Employment Law

DOL Proposes Major Overhaul of Overtime Rules

Why it matters

Expanding the scope of employees eligible for overtime, the Department of Labor (DOL) released its long-awaited new rules revising the white collar exemption found in section 13(a)(1) of the Fair Labor Standards Act (FLSA) so that it would allow salaried executive, administrative, and professional workers earning up to $50,440 to be eligible for overtime pay—a huge increase from the current salary of $23,660. The notice of proposed rulemaking (NPRM) would also increase the annual compensation threshold for exempt highly compensated employees from the current $100,000 to $122,148. With the NPRM now open for public comment, the DOL requested input on issues such as the best way to determine annual updates to salary levels going forward and whether to allow commissions to satisfy some portion of the required salary level. In addition to the salary changes, the agency hinted at possible changes to the duties test, querying whether the current duties test of exempt status should be modified, possibly adopting the “California method” requiring that exempt employees spend more than half of their working time on exempt tasks to qualify. An estimated 5 million workers would be impacted by the proposed rules, the DOL said, which would take effect in 2016.

Detailed discussion

In the first change to federal overtime rules since 2004, the Department of Labor (DOL) released a notice of proposed rulemaking (NPRM) titled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” drastically increasing the number of salaried workers eligible for time-and-a-half pay.

The proposed revisions to section 13(a)(1) of the Fair Labor Standards Act’s (FLSA) white collar exemption are long overdue, President Barack Obama wrote in an op-ed announcing the changes. Last March, he signed a memorandum instructing Secretary of Labor Thomas Perez to “modernize and streamline” the regulations.

The FLSA provides that employees who work in excess of 40 hours per week must receive overtime pay of at least 1.5 times their hourly rate unless exempted. Under the current regulations, an employee must be earning at least $455 per week to qualify for the exemption (or $23,660 per year) and must hold a position that falls within the DOL’s classifications of “white collar” jobs, or executive, administrative, and professional positions by meeting the “duties test” for one of the categories.

A separate category of workers known as highly compensated employees may also be exempt from overtime if they both earn more than $100,000 per year (including commissions and nondiscretionary bonuses) and “customarily and regularly” perform the duties of one of the white collar positions, earning at least $455 per week.

The NPRM would greatly expand the number of employees eligible for overtime, estimated by the DOL to be about 5 million, by raising the salary floor as well as possibly tweaking the duties test.

Specifically, the new regulations would more than double the annual floor to $50,440, or $970 per week. The new rules would also provide for regular increases by establishing a mechanism to automatically update the salary and compensation levels going forward.

One open question the DOL requested comment on from stakeholders: whether non-discretionary bonuses and other payments should be part of an exempt employee’s salary in order to meet the new salary level test. Would 10 percent of the salary limit be an appropriate interval for such nondiscretionary compensation, the agency wondered, with the remaining 90 percent paid on a salary or fee basis.

The DOL asked for input on other issues such as what industries commonly have pay arrangements that include nondiscretionary bonuses and incentive payments and what types of employees generally earn them, as well as the types of nondiscretionary compensation employees receive and “to what extent including nondiscretionary bonuses and incentive payments as part of the salary level would advance or hinder that test’s ability to serve as a dividing line between exempt and nonexempt employees.”

The test of employees’ duties was not the subject of any DOL tweaks. Instead, the agency included possible changes to the test in its list of issues open for public comment, noting that employers have advocated for maintaining the current test, established in 2004. A new test could result in “costly litigation,” the agency acknowledged, but said employees have argued that under the current test, they can spend more than 90 percent of their time on nonexempt work.

Do the tests as currently set forth adequately determine whether an employee qualifies as exempt or non-exempt, or do exempt employees currently perform a disproportionate amount of non-exempt work, the DOL asked, inviting “comments on whether adjustments to the duties tests are necessary, particularly in light of the proposed change in the salary level test.”

The agency asked for additional information on possible alternatives to the existing test, such as if employees should be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for the exemption, and if so, what the minimum amount should be, or if the DOL should look to California’s law requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty. Or is a threshold other than half of an employee’s time a better indicator of the realities of the workplace today, the agency asked.

While the department noted that it “is not proposing specific regulatory changes at this time,” the NPRM seeks “additional information on the duties tests for consideration in the final rule,” leaving open the possibility of changes.

Interested parties have until September 4, 2015 to comment on the proposal.

To read President Obama’s op-ed, click here.

To read the DOL’s NPRM, click here.

