New York State To Eliminate Tip Credit For Many Employees Beginning June 2020

Q:  I heard New York is changing its rules around tip credits for some types of employees.  What do I need to know?

A:  A tip credit is a concept permitted under the Fair Labor Standards Act (“FLSA”) and many state laws.  A tip credit allows employers to pay employees a cash wage of less than the minimum wage and take a tip credit up to a set amount.  For example, under the FLSA, employers can pay tipped employees a minimum cash wage of $2.13 per hour, and take a tip credit of $5.12 per hour.  If employees receive less than $5.12 an hour in tips, the employer must pay the employee the difference so that an employee always earns at least $7.25 (the minimum wage) per hour.  Regardless of whether an employer takes a tip credit, all tips are the property of the employee.  So, if an employer takes a tip credit and the employee makes more than $5.12 per hour in tips, the additional amount belongs to the tipped employee.

Currently, New York employers are permitted to take a tip credit for employees in miscellaneous industries. Employees covered by the miscellaneous industries wage order are those employees who are not covered by any of the other wage orders (hospitality, agricultural, non-profit, and building services).  Common types of employees covered by the miscellaneous wage order include employees in hair salons, nail salons, and car washes, as well as door-persons, tow truck drivers, valet parking attendants, and dog groomers.  The amount of the tip credit varies depending on: (1) where the employee is (New York City, Long Island & Westchester, or the remainder of New York); and (2) the average amount of tips the employee receives per week.  There is a “low” and “high” tip credit – if an employee’s average weekly tip earnings fall below the low scale, then the employer cannot take a tip credit.  If an employee’s average weekly tip earnings fall between the low and high scale, the employer can apply the low tip credit.  If the employee’s average weekly tip earnings exceed the high scale, then the employer can apply the high tip credit.

Governor Cuomo recently announced that New York is eliminating the tip credit for the miscellaneous industries. The decision is fueled by the New York Department of Labor’s (“NY DOL”) findings that the miscellaneous industries are often those in which wage theft is most prevalent.  In addition to malicious action by employers to underpay employees, the NY DOL found that there is generally confusion about tip credits among both employers and employees, making it difficult to ensure it is properly utilized.

The elimination will occur in two phases – on June 30, 2020, the difference between the minimum wage and current tip wages will be cut in half, and on December 31, 2020, the tip credit will be completely eliminated. For example, for a miscellaneous industry employee in New York City, an employer can currently pay a cash wage of $11.35 – $12.75, and take a tip credit of $2.25 to $3.65, depending on the employee’s weekly tip average.  Beginning June 30, 2020, the employer must pay a cash wage of $13.15 – $13.85 per hour, and can only take a tip credit of $1.15 – $1.85, depending on the employee’s weekly tip average.   Beginning December 31, 2020, the employer must pay a cash wage of $15.00 per hour, and cannot take any tip credit.

Jessica Rothenberg

Pennsylvania Supreme Court Confirms That Employers Cannot Use Fluctuating Workweek Method of Calculating Overtime

Q: I heard that the Pennsylvania Supreme Court recently issued a major ruling regarding overtime pay. What do I need to know?

A: On November 20, 2019, the Pennsylvania Supreme Court rejected the application of the fluctuating workweek method (“FWW Method”) of calculating overtime under the Pennsylvania Minimum Wage Act (PMWA) and its corresponding regulations. As a result, Pennsylvania employers must pay salaried, non-exempt employees an additional one and a half times the employees’ regular rate of pay for every hour worked over 40 in a workweek. See Chevalier v. Gen. Nutrition Ctrs., Inc., Nos. 22 WAP 2018, 23 WAP 2018 (Pa. Nov. 20, 2019).

Background

In general, non-exempt employees must be paid overtime at one and a half times their regular rate of pay for every hour worked in excess of 40 in a workweek. However, regulations implementing the federal Fair Labor Standards Act (FLSA) specifically permit employers to pay salaried, non-exempt employees using the FWW Method when their number of hours worked fluctuate from week to week. See 29 C.F.R. § 778.114. Under the FWW Method, an employer and employee can agree that the employee will receive a fixed weekly salary as straight time pay, regardless of the number of hours worked in a workweek. In addition to this base straight time salary, the employee is entitled to overtime pay at a rate of one-half the employee’s regular rate of pay. The overtime calculation of one-half the regular rate (rather than one and a half times the regular rate) is based on the principle that the employee’s underlying salary already covers all straight time due for the actual hours worked.

Unlike the regulations implementing the FLSA, however, nothing in the PMWA or its implementing regulations specifically authorizes the use of the FWW Method. In recent years, three different Pennsylvania federal courts rejected the FWW Method under state law, instead holding that employers must pay Pennsylvania employees overtime equal to one and one-half times the employee’s regular rate of pay. Pennsylvania’s highest court had not weighed in on the issue—until now.

