks’ Tip-Pooling Policy

In a pair of suits challenging Starbucks’ tip-pooling policy, New York’s highest court sided with the coffee chain.

Each week the tips collected in jars near registers at the hundreds of Starbucks stores in the state are distributed between baristas and shift supervisors based upon the number of hours worked. Two other categories of employees – assistant store managers and store managers – are excluded from the pool.

Starbucks employees in New York filed suit over the policy in two different cases. First, a group of baristas argued that shift supervisors should not be allowed to share in tips; in the second, assistant store managers argued they should be included in the tip pool. A federal court judge ruled for Starbucks in both cases. On appeal the 2nd U.S. Circuit Court of Appeals certified question of state law to the New York Court of Appeals.

The federal appellate court sought guidance interpreting Labor Law §196-d, which states: “No employer or his agent or an officer or agent of any corporation, or any other person shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charge purported to be a gratuity for an employee. … Nothing in this subdivision shall be construed as affecting the … sharing of tips by a waiter with a busboy or similar employee.”

The baristas argued that shift supervisors are “agents” of Starbucks because under the statute any supervisory responsibility – however slight – renders an employee an agent and ineligible to participate in a tip pool. Meanwhile, the assistant store managers contended they were not “agents” and that only those with “full” managerial authority, like the ability to hire and fire, constituted agents. Starbucks disagreed with both groups.

Relying heavily on the New York State Department of Labor’s interpretation of the statute, the court upheld Starbucks’ policy. Duties, not titles, should determine an employee’s eligibility to participate in a tip pool, according to the state DOL.

“[T]he DOL has consistently and, in our view, reasonably, maintained that employees who regularly provide direct service to patrons remain tip-pool eligible even if they exercise a limited degree of supervisory capacity,” the court wrote. Even the slightest degree of supervisory responsibility does not automatically disqualify an employee from sharing in tips under §196-d, the court told the baristas. Reliance upon a similar Massachusetts case was displaced, they added, because the statute interpreted for those baristas contained a categorical prohibition against tip-splitting.

As for the assistant store managers, their level of responsibility was enough to kick them out of the pool, even without full or final authority to hire or terminate. “[W]e believe that there comes a point at which the degree of managerial responsibility becomes so substantial that the individual can no longer fairly be characterized as an employee similar to general wait staff within the meaning of Labor Law §196-d,” the court said. “We conclude that the line should be drawn at meaningful or significant authority or control over subordinates.”

Examples of “meaningful authority” include input in the creation of employee work schedules, assistance in performance evaluations, or participation in the process of hiring or terminating employees.

“In sum, an employee whose personal service to patrons is a principal or regular part of his or her duties may participate in an employer-mandated tip allocation arrangement under Labor Law §196-d, even if that employee possesses limited supervisory responsibilities,” the court concluded. “But an employee granted meaningful authority or control over subordinates can no longer be considered similar to waiters and busboys within the meaning of section 196-d and, consequently, is not eligible to participate in a tip pool. We leave it to the federal courts to apply these principles” in the [barista] and [assistant store manager] cases.”

To read the decision in Barenboim v. Starbucks, click here

Why it matters: Having interpreted the New York Labor Law in accord with the coffee chain’s position, the court declined to take a firm position on whether an employer may deny tip-pool distributions to an employee who is nevertheless eligible to split tips under Labor Law §196-d. While the federal district court answered the question in the affirmative, New York’s highest court said it generally agreed but left “open the possibility that there may be an outer limit to an employer’s ability to excise certain classifications of employees from a tip pool.” Because Starbucks’ policy did not violate the statute, however, the court declined to resolve such a hypothetical scenario – leaving an unanswered question for a later date. As to the court’s interpretation of the statute, the “meaningful authority standard” established should provide guidance to employers attempting to craft valid tip policies under state law.

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What To Take From The Supreme Court This Term: All Arbitration, All The Time

Continuing its recent love affair with arbitration, the U.S. Supreme Court issued two decisions at the end of its term further embracing parties’ ability to contract on the issue.

