5th Cir.: Restaurant Cannot Take Tip Credit Where Retained Portion of Tips to Offset Credit Card Processing Costs in Excess of Its Direct Costs of Collecting Credit Card Tips

Steele v. Leasing Enterprises, Limited

This case was before the Fifth Circuit on the parties’ cross-appeals.  As discussed here, the case concerned an employer’s ability to withhold a percentage of an employee’s tips received by credit card to offset the fees associated with collecting credit card tips under the Fair Labor Standards Act (“FLSA”).  Specifically, the issue was whether the 3.25% that the defendant-restaurant admittedly retained of all credit card tips exceeded its actual costs of processing same, such that the employer forfeited any entitlement to take the tip credit with regard to its tipped employees.  The district court held that the defendant was not entitled to take the tip credit because this deduction exceeded the direct costs of collecting credit card tips for Perry’s’ tipped employees.  The Fifth Circuit affirmed the finding and held that the retention of tips in excess of the actual cost of collecting those tips violated 29 U.S.C. § 203(m).  As such, the employer was not entitled to benefit from the tip credit and was instead required to pay all tipped employees the regular minimum wage for all hours worked.

Describing the relevant facts, the court explained:

Instead of paying servers their charged tips through their bi-weekly pay checks, Perry’s chose to pay its servers their charged tips in cash on a daily basis. Perry’s voluntarily started this practice in response to servers’ requests. In order to pay its servers their charged tips in cash on a daily basis, Perry’s arranged for armored vehicles to deliver cash to each of its restaurants three times per week. Perry’s’ Chief Operating Officer testified that such frequent deliveries were necessary due to security concerns associated with keeping a large amount of cash on its premises.

In August 2009, Plaintiffs initiated this collective action. In their third amended complaint, they alleged that Perry’s had violated the FLSA by charging its servers the 3.25% offset fee. On August 31, 2010, the district court entered a partial interlocutory judgment, holding that Perry’s may offset credit card issuer fees, but not other costs associated with computers, labor, or cash delivery…

Following a bench trial, the district court issued findings of fact and conclusions of law, holding that Perry’s’ 3.25% offset violated the FLSA because the offset exceeded Perry’s’ credit card issuer fees. The court also held that Perry’s’ cash-delivery expenses could not be included in the offset amount because “[t]he restaurant’s decision to pay it[s] servers in cash is a business decision, not a fee directly attributable to its cost of dealing in credit” and that Perry’s had failed to prove fees related to cancellation of transactions and manual entry of credit card numbers, and therefore could not rely on these amounts to justify the amount of its offset. Finally, the court held that Perry’s may not include other expenses, such as costs associated with bookkeeping and reconciliation of cash tips, in the offset amount because those costs are incurred as a result of ordinary operations only indirectly related to Perry’s’ tip policy. The court concluded that even if it included all of Perry’s’ indirect costs, the 3.25% offset fee exceeded Perry’s’ total costs.

After discussing the law regarding the tip credit generally, the Fifth Circuit framed the issue before it as follows:

In this case we must determine whether an employer may offset employees’ tips that a customer charges on a credit card to recover the costs associated with collecting credit card tips without violating § 203(m)’s requirement that the employee retains all the tips that the employee receives. Specifically, we must determine if the employer violates that requirement when it offsets credit tips to recover costs that exceed the direct fees charged by the credit card companies. Perry’s contends that it may offset both credit card issuer fees and its own cash-delivery expenses and still claim a tip credit under 29 U.S.C. § 203(m). Plaintiffs assert that Perry’s may offset only an amount no greater than the total amount of credit card issuer fees.

The court then discussed the only prior circuit court decision to discuss this issue at length, and relevant DOL regulations and guidance:

Both parties rely on the only circuit court decision to address this issue, Myers v. Copper Cellar Corp., 192 F.3d 546 (6th Cir. 1999). In Myers, the employer deducted a fixed 3% service charge from employee tips whenever a customer tipped by credit card to account for the discount rate charged by credit card issuers. Id. at 552. Because the employer always deducted a fixed percentage, the deduction sometimes rose above or fell below the fee charged on a particular transaction. Id. at 553. The employees challenged this deduction, arguing that any withholding of tips violates § 203(m). The Sixth Circuit disagreed, holding that “an employer may subtract a sum from an employee’s charged gratuity which reasonably compensates it for its outlays sustained in clearing that tip, without surrendering its section 203(m) [tip credit].” Id. The Sixth Circuit determined that an employee does not “receive” a charged tip under § 203(m) until the “debited obligation [is] converted into cash.” Id. The court noted that this conversion is predicated on the “payment of a handling fee to the credit card issuer.” Id. at 554.

To reach that conclusion, the Sixth Circuit relied on 29 C.F.R. §§ 531.52 and 531.53. Section 531.52 defines tip as “a sum presented by a customer as a gift or gratuity in recognition of some service performed for him.” Section 531.53 further clarifies that tips include “amounts transferred by the employer to the employee pursuant to directions from credit customers who designate amounts to be added to their bills as tips.” The Sixth Circuit held that these two regulations make it clear “that a charged gratuity becomes a ‘tip’ only after the employer has liquidated it and transferred the proceeds to the tipped employee; prior to that transfer, the employer has an obvious legal right to deduct the cost of converting the credited tip to cash.” Myers, 192 F.3d at 554. The court noted that “payment of a handling fee to the credit card issuer” is “required” for that liquidation. Id. at 553–54.

