Third Circuit Rules That Paid Meal Breaks Do Not Offset FLSA Overtime Liability

On October 7, 2016, the Third Circuit underscored the need for employers to compensate all hours worked by non-exempt employees even when employers pay employees for break time they could treat as non-compensable under the Fair Labor Standards Act (“FLSA”).

In Smiley v. E.I. DuPont De Nemours & Company, plaintiffs filed an FLSA collective action and Pennsylvania state law class action seeking compensation for unpaid time spent donning and doffing uniforms and safety gear and performing other activities before and after their shifts. Unpaid time averaged 30-60 minutes per day.

Under DuPont’s written policy, plaintiffs working 12-hour shifts were paid for a 30-minute meal break and two other 30-minute breaks per shift. DuPont classified paid break time as hours worked for overtime purposes even though the FLSA does not require it to do so. For the employees at issue, paid break time always exceeded the unpaid pre-shift and post-shift donning and doffing time.

DuPont argued plaintiffs’ claims for unpaid overtime failed because it voluntarily treated break time as hours worked, such that the time qualified as an offset against the 30-60 minutes of daily unpaid pre-shift and post-shift time. The District Court agreed with DuPont and dismissed plaintiffs’ lawsuit in its entirety.

On appeal, the Third Circuit rejected DuPont’s offset argument and overturned the dismissal. After focusing on the FLSA’s “broad remedial purpose,” the Court noted that employers have some flexibility when considering whether to treat bona fide meal breaks as hours worked but held the FLSA explicitly permits offsets against overtime pay only in three specific situations, none of which addressed paid meal breaks.

The Third Circuit concluded that nothing in the FLSA authorized an employer to offset discretionary compensation the employer included in calculating employees’ regular rate of pay. Even though the FLSA does not require DuPont to pay for meal and other breaks or to treat such time as hours worked, once it did so voluntarily, it could not use this time as an offset against other time spent working that it did not count for overtime purposes.

Smiley is an important lesson for employers to review pay practices and ensure that all hours worked by non-exempt employees are compensated. Even if an employer goes beyond what the FLSA requires and pays an employees for meal breaks, that generosity cannot be used to offset other potential overtime violations in the Third Circuit.

The Third Circuit’s decision underscores the need for technical compliance with FLSA requirements. If a pay practice is not expressly authorized by the FLSA or implementing regulations, the practice may be held to run afoul of its mandates and expose employers to class-based liability even if they have the best of intentions and are attempting to exceed its mandates. Smiley highlights the need for companies, particularly smaller companies and startups, to seek review of employment practices by sophisticated employment counsel.

CONTACTS

If you have any questions or would like more information on the issues discussed in this article, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys provide employment counseling and litigate employment matters on behalf of both employers and employees.

Compliance enforcement for sale?

Trial lawyer Reuben Guttman questions how America’s attorney generals and the political organisations with which they associate raise funds.

Sometimes the press has a way of seeing the tip of the iceberg without enquiring into the breadth and depth of the whole mass. Such is the case with Pam Bondi, Florida’s attorney general. Amidst her purported investigation of Trump University, she took a $25,000 campaign contribution from Donald Trump’s Foundation. On the face of it, the payment violated federal law because charitable foundations cannot use their money for political campaign contributions. To make matters worse, while the New York State attorney general embarked on litigation against Trump University, Bondi chose not to jump into the fray. While it does not look good, this is perhaps the tip of the iceberg. So what’s underneath the tip?

Compliance enforcement at the state level is either for sale or has the appearance of being for sale. And as lawyers are taught in law school, even the appearance of impropriety has the capacity to impact confidence in the rule of law.

State attorney generals control the enforcement spigot. They make threshold decisions about whether to enforce a law, whether a set of facts even constitutes a violation, and whether enforcement should be privatised through retention of outside law firms.

Given their roles in making critical decisions about law enforcement, one would think that efforts would be taken to ensure that attorney general decision making is not tainted by the appearance of impropriety. Curiously, rather than steer clear of that appearance, attorney generals have institutionalised it through creation of the Republican Attorney Generals Association (RAGA) and the Democratic Attorney Generals Association (DAGA). These organisations – the officers of which are elected attorney generals – raise funds from some of the very individuals and corporations who are within the orbit of the attorney general enforcement authority.

