2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE

DOL OPINION LETTERS AND LOCAL LAWS

WAGE AND HOUR UPDATE



Margaret Carroll Alli – Ogletree Deakins (Detroit (Metro))

Robert R. Roginson – Ogletree Deakins (Los Angeles)

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DOL Opinion Letters and Local Laws: Wage and Hour Update

by Margaret Carroll Alli and Robert R. Roginson

I. INTRODUCTION

From new programs and opinion letters emanating from the U.S. Department of Labor (DOL) to the continued proliferation of state and local laws, to major court decisions impacting independent contractors, it has been a busy year in the realm of wage and hour laws. This session will cover the latest updates on both the federal and state levels and how in-house counsel can manage compliance with the ever-growing patchwork of wage and hour laws.

II. WHAT’S NEW AND WHAT’S NEXT IN THE DEPARTMENT OF LABOR (DOL) WAGE & HOUR DIVISION (WHD)

A. Opinion Letters Are Back

For 70 years, the WHD provided specific guidance on how to comply with the Fair Labor Standards Act (FLSA) through the use of Opinion Letters issued by the WHD Administrator or his/her designee. Opinion Letters applied the FLSA to a specific set of facts as provided to the agency, usually through a request from an employer or a regulated group. Not only did Opinion Letters clarify aspects of the FLSA, because they were official, written opinions by the WHD of how the FLSA applied to a specific set of facts, employers could rely on the opinion letters to limit or reduce damages in FLSA lawsuits.

Under Section 10 of the Portal-to-Portal Act, Opinion Letters may provide a complete affirmative defense to money damages where the employer proves that it acted “in good faith in conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation” by the Administrator of the WHD.1 Thus, for example, if an employer relied on an Opinion Letter and applied its conclusions to the same set of facts, the employer could assert a complete defense to liability if later sued under the FLSA on that practice.2 Similarly, an employer could preclude or limit liquidated (i.e. double) damages or a longer statute of limitations (for example, a third-year of damages for willful violations) by showing “good faith,” and reliance on an Opinion Letter with similar facts would be good faith.3

In 2010, the WHD formally stopped using Opinion Letters, opting instead for “Administrative Interpretations” of the FLSA. These Administrative Interpretations were general in nature and applied to large categories of employees as opposed to describing how the FLSA applied to a particular set of facts. As such, they became less useful in particular situations and/or as an affirmative defense in litigation.

Beginning on April 12, 2018, the WHD resurrected Opinion Letters after a 9-year hiatus. U.S. Secretary of Labor, Alexander Acosta, explained that the DOL “is committed to helping employers and employees clearly understand their labor responsibilities so employers can concentrate on doing what they do best; growing their businesses and creating jobs.”4 The WHD also redesigned its website to allow easy access to the Opinion Letters and guide employers and employees how to request an Opinion Letter. These steps by the WHD signal an emphasis on its function to assist employers in their efforts to stay compliant. To that end, the DOL allocated additional funds in its FY 2018 budget toward compliance assistance.

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In 2018, the WHD issued Opinion Letters on the following topics. Consistent with its long-standing practice, names of the individuals/entities seeking the opinion are redacted:5

 Compensability of travel time for non-exempt employees (FLSA 2018-18).

 Compensability of 15-minute rest breaks required hourly to address an employee’s serious health condition (FLSA 2018-19).

 Calculation of salary deductions and section 13(a)(1) salary basis (FLSA 2018- 14).

 Salary deductions for full-day absences based on hours missed and section 13(a)(1) salary basis (FLSA2018-7).

 Whether certain lump sum payments to employees are “earnings” for purpose of wage garnishment under the federal Consumer Credit Protection Act (CCPA).

 Application of the 13(b)(7) motion theater exemption to an establishment that is both a theater and a restaurant. (FLSA2018-23).

 Volunteer status of nonprofit members serving as global credentialing examiners (FLSA 2018-22).

 Retail and service establishment and the 7(i) exemption (FLSA2018-21).

 Compensability time spent attending employer-sponsored benefit fairs (FLSA 2018-20).

 Construction supervisors employed by homebuilders and section 13(a)(1) (FLSA 2018-17).

 Volunteer fire company contracting for paid EMTs – joint employment and volunteer status (FLSA2018-16).

 Product demonstration coordinators and exempt status under section 13(a)(1)(FLSA2018-15).

 Fraud/theft analysts and agents exempt status under section 13(a)(1) (FLSA 2018-13).

 Consultants, clinical coordinators, coordinators, and business development managers exempt status under section 13(a)(1) (FLSA 2018-12).

 Per diem lump sum job bonus and the regular rate in section 7(e) (FLSA 2018- 11).

 Year-end non-discretionary bonus and the regular rate in section 7(e) (FLSA 2018-9).

 Residential construction project supervisor and exempt status under section 13(a)(1) (FLSA 2018-10).

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 Commercial construction project superintendents and exempt status under section 13(a)(1)(FLSA2018-4).

 Client service managers and exempt status under section 13(a)(1) (FLSA2018- 8).

 Coaches and the teacher exemption under section 13(a)(1) (FLSA2018-6).

 Plumbing sales/service technicians and the retail and service establishment section 7(i) (FLSA2018-2).

 Regular rate calculation for fire fighters and alarm operators (FLSA2018-5).

 Helicopter pilots and exempt status under section 13(a)(1)(FLSA2018-3).

 Ambulance personnel on-call time and hours worked (FLSA2018-1).

In its 2018 Opinion Letters, the WHD included a critical disclaimer confirming that the practice of seeking an opinion letter is intended to assist in future compliance. It cannot be used as an end-run in current litigation (or a current investigation by the WHD) and is based exclusively on the facts presented:

The opinion below is based exclusively on the facts you have presented. You have represented that you do not seek this opinion for any party that the Wage and Hour Division (WHD) is currently investigating, or for use in any litigation that commenced prior to your request.

In practice, the best way to establish an affirmative defense to an FLSA lawsuit is to seek an Opinion Letter on a particular pay practice or set of facts, and your Ogletree lawyer can assist in that process. But, the effort is not without risk. If the WHD does not approve the pay practice or exempt classification laid out in the employer’s request, changes will have to be made immediately because failure to do so will only ensure penalties down the road.

B. Status of the P.A.I.D Program

The Payroll Audit Independent Determination (P.A.I.D) program is an innovative pilot program by the DOL aimed at encouraging employers to audit their pay practices and self-report minimum wage and overtime violations to the DOL. The program was designed to avoid expensive litigation and make sure that improper pay practices are corrected immediately and prospectively. In return for self-reporting under the “protection” of the P.A.I.D program, and paying all back wages owed to employees (under supervision of the DOL), an employer can avoid liability for double liquidated damages, civil penalties and attorneys’ fees because an employee who accepts the payment had to sign a release and could not later sue for those damages in litigation.

Touted as a six-month pilot program when it began in April, 2018, the DOL hoped to create a vehicle to remedy wage violations quickly, without litigation, and through a process that was more streamlined than a routine WHD investigation. However, participating in the P.A.I.D program had conditions:

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• The employer had to be covered by the FLSA, which excluded smaller employers.

• The employer had to be acting in “good faith” as determined by the DOL and cannot have been found to be in violation of FLSA minimum wage or overtime requirements within the last five years.

• An employer was not eligible to participate in the program if it was currently under investigation by the WHD for the same pay practice, or was in threatened or current litigation on the issue.

• The employer had to verify that it reviewed its compensation practices for potential FLSA violations.

• The employer had to identify specific violations it found, the identity (names, addresses, phone numbers) of impacted employees, the time period of the violations, and the amount of back wages owing.

• The employer had to provide substantial documentation to the DOL about each violation.

• The employer had to commit to future compliance.

Participation in the P.A.I.D program has its risks. For example, all of the information provided to the DOL, including the specific violations found during the self-audit, were subject to disclosure under a Freedom of Information Act (FOIA) request to other employees or the media. Also, employees who were notified of the violation and promised back payment of wages could refuse the payment and sue for liquidated damages and a longer statute of limitations (three years) if the violation was found to be willful. Stated differently, employers had to self-disclose a wage violation without any assurance that all impacted employees would accept the payment and sign a release.

Additionally, the P.A.I.D program applies only to violations of federal law. Because many states have higher minimum wage rates and fewer overtime exemptions, an open question is whether the release signed by employees in return for back wage payments under the P.A.I.D program would preclude a state law claim. Would the DOL only require payment of the federal minimum wage or would it insist on the higher state minimum wage rate? Because of these and other questions about the impact of the P.A.I.D program on state wage laws, in August 2018 the New York Attorney General (joined by state attorney generals from several other states) filed a lawsuit against the DOL for failing to comply with a records request under FOIA about the P.A.I.D program.