The Case

Plaintiff represented a class of non-exempt store managers who were paid a fixed weekly salary plus commissions, regardless of the number of hours they worked in a week. To determine overtime compensation, the defendant utilized the FWW Method. The defendant calculated each manager’s “regular rate” by dividing the manager’s fixed weekly salary by the actual number of hours worked, and then paid overtime at one-half times that regular rate for all hours worked in excess of 40. Plaintiff argued that the FWW Method was not permitted by Pennsylvania law and that she should have been paid one and a half times her regular rate for all hours worked in excess of 40.

The Court held that the FWW Method is not permissible under state law and that salaried non-exempt employees must be paid one and a half times their regular rate for all overtime hours. In coming to its conclusion, the Court cited to the PMWA and its implementing regulations which explicitly provide that each “employee shall be paid for overtime not less than 1-1/2 times the employee’s regular rate of pay for all hours in excess of 40 hours in a workweek.” The Court also found that the promulgation of certain FLSA regulations by the Pennsylvania Department of Labor and Industry regarding other methods of overtime calculation, combined with the Department’s failure to adopt the FWW Method regulation, were strong evidence that the FWW Method is not a permissible means of calculating overtime under Pennsylvania law.

Going Forward

The FWW Method of paying overtime in Pennsylvania has been of questionable legality for some time. The latest Supreme Court decision confirms that employers should not be utilizing the FWW Method of compensation in Pennsylvania—despite the fact that it remains permissible under federal law.

Coincidentally, on the same day that the Supreme Court issued its decision, the Pennsylvania Senate passed a bill amending the PMWA that would, among other things, insert a provision into the Act providing that the wage and hour requirements in the PMWA “shall be applied in accordance with the minimum wage and overtime provisions of the” FLSA and its regulations, “except when a higher standard is specified” under state law.

Since the PMWA does not specifically address the FWW Method, this piece of legislation may ultimately have the effect of making the FWW Method a viable option for Pennsylvania employers to use when calculating overtime pay for their non-exempt salaried employees. While we expect the legislation to ultimately pass the Pennsylvania House and be signed by the Governor, until that happens, Pennsylvania employers should heed the Chevalier decision and not utilize the FWW Method of calculating and paying overtime.

Lee Tankle and Jonathan Gilman

 

Ninth Circuit Finds Franchisors Not Joint Employers of Employees of Franchisees Absent Direct Control Over Wages, Hours and Working Conditions

Q.  As a franchisor, could I potentially be held liable for the wage and hour violations committed by franchisees of my organization against their employees?

A.  On October 1, 2019, a three-judge panel of the Ninth Circuit Court of Appeals ruled that McDonald’s Corporation was not liable as a joint employer for any alleged wage and hour violations committed against its California franchisee’s employees because McDonald’s did not exercise enough control over them.

In Salazar v. McDonald’s Corp., a class of approximately 1,400 restaurant workers at McDonald’s franchises in California alleged that they were denied overtime premiums, meal and rest breaks, and other benefits in violation of the California Labor Code. They argued that McDonald’s and itsCalifornia franchisee were joint employers such that McDonald’s should be held liable for the violations. In support of their joint employer theory, the restaurant workers conveyed that McDonald’s required the franchisees to use specific computer systems for timekeeping which allegedly caused them to miss out on receiving overtime pay, and to send their managers to McDonald’s-sponsored trainings, which included topics on wage and hour policies. On the other hand, the facts also showed that the California franchisees were solely responsible for setting wages, interviewing, hiring, firing, supervising, and paying all of its employees.

The Ninth Circuit ultimately determined McDonald’s was not a joint employer of its franchisees’ workers for purposes of wage and hour liability. Its decision narrowly focused on the California Supreme Court’s 2010 ruling in Martinez v. Combs, which addressed three alternative definitions for determining whether an employment relationship exists: (1) exercising “control” over employees’ wages, hours, or working conditions; (2) “suffering or permitting” employees to work; or (3) creating a common law employment relationship. Under the “control” definition, the Ninth Circuit held that McDonald’s did not have the necessary control over “day-to-day aspects” of working conditions, such as hiring, direction, supervision, or discharge; rather, McDonald’s only had direct control over quality, such as operational branding. It also found that McDonald’s did not fall under the “suffer or permit” definition, which “pertains to responsibility for the fact of employment itself. The question under California law is whether McDonald’s is one of Plaintiffs’ employers, not whether McDonald’s caused Plaintiffs’ employer to violate wage-and-hour laws by giving the employer bad tools or bad advice.” For similar reasons, the Ninth Circuit panel held that McDonald’s could not be considered an employer under California common law because its quality control and maintenance of brand standards was not evidence that it had the requisite level of control over the workers’ employment to be deemed a joint employer.

The Ninth Circuit also rejected plaintiffs’ novel legal argument that McDonald’s was liable for wage and hour violations under an ostensible-agency theory, as it noted the term “agent” under state law only applies to an employer that exercises control over the wages, hours, or working conditions of workers, which was not the case here. In addition, the Court ruled that the workers’ negligence claim based on McDonald’s alleged failure to prevent the violations failed, as the claim was preempted by California’s wage and hour statutes and plaintiffs could prove neither the damages nor the duty elements required under a negligence theory of liability.