Through various functions, RAGA and DAGA arrange settings for regulators to mingle with the regulated. This year, RAGA has events scheduled at the Broadmoor Resort in Colorado, a retreat at Pebble Beach, California and a meeting at Omni Barton Creek in Austin, Texas.  Meanwhile DAGA will be holding a reception and dinner at the Four Seasons Hotel in Washington, DC, a 2017 winter conference in Fort Lauderdale and a spring 2017 conference at the Nines Hotel in Portland, Oregon.

A glance at information gathered by the Center for Responsive Politics provides insight into DAGA’s funders and a hint at with whom the Democratic AG’s mingle. Funders range from large pharmaceutical companies – some of which have been the target of investigations and compliance enforcement – to a range of law firms, some of which have represented state agencies and even the offices of attorney generals.

A 2014 membership benefits breakdown by RAGA, disclosed by the New York Times, lists benefits accorded to those whose annual contribution is $125,000. Members of the “Edmund Randolph Club” get a “quarterly call with a featured attorney general,” the “opportunity to submit issue briefing topics and to be a panellist at a RAGA National Meeting,” and “Access to the annual RAGA (2014) retreat in San Diego.” For the record, Edmund Randolph was the first attorney general of the United States.

For its part, the DAGA website makes no bones about selling access to the offices of the attorney general the website claims to be the “second most powerful in state government.” The website states that as a supporter of DAGA, you will enjoy a list of benefits including “Issue conferences,” “AG roundtables,” “political updates,” and a “Democratic AG Directory” where “DAGA members receive a comprehensive directory of all Democratic Attorney Generals and their key staff and office contacts.” The description of the AG Roundtables makes clear that they are designed to “provide a unique opportunity for focused conversation with specific AG’s in small settings.”

The RAGA website is clear about its mission: to get Republicans elected as attorney generals. This year RAGA has focused its efforts on the race for North Carolina’s attorney general. Rather than merely promoting the qualifications of the Republican candidate, RAGA has gone one step further and launched a website dedicated to the Democratic candidate, Josh Stein. The site is called ExtremeHarvardRadical.com.  This so-called “extreme radical” is a North Carolina state senator who spent seven years as senior deputy attorney general of North Carolina and was honoured by both Mothers Against Drunk Driving and the American Association of Retired Persons. Yes, Stein is guilty of securing degrees from Harvard Law School and Harvard’s Kennedy School of Government. His campaign website also discloses that he is Jewish and that he and his wife belong to a Synagogue, which makes one wonder if calling him a “Harvard radical” is a dog whistle for something else?

The DAGA site has a more vanilla message about elections: there are 27 Republican AG’s and 24 Democratic AG’s with key races in nine states this year, including North Carolina.

Placed in context, here is a message for those nine new AG’s: Maybe you should make a clean break from accepting campaign funding from those whom you regulate? And maybe membership in DAGA or RAGA is not something to brag about?

And what about Pam Bondi?  It turns out that she is the immediate past chair of RAGA’s Executive Committee.

Reuben Guttman is a trial lawyer and founding partner at Guttman, Buschner & Brooks.

NINTH CIRCUIT DEEPENS CIRCUIT SPLIT ON ENFORCEABILITY OF EMPLOYEE CLASS ACTIONS WAIVERS

Ninth Circuit Court of Appeals Holds Employers Cannot Require Employees to Individually Arbitrate Claims By Way of “Separate Proceedings.”

OVERVIEW

In late August 2016, a divided panel of the Ninth Circuit Court of Appeals held that employers cannot require employees to individually arbitrate their claims by way of “separate proceedings,” even if executing a class action waiver in an employee arbitration agreement. Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 20016). The decision deepens a Circuit split and will likely have significant consequences for employers.

The Ninth Circuit joined the National Relations Board (“NLRB”) and the Seventh Circuit by holding that requiring employees to sign an agreement bringing concerted legal claims violates § 7 and § 8 of the National Labor Relations Act (“NLRA”). By contrast, the Fifth, Second, and Eighth Circuits previously rejected the NLRB’s interpretation and allow enforcement of class and collective action waivers in employee arbitration agreements. E.g. Murphy Oil USA v. NLRB, No. 14-60800 (5th Cir., October 26, 2015); D.R. Horton, Inc. v. NLRB, 737 F. 3d. 344 (5th Cir. 2013).