Given these risks, the viability of the P.A.I.D as an effective compliance tool has been questioned and employers considering its use should obtain careful legal advice. In October 2018, the DOL announced it was extending the P.A.I.D program for another six months.

C. Where or Where Is My WHD Administrator?

On September 5, 2017, President Trump nominated Cheryl Stanton as the Administrator of the WHD. Ms. Stanton is currently the Executive Director of the South Carolina Department of Employment and Workforce. Prior to her current political appointment in South Carolina, Ms.

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Stanton was a shareholder at Ogletree Deakins and, prior to that, she served as a regulatory liaison in the White House under former President Bush.

As of the date this paper went to print, Ms. Stanton has not been confirmed by the Senate and no vote on the Senate floor has been scheduled. As such, nearly two years into the current administration, the top job in the WHD remains vacant.6 If history repeats itself, confirmation may not occur in this in this presidential term. This vacancy likely affects the ability of the WHD implement key regulatory initiatives, including review and revision of the salary level necessary for the white collar overtime exemptions.

D. Anticipated New Regulation on the Salary Level for the White Collar Overtime Exemptions

After the prior attempt by the DOL to more than double the salary level threshold for the FLSA “white collar” overtime exemptions was judicially invalidated in November 2016, the DOL under the new administration announced that it was going back to the drawing board. To refresh, the prior rule doubling the salary level threshold (“Final Rule”) was enjoined by a federal district judge in Texas, who later granted summary judgment to the parties challenging the Final Rule. On appeal to the 5th Circuit, one of the issues was whether the DOL had the authority under the FLSA to even set a salary level threshold in the first place. Even though administrations had already changed following the 2016 general election, the DOL took the position on appeal that it had the statutory authority to set a salary level test as a portal into the overtime exemptions.7

On July 26, 2017, the WHD published a Request for Information: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees (2017 RFI).8 Essentially an invitation for public comment, the 2017 RFI was intended to provide the DOL with “information to aid in formulating a proposal to revise the part 541 regulations.” In it, the DOL asked eleven questions, including whether the statutory salary level should be tied to inflation or some other measure, whether multiple salary levels should be imposed, should they automatically increase on a periodic basis, and whether employers increased the salaries for exempt employees in anticipation of the prior Final Rule. The public comment period closed on September 25, 2017 after the DOL received nearly 165,000 comments.

The RFI was not a new overtime rule and did nothing to change the white collar overtime regulations that were last substantially revised in 2004. There are several steps that have to occur before a new regulation is in place, most notably, the DOL has to publish a Notice of Proposed Rule Making (NPRM) and present an actual proposed rule for public comment. Right now, the DOL is suggesting that it may issue a NPRM in March 2019. Depending on the public comments (there is typically a 90 day comment period) the DOL will have an opportunity to revise the proposed rule based on the comments it receives before issuing another final rule. All in all, the earliest we anticipate seeing a new final rule on the white collar overtime exemptions rule would be late 2019.

Based on a series of “listening sessions” announced by the DOL on August 27, 2018 to occur in September and October 2018 at locations across the country, the DOL remains in active information gathering mode relative to the Part 541 white collar exemptions. In those listening sessions, the DOL did not tip its hand on what the new overtime regulations would look like. Staring through our crystal ball, we anticipate that the DOL will keep the salary level test, increase it to some level above the current $455 per week, but well below the $47,475 annual

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-6 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE salary proposed by the prior administration – more likely in the $35,000 annual salary range -- and will not index the salary level to automatically increase.

III. INDEPENDENT CONTRACTOR TRENDS TO WATCH

Last year, employers across the country pondered how the election of Donald Trump as President of the United States would change the American political landscape and what would be different over the next four (or eight) years compared to the preceding eight years under President Obama. Now, almost two years later, we see those changes unfold. Secretary of Labor Alex Acosta quickly began reversing course on several Obama-era regulations and initiatives. In June 2017, the DOL had withdrew two informal guidance documents issued during the Obama administration, including a 2015 “Administrator’s Interpretation” directly addressing the issue of independent contractor misclassification.

While the DOL has made changes which make it easier for companies to use the services of independent contractors, litigation trends and policy directives at the state and local levels indicate that independent contractor classification issues, and therefore wage-and-hour litigation, will continue to be prevalent. In fact, even under Obama’s tenure, the volume of wage-and-hour private litigation continuously outweighed agency activity. Researchers have concluded that 1,935 wage-and-hour lawsuits were filed in 2000. In 2016, that number topped 8,000, the second- highest figure for any year since the FLSA was enacted. In 2017, that number slightly dipped to approximately 7,858. In the first quarter of 2018, there have been approximately 1,847 suits filed, slightly under the paces set by 2016 and 2017. Although these numbers are perhaps indicative of a slight decrease in FLSA lawsuit fervor, there are few indications that the nation’s plaintiffs’ attorneys intend to back down, regardless of the administration.

A. Tests Used to Determine Independent Contractor Status

The test used to determine independent contractor (IC) status varies depending on the particular law involved, and there are many different IC tests that are used. Most of these tests in the litigation context, however, focus, in whole or in part, on the same general factors, including: (1) who controls the manner, method, and means of performance; (2) whether opportunities for profit or loss exist; (3) who provides the equipment and pays expenses; (4) the length of the relationship; (5) whether the services provided are an integral part of the business; and (6) the degree of skill required. Other factors often considered in this analysis include whether benefits are provided, the intent of the parties, and whether the individual is paid on a 1099 or W-2, is free to hire helpers or employees, is able to work elsewhere or have another business, and can or does operate as a separate legal entity.

In response to Congressional and business industry concerns, the IRS reconfigured its traditional 20-factor test for employee status several years ago. The IRS now evaluates the right to control in three categories: Behavioral Control, Financial Control, and the Type of Relationship. The IRS’s audit branch now uses this reconfigured test in place of the traditional 20-factor test.

Behavioral Control includes the type of instruction given. A worker is generally subject to a business’s edicts about when, where, and how to work. The degree of instruction is also important to Behavioral Control, as the more detailed the instructions for the worker the more control the business exercises over the worker. Whether the business uses an evaluation system will be an element of consideration, because a system that measures the details of how the work is performed would point toward employee status. Finally, the amount of training is

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-7 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE weighed. A business providing training to a worker on how to do the job would indicate that the business wants the job performed in a certain way, leading to a conclusion of employee status.

Financial Control includes the elements one would expect from the title. If a worker has a significant investment in the equipment he or she uses in working for someone else, it would point to IC status. And should the worker incur unreimbursed expenses, such as fixed, ongoing costs that are incurred regardless of the work, it is more likely that worker is an independent contractor. The worker’s opportunity for profit or loss is one of the most significant and persuasive factors. Specifically, the worker’s opportunity to lose money, thus being in business for him or herself, is a significant sign that the worker is an independent contractor; as would the payment of a flat fee to complete a job. An IC would also generally be free to seek out other business opportunities.

Finally, the IRS will evaluate the Type of Relationship. A written contract identifying a worker as an independent contractor will help, but is not dispositive and will not generally be given much weight by the courts. The actual facts of the relationship are much more important. Whether the worker receives employee benefits will also be a factor in this test. Should the worker receive such benefits it would be an indication of employee status. The IRS will also evaluate the permanency of the relationship, as a worker who is retained for an indefinite time without an end date, often jumping project to project, would also indicate employee status.

The test typically used in the unemployment context, however, is much narrower. This test is commonly referred to as the “ABC” test. To meet the test, the individual contractor must: (1) control the manner, method and means of performance; (2) perform services outside of the usual course of the employer’s business or outside the employer’s place of business; and (3) perform services in an independently established trade, business or occupation. As discussed below, several states, such as California, Connecticut, Massachusetts, and New Jersey, have adopted the ABC test for broader use, resulting in a much tougher standard to prevail on independent contractor misclassification challenges.

B. Federal Enforcement and Legislative Initiatives

Former Secretary of Labor, Thomas Perez, continually made IC misclassification a primary initiative, openly characterizing IC classification as “workplace fraud.” Under the Trump Administration, however, the DOL has not continued its enforcement efforts in this area with the same fervor it did under Obama. As discussed above, Secretary Acosta has already shown that he is supportive of free enterprise, job creation and reducing government regulations that burden job creation. Acosta’s previous work, both at the National Labor Relations Board (NLRB) and the Department of Justice, forecasts that he will bring a conservative approach to the DOL. In a 2010 article published in FIU Law Review, Acosta expressed concern about the NLRB under Obama and advocated for predictability, efficiency, and stability from the Board.