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Penalties for Incorrect W-2, 1099s Just Doubled

Why it matters

Noncompliance just got more expensive. A provision of the Trade Preferences Extension Act signed into law by President Barack Obama in late June increased the penalties under the Internal Revenue Code Sections 6721 and 6722 for returns and statements filed after December 31, 2015. The penalty provisions for Forms W-2 and 1099 jumped 150 percent: from $100 for a single incorrect return to $250, with the annual cap also doubled to $3 million from $1.5 million. For intentionally failing to file a return, the amount rose from $250 to $500. Of course, because there are two filing requirements for employers—returns must be filed with the Internal Revenue Service pursuant to Section 6721 while Section 6722 applies to returns that must be provided to employees—the actual cost of a single incorrect form will cost an employer $500. Employers should ensure that their filings are on time and accurate or face a steep price.

Detailed discussion

Penalties for incorrect information returns and statements filed with the federal government just got more expensive for employers. The Trade Preferences Extension Act, signed into law by President Barack Obama on June 29, included a provision doubling the applicable penalties.

Employers are required to file a Form W-2 for each employee from whom income, Social Security, or Medicare tax was withheld, as well as provide the form to their employees. Different types of 1099 Forms are required to be filed for each individual to whom the employer has made various distributions or payments.

Information returns or statements required to be filed after December 31, 2015 pursuant to Sections 6721 and 6722 of the Internal Revenue Code (IRC)—or the penalty provisions for Forms W-2 and 1099—now face twice the fine. Previously, the IRC stated that a single incorrect return would cost an employer $100, with an annual cap on all failures set at $1.5 million.

Now a single incorrect return will cost an employer $250, with an annual cap of $3 million. The penalty for intentionally failing to file a form jumped from $250 to $500.

However, these amounts are only half of what an employer could be liable for. For each employee, an employer is responsible for satisfying both Section 6721, by filing the applicable form with the Internal Revenue Service (IRS), as well as Section 6722, by supplying the form to the employee. Just one incorrect W-2 or 1099 could cost $500.

The penalty provisions certainly come into play when filing errors are made but could also cost employers in a settlement with workers. Employers bear the burden of complying with federal filing requirements and should ensure that the applicable forms are correctly filed or face even stiffer penalties (a possibility if additional forms are provided—to the plaintiff’s attorney, for example—increasing the fines yet again).

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Who Is the Primary Beneficiary? Second Circuit Sets Out New Test for Interns Seeking Wages

Why it matters

Interns lost a round in the Second Circuit Court of Appeals when the federal appellate panel reversed class certification and summary judgment in their favor, remanding the suit back to district court. Former interns for Fox Entertainment sued seeking wages and overtime under the Fair Labor Standards Act (FLSA) as well as California and New York state law. In 2013, a federal court judge sided with the interns, certifying a nationwide class and granting summary judgment on the issue of whether or not they were employees. But on appeal, the three-judge panel said the lower court used an incorrect standard. Instead of relying on the “too rigid” six-part test from the Department of Labor (DOL), other factors should have been evaluated to answer the question of whether the intern or the employer was the primary beneficiary of the relationship, the panel wrote. The “non-exhaustive set of considerations” included whether an internship tied into academic coursework, if an intern received academic credit for the position, and whether the internship accommodates academic commitments by corresponding to the school calendar. The new test should prove to be employer-friendly, with additional considerations about the benefits an internship can provide to an intern, as opposed to simply the “immediate advantage” to employers found in the DOL’s six-factor test. The panel also emphasized that “the question of an intern’s employment status is a highly individualized inquiry,” providing beneficial language to employers seeking to avoid class or collective status in a suit brought by a worker.

Detailed discussion

Four different interns who worked for various units of Fox filed a putative class action under California and New York Labor Laws as well as the Fair Labor Standards Act (FLSA). Both sides moved for summary judgment.

A federal court judge dismissed one of the plaintiffs, certified a class of New York interns, and then determined that two of the interns were “employees” covered by the FLSA and state law, with Fox their “employer,” relying upon a six-factor Intern Fact Sheet test from the Department of Labor (DOL).

The interns “worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training,” the court said. “The benefit they may have received—such as knowledge of how a production or accounting office functions or references for future jobs—are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer. They received nothing approximating the education they would receive in an academic setting or vocational school.”

Fox appealed. Before the Second Circuit Court of Appeals, the employer argued that the panel should use a more nuanced “primary beneficiary” test, which would better reflect the economic realities of the relationship between an employer and an intern. The interns countered that the panel should consider interns to be employees whenever the employer receives an “immediate advantage” from the interns’ work.

The DOL also weighed in, defending its six-factor test and asserting its position was entitled to deference. Declining to defer to the DOL or its Fact Sheet, the panel said the six-factor test was “essentially a distillation of facts” from a 1947 U.S. Supreme Court case that didn’t involve interns.