REASONING 

As a condition of employment, Ernst & Young required its employees to execute agreements hat legal claims had to be brought through arbitration, and in “separate proceedings.” After signing this agreement, two plaintiffs brought a wage and hour class and collective action in federal court against Ernst & Young. Invoking the employee arbitration agreement, Ernst & Young filed a motion to compel arbitration, which the district court granted.

The Ninth Circuit reversed the order compelling arbitration, holding that the NLRA § 7’s “mutual aid or protection clause” provides a substantive right to collectively “seek to improve working conditions through resort to administrative and judicial forums.” The court rejected defendant’s argument that the Federal Arbitration Act (“FAA”) mandates a different result, holding that the FAA’s savings clause  prevents enforcement of an arbitration contract’s waiver of a substantive federal right. Critically, the Court left open the possibility that the FAA can prevent enforcement of procedural federal rights but exempted enforcement of arbitration provisions from its ambit by deeming the  “[t]he rights established in § 7 of the NLRA — including the right of employees to pursue legal claims together” to be substantive. The Ninth Circuit explained that these rights are “central, fundamental protections of the act, so the FAA does not mandate the enforcement of a contract that alleges their waiver.”

The panel also remanded the case to the district court to determine whether the “separate proceedings” clause was severable from the remainder of the contract.

The majority emphasized that the contract’s requirement of aribration did not, alone, cause problems. Rather, the problem with the contract was not that it required arbitration, but that it precluded concerted action, stating:

The illegality of the “separate proceeding” term here has nothing to do with arbitration as a forum. It would equally violate the NLRA for Ernst & Young to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in separate proceedings. The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism, if the contract (1) limited resolution to that mechanism and (2) required separate individual proceedings. The problem with the contract at issue is not that it requires arbitration; it is that the contract term defeats a substantive federal right to pursue concerted worked-related legal claims. (emphasis added).

In her dissent, Judge Sandra S. Ikuta criticized the decision as “breathtaking in its scope and in its error,” writing that the majority had joined “the wrong side of a circuit split.” She reasoned that “when a party claims that a federal statute makes an arbitration agreement unenforceable … the Supreme Court requires a showing that such a federal statute includes an express “contrary congressional command.” Finding no such express congressional command within the NLRA, she concluded it could not override the FAA.

Judge Ikuta also disagreed that §§ 7 or 8 of the NLRA create a substantive right to the availability of classwide claims, stating that “[w]hile the NLRA protects concerted activity, it does not give employees an unwaivable right to proceed as a group to arbitrate or litigate disputes.” Finally, Judge Ikuta asserted that “[t]o the extent the Supreme Court has held that class actions are inconsistent with arbitration … the majority effectively cripples the ability of the employers and employees to enter into binding agreements to arbitrate.”

IMPLICATIONS 

The decision deepens an existing Circuit splits and leaves the enforceability of agreements which mandate arbitration by way of separate proceedings and preclude class and/or collective actions in the employment context uncertain.

RECOMMENDATIONS

As a protective measure, employers should consider amending their arbitration agreements to provide that the entire agreement is rendered null and void and that the class or collective waiver is not to be severed from the remainder of the agreement if found unenforceable. This approach is advisable because defending against class or collective action certification in arbitration is generally more difficult in arbitration than federal court. Ernst & Young faces the possibility it may have to do just that depending on the district court’s decision on remand, but other employers can minimize this possibility through effective drafting of arbitration agreements.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys provide employment counseling and litigate on behalf of both employers and employees.

Sitting with Ralph

Trial lawyer Reuben Guttman describes a meeting with renowned lawyer and political activist Ralph Nader.

Half a century after publishing Unsafe at Any Speed, a book exposing the hazards of General Motor’s Corvair, consumer advocate Ralph Nader is holding an anniversary celebration in the form of what he calls a “civic mobilisation.” The event will be held at Washington DC’s Daughters of the American Revolution (DAR) Constitution Hall, 26-29 September, 2016.

