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

Two Federal Agencies Make it Easier to Establish Independent Contractor Status

Q.  What is the standard for determining whether a worker is an independent contractor for purposes of federal wage and hour laws and union organizing conduct?

A.  Recently, both the U.S. Department of Labor (DOL) and the National Labor Relations Board (NLRB) issued documents supporting independent contractor status, evidencing the more pro-employer stance of the Trump administration as compared to the Obama administration. Although those documents — an opinion letter from the DOL and an advice memorandum from the NLRB’s Office of General Counsel — apply only to misclassification claims under the Fair Labor Standards Act (FLSA) and the National Labor Relations Act (NLRA), respectively, they provide helpful guidance to companies on structuring their independent contractor relationships to minimize the risk of a misclassification claim. Companies should be mindful, however, that other laws — such as state wage and hour, unemployment compensation and workers’ compensation statutes — may impose higher burdens for proving that individuals are independent contractors.

To read the full article, click here.

Susan K. Lessack and Tracey E. Diamond

The Importance of Clear Floating Holidays and Personal Days Policies

Q:  My company offers floating holidays to employees.  Can we have a “use it or lose it” policy for unused floating holidays?  Do they have to be paid out at termination?  What about personal days?

A.  Like many wage and hour questions, the treatment of floating holidays and personal days is governed by state law. As explained in more detail below, in most states, treatment of floating holidays and personal days is governed by the employer’s policy.  However, in California, treatment is governed by state law.

Many employers offer paid floating holidays and/or paid personal days to give employees flexibility to use them for religious holidays or special events, such as birthdays. Some employers allow employees to use floating holidays/personal days anytime during the year, while others tie their use to a specific event.  For example, some employers provide a floating holiday upon an annual employment anniversary, and require that the holiday be used within a week of the anniversary.  Under most employer policies, personal days can be used at any time during the year, subject to employer approval.

Most states, including New Jersey and Pennsylvania, allow for floating holidays and personal days to be governed by the employer’s written policies. If the employer’s policy states that unused floating holidays/personal days are forfeited at the end of the year, that policy governs.  Likewise, an employer’s policy may provide that floating holidays and personal days will not be paid upon termination.  In many cases, however, the lack of a written policy may be held against the employer, even if the employer’s practice is to require forfeiture and/or refuse payout at termination.  In short, in most jurisdictions, the employer may set the rules for floating holidays, but the employer is well-advised to do so in a clear written policy.

In California, the type of floating holiday/personal day affects its treatment. The California Division of Labor Standards Enforcement has opined that leave time that is provided without condition is presumed to be vacation (and thus treated as wages) no matter what the employer calls the days off.  Thus, floating holidays/personal days that can be used at any time are treated like vacation, which means that under California law, they cannot be forfeited (i.e. must roll over from year to year) and must be paid out upon termination.  Floating holidays/personal days that are tied to a specific date (such as an employment anniversary, a birthday or the selection of one of a number of holidays) and must be used on or near that date, are not treated as vacation and therefore, under California law, they can be forfeited if not used and the employer does not have to pay the employee for the unused time upon termination.

Regardless of where they do business, employers should have clear written policies regarding treatment of floating holidays and personal days. Moreover, in California, employers who do not want floating holidays/personal days to roll over year-to-year or be paid out upon termination should revise their policies so that the time off is tied to a specific event or date, rather than allowing floating holidays or personal days that may be used for any reason.

–Jessica Rothenberg