Instead, the court agreed with the employer and adopted the “primary beneficiary” test. “The primary beneficiary test has two salient features,” the panel wrote. “First, it focuses on what the intern receives in exchange for this work. Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.”

The court then listed seven factors, a “non-exhaustive set of considerations” to aid courts in determining whether a worker is an employee for purposes of the FLSA:

“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.”

No one factor is dispositive, the court said, and “every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage.” In addition to weighing and balancing all of the circumstances listed, the panel added that courts “may consider relevant evidence beyond the specified factors in appropriate cases.”

“The approach we adopt also reflects a central feature of the modern internship—the relationship between the internship and the intern’s formal education,” the court wrote. “By focusing on the educational aspects of the internship, our approach better reflects the role of internships in today’s economy than the DOL factors, which were derived from a 68-year-old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.”

Reversing summary judgment in favor of the interns, the court remanded the case for the district court to make a second attempt at considering the plaintiffs’ employment status.

The panel then turned to the district court’s order certifying a nationwide class of interns over a five-year period, which it similarly reversed, despite the plaintiff’s presentation of evidence to show interns were commonly recruited to help with busy periods and displaced paid employees.

“As our previous discussion of the proper test indicates, the question of an intern’s employment status is a highly individualized inquiry,” the court said. “[The plaintiff’s] common evidence will not help to answer whether a given internship was tied to an education program, whether and what type of training the intern received, whether the intern continued to work beyond the primary period of learning, or the many other questions that are relevant to each class member’s case.”

Even if the plaintiffs could establish that Fox had a policy of replacing paid employees with unpaid interns, “it would not necessarily mean that every Fox intern was likely to prevail on her claim that she was an FLSA employee under the primary beneficiary test, the most important issue in each case,” the panel said. “Because the most important question in this litigation cannot be answered with generalized proof,” the court vacated the certification order and remanded the case.

To read the opinion in Glatt v. Fox Searchlight Pictures, Inc., click here.

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Court Stays Case Pending Conciliation Efforts in First Post-Mach Mining Decision

Why it matters

In what is believed to be the first decision interpreting the U.S. Supreme Court’s Mach Mining v. EEOC decision from the most recent term, a federal court judge in Ohio sided with an employer to stay a lawsuit because the EEOC failed in its effort to conciliate prior to filing suit. Earlier this year, the justices ruled that courts may consider the sufficiency of the Equal Employment Opportunity Commission’s (EEOC) conciliation efforts prior to bringing suit against an employer. In the case at hand, the agency filed a complaint alleging violations of the Americans with Disabilities Act (ADA) in August 2013. The employer responded with a motion to dismiss, arguing that the agency did not comply with the pre-suit conciliation requirement. To counter the EEOC’s sworn affidavit attesting to the agency’s efforts, the employer filed its own declaration that the agency presented it with a “take it or leave it” demand and then said conciliation had failed, without engaging in actual negotiations. Given the numerous conflicting facts—and noting that the agency never presented the employer with a dollar amount for a settlement, despite promising to—the court stayed the case and ordered the EEOC to engage in the conciliation process. Importantly for employers looking for guidance in similar cases, the court hewed closely to the language found in Mach Mining and awarded the employer a victory with the chance for a do-over in pre-suit conciliation.

Detailed discussion

The battle over pre-suit conciliation efforts began when a woman filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC) claiming that Mach Mining LLC refused to hire her as a coal miner because of her sex. The agency sent a letter to the employer announcing that it found reasonable cause to believe discrimination had occurred against a class of women who applied for similar jobs and invited the company to participate in “informal methods” of dispute resolution with the complainant.

Roughly one year later, the EEOC sent a second letter, stating that conciliation efforts “have occurred and have been unsuccessful.” The agency then filed suit in Illinois federal court. Mach Mining answered the complaint, arguing that the EEOC had failed to conciliate in good faith. A federal court sided with Mach Mining but the Seventh Circuit Court of Appeals reversed and the U.S. Supreme Court granted certiorari, noting a split among the circuits on the issue of whether courts are permitted to review the agency’s attempts at conciliation.

In June, the justices held that courts may consider the sufficiency of the EEOC’s conciliation efforts prior to bringing suit against an employer. The unanimous Court acknowledged that the federal agency has discretion on “how to conduct conciliation efforts and when to end them,” and emphasized that the review should be “narrow” and not a “deep dive.”

Closely tracking the Mach Mining decision, a federal court in Ohio stayed an EEOC suit because the agency failed to complete its statutorily required pre-suit conciliation efforts.