1. DOL Administrative Guidance

The most recent DOL guidance on independent contractors was issued in July 2015 by David Weil, Former DOL Administrator, in the form of an “Administrator’s Interpretation.” In this Interpretation, the DOL reinforces its long-standing enforcement position that the economic realities test governs whether someone is an independent contractor under FLSA. The economic realities test is guided by six separate factors, including whether: (1) the work performed is an integral part of the employer’s business; (2) the worker’s managerial skill affects the worker’s opportunity for profit or loss; (3) the worker is retained on a permanent or

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-8 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE indefinite basis; (4) the worker’s investment is relatively minor as compared to the employer’s investment; (5) the worker exercises business skills, judgment, and initiative in the work performed; and (6) the worker has control over meaningful aspects of the work performed. Under this guidance, David Weil concluded that “most workers are employees under the FLSA’s broad definitions.”

As mentioned above, this guidance was withdrawn by Secretary Acosta in June 2017. This withdrawal has been largely viewed as a win for the business groups, who argued the guidance – which clearly purported to bring more employees under the FLSA’s protection – would increase litigation over misclassification issues. However, the exact consequences of the withdrawal is unclear and yet to be determined. In fact, Secretary Acosta states in the announcement that the withdrawal “does not change the legal responsibilities of employers” under federal wage and hour laws, and that the DOL will “continue to fully and fairly enforce all laws within its jurisdiction.” In absence of this guidance, courts will likely revert to pre-guidance interpretations of the FLSA as determined by courts in each jurisdiction. This hodgepodge approach to independent contract misclassification could continue to result in inconsistent rulings depending on jurisdiction and litigation concentrated in jurisdictions deemed by the plaintiffs’ bar to be “employee friendly.”

2. DOL Funding and Other Enforcement Initiatives

In the past, the DOL has received significant funding that is specifically earmarked for independent contractor misclassification efforts. The FY 2017 budget provides $277 million to the DOL’s Wage and Hour Division. This amount was lowered to $230.1 million in the FY 2018 budget. The budget also contains an increase of $3 million to “perform compliance assistance projects to educate employer groups and industry associations on how to comply with the law.” How that effort will be carried out remains to be seen.

For the most part, the DOL has been busy reversing course on several key Obama-era initiatives and instituting its own programs, policies, and regulations. For example, the DOL reinstated the issuance of WHD opinion letters as one of its methods for providing guidance to employers on federal wage and hour laws. An opinion letter is an official, written opinion by the WHD addressing how a particular law applies in specific circumstances presented by an employer, employee, or other entity requesting the opinion. These letters were a division practice for more than 70 years, until 2010 when the DOL discontinued the initiative.

The DOL also ceased operation of a 2016 user-friendly webpage where workers, employers, and government agencies could access information and resources about the alleged misclassification of works as independent contractors. The DOL described the site as an educational and resource tool and proceeded to characterize independent contractor misclassification as a “huge problem for workers” and to quote an alleged victim of misclassification who compared his working conditions to “modern day slavery.” Under Secretary Acosta’s DOL, this webpage is no longer operational. This is not the only change the DOL has made to its website. The public links for several chapters of the WHD’s Field Operations Handbook have been removed, replaced by the new text “revision coming soon.” This includes the chapter on independent contractor misclassification. Further, the website no longer contains a May 2014 fact sheet describing the Obama-era DOL’s broad interpretation of employment to determine whether workers should be classified as employees or independent contractors. The DOL replaced this fact sheet with a 2008 version that notably does not include language that “most workers are employees.”9

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C. State Legislative and Other Enforcement Initiatives

In addition to initiatives at the federal level, numerous states continue to either pass or introduce misclassification legislation. Much of this is targeted towards specific industries and creates a presumption of employee status unless a strict exception is satisfied. Numerous states adopted the narrow “ABC” test, which carries with it a presumption of employee status.

In April 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West v. Superior Court, in which the Court chose to scrap the nearly 30-year old test for determining whether a worker is an employee or an independent contractor for claims asserted under California’s wage orders, and instead, adopted a simplified “ABC” test. In replacing the decades-old Borello control test, which applied multiple factors to the determination of whether a worker qualifies as an independent contractor. The Court interpreted California’s wage precedents and policy as placing the burden on the business to prove that a worker is an independent contractor rather than an employee, otherwise the worker will be presumed to be an employee. To meet its burden under the ABC test, a business must establish each of three ABC factors: (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business. Under the ABC Test, the failure of a business to establish any one of the three factors means that a worker will be determined to be an employee and not an independent contractor as a matter of law. The Court’s ruling specifically applies to claims stemming from California’s Wage Orders, but the Court left open whether this test would also apply to other statutes, such as those governing claims for failure to pay workers’ business expenses (Cal. Labor Code sect. 2802). The ABC Test is undoubtedly much simpler to apply than the now- replaced Borello control test, under which numerous factors had to be considered for the analysis, and the importance of any one factor was to be determined by courts or agencies on a case-by case basis. (S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341 [Borello]). However, the ABC Test is far broader in its reach than the Borello test, purposefully so the Supreme Court stated, and will likely result in many more workers being unable to meet the requisite test to be classified as an independent contractor.

In 2016, the Connecticut Supreme Court clarified the State’s adopted “ABC” test for independent contractors in an unemployment proceeding involving home heating oil installers and technicians. In applying this difficult-to-meet test, the Court explained that prong B—that services performed by the installers/technicians—must be “performed outside of all places of business of the enterprise for which the service is performed.” Connecticut courts and administrative agencies had previously held that this term included the homes of the business’s customers. However, the Supreme Court held that because the homes were under the homeowners’ control, the company failed to establish this prong. See Standard Oil of Connecticut, Inc. v. Administrator, Unemployment Compensation Act, No. SC 19493 (Sup. Ct. Conn. Mar. 15, 2016). However, the Connecticut Supreme Court recently came down with a more employer friendly opinion when applying the ABC test. It held that “just as the mere freedom to provide services for third parties is not by itself dispositive under part C, whether the individual has actually provided services for someone other than the employer is not dispositive proof of an employer-employee relationship.” S.W. Appraisal Group, LLC v. Administrator, Unemployment Compensation Act, No. SC 19651 (Sup. Ct. Conn. Mar. 21, 2017). This is a critical distinction and means that the individual may not need to actually work elsewhere to satisfy this prong of the test, so long as he or she had the option to.

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Another way states are trying to combat IC misclassification is through laws that create joint liability for companies who use contractors. California has enacted such a law, which applies to companies with 25 or more employees. Under this bill, a hosting company (client company) that contracts with another company (contractor) to supply employees to perform services in the client company’s “usual course of business” will be liable for the payment of wages for the contractor’s employees, the contractor’s failure to secure workers’ compensation coverage, and compliance with all occupational safety and health requirements if the contractor fails to do so. Importantly, this liability attaches without any formal finding of joint employment status. The joint responsibility comes into effect when the contractor has a total of six or more non-exempt workers at the job site. In all, over 30 states and the District of Columbia have passed some version of legislation intended to curtail misclassification of employees as independent contractors.

Additionally, numerous states have entered into formal Memoranda of Understanding (MOU) with the IRS and DOL to share information regarding misclassification. Currently, 27 states have entered into these formal information-sharing agreements, including Alabama, Alaska, Arkansas, California, Colorado, Connecticut, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Rhode Island, Texas, Utah, Vermont, Washington, Wisconsin, and Wyoming. Many of these MOUs have expired by their terms, and it will be interesting to see if the current DOL and IRS will seek to procure new MOUs. The DOL has also entered into an MOU with the Department of Housing and Urban Development to combat IC misclassification in the construction industry, and multiple states have formed task forces to combat IC misclassification.

States and municipalities are also getting in the game by introducing reporting systems to identify misclassification issues. Rhode Island, for example, announced an anonymous tip line for reporting allegations of misclassification. The tip line will be staffed by Rhode Island’s Division of Taxation. North Carolina passed the Employee Fair Classification Act, aimed at combatting independent contractor misclassification, which became effective December 31, 2017. The new law not only authorizes the Employee Classification Section to receive complaints of employee misclassification, but also allows it to investigate reports of employee misclassification; coordinate with other state agencies and District Attorneys’ offices in the prosecution of employers and individuals who fail to pay civil assessments or penalties; provide information about each report of misclassification to the Department of Labor, the Division of Employment Security, the Department of Revenue, and the Industrial Commission to facilitate investigation of potential statutory violations; educate employers, employees, and the public about employee misclassification; and report annually to the Governor and Joint Legislative Commission on Governmental Operations.

Municipalities are also passing legislation aimed at independent contractors. For example, Seattle passed an ordinance allowing for collective bargaining and unionization of for- hire taxi and limousine drivers and drivers for app-based companies such as Lyft and Uber, whose workers provide services as independent contractors. New York City also passed a local law that enhances workplace protections for freelance workers.