In a unanimous decision, the justices held in Oxford Health v. Sutter that an arbitrator’s interpretation of an arbitration agreement to allow class arbitration did not “exceed his powers” under §10(a)(4) of the Federal Arbitration Act, upholding an award for the plaintiffs.

On appeal from the 3rd U.S. Circuit Court of Appeals, the Oxford case involved an arbitration agreement between a managed care plan and member physicians. One of the doctors filed a putative class action suit against the plan charging that it failed to make full and prompt payments. A trial court ordered the case to arbitration.

Under the agreement between the parties, arbitration was required of all claims and prohibited any court “civil action concerning any dispute.” But the agreement failed to address the issue of classwide arbitration.

The parties agreed to allow the arbitrator to decide whether class arbitration was authorized by the parties’ agreement. The arbitrator found it was and subsequently issued an award for the plaintiff. In the interim the U.S. Supreme Court decided Stolt-Nielsen v. Animal Feeds International Corp., where the justices held that if the parties consent to class arbitration, it is permitted by the FAA. Pointing to Stolt-Nielsen and arguing the parties hadn’t truly consented to the classwide decision, the health plan appealed to the 3rd Circuit, which affirmed the arbitrator’s decision.

Emphasizing the limited judicial review allowed by the FAA over an arbitrator’s ruling, the Court said it essentially lacked the authority to review the issue.

Or, as Justice Elena Kagan wrote, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”

The arbitrator “did what the parties had asked: He considered their contract and decided whether it reflected an agreement to permit class proceedings,” wrote Justice Kagan. “That suffices to show that the arbitrator did not ‘exceed [his] powers.’ …

“So long as the arbitrator was ‘arguably construing’ the contract – which this one was – a court may not correct his mistakes under §10(a)(4). The potential for those mistakes is the price of agreeing to arbitration,” Justice Kagan noted.

The Court continued its pro-arbitration trend just ten days later with American Express Co. v. Italian Colors Restaurant, where the justices declined to invalidate a contractual waiver of class arbitration under the “effective vindication” doctrine. Even though it would be cost-prohibitive for the plaintiffs to bring their claims on an individual basis, the 5-3 Court stuck with a strict contract interpretation.

The case began with a group of merchants alleging that American Express violated the Sherman Act by forcing them to accept credit cards at rates 30 percent higher than the fees for competing cards. The company moved to compel individual arbitration pursuant to the agreement between the parties, but the plaintiff objected.

The antitrust allegations at issue required complex evidentiary proof involving expensive expert testimony, which the merchants estimated could cost up to $1 million per arbitration. The potential statutory recovery for a victorious plaintiff: $38,549 at most. Facing a losing battle, the plaintiffs said their contractual waiver of classwide arbitration should be thrown out.

The 2nd U.S. Circuit Court of Appeals sided with the merchants, relying upon the doctrine of “effective vindication” to render the class action waiver unenforceable.

But the justices reversed.

“Respondents argue that requiring them to litigate their claims individually – as they contracted to do – would contravene the policies of the antitrust laws,” wrote Justice Antonin Scalia for the majority. “But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”

The Court refused to apply the “effective vindication doctrine,” which it characterized as a “judge-made exception to the FAA” intended to prevent a prospective waiver of “a party’s right to pursue statutory remedies.” The doctrine would help plaintiffs facing exorbitant filing and administrative fees attached to arbitration that would make access to the forum impossible, Justice Scalia suggested. “But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

“The class-action waiver merely limits arbitration to the two contracting parties. It no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938,” the Court concluded.

To which Justice Kagan – joined in her dissent by Justices Ruth Bader Ginsburg and Stephen Breyer – replied with “the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.”

She cautioned that the decision will allow arbitration clauses to “chok[e] off a plaintiff’s ability to enforce congressionally created rights.”

To read the decision in Oxford Health Plans v. Sutter, click here.