In that case, the EEOC filed suit in August 2013 against OhioHealth Corporation, alleging the company failed to provide Laura Stone with a reasonable accommodation for her purported disability and then terminated her because of that disability.

OhioHealth responded with a motion for summary judgment in February, arguing that the EEOC had failed to satisfy all conditions precedent to the filing of the action. The agency countered that conciliation efforts took place, while OhioHealth told the court that the EEOC’s efforts did not satisfy its statutory duties.

U.S. District Court Judge Gregory L. Frost agreed.

“It is well settled that in order to satisfy the conciliation condition precedent to suit, the EEOC must perform two basic acts,” he wrote. “First, the EEOC must inform the employer about the specific allegations, as the Commission typically does in a letter announcing its determination of ‘reasonable cause.’ Such notice properly describes both what the employer has done and which employees (or what class of employees) have suffered as a result.”

The parties did not dispute that the EEOC fulfilled the first required act, instead focusing on the second, where “the EEOC must try to engage the employer in some form of discussion (whether written or oral), so as to give the employer an opportunity to remedy the allegedly discriminatory practice.”

In a declaration, an EEOC District Director stated the agency issued a determination finding reasonable cause to OhioHealth on September 15, 2011. The EEOC then “engaged in communications” with the employer to provide it with the opportunity to remedy the discriminatory practices, including sending a conciliation proposal and engaging in telephone conferences regarding a counterproposal and the EEOC’s final offer. The agency then sent a letter on October 14, 2011 stating that conciliation efforts had not been successful.

OhioHealth presented a different perspective. The employer argued the EEOC presented its demand as a “take-it-or-leave-it proposition,” failed to provide information requested by the company, demanded a counteroffer, and then declared the efforts had failed.

Judge Frost was careful to note that he was examining whether the EEOC attempted to confer about the charge and not what happened (such as the statements made or positions taken) during the discussions. The EEOC specifically contended that a final offer was made but OhioHealth specifically denied that a final offer was made.

“[T]his conflict hardly suggests that conciliation efforts were unsuccessful or clear—and it possibly suggests that the EEOC was not even aware of OhioHealth’s position when the EEOC declared that position dispositive of the conciliation effort,” the court wrote. “Or it might even suggest that the EEOC was engaged in the production of bookend letters that failed to reflect a good faith conciliation effort. All of this supports finding the conciliation condition precedent unsatisfied because if the proceedings were for appearances only, then there never was a real attempt to engage in conciliation as the law requires.”

A second reason existed for the court to find the conciliation condition precedent unsatisfied, Judge Frost said. “The EEOC’s determination letter indicated that a commission representative would prepare a dollar amount that includes lost wages and benefits, applicable interest, and any appropriate attorney fees and costs,” the court said. “Nothing that the EEOC has submitted to this Court in its declaration or the attachment indicates that this was ever done.”

“Absent disclosure of this calculation to OhioHealth, the conciliation process could have been nothing but a sham,” the judge said. “The Supreme Court has stated that ‘conference, conciliation, and persuasion’ as used in [Title VII] ‘necessarily involve communication between parties, including the exchange of information and views.’ But an unsupported demand letter such as the one involved here alone cannot logically constitute an attempt to inform and engage in the conciliation process. The bookend letters here, similar to the bookend letters that failed in Mach Mining, ‘do not themselves fulfill the conciliation condition.’ This is not to say that the bookend letters before this Court suggest an insufficient effort at conciliation; rather, the evidence suggests no actual attempt at conciliation.”

As the court concluded the EEOC failed to show that it met the conciliation requirement, it stayed the action for 60 days and ordered the agency to engage in a good faith conciliation effort with OhioHealth.

Judge Frost added “a cautionary notice” as well. He wrote that the EEOC’s counsel represented to the court that it was the agency’s policy that because the EEOC had filed a complaint against OhioHealth, only a public resolution would be possible and that the agency would not reach a private resolution via conciliation.

“This policy or position is of course contrary not only to the purpose of the workplace discrimination statutes upon which the EEOC bases this case, but it is also directly contrary to the holding of Mach Mining,” the court said, where the justices “expressly endorsed” implementing a stay and ordering conciliation efforts when the EEOC has failed to engage in conciliation efforts before filing suit.

Calling the EEOC’s position “ridiculous,” Judge Frost said it “defies the statutory scheme, binding case law, this Court, and common sense. Accordingly, if the EEOC continues down this dangerous path and fails to engage in good faith efforts at conciliation as ordered, this Court will impose any or all consequences available, including but not limited to contempt and dismissal of this action for failure to prosecute.”

To read the opinion and order in EEOC v. OhioHealth Corporation, click here.

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