As recognized by the Sixth Circuit, the Department of Labor has long interpreted its regulations to permit employers to deduct credit card issuer fees. U.S. Dept. of Labor Field Operations Handbook § 30d05(a) (Dec. 9, 1988).  In Myers, the Sixth Circuit added that such a deduction is allowed under the statute even if, as a consequence, some deductions will exceed the expense actually incurred in collecting the subject gratuity, as long as the employer proves by a preponderance of the evidence that, in the aggregate, the amounts collected from its employees, over a definable time period, have reasonably reimbursed it for no more than its total expenditures associated with credit card tip collections.

Myers, 192 F.3d at 554. Following Myers, the Department of Labor amended its position to allow employers to deduct an average offset for credit card issuer fees as long as “the employer reduces the amount of credit card tips paid to the employee by an amount no greater than the amount charged to the employer by the credit card company.” See U.S. Dept. of Labor Wage and Hour Division Opinion Letter FLSA2006-1.5 The parties do not contest that an employer may deduct a fixed composite amount from credit card tips, so long as that composite does not exceed the total expenditures on credit card issuer fees, and still maintain a tip credit. We agree. Credit card fees are a compulsory cost of collecting credit card tips. As a result, an employer may offset credit card tips for credit card issuer fees and still satisfy the requirements of § 203(m).  However, our inquiry does not end with this holding.

Applying the law to the facts at bar, the court concluded that the employer’s 3.25% chargeback was an impermissible offset, because here the defendant-employer was seeking an offset for costs above and beyond their actual direct cost of collecting credit card tips.  In so doing, the Fifth Circuit like the court below rejected the employer’s argument that it should be entitled to build its indirect costs of processing the credit card tips (that it voluntarily incurred based on its business decision) in addition to the direct cost of processing the credit card tips.  The court reasoned:

Perry’s concedes that its 3.25% offset always exceeded the total credit card issuer fees, including swipe fees, charge backs, void fees, and manual-entry fees. Perry’s submitted demonstrative exhibits which showed that the total offset for each restaurant exceeded all credit card issuer fees by at least $7,500 a year, and by as much as $39,000 in 2012. As a result, Perry’s argues that an employer may also deduct an average of additional expenditures associated with credit card tips and still maintain a tip credit under § 203(m). Although Perry’s justified its 3.25% offset based on a number of other expenses before the district court, Perry’s now maintains that credit card issuer fees and its cash-delivery expenses alone justify the 3.25% offset. In support, Perry’s shows that on an aggregate basis (and across all restaurants), Perry’s’ expenses for collecting and distributing credit card tips to cash—including both credit card issuer fees and expenses for cash-delivery services—always exceeded the offset amount. We must determine whether deducting additional amounts for cash-delivery services violates § 203’s requirement that the employee must keep all of his or her tips.

A Perry’s corporate executive testified that it made a “business decision” to receive cash deliveries three times a week in order to cash out servers’ tips each day and to decrease security concerns associated with keeping too much cash in the register. Importantly, this executive testified that it was only necessary to cash out servers each night because of employee demand, and that if it instead transferred the tips to the servers in their bi-weekly pay checks, the extra cash deliveries would not be necessary. The district court found that Perry’s’ cash-delivery system was “a business decision, not a fee directly attributable to its cost of dealing in credit.” We agree.

In Myers, the Sixth Circuit allowed the employer to offset tips to cover reasonable reimbursement for costs “associated with credit card tip collections” and highlighted that credit card fees were “required” to transfer credit to cash.9 192 F.3d at 554–55 (emphasis added). That court emphasized that the employer’s deductions were acceptable because “[t]he liquidation of the restaurant patron’s paper debt to the table server required the predicate payment of a handling fee to the credit card issuer.” Id. at 553–54. The Department of Labor incorporated a reading of Myers in an opinion letter:

The employer’s deduction from tips for the cost imposed by the credit card company reflects a charge by an entity outside the relationship of employer and tipped employee. However, it is the Wage and Hour Division’s position that the other costs that [an employer] wishes the tipped employees to bear must be considered the normal administrative costs of [the employer’s] restaurant operations. For example, time spent by servers processing credit card sales represents an activity that generates revenue for the restaurant, not an activity primarily associated with collecting tips.

U.S. Dept. of Labor Wage and Hour Division Opinion Letter FLSA2006-1. While it is unnecessary to opine whether any costs, other than the fees charged directly by a credit card company, associated with collecting credit card tips can ever be deducted by an employer, we conclude that an employer only has a legal right to deduct those costs that are required to make such a collection.

Perry’s made two internal business decisions that were not required to collect credit card tips: (1) Perry’s responded to its employees’ demand to be tipped out in cash each night, instead of transferring their tips in their bi-weekly pay checks, and (2) Perry’s elected to have cash delivered three times a week to address security concerns.11 Unlike credit card issuer fees, which every employer accepting credit card tips must pay, the cost of cash delivery three times a week is an indirect and discretionary cost associated with accepting credit card tips. As the district court noted, this cash delivery was “a business decision, not a fee directly attributable to its cost of dealing in credit.” Moreover, Perry’s deducted an amount that exceeded these total costs—credit card issuer fees and cash-delivery expenses—in nine of the relevant restaurant-years.