The Ninth Circuit ruling is significant for franchisors and other affiliated companies of employers, as it clarifies that a joint employment relationship under California wage and hour laws primarily depends on whether the company exerts direct control over day-to-day working conditions, such as hiring, direction, supervision, and discharge. The decision was issued only one week after a California appellate court ruled that Shell Oil Products US was not a joint employer for purposes of California wage and hour violations based on the same test employed by the Ninth Circuit. In April 2019, the U.S. Department of Labor proposed the enactment of a similar control test for determining joint employer liability under the Fair Labor Standards Act. Nonetheless, companies are advised to consult with experienced labor and employment attorneys in order to stay abreast of the evolving tests used to determine joint employment liability.

Jonathan Gilman

 

Agreement Between the Parties Dictates Whether a Third Party Bonus Should be Included in the Calculation of Overtime Pay

Q.  A client of my company asked whether it could offer production bonuses to our employees who deliver their work product prior to the deadline.  Does the FLSA require my company to account for these third-party bonuses when calculating the regular rate of pay for overtime purposes?

A.  The answer to your question depends on the particular circumstances, according to the Third Circuit. In a case of first impression, Secretary U.S. Department of Labor v. Bristol Excavating, the Third Circuit Court of Appeals addressed the question of whether an employer must treat bonuses provided by third parties as “remuneration for employment” when calculating employees’ overtime rate of pay.

The defendant in the case, a small excavation company, contracted with a natural gas company to provide equipment, labor, and other services at a number of drill sites in Pennsylvania. At the drill sites, the defendant’s employees frequently worked twelve-hour shifts, often for two-week periods without a day off.  The natural gas company maintained a bonus program by which its own employees received “Pacesetter” bonuses for completing their work quickly, along with other safety and efficiency-related bonuses.  Following inquiries by the defendant’s employees, the gas company offered to extend the program to the defendant’s employees and the defendant acquiesced.  The defendant agreed to handle the administrative chores necessary for its employees to receive the bonuses, specifically, by rolling the bonuses into its regular payroll process and distributing payment to its employees after making the routine payroll deductions.  However, the defendant did not include the bonus payments from the gas company when calculating the regular rate of pay for overtime purposes.

The U.S. Department of Labor (DOL) audited the defendant’s offices as part of a routine inspection to assure that it was properly calculating overtime compensation. The auditor determined that the bonuses should be added to the calculation of the employees’ regular rate of pay.  When the company refused, the DOL filed suit, alleging that the company violated the FLSA’s overtime provisions.

Under the Fair Labor Standards Act (“FLSA”), employers must pay employees one-and-a-half times their regular rate of pay for all hours worked above 40 in a work week. “Regular rate” includes “all remuneration for employment paid to, or on behalf of, the employee.”  However, “remuneration for employment” is not defined in the overtime provisions or elsewhere in the FLSA.

The DOL asserted that employers must include bonuses from third parties in the regular rate of pay when calculating overtime pay, regardless of what the employer and employee may have agreed. Agreeing with the Department of Labor, the district court concluded that the incentive bonuses should have been included in the regular rate of pay because they were remuneration for employment and did not qualify for any of the statutory exemptions.

On appeal, however, the Third Circuit decided otherwise. The court held that a third-party payment qualifies as a remuneration for employment only when the employer and employee have effectively agreed that it will.  In the absence of an explicit agreement between the parties, the courts should look for an implicit agreement based on a holistic consideration of the particular facts of each case.  Factors for the court to consider include: (i) whether the specific requirements for receiving the payment are known by the employees in advance of their performing the relevant work; (ii) whether the payment itself is for a reasonably specific amount; and (iii) whether the employer’s facilitation of the payment is significantly more than serving as a pass through vehicle.  The more involved an employer becomes in facilitating the bonus or dictating its terms, “the clearer it becomes that the employer is invested in the arrangement in a way that could be called an implicit agreement with the employees.”

With these points in mind, if your company does not wish to include third-party bonuses in the regular rate of pay calculation for overtime purposes, the employer should have the employee agree in writing that such bonuses do not qualify as remuneration for employment. In addition, employers should analyze each payment carefully to ensure that it satisfies the Third Circuit test.  In any event, the less involvement the company has in facilitating bonus payments, the better, given that “an employer’s role in initiating, designing, and managing the incentive bonus program will likely be of high importance.”  We recommend consulting with counsel about how the Third Circuit’s decision in Bristol Excavating applies to your specific situation.

Rogers Stevens

 

New DOL Overtime Rule Takes Effect January 1, 2020

Q.  Has the salary threshold increased for exempt status under the Fair Labor Standards Act?

A.  On September 24 — more than five years after the Obama administration first proposed updating the overtime regulations of the Fair Labor Standards Act (FLSA) — the U.S. Department of Labor (DOL) released the final version of its long-anticipated rule expanding overtime eligibility for certain employees making less than $35,568 per year. The final rule is largely unchanged from the proposed rule released in March 2019, and the dollar amounts for the exemptions are lower than those in the rule published by the Obama administration in May 2016 — a rule that was enjoined shortly before it was scheduled to go into effect.

For more information, click here.

Christopher J. Moran and Lee E. Tankle