D. Case Law and Litigation Trends

1. Federal and State Court Litigation and Litigation Trends

Independent contractor misclassification litigation also continues to increase, both on an

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-11 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE individual and, more prevalently, class or collective action basis. This litigation typically includes claims for overtime under the FLSA and state equivalents, violations of state wage/hour or wage/deduction statutes, unjust enrichment, fraud, and others. The annual statistics released by the Administrative Office of the U.S. Courts are illustrative. These confirm that FLSA collective action filings once again represent the largest category of employment-related class action filings in 2015. During the most recent twelve-month period, FLSA lawsuits accounted for 8,070 out of 18,638 (over 43%) of the labor and employment related lawsuits filed in federal court.

These cases are becoming tougher and tougher to defend, with several courts granting class or collective action certification of these claims based, in large part, on common classification and/or common IC agreements alone. See Myers v. Jani-King of Philadelphia, Inc., No. 09-1738 (E.D. Pa. Mar. 11, 2015) aff’d sub nom. Williams v. Jani–King of Philadelphia Inc., 837 F.3d 314, 325 (3d Cir. 2016). In this case, franchisees that provided janitorial and other cleaning services to commercial properties in the Philadelphia area brought a putative class action against their commercial cleaning franchisor, alleging the franchisor misclassified them as independent contractors. In certifying the class, the court noted that the manuals and franchise agreements placed controls on the franchisees including: how often to communicate with customers, how to address complaints, where/how to solicit business, how to advertise, and what records to keep. See also In the Matter of Baez, (N.Y. Sup. Ct. App. Div.) (holding another janitorial franchisor liable for unpaid unemployment insurance because franchisee was required to operate the business in accordance with the procedures set forth by the franchisor).

Further, obtaining summary judgment is becoming more and more difficult. For example, in Keller v. Miri Microsystems, LLC, No. 14-1430 (6th Cir. Mar. 27, 2015), the Sixth Circuit Court of Appeals reversed a federal district court’s grant of summary judgment in favor of the company on independent contractor misclassification claims under the FLSA brought by a satellite TV installer. When applying the applicable six-factor economic realities test, the Sixth Circuit found issues of material fact existed that precluded summary judgment, including whether: (1) the parties had a de facto exclusive working relationship because the installers did not have time to work elsewhere; (2) the degree of skill required indicated that the installer was an employee; (3) the installer’s investment indicated he was economically dependent on the company; (4) the installer had opportunity for profit or loss through improving efficiency or accepting more assignments; and (5) the company controlled the manner, method and means of performance.

To make matters more complicated, some courts are also construing the definition of employee very broadly. A federal court in Illinois found restaurant delivery drivers to be misclassified. The Court applied the economic realities test, described above, in determining whether a class of delivery drivers was misclassified in claims against two restaurants. The Court found the test weighed overwhelmingly in the delivery drivers’ favor, finding all six elements of the test supported employee status. This decision shows just how broadly the term employee can be construed under the FLSA. Here the court largely disregarded the fact that plaintiffs owned their own vehicles and treated the fact that the plaintiffs also provided food deliveries for other restaurants as inconsequential. See Arunin v. Oasis Chicago, Inc. d/b/a Butterfly Sushi and Butterfly Thai Restaurant, No. 14-cv-6870 (N.D. Ill. Mar. 4, 2016).

2. Gig Economy Litigation

Uber and Lyft continue to litigate the issue of independent contractor classification with their drivers. The Uber litigation has been contentious and lengthy, with multiple challenges and appeals involving Uber’s arbitration agreement, class treatment, and others. After the drivers

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-12 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE won conditional certification of its misclassification class, Uber attempted to put these labor challenges behind it in August 2016 when it proposed a $100 million class action settlement with the drivers in the misclassification suit. U.S. District Judge Edward M. Chen, however, rejected this settlement offer as too favorable to Uber. O’Connor v. Uber Technologies, Inc., 58 F. Supp. 3d 989 (N.D. Cal. 2014). In December 2016, Uber did win its own victory when the Ninth Circuit ruled Uber’s 2013 and 2014 arbitration agreements blocked another suit where a group of drivers attempted to challenge the company’s background check policies. Mohamed v. Uber Technologies, Inc., 848 F.3d 1201 (9th Cir. 2016). The Ninth Circuit is also currently deciding whether the O’Connor class and other similar classes can proceed as a class action, or whether their arbitration agreements are enforceable.

The same can be said for Lyft, who is similarly litigating the classification issue. Lyft, however, fared better in resolving its California class action on March 16, 2017, when U.S. District Judge Vince Chhabria granted final approval to Lyft’s $27 million settlement in its ongoing misclassification litigation. That suit, Cotter v. Lyft, 176 F. Supp. 3d (N.D. Cal. 2016), originally began as a nationwide class action alleging misclassification of Lyft’s drivers, but was later narrowed to only California drivers. After the Court denied both parties’ motions for summary judgment, the parties originally proposed a class settlement of $12.25 million, which Judge Chhabria rejected in April 2016. After further negotiations, the parties proposed the revised settlement, which received final approval while also maintaining the independent contractor status of the drivers.

Gig economy cases are also beginning to go to trial. In Lawson v. GrubHub Holdings, Inc., an on-demand food delivery company prevailed in a misclassification bench trial that was tried in the Northern District of California. In a lengthy opinion, Magistrate Judge Jacqueline Scott Corley concluded that GrubHub did not control the details of how the plaintiff-driver accomplished his work. According to the judge, however, there were some facts that indicated GrubHub exercised control over the driver. For example, GrubHub determined the driver’s rate of pay, which blocks of time to make available for the driver, and the geographical boundaries of the delivery zones. Also, GrubHub retained the right to terminate the driver’s agreement at will, upon 14 days’ notice. Weighing against these facts, the judge found that Grub hub did not control what vehicle the driver used, what the drivers wore during deliveries, and did not offer any training or orientation for the driver. In addition, the Judge analyzed a series of “secondary factors” under California state law, and determined these additional factors further weighed in favor of GrubHub. While these cases are highly fact-intensive, the GrubHub decision signals that it is possible for a gig-economy business to lawfully structure their business using an independent contractor model.

E. Options for Minimizing Risks of Liability

1. Recommended Factors and Considerations to Strengthen Defensibility of Independent Contractor Relationship

It is impossible to determine with certainty how any court or agency may rule when assessing the enforceability/defensibility of any one IC model. There are numerous steps, however, any company using ICs can and should take to enhance the enforceability of their IC models and minimize their risks of any misclassification liability. Many of these recommended steps have been factors courts have focused on when upholding IC status in recent cases.

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Specifically, we recommend that the following factors/business considerations be built into any IC model, to the extent possible, to minimize the risks of misclassification liability:

(a) Only contract with individuals who are incorporated into a separate legal entity and require proof of good standing for such entity;

(b) Where applicable, ensure contractors have multiple routes or territories, which will necessarily mean they also employ several helpers or employees for whom they control all terms and conditions of employment;

(c) Ensure the contractor’s relationship with the company is not established for a high degree of permanence by establishing an expiration date in the contract not to exceed one year at the longest;

(d) Avoid termination at-will language in contract;

(e) Allow the contractor to hire employees to assist him/her with the services and/or perform the services in his/her place without prior approval of the company;

(f) Allow the contractor to negotiate contract terms (e.g., rates);

(g) Require payment by the job—not time worked— and avoid paying any set salary;

(h) Allow the contractor to work elsewhere, have his/her own clients, and advertise his/her own services to others through the use of his/her own business cards or other advertising materials;

(i) Allow the contractor to control the economic aspects of his/her job by, for example:

(i) requiring significant investment in all equipment necessary to perform the job and no reimbursement of operating expenses or company-provided subsidies, privileges, goods, services or facilities at a discount or free (i.e., such as providing an office or office equipment for the contractor to use); and

(ii) providing opportunity for profit or loss based on managerial skill by allowing the contractor to make his/her services available to the market, accept or refuse work for the company at his/her discretion, and hire employees to perform work with him/her or in his/her place.

(j) Avoid any semblance of control over “manner and means” in which services are performed, such as:

(i) specific work hours or mandated work at company offices; (ii) designated break/lunch periods; (iii) specific techniques; (iv) training programs; (v) grooming standards; (vi) non-compete provisions; and (vii) mandated dress code, uniforms, or use of business cards with the

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company’s logo.

(k) No use of conventional discipline for contractors (rather, breach of contractual obligations may result in contract termination);

(l) Allow the contractor to own or obtain an equity interest in the business that can be sold to others without prior company approval for profit or loss;

(m) Do not offer independent contractors employee benefits or vacation; and

(n) Do not include contractors in employee meetings or employee training sessions.

It is imperative that these and other factors/business considerations be incorporated into a carefully-drafted IC agreement to increase the chances of the IC model being upheld.

2. Other Preventative Steps to Avoid/Minimize the Impact of Misclassification Litigation

While a strong independent contractor agreement with all of the bells and whistles (discussed above) is very important to defending an independent contractor misclassification challenge, it is perhaps equally as important that the model is adhered to in practice. This is because actual practice is the typical focus of any IC misclassification inquiry. And, actual practice in the field will inevitably be the focus of any misclassification litigation.