The DAR Hall itself is not without historic significance. Renowned African American singer Marian Anderson appeared there a number of times. But that was after 1939, when she had been denied the right to appear on the DAR stage and as a result thousands of DAR members, including First Lady Eleanor Roosevelt, resigned their membership. Anderson instead sang on the steps of the Lincoln Memorial.

Nader has himself been a slice of American history. He is not just a consumer advocate but, at least for my generation, has been “the” consumer advocate. His trajectory was made possible by his own efforts, those he assembled to work with him or for his causes, and not because of his ties to pre-existing institutions or parties. Fifty years after the publication of Unsafe at Any Speed, Ralph Nader is an American institution.

And so when Chris Nace, one of the nation’s leading trial lawyers, asked me to sit with Ralph Nader and a handful of other trial lawyers to hear about Nader’s plans for the “civic mobilisation,” I could not resist the opportunity. Our paths had crossed at a distance over the years through various interactions with his organisations, but I had never really had the opportunity to talk with him in a small group setting. Still, Nader seemed part of my orbit. Back in elementary school, I remember that our Weekly Reader had a feature story on “Nader’s Radars,” a group of young lawyers investigating corporate abuse. I was proud to raise my hand and tell my teacher that my older brother was one of them and working for Nader’s Center for Study of Responsive Law. Many years after I became a lawyer, I had the opportunity to serve as outside litigation counsel to the Oil, Chemical & Atomic Workers Union (OCAW); the union whose members or leaders included whistleblower Karen Silkwood and Tony Mazzochi, the father of the Occupational Safety and Health Act. The OCAW leadership recognised the symbiotic relationship between organised labour and the consumer movement and within the OCAW circles, Nader, or just “Ralph,” was a moral compass.

At the head of a conference table of trial lawyers at the law offices of Paulson & Nace, Nader talks about tort law under siege. His efforts and use of citizen’s suits and tort law have led to safer consumers goods, from automobiles to children’s toys, and yet Nader is mystified that the proponents of these suits are in some circles characterised as ambulance chasers while those that defend the abuses of corporate greed are deemed “white shoes” lawyers.

He talks about the compulsory arbitration which is privatising the judicial system and eliminating the published precedent that forms the backbone of the common law tradition. He muses about the ethics of corporate lawyers – as officers of the court – who bolt compulsory arbitration clauses into contracts for consumer goods and services and thus eliminate any right to adjudication in an open court of law, including trial by jury. He notes how even his Harvard Law School classmate, Professor Arthur Miller, one of the most cited experts on the Federal Rules of Civil Procedure, has written about the Supreme Court rulings on class actions, and pleading and summary judgement standards that have tipped the litigation playing field in favour of large corporations and against consumers.

At 82, Nader is still an imposing physical and intellectual presence. He is tall and trim and speaks forcefully about the way the judicial system ought to work.

Nader talking about the practice of law is like listening to an Ivy League Law School Professor from the movie The Paper Chase. And yet, ironically, Nader – who wants to address issues that impact every day consumers – may very well be too practical in terms of his goals to be a tenured professor at a contemporary American Law School. Would US News – which ranks law schools – even give bonus points to a school that placed Nader on its faculty? For his September “civic mobilisation,” Nader would welcome the attendance of law students, but hints at concern that the modern legal theorists who serve as professors in our nation’s legal institutions will not see value in encouraging students to forgo class and listen to talks from some of the nations’ leading practitioners, whistleblowers and scholars who are involved in the practical application of consumer or tort law.

For a Washington DC gathering, the sit down with Nader is an aberration. There is no discussion of compromise or even fund raising. The talk is simply about getting the word out about the “civic mobilisation” and filling the 3,500 seats at Constitution Hall. I wonder, of course, whether such a gathering will make a difference, but remind myself that change is incremental and few people in American history have driven change impacting everyday life as much as Ralph.

Insurers May Be Down on the ACA’s Exchanges . . . but they should be careful what they wish for

Last month, Aetna announced that it would drastically reduce its participation on the Affordable Care Act (ACA) exchanges in 2017 because of larger-than-expected losses: it will go from 15 states to four. This follows similar decisions by UnitedHealth Group and Humana. As a result, more than one third of the exchanges next year will have only one participating insurer, so no competition at all. As early as May, even before the insurers’ announcements, analysts were predicting double-digit premium increases in 2017.

Why is this happening?