Thus, the court concluded that:

Allowing Perry’s to offset employees’ tips to cover discretionary costs of cash delivery would conflict with § 203(m)’s requirement that “all tips received by such employee have been retained by the employee” for employers to maintain a statutory tip credit. Perry’s has not pointed to any additional expenses that are the direct and unavoidable consequence of accepting credit card tips. Because Perry’s offset always exceeded the direct costs required to convert credit card tips to cash, as contemplated in § 203(m) and interpreted by the Sixth Circuit, we hold that Perry’s’ 3.25% offset violated § 203(m) of the FLSA, and therefore Perry’s must be divested of its statutory tip credit for the relevant time period.

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4th Cir.: Strippers Are Employees NOT Independent Contractors; Trial Court Properly Applied the Economic Reality Test

McFeeley v. Jackson Street Entertainment, LLC

In this case, multiple exotic dancers sued their dance clubs for failure to comply with the Fair Labor Standards Act and corresponding Maryland wage and hour laws. The district court held that plaintiffs were employees of the defendant companies and not independent contractors as the clubs contended. Following a damages-only trial and judgment on behalf of the dancers, the Defendant-clubs appealed the court’s finding that the dancers were employees and not independent contractors.  The Fourth Circuit held that the court properly captured the economic reality of the relationship here, and thus affirmed the judgment.

The Fourth Circuit summarized the salient facts regarding the dancers’ relationship with the defendant-clubs as follows:

Anyone wishing to dance at either club was required to fill out a form and perform an audition. Defendants asked all hired dancers to sign agreements titled “Space/Lease Rental Agreement of Business Space” that explicitly categorized dancers as independent contractors. The clubs began using these agreements after being sued in 2011 by dancers who claimed, as plaintiffs do here, to have been employees rather than independent contractors. Defendant Offiah thereafter consulted an attorney, who drafted the agreement containing the “independent contractor” language.

Plaintiffs’ duties at Fuego and Extasy primarily involved dancing on stage and in certain other areas of the two clubs. At no point did the clubs pay the dancers an hourly wage or any other form of compensation. Rather, plaintiffs’ compensation was limited to performance fees and tips received directly from patrons. The clubs also collected a “tip-in” fee from everyone who entered either dance club, patrons and dancers alike. The dancers and clubs dispute other aspects of their working relationship, including work schedules and policies.

After discussing the traditional elements of the economic reality test, the Fourth Circuit discussed each element and concluded that, overall, they supported the district court’s holding that the dancers were employees and not independent contractors.

Here, as in so many FLSA disputes, plaintiffs and defendants offer competing narratives of their working relationship. The exotic dancers claim that all aspects of their work at Fuego and Extasy were closely regulated by defendants, from their hours to their earnings to their workplace conduct. The clubs, not surprisingly, portray the dancers as free agents that came and went as they pleased and used the clubs as nothing but a rented space in which to perform. The dueling depictions serve to remind us that the employee/independentcontractor distinction is not a bright line but a spectrum, and that courts must struggle with matters of degree rather than issue categorical pronouncements.

Based on the totality of the circumstances presented here, the relationship between plaintiffs and defendants falls on the employee side of the spectrum. Even given that we must view the facts in the light most favorable to defendants, see Ctr. for Individual Freedom, Inc. v. Tennant, 706 F.3d 270, 279 (4th Cir. 2013), we cannot accept defendants’ contrary characterization, which cherry-picks a few facts that supposedly tilt in their favor and downplays the weightier and more numerous factors indicative of an employment relationship. Most critical on the facts of this case is the first factor of the “economic realities” test: the degree of control that the putative employer has over the manner in which the work is performed.

The clubs insist they had very little control over the dancers. Plaintiffs were allegedly free in the clubs’ view to determine their own work schedules, how and when they performed, and whether they danced at clubs other than Fuego and Extasy. But the relaxed working relationship represented by defendants—the kind that perhaps every worker dreams about—finds little support in the record.

To the contrary, plaintiffs described and the district court found the following plain manifestations of defendants’ control over the dancers:

  • Dancers were required to sign in upon arriving at the club and to pay the “tip-in” or entrance fee required of both dancers and patrons.

  • The clubs dictated each dancer’s work schedule. As plaintiff Danielle Everett testified, “I ended up having a set schedule once I started at Fuego’s. Tuesdays and Thursdays there, and Mondays, Wednesdays, Fridays, and Saturdays at Extasy.” J.A. 578 (Everett’s deposition). This was typical of the deposition testimony submitted in the summary judgment record.