To ensure actual practice comports with the general independent contractor model you have established, we recommend several proactive steps, discussed more fully below, including: (1) an audit of policies and documents used with independent contractors; (2) review of current practices; and (3) management training.

a. Audit of Policies Used With Independent Contractors

Conducting regular audits of the policies used in the field with independent contractors, to ensure problematic documents are not being generated and relied on, is critical to assisting in the defense of an IC model. In any misclassification challenge, plaintiffs’ lawyers undoubtedly first look for whether policies exerting significant control over independent contractors or otherwise establishing multiple indicia of employment status on their face exist. This is because, with such an unlawful policy, obtaining class or collective action certification becomes much easier. Further, plaintiffs’ lawyers also look at whether significant employment documentation, such as termination checklists, performance evaluations, corrective action plans and the like, are uniformly used with independent contractors in practice. This, too, can make obtaining class or collective action certification much easier.

To avoid providing plaintiffs’ lawyers with the low-hanging fruit, it is critical to conduct regular audits in the field to ensure these types of problematic document trails are not being generated and relied on in the ordinary course. We, of course, recommend that any such audits be conducted by or at the explicit request of counsel to protect it under the attorney-client privilege, to the extent possible. This audit should include asking for and reviewing a sampling of communications used with independent contractors, policies applicable to independent contractors, and any other forms used with independent contractors. These documents should be reviewed to ensure: (1) employment-related terminology is not being used (i.e. hire or fire, discipline), (2) employment policies and procedures that are inconsistent with independent

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-15 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE contractor status, such as progressive disciplinary policies, are not being used; (3) other documents typically provided to employees, like employee handbooks, are not being provided to independent contractors; and (4) independent contractor files, to the extent you maintain them, are kept separately from employee files. If any issues are discovered during the audit, it is much easier to clean them up, with the assistance of counsel, in advance of any litigation. Audits like this are all the more important in states like Massachusetts, Connecticut and California, which use stringent IC tests or are hotbeds for litigation given the state law claims at issue.

b. Audit of Current Practices With Independent Contractors

Carefully assessing the current management practices with regard to independent contractors is also critical. Again, we highly recommend that this audit be either conducted by counsel or at the explicit direction of counsel to try to protect this from discovery under the attorney-client privilege to the greatest extent possible. Such an audit should focus on what practices management is employing with independent contractors. For example, if management is allowing independent contractors to take time off for vacation or otherwise without providing appropriate coverage for his/her business, this weighs in favor of employment status. Reviewing whether management is requiring the independent contractors to wear uniforms, display company logos or other insignia, which is typically required of employees only, is also important. The extent and nature of communications with independent contractors can also be problematic. For example, if management is calling the independent contractor multiple times a day, is requiring the independent contractor to call in to “report” to work, or is otherwise requiring regular reporting on the manner, method and means of performance, this, too, greatly weighs against independent contractor status. Importantly, merely ensuring compliance with the end results is fully consistent with independent contractor status. However, when management gets involved in how the independent contractor performs the manner, method and means of the job by controlling daily or other details, this will be problematic in a misclassification challenge.

c. Management Training

Finally, ensuring your management team truly understands the difference between independent contractors and employees is crucial. This is particularly true because your front- line management team will likely be the key witnesses in any misclassification challenge. An effective management training program should include several components, including: (1) proper terminology for use with independent contractors (i.e., management does not “hire” or “fire” independent contractors. Rather, they contract with or terminate the contract of independent contractors); (2) the difference between employees and independent contractors in terms of policy application, daily management (i.e., who sets the schedule, who controls the daily details of work), performance reviews, mandatory meetings and training, and the like..; and (3) the components of the contract. The importance of training management on the contract itself cannot be overemphasized enough. The management team needs to understand the various provisions of the contract and be able to explain them to the independent contractors when asked.

d. Arbitration Agreements With Class Action Waivers

Arbitration agreements with class action waivers remain a significant way to reduce the risk of facing class action liability arising from the alleged misclassification of independent contractors. In May 2018, the Supreme Court of the United States settled the contentious class action waiver issue that has riled courts for the past six years. In Epic Systems Corporation v. Lewis, the Court upheld class action waivers in arbitration agreements. Relying heavily on the

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-16 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE text of the Federal Arbitration Act (FAA) and “a congressional command requiring us to enforce, not override, the terms of the arbitration agreements before us,” the Court ruled that the FAA instructs “federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” The Court also reasoned that neither the FAA’s savings clause nor the National Labor Relations Act (NLRA) contravenes this conclusion.

e. Other Options for Minimizing Risks of Liability

In addition to the considerations discussed above, there are several other legal options companies can utilize to minimize the risk of IC misclassification liability. Some of these options include: (a) obtaining an opinion letter on the IC status of the individual in question from counsel; (b) requesting an SS-8 determination from the IRS on the proper status of such individuals (described below); and (c) petitioning for acceptance into the Voluntary Classification Settlement Program (VCSP) offered by the IRS (described below). All such options should be carefully discussed and planned with counsel, as each one may carry certain risk depending on the circumstances and may—or may not—be advisable accordingly. The use of a class action waiver in an arbitration agreement is another important consideration. Indeed, with the increase in misclassification litigation, more and more companies are implementing these sorts of agreements, at least in certain parts of the country. As discussed above, there are pros and cons with these sorts of agreements that must be carefully weighed and considered. And, until the Supreme Court issues its ruling on this issue, enforceability of these agreements remains up in the air, at least in certain parts of the country. However, given the prevalence of misclassification litigation—and high costs associated with the same—this is an option well worth considering.

IV. THE 10TH AMENDMENT LIVES – STATE AND LOCAL ACTIVITY IN THE WAGE AND HOUR SPACE

Historically, states have passed their own laws on a wide variety of wage and hour laws, such as:

• Minimum wage and overtime requirements • Meal breaks • Rest breaks • Minimum pay for reporting to work • Direct deposit and payroll cards • Frequency of pay • Paystub requirements • Advance notice of changes in pay or hours • Deduction from pay, including requirements for final paychecks upon termination from employment • Vacation policies – “use it or lose it” limitations • Wage statement “notice” to employees

Some states, particularly California, have traditionally been more prolific in passing state and local wage requirements. Most notably, California’s hyper-technical wage statement requirements with draconian penalties for technical errors have substantially increased the cost of having employees in California. For companies with employees in multiple states, it is becoming increasingly difficult for HR and payroll professionals to maintain wage practices that comply with the patchwork or ever-changing state and local wage rules. Employers may have employees in the same job classification across multiple states with widely varying pay

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-17 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE requirements. It is a struggle to keep up with current requirements, especially since they can vary even within a particular state given the increase in local ordinances impacting minimum wage, paid sick days and other wage requirements.

To address the wide variation in state minimum wage rates and in recognition of the demands on busy HR professionals, we have developed a subscription service, OD Comply State Wage and Hour Issues, for our clients who have employees in multiple states. OD Comply provides up-to-date information on common wage and hour laws for each state, including minimum wage, overtime, pay deductions, vacation pay and other issues. The service provides practical information on state wage hour laws, along with citations to statutes, regularly guidance and can be customized to particular states. https://ogletree.com/innovations/o-d- comply/state-wage-and-hour-issues.

In this section, we focus on three recent trends, namely, (1) the growing number of states passing pre-emption laws forbidding local governments and municipalities from creating inconsistent wage requirements; (2) the rise of state “don’t ask” laws that forbid employers from asking job candidates about prior salary or wage information, and (3) the increasing use of ballot initiatives to effectuate change in the wage/hour arena. We also discuss the potential extraterritorial effect of state-level wage and hour laws.

A. The Growing Trend of State Preemption of Local Wage Ordinances

State and local governments have been wrestling in recent years over who has authority to enact wage and hours laws as evidenced by the patchwork of local wage laws referenced above. In response, state legislators are increasingly using “preemption laws” – or laws that nullify the authority of local governments to enact their own wage-related regulations governing employers and local workers in that jurisdiction. After dozens of city and county governments voted to raise local minimum wage in the last several years and enact measures protecting workers beyond baseline state-required minimums, states have responded by passing laws usurping the ability of local governments to pass their own wage and hour laws. While we generally refer to these state laws as “pre-empting” local laws that are contrary to state law, in many cases they reinforce the concept of exclusivity: state and applicable federal law provide the exclusive remedy relative to wages and other workplace requirements. Bucking this trend, some states have taken the opposite approach by passing anti-preemption laws that expressly give local municipalities the power to enact wage and hour ordinances and regulations.