The Obama administration, as well as stalwart supporters in the policy community, have rushed to assure us that nothing much is happening: some bumps along the way were to be expected in such a grand experiment, and the Department of Health and Human Services (HHS), working with other stakeholders, will make it right.

Maybe.

Keep in mind that the whole point of the ACA was to placate private, for-profit health insurers, the group that destroyed Hillary-care in the 1990’s. (Remember Harry and Louise?) The companies did not want to lose their customers in the individual market — the healthy and the wealthy — and those customers, who had qualified for insurance, wanted to keep it.

But before the ACA, something like 40 million Americans had no access to health insurance, let alone healthcare; many more were underinsured. People demanded better. Centrist Democratic leaders — today we would call them the political elite — were determined to show that everyone could be adequately covered by commercial health insurers competing in a private market. So they filled the ACA with features designed specifically to make the new system attractive to commercial insurers.

First and most important, the federal government subsidized premiums for those with incomes under 400% of the federal poverty level ($97,000 for a family of four in 2016) — taxpayer funds that went directly to insurers. In addition, the ACA included three different programs to protect insurers from unusually costly patients (and simultaneously to prevent companies from cherry-picking healthy customers). These were known as the three ‘R’s: reinsurance, risk corridors, and risk adjustment. Only risk adjustment, under which insurers with a higher proportion of healthy customers compensate those with a sicker cohort, is permanent; the other two programs expire at the end of the year.

In exchange for these protections, insurers were required to offer every plan at the same price to all customers — that is, all plans were community-rated, with limited adjustments only for age and smoking status. No more pre-existing condition exclusions — patients with chronic illnesses could be charged no more than healthy customers. This is far and away the most popular feature of the ACA.

Nevertheless, 3 years in, insurers are complaining of losses, and voting with their feet. To reverse the downward momentum, HHS is tweaking risk adjustment, and adding a program to reimburse costs over $2 million for a single individual (to be shared among insurers).

ACA supporters have more ideas: greater outreach to eligible young, healthy people; higher penalties for failure to enroll; fewer required benefits; narrower networks. Insurers would like to adjust ratings upwards by, for example, charging the oldest customers five times more than younger ones, instead of three times more; or obtaining government reinsurance for especially costly patients; Hillary has suggested higher taxpayer-funded subsidies, and perhaps a “public option”.

Many of these measures would increase the cost of exchange policies and/or reduce their value. But the current policies are not great insurance: premiums are high. In 2015, 86% of enrollees received subsidies. Only 2% of eligible families who did not qualify for subsidies enrolled. Moreover, many families cannot access the benefits they have paid for because of high out-of-pocket expenses, especially deductibles.

The average deductible for a silver plan in 2015 was $2,994 — this in a country where 46% of families could not manage $400 for an emergency without borrowing the money or selling something. The federal limit next year for out-of-pocket expenses (including deductibles and co-pays, but not premiums) for a family is $14,300.

Under the ACA, the goal for insurers is to price their policies low enough to attract the healthy, but high enough to cover the costs of the sick. But even with giant computers, Big Data, and armies of actuaries, that may not be possible. It is certainly not the standard insurance business plan.

Commercial insurance works by charging individuals enough to cover their risk (with something left over for profit). High-risk people often cannot buy insurance at all. No one sells ordinary flood insurance to homeowners in a flood plain. We have Medicare for elderly and disabled people because they couldn’t get private health insurance. Insurers want to keep their healthy customers, and let someone else — high-risk pools, charity, the government — take care of anyone who gets sick.

But remember this: health insurance is not healthcare. Insurers are simply middlemen: if they disappeared — or were paid simply to track claims — and replaced by a Medicare-for-all system, everyone could still access healthcare. It is not clear that the value added by the industry is worth the cost, estimated at $350 billion. Spending that money directly on healthcare could improve our health, and eliminating public subsides to private insurers would reduce the deficit.

Insurers who are dissatisfied with the ACA: Be careful what you wish for.

Caroline Poplin, MD, JD, is an attorney and internist in Bethesda, Md. She is a former staff internist for the National Naval Medical Center, and currently practices medicine part-time at the Arlington Free Clinic in Virginia. She also Of Counsel & Medical Director at Guttman, Buschner & Brooks PLLC.