  • The clubs imposed written guidelines that all dancers had to obey during working hours. J.A. 769-77 (clubs’ rulebook). These rules went into considerable detail, banning drinking while working, smoking in the clubs’ bathroom, and loitering in the parking lot after business hours. They prohibited dancers from leaving the club and returning later in the night. Dancers were required to wear dance shoes at all times and could not bring family or friends to the clubs during working hours. Violations of the clubs’ guidelines carried penalties such as suspension or dismissal. Although the defendants claimed not to enforce the rules, as the district court put it, “[a]n employer’s ‘potential power’ to enforce its rules and manage dancers’ conduct is a form of control.” J.A. 997 (quoting Hart v. Rick’s Cabaret Int’l, Inc., 967 F.Supp.2d 901, 918 (S.D.N.Y. 2013)).

  • The clubs set the fees that dancers were supposed to charge patrons for private dances and dictated how tips and fees were handled. The guidelines explicitly state: “[D]o not [overcharge] our customers. If you do, you will be kicked out of the club.” J.A. 771.

  • Defendants personally instructed dancers on their behavior and conduct at work. For example, one manager stated that he “ ‘coached’ dancers whom he believed did not have the right attitude or were not behaving properly.” J.A. 997.

  • Defendants managed the clubs’ atmosphere and clientele by making all decisions regarding advertising, hours of operation, and the types of food and beverages sold, as well as handling lighting and music for the dancers. Id.

Reviewing the above factual circumstances into account the Fourth Circuit held that the district court was correct to conclude that the dancers were employees of the clubs under the FLSA and not independent contractors.  The Court reasoned:

Taking the above circumstances into account, the district court found that the clubs’ “significant control” over how plaintiffs performed their work bore little resemblance to the latitude normally afforded to independent contractors. J.A. 997. We agree. The many ways in which defendants directed the dancers rose to the level of control that an employer would typically exercise over an employee. To conclude otherwise would unduly downgrade the factor of employer control and exclude workers that the FLSA was designed to embrace.

None of this is to suggest that a worker automatically becomes an employee covered by the FLSA the moment a company exercises any control over him. After all, a company that engages an independent contractor seeks to exert some control, whether expressed orally or in writing, over the performance of the contractor’s duties and over his conduct on the company’s premises. It is rather hard to imagine a party contracting for needed services with an insouciant “Do whatever you want, wherever you want, and however you please.” A company that leases space or otherwise invites independent contractors onto its property might at a minimum wish to prohibit smoking and littering or to set the hours of use in order to keep the premises in good shape. Such conditions, along with the terms of performance and compensation, are part and parcel of bargaining between parties whose independent contractual status is not in dispute.

If any sign of control or any restriction on use of space could convert an independent contractor into an employee, there would soon be nothing left of the former category. Workers and managers alike might sorely miss the flexibility and freedom that independent-contractor status confers. But the degree of control the clubs exercised here over all aspects of the individual dancers’ work and of the clubs’ operation argues in favor of an employment relationship. Each of the other five factors of the “economic realities” test is either neutral or leads us in the same direction.

Two of those factors relate logically to one other: “the worker’s opportunities for profit or loss dependent on his managerial skill” and “the worker’s investment in equipment or material, or his employment of other workers.” Schultz, 466 F.3d at 305. The relevance of these two factors is intuitive. The more the worker’s earnings depend on his own managerial capacity rather than the company’s, and the more he is personally invested in the capital and labor of the enterprise, the less the worker is “economically dependent on the business” and the more he is “in business for himself” and hence an independent contractor. Id. at 304 (quoting Henderson v. Inter-Chem Coal Co., Inc., 41 F.3d 567, 570 (10th Cir. 1994)).

The clubs attempt to capitalize on these two factors by highlighting that dancers relied on their own skill and ability to attract clients. They further contend that dancers sold tickets for entrance to the two clubs, distributed promotional flyers, and put their own photos on the flyers. As the district court noted, however, “[t]his argument—that dancers can ‘hustle’ to increase their profits—has been almost universally rejected.” J.A. 999 (collecting cases). It is natural for an employee to do his part in drumming up business for his employer, especially if the employee’s earnings depend on it. An obvious example might be a salesperson in a retail store who works hard at drawing foot traffic into the store. The skill that the employee exercises in that context is not managerial but simply good salesmanship.

Here, the lion’s share of the managerial skill and investment normally expected of employers came from the defendants. The district court found that the clubs’ managers “controlled the stream of clientele that appeared at the clubs by setting the clubs’ hours, coordinating and paying for all advertising, and managing the atmosphere within the clubs.” J.A. 1001. They “ultimately controlled a key determinant—pricing—affecting [p]laintiffs’ ability to make a profit.” Id. In terms of investment, defendants paid “rent for both clubs; the clubs’ bills such as water and electric; business liability insurance; and for radio and print advertising,” as well as wages for all non-performing staff. Id. at 1002. The dancers’ investment was limited to their own apparel and, on occasion, food and decorations they brought to the clubs. Id. at 1002-03.

On balance then, plaintiffs’ opportunities for profit or loss depended far more on defendants’ management and decision-making than on their own, and defendants’ investment in the clubs’ operation far exceeded the plaintiffs’. These two factors thus fail to tip the scales in favor of classifying the dancers as independent contractors.