Opponents of preemption laws – local government leaders – argue that they should be permitted to enact laws governing their locality that are different from state-wide laws because they represent the level of government closest to the people they govern and better reflect their city’s values. Unencumbered by state-wide issues, local leaders point to the higher cost of living in cities and urban areas, and argue that city leaders have the right and responsibility to “even the playing field” by enacting higher minimum wages to offset the higher cost of living. In contrast, proponents of the preemption laws, typically state-wide leaders and business groups, are concerned with the inconsistency in regulations affecting the workplace. In order to relieve businesses from the task of navigating a patchwork of regulation, proponents of state pre- emption believe wage requirements should be uniform across the state. And, state leaders often point to the expansive employee-protection laws that already exist as evidence of ample remedies and protections for workers.

While preemption laws are on the rise, the scope of preemption varies significantly among the states. Some states only prevent local governments from enacting higher minimum

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-18 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE wage rates, while other states cast a wider net and prevent local governments from regulating employment discrimination or enacting any employee protection ordinances, including sick and vacation days, minimum wage rates, and employee benefits of any kind. Currently, twenty-four states have enacted some form of a preemption law that prohibits local governments from enacting their own wage and hour laws. Attachment A contains list of states that have enacted some form of a law pre-empting local governments from enacting wage requirements.

On the opposite end, eight states so far have passed laws expressly giving local governments the power to enact local wage and hour requirements. Attachment B contains a list of the states empowering local wage regulation and the localities that have done so.

Two states, New York and Oregon, have enacted separate minimum wage rates for workers in particular localities. For example, New York law provides a separate (and higher) minimum wage rate for workers in New York City, Nassau, Suffolk, and Westchester Counties. In Oregon, the state minimum wage law mandates a different minimum wage rates for the Portland metropolitan area, nonurban counties, and other parts of the state.

Not surprisingly, there have been legal challenges to state laws barring local governments from passing inconsistent wage requirements. In some states, courts have invalidated the preemption law. The two most notable examples are Missouri and Ohio. In Cooperative Home Care, Inc. v. City of St. Louis, 514 S.W.3d 571 (Mo. 2017), the Supreme Court of Missouri invalidated Missouri’s preemption law, holding that it violated the “single subject” provision of Missouri’s Constitution, which forbids a legislative practice known as “logrolling” – when a bill unnaturally addresses more than one subject matter. The legislature responded by adopting Mo. Stat. § 290.528, which corrects the problem by addressing only the topic of preemption and remains in effect today, thereby reinstating a bar on the ability of local government to enact their own minimum wage or “employment benefits” regulations. Ohio’s pre- emption law met with a similar fate – a state trial court ruled that it violated the Ohio Constitution’s single subject rule. City of Bexley v. State, 92 N.E.3d 397 (Ohio Com. Pl. 2017).

We anticipate that legal challenges to state preemption laws will continue, with a mixed bag of results depending on the geographic region. We also anticipate that, as in Missouri, there will be a legislative response to any adverse judicial review.

B. “Don’t Ask” State and Local Laws on the Rise

Another growing trend relates to state and local governments enacting “don’t ask” laws, which prohibit employers from asking an employee or applicant about prior compensation history. The “don’t ask” laws are designed to stem what many believe are systemic pay disparities between men and women and are predicated on the belief that asking about prior compensation will only sustain pay disparities. For employers with employees in multiple states, the patchwork of state and local regulations regarding permitted inquiries during the on-boarding process creates a significant compliance burden. In some states, the rules may vary city-by- city, further increasing the cost of compliance. Attachment C lists the states and localities that have enacted or are anticipated to soon enact state-wide “don’t ask” laws.

Several state laws that prohibit employers from inquiring about an applicant’s compensation history are imbedded in, and part of, broader legislation designed to promote pay equity. In those states, forbidding employers from inquiring about prior compensation is just one of many new requirements aimed at addressing perceived pay discrimination. For example,

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California, Delaware, Maryland, Massachusetts, New York, and Oregon have all passed pay equity laws that are much broader the requirements of the federal Equal Pay Act.

Other states, while not expanding the definition of pay discrimination or the burdens of proof beyond federal law, have imposed new requirements on employers relative to transparency, recordkeeping, and compliance. Yet other states (New Jersey, New York, and Pennsylvania) have, either through legislation or Executive Orders, bared public employers from asking about an employee or applicant’s prior compensation history.

Local governments have also jumped into the fray. For example, Chicago, Illinois, Louisville, Kentucky, New Orleans, Louisiana, and Kansas City, Missouri bar employers from asking about an applicant’s prior compensation history despite the absence of state-wide ban.

As noted above, some states have taken a very different approach and affirmatively preclude local governments from passing regulations or ordinances that impose special requirements (including “don’t ask” rules) for the hiring process. For example, Michigan, which does not have a “don’t ask” law at the state level, passed a law in March 2018 that prohibits local government bodies from adopting or enforcing any local policy, resolution, or ordinance regulating what a prospective employer must request, require, or exclude during the interview process or on an application for employment. Simply put, local governments cannot impose a “don’t ask” rule where none exists at the state level. In April 2018, Wisconsin enacted a law that affirmatively allows an employer to solicit prior salary information from prospective employees, and bars local government bodies from enacting or enforcing any ordinance to the contrary. 10

We anticipate that these competing trends will continue. Some states will prohibit the use of local ordinances to saddle employers with different or broader hiring, background check or interviewing requirements than otherwise exist under state law. Other states will expand pay equity protections and allow, even encourage, local regulation on the topic.

C. Ballot Initiatives to Increase Minimum Wage or Provide Paid Leave

State minimum wage rates continue to rise either through legislative enactment or, more recently, ballot initiatives. Many state legislatures regularly update the minimum wage rate to be effective in January or July of each year. A more recent trend has been to include proposed minimum wage increases through ballot initiatives. These initiatives, while often billed as “grass roots” movements, are often funded and supported by interested third-party groups. For example, this November, Missouri residents will vote on whether to raise the state’s minimum wage from $7.85 to $8.60 beginning in 2019, with additional 85-cent per hour increases each year until 2023. The measure would also exempt government employees from the minimum wage increases and the penalties for employers who do not comply.

In addition to minimum wage increases, we are also seeing a trend to use ballot initiatives to mandate paid sick days. In some states, a ballot initiative has greater legal protections (often constitutional) than statutes and cannot be modified by a majority vote of the legislature. For example, in September 2018 the Michigan legislature adopted a citizen-initiated, paid leave ballot proposal that was supposed to be put to a vote in the November 2018 general election. However, unlike the ballot initiative (which would have had immediate effect), the legislative response defers the effective date of the paid leave law until 90 days after the end of the current legislative session, roughly April 1, 2019. Without immediate effect, the legislature

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-20 2018 LABOR AND EMPLOYMENT COUNSEL EXCLUSIVE will have an opportunity to amend the proposal (with a simple majority vote) after the general election.

D. The Potential Extraterritorial Effect of State Wage Laws

State statutes setting wage and hour standards are often invoked by nonresident employees or resident employees working out of state. Generally, the laws of the state in which the work is performed govern, even when an employee is merely assigned temporarily to work in that state, but there are exceptions. Some wage and hour statutes have been held to apply extraterritorially, while others have not. The extraterritorial effect of wage and hour laws will vary state-by-state and are highly fact-specific. Much will depend on the precise language of the applicable state statute and the following factors:

• Where the work is performed; • Where the employee lives; and • The extent of the employer’s in-state contacts or presence.

The wage and hour laws in most states do not apply when the employee does not live or work in state of the law invoked, even if the employer is based in that state. California, Colorado, Connecticut, Illinois, Maryland, New Jersey, New York, North Carolina, and Ohio follow this approach. In a few states, however, state wage and hour laws may apply even if the employee neither lives nor works in that state, where (1) the employer has a substantial presence in that state; (2) a choice of law provision specifies that the law of that applies; or (3) where the employee’s employment is “based” in that state, even though the employee actually work in another state. Courts in Kansas, Kentucky, Massachusetts, and Washington generally favor this approach. The typical situations in which the extra-territorial effect of state wage and hour laws are addressed by courts are as follows:

• Nonresident employees working in state for resident employers. • Nonresident employees working out-of-state for resident employers. • Resident employees working out-of-state for resident employers. • Resident employees working in state for non-resident, out-of-state employers. • Resident employees working out-of-state for non-resident employers. • Nonresident employees working in state for out of state employers.

V. CONCLUSION

While the change in the federal administration provides some relief respecting the federal enforcement of wage and hour laws, several states and local governments have enacted new wage and hour mandates which have presented new challenges for employers, particularly those with operations in several states and municipalities. Employers will continue to be challenged in developing compliance policies which can be implemented and enforced.