To read the decision in American Express Co. v. Italian Colors Restaurant, click here

Why it matters: Although the American Express case was decided in the context of antitrust litigation, the decision is likely a boon for employers. Under the Court’s reasoning, an employer can prohibit classwide arbitration as part of an employment agreement, effectively shutting the door on employment class actions. Employers seeking to limit class proceedings should broadly define the term “class action” in the arbitration agreement to include Fair Labor Standards Act collective action to avoid any attempts by employees to circumvent the prohibition. While the American Express decision will have a more significant impact, together with the Oxford opinion, the takeaway for lawyers is the Court’s enthusiasm for – and likelihood of upholding – arbitration agreements. The Oxford case did leave one open question for future litigation over arbitration, however. Under the FAA, parties to an arbitration agreement must consent to classwide proceedings. But what constitutes consent? The parties in Oxford agreed to let the arbitrator decide and the agreement itself was silent on whether class-action arbitration was allowed, so the issue remains unclear. One hint was provided by a concurring opinion authored by Justice Samuel Alito and joined by Justice Scalia, which seemed to suggest that silence on the issue does not equate to consent. “If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred [a]n implicit agreement to authorize class action arbitration,” Justice Alito wrote. A key takeaway is that it is critical to be clear in the agreement and not leave the issue open for interpretation.

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NLRB: Non-Disparagement, Confidentiality Clauses Invalid

Both the confidentiality and non-disparagement provisions of an employment agreement required by Quicken Loans are unlawful under the National Labor Relations Act, the National Labor Relations Board recently held.

Detroit-based Quicken required all of its mortgage bankers to sign an employment agreement, two provisions of which were addressed by the Board. Under the “Non-disparagement” section, the brokers were not allowed to “publicly criticize, ridicule, disparage or defame the Company or its products, services, policies, directors, officers, shareholders, or employees, with or through any written or oral statement or image.”

The “Proprietary/Confidential Information” section contained a laundry list of items – including “all personnel lists, rosters, personal information of co-workers” as well as handbooks, personnel files, personnel information such as home phone numbers, cell phone numbers, addresses, and e-mail addresses – employees agreed to hold and maintain “in the strictest of confidence” and not “disclose, reveal or expose.”

Phoenix broker Lydia Garza resigned her position after five years of employment and received a letter in the mail from Quicken reminding her of the “continuing obligations” she had agreed to in her employment contract, particularly the two provisions at issue. Garza responded with an unfair labor charge with the NLRB, alleging that her former employer maintained overly broad and discriminatory rules in violation of Section 8(a)(1) of the NLRA.

An administrative law judge agreed, finding that the employment agreement unlawfully restricted Quicken’s mortgage brokers from exercising their Section 7 rights. Referring to the Proprietary/Confidential Information provision, he noted that by “complying with these restrictions, employees would not be permitted to discuss with others, including their fellow employees or union representatives, the wages and other benefits that they receive, the names, wages, benefits, addresses or telephone numbers of other employees.”

“There can be no doubt that these restrictions would substantially hinder employees in the exercise of their Section 7 rights,” he concluded.

Turning to the Non-disparagement section, the ALJ found that a “reasonable employee could conclude that the prohibitions contained in the agreement” would restrict his or her rights to criticize the employer and its products, which employees are allowed to do within certain limits.

The Board affirmed the ALJ, recommending that Quicken rescind the entire Non-disparagement provision. As for the Proprietary/Confidential section, the Board also agreed the provision should be rescinded, but took a moment to frown upon Quicken’s broad definition of such information. “The Board has found that rules prohibiting employees from disclosing this type of information about employees violate Section 8(a)(1) of the Act,” it noted.

The Board ordered the company to reprint corrected versions of the agreement, but allowed it to save on expenses by using a handbook insert for existing employees until a new version of the agreement is printed, as well as to post notice about employees’ rights under the NLRA.

To read the Board’s decision in Quicken Loans, click here.

Why it matters: As demonstrated by the Quicken Loans decision, the Board continues its aggressive efforts on behalf of employees by casting a critical eye on all employer documents – not just handbooks and policy statements, but employment agreements as well. Whether reviewing courts will uphold the Board’s decision remains to be seen. In the meantime, employers would be well served to review all of their documents to determine whether they are compliant with recent Board rulings, particularly with an eye toward crafting a confidentiality policy within the permissible scope of Section 8 of the NLRA.


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