As with the control factor, however, neither of these two elements should be overstated. Those who engage independent contractorsare often themselves companies or small businesses with employees of their own. Therefore, they have most likely invested in the labor and capital necessary to operate the business, taken on overhead costs, and exercised their managerial skill in ways that affect the opportunities for profit of their workers. Those fundamental components of running a company, however, hardly render anyone with whom the company transacts business an “employee” under the FLSA. The focus, as suggested by the wording of these two factors, should remain on the worker’s contribution to managerial decision-making and investment relative to the company’s. In this case, the ratio of managerial skill and operational support tilts too heavily towards the clubs to support an independent-contractor classification for the dancers.

The final three factors are more peripheral to the dispute here and will be discussed only briefly: the degree of skill required for the work; the permanence of the working relationship; and the degree to which the services rendered are an integral part of the putative employer’s business. As to the degree of skill required, the clubs conceded that they did not require dancers to have prior dancing experience. The district court properly found that “the minimal degree of skill required for exotic dancing at these clubs” supported anemployee classification. J.A. 1003-04. Moreover, even the skill displayed by the most accomplished dancers in a ballet company would hardly by itself be sufficient to denote an independent contractor designation.

As to the permanence of the working relationship, courts have generally accorded this factor little weight in challenges brought by exotic dancers given the inherently “itinerant” nature of their work. J.A. 1004-05; see also Harrell v. Diamond A Entm’t, Inc., 992 F.Supp. 1343, 1352 (M.D. Fla. 1997). In this case, defendants and plaintiffs had “an at-will arrangement that could be terminated by either party at any time.” J.A. 1005. Because this type of agreement could characterize either an employee or an independent contractor depending on the other circumstances of the working relationship, we agree with the district court that this temporal element does not affect the outcome here.

Finally, as to the importance of the services rendered to the company’s business, even the clubs had to concede the point that an “exotic dance club could [not] function, much less be profitable, without exotic dancers.” Secretary of Labor’s Amicus Br. in Supp. of Appellees 24. Indeed, “the exotic dancers were the only source of entertainment for customers …. especially considering that neither club served alcohol or food.” J.A. 1006. Considering all six factors together, particularly the defendants’ high degree of control over the dancers, the totality of circumstances speak clearly to an employer-employee relationship between plaintiffs and defendants. The trial court was right to term it such.

Significantly, the Fourth Circuit also affirmed the trial court’s holding that the performance fees collected by the dancers directly from the clubs’ patrons were not wages, and that the clubs were not entitled to claim same as an offset in an effort to meet their minimum wage wage obligations.  Discussing this issue, the Court explained:

Appellants’ second attack on their liability for damages targets the district court’s alleged error in excluding from trial evidence regarding plaintiffs’ income tax returns, performance fees, and tips. The clubs contend that fees and tips kept by the dancers would have reduced any compensation that defendants owed plaintiffs under the FLSA and MWHL. According to defendants, the fees and tips dancers received directly from patrons exceeded the minimum wage mandated by federal and state law. Had the evidence been admitted, the argument goes, the jury may have awarded plaintiffs less in unpaid wages.

We disagree. The district court found that evidence related to plaintiffs’ earnings was irrelevant or, if relevant, posed a danger of confusing the issues and misleading the jury. See Fed. R. Evid. 403. Proof of tips and fees received was irrelevant here because theFLSA precludes defendants from using tips or fees to offset the minimum wage they were required to pay plaintiffs. To be eligible for the “tip credit” under the FLSA and corresponding Maryland law, defendants were required to pay dancers the minimum wage set for those receiving tip income and to notify employees of the “tip credit” provision. 29 U.S.C. 203(m)Md. Code Ann., Lab. & Empl. § 3-419 (West 2014). The clubs paid the dancers no compensation of any kind and afforded them no notice. They cannot therefore claim the “tip credit.”

The clubs are likewise ineligible to use performance fees paid by patrons to the dancers to reduce their liability. Appellants appear to distinguish performance fees from tips in their argument, without providing much analysis in their briefs on a question that has occupied other courts. See, e.g.Hart, 967 F.Supp.2d at 926-34 (discussing how performance fees received by exotic dancers relate to minimum wage obligations). If performance fees do constitute tips, defendants would certainly be entitled to no offset because, as noted above, they cannot claim any “tip credit.” For the sake of argument, however, we treat performance fees as a possible separate offset within the FLSA’s “service charge” category. Even with this benefit of the doubt, defendants come up short.

For purposes of the FLSA, a “service charge” is a “compulsory charge for service … imposed on a customer by an employer’s establishment.” 29 C.F.R. § 531.55(a). There are at least two prerequisites to counting “service charges” as an offset to an employer’s minimum-wage liability. The service charge “must have been included in the establishment’s gross receipts,” Hart, 967 F.Supp.2d at 929, and it must have been “distributed by the employer to its employees,” 29 C.F.R. § 531.55(b). These requirements are necessary to ensure that employees actually received the service charges as part of their compensation as opposed to relying on the employer’s assertion or say-so. See Hart, 967 F.Supp.2d at 930. We do not minimize the recordkeeping burdens of the FLSA, especially on small businesses, but some such obligations have been regarded as necessary to ensure compliance with the statute.