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ENDNOTES

1 29 U.S.C. 259; 29 C.F.R 790. 2 Of course, the Opinion Letter would not provide an affirmative defense if the factual circumstances at issue are different from those set forth in the Opinion Letter. 3 29 U.S.C. 260 4 https://www.dol.gov/newsroom/releases/whd/whd20170627 5 Opinion Letters can be found at https://www.dol.gov/whd/opinion/search/index.htm? 6 Bryan Jarrett is acting head of the WHD while Ms. Stanton awaits confirmation. 7 Nevada, et al., v. U.S. Dep’t of Labor, et al., 2018 F.Supp.3d 520 (E.D.Tex. 2016), appeal pending, No. 16-41606 (5th Cir.) 8 https://www.dol.gov/whd/overtime/rfi2016.htm 9 The 2008 fact sheet propounds the following non-exclusive factors for determining independent contractor status: (1) the extent to which the services rendered are an integral prat of the principal’s business; (2) the permanency of the relationship; (3) the amount of the alleged contractor’s investment in facilities and equipment; (4) the nature and degree of control by the principal; (5) the alleged contractor’s opportunities for profit and loss; (6) the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and (7) the degree of independent business organization and operation. 10 Wis.Stat.section 103.36; https://ogletree.com/shared-content/content/blog/2018/may/wisconsin-law- prohibits-local-regulation-of-several-employment-issues

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C. 21-22 ATTACHMENT A

STATES WITH LAWS PRECLUDING LOCAL GOVERNMENTS FROM PASSING WAGE REQUIREMENTS

STATE LAW SUMMARY Alabama Ala. Code § 25-7-41 Prohibiting local government from enacting their own laws providing any employment benefit, including unpaid leave, wages, and work schedules, that is not required by state or federal law Arkansas Ark. Code § 11-4-222 Prohibiting local government from enacting a minimum wage rate or “employment benefit” that exceeds the requirements of federal or state law Colorado Colo. Rev. Stat. § 8-6-101 Prohibiting local government from enacting any “with respect to minimum wages” except as to their own employees Florida Fla. Stat. § 218.077 Prohibiting local government from enacting a minimum wage or other “employment benefits” not required by federal or state law except as to their own employees, employees of a contractor or subcontractor used by the local government, and employees of any employer receiving a direct tax abatement from the local government under the terms of a contract Georgia Ga. Code § 34-4-3.1 Prohibiting local government from adopting any “wage or employment benefit mandate” Idaho Idaho Code § 44-1502 Prohibiting local government from establishing a minimum wage that is higher than the statewide minimum wage Indiana Ind. Code § 22-2-16-3 Prohibiting local government from establishing “a benefit,” “term of employment,” “working condition,” or “attendance, scheduling, or leave policy” that exceeds the requirements of federal or state Iowa Iowa Code § 364.3 Prohibiting local government from enacting a minimum wage, “any form of employment leave,” “hiring practices,” “employment benefits,” “scheduling practices,” “or other terms or conditions of employment” that “exceed or conflict” with federal or state law Kansas Kan. Stat. § 12-16,130 Prohibiting local government from enacting “compensation,” “leave from work,” “employee benefit,” or “scheduling” laws Kentucky Ky. Rev. Stat. § 82.082 Prohibiting local government from enacting any law “in conflict with a . . . statute”); Kentucky Rest. Ass’n v. Louisville/Jefferson Cnty. Metro Gov’t, 501 S.W.3d 425, 428 (Ky. 2016) (striking down city-imposed minimum wage that exceeded state-wide rate) Louisiana La. Stat. Ann. § 23:642 Prohibiting local government from enacting “a mandatory, minimum number of vacation or sick leave days” or minimum wage rate Michigan Mich. Comp. Laws § Prohibiting local government from enacting a minimum wage rate that 123.1385 exceeds the requirements of federal or state law) and ADD MICHIGAN’S 2018 LAW CITE. Mississippi Miss. Code. § 17-1-51 Prohibiting local government from enacting minimum wage or “minimum number of vacation or sick days” Missouri Mo. Stat. § 290.528 Prohibiting local government from enacting minimum wage or “employment benefits” that exceed state law North Carolina N.C.S.L. 2017-4 § 3 & 4 Prohibiting local governments from broadly and generally “regulating private employment practices,” until at least December 1, 2020. STATE LAW SUMMARY Ohio Ohio Rev. Code § 4111.02 Prohibiting local government from enacting a minimum wage different from the state-wide minimum wage. However, the law has been struck down in certain parts of the state. See, e.g., City of Bexley v. State, 92 N.E.3d 397 (Ohio Com. Pl. 2017). Oklahoma Okla. Stat. tit. 40, § 160 Prohibiting local government from enacting minimum or “vacation or sick leave days” Pennsylvania 43 Pa. Stat. § 333.114a Preempting any local ordinance concerning minimum wage Rhode Island 28 R.I. Gen. Laws § 28-12- Prohibiting local government from enacting a minimum wage rate that 25 exceeds the requirements of federal or state law South Carolina S.C. Code § 6-1-130 Prohibiting local government from enacting a minimum wage rate that exceeds the requirements of federal law, except for contracts of which the local government is a party Tennessee Tenn. Code § 50-2-112 Prohibiting local government from enacting a minimum wage rate that exceeds the requirements of federal or state law, except where compliance would result in losing federal funding for a particular contract Texas Tex. Labor Code § Preempting any local ordinance concerning minimum wage except for 62.0515 contracts to which the local government is a party Utah Utah Code § 34-40-106 Prohibiting local government from enacting a minimum wage rate that exceeds the federal minimum wage, except where federal law requires the payment of a specified wage to persons working on projects funded in whole or in part by federal funds Wisconsin Wis. Stat. § 104.001 Prohibiting local government from enacting a minimum wage rate ATTACHMENT B

STATE EMPOWERING LOCAL GOVERNMENT TO PASS WAGE REGULATIONS AND THE LOCALITIES THAT HAVE DONE SO

STATE CITY Arizona Flagstaff

California Berkeley, Cupertino, El Cerrito, Emeryville, Long Beach, Los Altos, Los Angeles (city), Los Angeles County, Malibu, Milpitas, Mountain View, Oakland, Palo Alto, Pasadena, Redwood City, Richmond, San Diego, San Francisco, San Jose, San Leandro, San Mateo, Santa Clara (city)

Illinois Chicago, Cook County

Maine Portland

Maryland Baltimore, Montgomery County, Prince George’s County

Minnesota Minneapolis

New Mexico Bernalillo County, Las Cruces, Santa Fe (city), Santa Fe County

Washington Seattle, Tacoma ATTACHMENT C

STATE AND LOCAL GOVERNMENTS ENACTING “DON’T ASK” LAWS

STATE SCOPE California Employers may not seek an applicant’s pay or benefits history, and may not rely on prior salary (eff. 1/1/18) history in setting salary unless the applicant makes a voluntary and unprompted disclosure (but employers cannot use salary history to justify a pay disparity). If an applicant discloses prior pay history voluntarily, the employer may verify it. Connecticut Employers may not seek a candidate’s pay history, unless it was voluntarily disclosed. (eff. 1/1/19)

Delaware Employers may not seek compensation history from an applicant and are prohibited from (eff. 12/14/17) screening applicants based on past compensation, but the information can be confirmed after an offer is extended. Hawaii Employers may not seek a candidate’s pay history, unless it was voluntarily disclosed. The law (eff. 1/1/19) does not apply to internal candidates. Massachusetts Employers may not request salary history information or screen an applicant based on prior (eff. 7/1/18) salary history, but may confirm prior history if volunteered or if an offer has been extended. New Jersey New Jersey agencies and offices are prohibited from asking job applicants for their (eff. 2/1/18) compensation history, or investigating the prior salaries of applicants. New York State agencies and departments may not request salary history from applicants until after an (eff. 1/9/17) offer has been extended. If the applicant’s prior salary history is already known, that information may not be relied upon in determining such applicant’s salary, unless required by law or collective bargaining agreement. Oregon Employers may not seek an applicant’s prior pay history until after an offer is extended. (eff. 10/7/17) Employers are prohibited from using prior compensation to set pay, except for internal candidates. Pennsylvania State agencies may not ask about a job applicant’s compensation history at any stage during (eff. 9/4/18) the hiring process. Puerto Rico Employers may not inquire about an applicant’s salary history, but may inquire or confirm (eff. 3/8/17) salary history if the applicant voluntarily discloses it or if an offer of employment has been made. Vermont Employers may not request an applicant’s pay history. If the information is volunteered, the (eff. 7/1/18) employer may confirm it after an offer has been made.

The following chart lists the local government bodies that have enacted, or will soon enact, laws banning employers from inquiring about an applicant’s prior compensation history. This chart contains the same additional information as the chart above.