Neither condition for applying the service-charge offset is met here. As conceded by defendant Offiah, the dance clubs never recorded or included as part of the dance clubs’ gross receipts any payments that patrons paid directly to dancers. J.A. 491-97 (Offiah’s deposition). When asked about performance fees during his deposition, defendant Offiah repeatedly stressed that fees belong solely to the dancers. Id. Since none of those payments ever went to the clubs’ proprietors, defendants also could not have distributed any part of those service charges to the dancers. As a result, the “service charge” offset is unavailable to defendants. Accordingly, the trial court correctly excluded evidence showing plaintiffs’ earnings in the form of tips and performance fees.

This case is significant because, while many district courts have reached the same conclusions, this is the first Circuit Court decision to affirm same.

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DOL Issues Final Overtime Rule, Expanding Overtime Pay for Over 4 Million Workers; New Rule to Go Into Effect Dec. 1, 2016

The United States Department of Labor (DOL) Announced its long-awaited final rule regarding the update to the existing overtime rules.  The new rule is set to take effect on December 1, 2016.

Most significantly, whereas the previous rule employees who met certain duties tests under the so-called “white collar” exemptions had to make at least $455 per week on a “salary basis,” the new rule brings that threshold to $913 per week (or $47,476 annually).  This is approximately $3,000 less on an annual basis that an estimated $50,440 per year that a proposed version of the rule promulgated by the DOL had set last year, but over two times the current threshold amount.

The new salary basis threshold equates with the 40th percentile of weekly earnings for a full-time, salaried work in the United States’ lowest income region.

The final rule also raises the overtime eligibility threshold for highly compensated employees from $100,000 to $134,000.

While the rule raises the applicable thresholds for various exemptions, it also allows employers to count earnings paid to employees as bonuses and commissions toward meeting the salary threshold.  Specifically, the rule permits employers to meet up to ten (10%) of the salary threshold with amounts paid to employees as bonus and commission payments.

Although the DOL had also asked for input on a proposed rule which would have tracked the California white collar exemptions and created a more bright-line test requiring that a worker spend at least 50 percent of his or her time on exempt duties each week to qualify for an exemption, the final rule abandoned any such change to the duties’ portions of the executive, administrative, professional, outside sales, and computer employee exemptions.

In a lesser publicized 2nd final rule, the DOL carved out certain employers from the new rule.  Specifically, the 2nd rule announced a non-enforcement policy with regard to the 1st rule, for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities (i.e. group homes) with 15 or fewer beds.  Under the 2nd final rule announced, from December 1, 2016 to March 17, 2019, the DOL will not enforce the updated salary threshold of $913 per week for this subset of employers covered by the non-enforcement policy.

For further information on all things pertaining to the new rules, visit the DOL’s website.

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DOL Issues Final Overtime Rule, Expanding Overtime Pay for Over 4 Million Workers; New Rule to Go Into Effect Dec. 1, 2016

The United States Department of Labor (DOL) Announced its long-awaited final rule regarding the update to the existing overtime rules.  The new rule is set to take effect on December 1, 2016.

Most significantly, whereas the previous rule employees who met certain duties tests under the so-called “white collar” exemptions had to make at least $455 per week on a “salary basis,” the new rule brings that threshold to $913 per week (or $47,476 annually).  This is approximately $3,000 less on an annual basis that an estimated $50,440 per year that a proposed version of the rule promulgated by the DOL had set last year, but over two times the current threshold amount.

The new salary basis threshold equates with the 40th percentile of weekly earnings for a full-time, salaried work in the United States’ lowest income region.

The final rule also raises the overtime eligibility threshold for highly compensated employees from $100,000 to $134,000.

While the rule raises the applicable thresholds for various exemptions, it also allows employers to count earnings paid to employees as bonuses and commissions toward meeting the salary threshold.  Specifically, the rule permits employers to meet up to ten (10%) of the salary threshold with amounts paid to employees as bonus and commission payments.

Although the DOL had also asked for input on a proposed rule which would have tracked the California white collar exemptions and created a more bright-line test requiring that a worker spend at least 50 percent of his or her time on exempt duties each week to qualify for an exemption, the final rule abandoned any such change to the duties’ portions of the executive, administrative, professional, outside sales, and computer employee exemptions.

In a lesser publicized 2nd final rule, the DOL carved out certain employers from the new rule.  Specifically, the 2nd rule announced a non-enforcement policy with regard to the 1st rule, for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities (i.e. group homes) with 15 or fewer beds.  Under the 2nd final rule announced, from December 1, 2016 to March 17, 2019, the DOL will not enforce the updated salary threshold of $913 per week for this subset of employers covered by the non-enforcement policy.

For further information on all things pertaining to the new rules, visit the DOL’s website.

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A Statistically Significant Settlement For Federal Contractors

As discussed in last week’s Fox Workplace Watch Alert, the Office of Federal Contract Compliance Programs (OFCCP) announced its largest pay equity recovery to date – a $5 million settlement of gender and racial pay discrimination claims it brought against State Street Corporation after a six-year investigation into the financial services firm’s compensation practices.  In essence, OFCCP alleged that a statistically significant disparity existed between the compensation paid to hundreds of women, and more than a dozen black, executives than that paid to their similarly situated male and white coworkers, respectively.