CITY SCOPE Albany County, New Employers are prohibited from requesting information about a job applicant’s previous York compensation and benefits until after a job offer is made and with the applicant’s written (eff. 12/17/17) authorization. Chicago, Illinois City departments may not ask for an applicant’s salary history. (eff. 4/10/18)

Kansas City, Missouri The City may not ask for an applicant’s prior pay history until hired at an agreed-upon salary. (eff. 7/26/18) CITY SCOPE Louisville, Kentucky City departments, agencies, and offices may not ask for an applicant’s salary history. (eff. 5/17/18) New York City, New Employers are prohibited from inquiring about a job applicant’s previous pay or benefits. If York an employer already has such information, it cannot use it to set pay unless the applicant (eff. 10/31/17) makes a voluntary and unprompted disclosure of salary history. If prior salary history is voluntarily disclosed, an employer may verify. New Orleans, City departments may not ask for an applicant’s salary history. Louisiana (eff. 1/25/17)

Philadelphia, Employers may not inquire about an applicant’s prior compensation history, and may not set Pennsylvania compensation based on past compensation unless the applicant knowingly and willfully (stayed) discloses it. Pittsburgh, City departments, divisions, agencies, or offices may not ask about an applicant’s prior pay Pennsylvania history and, if they discover it, cannot rely upon it unless the applicant volunteered it. (eff. 1/30/17) San Francisco, Employers may not ask about or consider a job applicant’s prior salary history, and may not California disclose the salary history of any current or former employee without written consent. (eff. 7/1/18) Westchester County, Employers may not ask about a job applicant’s prior salary history, but may confirm prior salary New York (eff. after an offer is made, if the applicant provides prior salary to support a higher wage than 7/8/18) offered and the applicant furnishes written authorization for a verification of prior salary history

35720393.1 DOL Opinion Letters and Local Laws: Wage and Hour Update

Presented by Margaret Carroll Alli (Detroit (Metro)) Robert R. Roginson (Los Angeles)

What’s New and What’s Next at DOL?

. Opinion letters are back . P.A.I.D program continues . Anticipated regulation on the new salary level for white collar overtime exemptions . Wage/Hour Administrator

1 Independent Contractor Developments

Numerous Tests For IC Status

. There are many different tests for determining IC status . Depends on the particular law, particular state, particular court, or agency . Common themes throughout: all attempting to determine whether the worker is truly independently in business, or whether he is controlled by and reliant on your business

2 DOL Enforcement Initiatives

. 2017 and 2018 have seen a change in attitude about IC enforcement by DOL, though it has not gone away . June 2017: Secretary of Labor Acosta withdrew the 2015 Administrator’s Interpretation on IC status that concluded that “most workers are employees under the FLSA” . DOL removed its dedicated website on IC classification . DOL pulled a recent Fact Sheet on IC factors and republished a 2008 Fact Sheet

DOL Enforcement Initiatives

. Wage and Hour Division budget was decreased from $277M to $230.1M, but some of that was allotted to compliance assistance – PAID program for voluntary payment of back wages to employees after self audit kicked off on April 3 for six-month pilot program – Compliance videos now available for employers . It appears that the WHD will be more employer friendly than the last administration’s WHD, but do not become complacent – Less agency enforcement may mean more lawsuits!

3 State and Local Enforcement Initiatives

. Attorney General Investigations and Joint Task Forces . Legislative and Other State Initiatives – California adopts “ABC” test – Massachusetts’ use of “ABC” test – New Jersey and Connecticut applying broad “ABC” test – Numerous states have passed some version of legislation intended to curtail misclassification – Rhode Island – anonymous tip line – Municipalities also passing legislation

“ABC” Test Used by Several States

. No balancing test—the company must overcome the presumption of employee status by proving the following three requirements: – The worker is free from direction and control in the performance of the service, both under the contract of hire and in fact – The worker’s services must be performed either (i) outside the usual course of the employer’s business or (ii) outside all the employer’s places of business – The worker must be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the service being provided

4 California Dynamex v. Superior Court, 4 Cal.5th 903 (2018) . California adopts an ABC test for determining whether a worker is an employee or an independent contractor under the California wage orders . The new ABC test replaces the 29-year-old Borello test, which is a multi-factor test based primarily upon a company’s “right to control” the worker

California Dynamex v. Superior Court, 4 Cal.5th 903 (2018)

. Application to other Labor Code laws . Court is clear that the ABC test applies to determine employee status under the wage orders only – Includes, among other things, minimum wage, overtime, meal periods, rest periods, and reimbursement for tools and uniforms . Court expressly states that it was not deciding whether ABC test applies to other Labor Code claims: – Claims for reimbursement under LC 2802 – Meal period claims under LC 512 – Overtime under LC 510 – Derivative claims like itemized wage statements (check stubs) under LC 226 . Unclear whether it applies to Private Attorneys General Act (PAGA) claims . Difficult to see how trial courts will apply different tests to the same workers

5 Key Cases

. Delivery company cases . Janitorial franchisor cases . Rideshare gig economy cases . NLRB cases – 2/18: NLRB asked for briefing on issue of whether IC misclassification alone can violate the NLRA . California Litigation – Grub Hub trial and ruling in favor of Grub Hub (on appeal)

Rideshare Litigation

. Likely will continue to litigate issue nationwide, absent legislative changes

6 Checklist of Factors That Support IC Status

. Enter into a written contract with ICs – not controlling but essential! . Require ICs to be set up in a separate legal entity, and require proof of good standing for same . Where applicable, ensure that ICs have multiple routes or territories, which would require them to employ helpers or employees . Avoid permanent relationships – establish an expiration date in the contract not to exceed one year at the longest . Avoid termination at will language in contract . Allow the IC to hire employees to assist him/her with the services and/or to perform services in his/her place without prior company approval . Allow the IC to negotiate contract terms (e.g., rates) . Require payment by the job – not hourly – and avoid paying any set salary . No exclusivity: allow IC to work for other customers, to advertise his/her services to others through his/her own business cards or other advertising materials

. Allow the IC to control the economic aspects of his/her business by, for example: – Requiring significant investment in all equipment necessary to perform the service – No reimbursement of business expenses – No provision of subsidies, privileges, goods, services, or facilities at a discount or free (e.g., providing an office or office equipment for IC use) – Provide an opportunity for profit or loss based on managerial skill by allowing the IC to make his/her services available to the market, accept or refuse work for your Company (document any refusals) at his/her discretion, and hire employees to perform work with him/her or in his/her place

7 . Avoid CONTROL over the manner and means in which services are performed, such as: – Specific work hours or mandated work at company offices – Designated break/lunch periods – Specific techniques – Employee handbooks or policy manuals – Training programs – Grooming provisions – Noncompetition provisions – Mandated dress code, uniforms, or use of business cards with the company’s logo

. No use of conventional discipline for ICs (say that breach of contract may result in contract termination) . Allow the IC to own or obtain an equity interest in the business that can be sold to others without prior company approval for profit or loss . No benefits or vacation . Do not include ICs in employee meetings or employee training sessions

8 Other Best Practices To Consider

. Regular audit of policies and practices used with ICs to ensure that they are appropriate and being followed – Under supervision of counsel – Look for: • Employment related terminology • Employment policies and procedures being applied to ICs • IC files kept separately from employee files • Best practices for IC status that are not being followed by supervisors . Management Training – This is crucial – Managers need to understand the difference between employees and ICs and their actions on the front line can make a big difference in your case

Tip

. Consider entering into a mandatory arbitration agreement with a class action waiver in it, especially in light of Supreme Court’s decision in Epic Systems Corp. v. Lewis allowing such agreements

9 Wage & Hour Laws – State/Local Trends

10 Why So Much State and Local Activity?

. The FLSA expressly provides that states and localities can establish: – A higher minimum wage – Shorter periods before overtime is required . Approximately 29 states have established higher minimum wages . Ballot initiatives on the rise

Here They Are…

11 Regulating How Employees Are Paid

. Beyond how much employees are paid, states and localities regulate how they are paid . For example: – Frequency of payment – Form of payment – Payment on termination – Paystubs/wage statements

States/Territories With Meal Period Laws According to U.S. DOL

12 States With Rest Period Laws

. California . Colorado . Illinois . Kentucky . Minnesota . Nevada . Oregon . Vermont . Washington

State/Local Paid Sick Leave Laws

. Clearly on the rise . At least 9 states, 30 cities have paid sick leave laws/regulations . Different places, different requirements  Accrual  Carryover  Limitations on use  Eligibility

13 Growing Trend of “Don’t Ask” Laws

. 11 states . 10 local governments . Prohibit inquiries about compensation history

Extra-Territorial Effect of State Wage Laws?

. Nonresident employees working in state for resident employer? . Resident employees working out-of-state for resident employers? . Resident employees working in state for non-resident employer?

14 Preemption of Local Wage/Hour Laws

. 24 states prohibit local governments from passing various forms of wage requirements . Attempt to avoid a patchwork of local laws

DOL Opinion Letters and Local Laws: Wage and Hour Update

Presented by Margaret Carroll Alli (Detroit (Metro)) Robert R. Roginson (Los Angeles)

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