OFCCP’s action demonstrates how it can marshal sophisticated analytics to tease out pay disparities that otherwise may have gone unnoticed.  Like many other issues championed by the prior administration, it remains to be seen whether OFCCP’s recent focus on this issue will continue in the Trump Administration.  But federal contractors should pay attention to this settlement and take the opportunity to perform internal audits and address any potential issues before being the subject of a pay equity action (not to mention blog posts and alerts!).

Today’s post was written by Justin Schwam, an associate in our Labor and Employment Department in the Morristown office.

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3d Cir.: Employer Must Pay for All Breaks Shorter Than 20 Minutes Notwithstanding “Flex Time” Policy

Secretary United States Department of Labor v. American Future Systems, Inc.

This case was before the Third Circuit on appeal by the employer.  The district court granted the DOL’s motion for summary judgment, holding that the employer’s policy of excluding time for breaks less than 20 minutes long violated the FLSA.  The Third Circuit agreed and affirmed, holding that the Fair Labor Standards Act requires employers to compensate employees for breaks of 20 minutes or less during which they are free of any work related duties.

The court summarized the relevant facts as follows:

American Future Systems, d/b/a Progressive Business Publications, publishes and distributes business publications and sells them through its sales representatives. Edward Satell is the President, CEO, and owner of the company. Sales representatives are paid an hourly wage and receive bonuses based on the number of sales per hour while they are logged onto the computer at their workstation. They also receive extra compensation if they maintain a certain sales-per-hour level over a given two-week period.

Progressive previously had a policy that gave employees two fifteen-minute paid breaks per day. In 2009, Progressive changed its policy by eliminating paid breaks but allowing employees to log off of their computers at any time. However, employees are only paid for time they are logged on. Progressive refers to this as “flexible time” or “flex time” and explains that it “arises out of an employer’s policy that maximizes its employees’ ability to take breaks from work at any time, for any reason, and for any duration.”

Furthermore, under this policy, every two weeks, sales representatives estimate the total number of hours that they expect to work during the upcoming two-week pay period. They are subject to discipline, including termination, for failing to work the number of hours they commit to. Progressive also sends representatives home for the day if their sales are not high enough and sets fixed work schedules or daily requirements for representatives when that is deemed necessary.

Apart from those requirements, representatives can decide when they will work between the hours of 8:30 AM and 5:00 PM from Monday to Friday, so long as they do not work more than forty hours each week. As noted above, during the work day, they can log off of their computers at any time, for any reason, and for any length of time and may leave the office when they are logged off. Employees choose their start and end time and can take as many breaks as they please. However, Progressive only pays sales representatives for time they are logged off of their computers if they are logged off for less than ninety seconds. This includes time they are logged off to use the bathroom or get coffee. The policy also applies to any break an employee may decide to take after a particularly difficult sales call to get ready for the next call. On average, representatives are each paid for just over five hours per day at the federal minimum wage of $7.25 per hour.

On appeal, the defendant-employer raised three arguments: (1) that time spent logged off under its flexible break policy categorically does not constitute work; (2) that the District Court erred in finding that WHD’s interpretive regulation on breaks less than twenty minutes long, 29 C.F.R § 785.18, is entitled to substantial deference; and (3) that the District Court erred in adopting the bright-line rule embodied in 29 C.F.R. § 785.18 rather than using a fact-specific analysis. The Third Circuit rejected each of these arguments.

The court rejected the defendant’s that their defendant’s “flex time” policy was not a break policy within the meaning of the FLSA, reasoning that labeling its policy as “flex time” was simply a means to attempt to illegally circumvent the requirements of the FLSA.

The court next held that the DOL’s break time regulation, codified in 29 C.F.R. § 785.18 is entitled to Skidmore deference, the highest level of deference given to an administrative regulation.  The court reasoned that the regulation was due Skidmore deference because: (1) the former FLSA specifically empowered the DOL to promulgate such regulations; (2) the DOL’s interpretation of the break time regulations has been consistent throughout the various opinion letters the DOL has issued to address this issue; and (3) the DOL’s interpretation is reasonable given the language and purpose of the FLSA.

Having determined that the regulation is entitled to deference, the court held that the regulation must be read to create a bright line rule and concluded that it does.  The court explained that “the restrictions endemic in the limited duration of twenty minutes or less illustrate the wisdom of concluding that the Secretary intended a bright line rule under the applicable regulations.”  As such, the court affirmed the decision below and held that defendant’s break policy which excluded time for breaks less than 20 minutes long violated the FLSA.

Click Secretary United States Department of Labor v. American Future Systems, Inc. to read the entire Opinion of the Court.

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Massachusetts Will Require Accommodations for Pregnant Employees

As of April 1, 2018, employers in Massachusetts will be required to provide accommodations to pregnant employees.

In July, the Governor signed into law the Pregnant Workers Fairness Act that amends the Massachusetts’ general discrimination law to require employers to provide a reasonable accommodation to pregnant employees and to prevent employers from discriminating against pregnant employees who request an accommodation.

Under the law, there is no set guarantee of leave, but paid or unpaid leave to recover from childbirth may be a reasonable accommodation.

Other accommodations listed in the law may include:

  • more frequent or longer paid or unpaid breaks;
  • acquisition or modification of equipment or seating;
  • temporary transfer to a less strenuous or hazardous position;
  • job restructuring;
  • light duty;
  • private non-bathroom space for expressing breast milk;
  • assistance with manual labor; or
  • modified work schedules; provided, however, that no employer shall be required to discharge any
    employee, transfer any employee with more seniority, or promote any employee who is not able
    to perform the essential functions of the job, with or without a reasonable accommodation.

Employers do not have to provide an accommodation if doing so would create an undue hardship.

The law also poses some limits on the documentation that can be required from employees.  Generally, employers may require documentation to support a request for an accommodation, except when the employee is requesting one of the following accommodations:

  1. more frequent restroom, food and water breaks;
  2. seating; and
  3. limits on lifting over 20 pounds.

Employers will be required to give a written notice to employees of their rights beginning on January 1, 2018.  Employers will have to give such notice to any new hires after that date and to any employee who requests an accommodation.

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Will California “Ban the Box”?

The California Assembly has passed Assembly Bill 1008, which would affect employers’ abilities to make pre-hire and personnel decisions based on a person’s criminal history.  Governor Jerry Brown has until October 15, 2017 to act on the bill and he is expected to sign it.

AB 1008 would apply to all employers in California with five or more employees. The bill would make it unlawful for California employers to:
• Include on any application for employment any question that seeks the disclosure of an applicant’s conviction history;
• Inquire into or consider the conviction history of an applicant before the applicant receives a conditional offer of employment; and
• Consider or even disclose information about any of the following in connection with any application for employment: (1) an arrest that did not result in a conviction, subject to the exceptions in Labor Code § 432.7(a)(1) and (f); (2) referral to or participation in a pretrial or posttrial diversion program; and (3) convictions that have been sealed, dismissed, expunged or statutorily erased pursuant to law.

Once a conditional offer has been made, employers are required to conduct an individualized assessment before rescinding an employment offer based upon a criminal history. The assessment must include an evaluation of the:
• The nature and gravity of the offense and conduct;
• The time that has passed since the offense or conduct and completion of the sentence; and
• The nature of the job held or sought.

If the employer makes a preliminary decision that the applicant’s conviction history is disqualifying, the employer must notify the applicant of this preliminary decision in writing. However, the employer is not required to explain to the applicant its reasoning for making the preliminary decision.

The notice requirements are similar to those under Fair Credit Reporting Act.  In short, employers must state which convictions are disqualifying, include a copy of the criminal history and advise that the applicant has at least 5 business days to challenge the accuracy of the report or to explain the circumstances of the conviction.

If the applicant timely notifies the employer in writing that he or she is disputing the conviction history and is taking steps to obtain evidence to support this, the employer must provide five (5) additional business days to respond to the notice. The employer must also consider any additional evidence or documents the applicant provides in response to the notice before making a final decision.

Once a final decision is made, an adverse action notice must be given to the applicant and the applicant must be advised that he or she has the right to file a complaint with the Department of Fair Employment and Housing.

We will keep an eye on this one since it will likely go into effect on January 1, 2018 if it is signed into law.

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Birmingham Passes Ordinance Prohibiting Discrimination

Alabama never ceases to surprise.

On September 26, 2017, the Birmingham City Council passed an ordinance that makes it a crime for any entity doing business in the city to discriminate based on race, color, national origin, sex, sexual orientation, gender identity, disability, or familial status. The ordinance passed unanimously and is the first of its kind in Alabama.

In announcing the measure, the City Council took a bit of defiant tone, noting that Birmingham had to act since the state legislature was unwilling.  It remains to be seen if the state legislature will try to take steps to pass legislation prohibiting Birmingham and other cities from passing such ordinances.

The City also created a local human rights commission to process and try to resolve such complaints.  If the matter cannot be resolved, an employee must swear out a complaints in criminal court.  The criminal court has the power to order a fine, but not reinstatement or back pay.

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Seventh Circuit Says Extended Medical Leave is Not a Reasonable Accommodation under the ADA

On September 20, 2017, the Seventh Circuit Court of Appeals issued a decision that a requested three month medical leave due to a disability was not a reasonable accommodation under the ADA.  Although there is some discussion of the particular facts in the case, much to the delight of management-side attorneys like me, the case goes beyond saying that the leave was not reasonable in this particular circumstance.

Instead the Court noted that the ADA is not a medical leave statute.  The Court held that an accommodation need only be granted under the ADA if it will help the employee work.  Since an employee who needs leave cannot work, then they cannot be considered a qualified individual with a disability.

The Court does note that a brief leave of days or perhaps a few weeks, might, in some circumstances be a reasonable accommodation.  But, and here’s the good part, “a medical leave spanning multiple months does not permit the employee to perform the essential functions of his job. To the contrary, the “[i]nability to work for a multi-month period removes a person from the class protected by the ADA.”

The subject of how long must an employer grant leave to a disabled employee is a common one. Often, it is the source of great frustration for employers.  Although there is still no bright-line test as to just how much leave must be granted, this case certainly seems to limit that time to less than two months for employers within the Seventh Circuit.

Employers should still be cautious as many state and local laws that require reasonable accommodations for disabilities may not be interpreted in the same manner.

If you want to read more, the case is Severson v. Heartland Woodcraft Inc. 2017 U.S. App. LEXIS 18197.

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