Wage and Hour and Executive Compensation

On August 31, 2017, the United States District Court for the Eastern District of Texas (the “Court”) invalidated the United States Department of Labor’s (“DOL”) changes to the Fair Labor Standards Act’s (“FLSA”) overtime exemption rules (the “Final Rule”).  The Final Rule was scheduled to go into effect on December 1, 2016 before the Court issued a nationwide injunction blocking the implementation of the Final Rule.  In that case, captioned “State of Nevada, et al. v. United States Department of Labor et. al., Case No. 4:16-cv-00731-ALM”, the plaintiffs questioned, among other things, whether the Final Rule was lawful, whether the DOL had the authority to promulgate the Final Rule and whether the mechanism for automatic updates to the salary level under the Final Rule were permissible.  The Court agreed with the plaintiffs, finding that the Final Rule is invalid.

By way of brief background, the FLSA provides that unless an individual is subject to an exemption, employees must be paid overtime for all hours worked over 40 hours in a workweek.  There are, however, numerous exemptions to the FLSA’s overtime requirements including, but not limited to, the executive, administrative and professional exemptions (the “White Collar Exemptions”).  The FLSA has always set 3 requirements for application of the White Collar Exemptions: (1) the employee must earn a salary (or fee) that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the salary or fee must be in the requisite minimum amount (the “salary level test”); and (3) the employee’s job duties must involve executive, administrative or professional duties as defined by the applicable regulations (the “duties test”).  The Final Rule sought to change the salary level test for the White Collar Exemptions; however, the salary basis and the duties tests were to remain unchanged.  The Final Rule sought to increase the minimum salary required from $23,660 to $47,476 annually ($913/week).  The Final Rule also sought to increase the required annual salary for highly compensated employees from $100,000 to $134,004.  Significantly, the Final Rule also provided for automatic updates to the salary and compensation levels every three years beginning January 1, 2020 to account for inflation.

The Court found that when enacting the relevant provisions of the FLSA, Congress unambiguously intended for the White Collar Exemption to apply to employees who perform bona fide executive, administrative or professional duties.  That said, the DOL did not have the authority to implement a salary level test that could effectively eliminate the duties test proscribed by the statute.   The Court also noted that the Final Rule more than doubled the DOL’s previous minimum salary level, and could make an employee’s actual duties irrelevant if his/her salary were below the new threshold.  Judge Mizzant was clear that the DOL “has exceeded its authority and gone too far with the Final Rule” and the Final Rule was found to be invalid.  The Court’s decision ends months of speculation about whether the Final Rule, heralded as a major accomplishment of President Obama’s administration, would survive Donald Trump’s presidency.

Now that the Final Rule has been invalidated and compliance is moot, barring appeal or further administrative action, employers should take the opportunity to check the requirements of state law to see if their states impose different exemptions than those imposed by the FLSA.  By way of example, New Jersey adopts the FLSA White Collar Exemptions, and the salary level test is the same.  New York, however, increased the executive and administrative salary exemption thresholds effective December 31, 2016.  In New York City “large employers” invoking a “white collar exemption” must meet the salary threshold of $825/wk.  For “small employers” the salary threshold is $787.50/week.  These levels, however, are set to increase over the next few years and the amounts will differ in other parts of the State.

Employers should check here often for additional updates concerning the FLSA and changes to the exemption rules in New York and New Jersey.

In Cheeks v. Freeport Pancake House, Inc. et als., the United States Court of Appeals for the Second Circuit held that parties may not privately settle claims arising under the Fair Labor Standards Act (“FLSA”) with prejudice (which forecloses a future lawsuit), without court approval or United States Department of Labor (“DOL”) supervision.  With this ruling, employers facing an FLSA suit in the Second Circuit must be prepared for a public filing and judicial approval of any settlement.

In Cheeks, Mr. Cheeks worked at the Freeport Pancake House as a server and manager.  In August 2012, he sued for unpaid overtime wages, liquidated damages and attorneys’ fees under both the FLSA and the New York Labor Law.  Mr. Cheeks also claimed damages for his demotion and ultimate termination.

The parties agreed to a private settlement of Mr. Cheeks’ action and attempted to file a Joint Stipulation and Order of Dismissal pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii), which allows for a voluntary dismissal without court order, unless there is an “applicable federal statute” providing otherwise.  The District Court refused to accept the Stipulation, however, concluding that the parties could not agree to a private settlement of the FLSA claims without either District Court or DOL approval.  The parties certified the question to the United States Court of Appeals for the Second Circuit, which affirmed the District Court.

In deciding this issue, the Second Circuit settled a split among the District Courts.  In Cheeks, the Court was called upon to answer the open issue of whether parties could voluntarily dismiss an FLSA action, with prejudice, and without court approval.  In holding that the FLSA presents an exception to Rule 41, the Court cited the purpose and policy behind the FLSA, a “uniquely protective statute,” which seeks to prevent the “potential for abuse” in wage and hour settlements.  On balance, the court found the burdens of requiring judicial review of often small FLSA actions are outweighed by the remedial purpose of the FLSA.

Employers should now understand that they may not secure “with prejudice” dismissals of wage and hour disputes without court or DOL approval.  In order to secure a complete release of an employee’s claims filed in court under the FLSA, including liquidated damages and attorneys’ fees, as well as the dismissal of putative class or collective actions, the parties must submit the settlement to the court or DOL for approval.


On March 11, 2015, the Third Circuit Court of Appeals became the first Circuit Court to apply the “covered employee” provision of the SAFETEA-LU Technical Corrections Act of 2008 (the “Corrections Act”) to the Motor Carrier Act exemption of the Fair Labor Standards Act (“FLSA”). In McMaster v. Eastern Armored Services, Inc., No. 14-1010 (Precedential), the Court held that an employee of a motor carrier whose job “in whole or in part” affects the safe operation of vehicles lighter than 10,000 pounds is a “covered employee” entitled to overtime for weeks in which such employee works more than 40 hours.

The FLSA generally provides that employers must pay hourly employees 150% of their regularly hourly rate for hours worked in a workweek over 40. 29 U.S.C. § 207. The “motor carrier exemption” provides that overtime pay is not required for any employee for whom the Secretary of Transportation has the power to establish qualifications and maximum hours of service. See 29 U.S.C. § 213(b)(1). In McMaster, the Third Circuit affirmed the decision of the United States District Court for the District of New Jersey that Ashley McMaster, an employee of an armored courier company, fell squarely within the exception to the Motor Carrier exemption created by Congress’s June 6, 2008 passage of the Corrections Act. As such, the Court determined McMaster to be entitled to overtime.

McMaster was employed by Eastern Armored Services (“Eastern”) from March 2010 through June 2011, and her employment included driving an armored vehicle as well as riding as a passenger in an armored vehicle to ensure safety and security. Eastern paid her hourly, and she spent 51% of her total days working on vehicles rated heavier than 10,000 pounds and 49% of her total days working on vehicles rates lighter than 10,000 pounds. She often worked more than 40 hours in a workweek but was never paid overtime because, according to Eastern, McMaster fell within the Motor Carrier exemption to the FLSA. The District Court disagreed and granted summary judgment in favor of McMaster, entering an order that McMaster was eligible to be paid overtime wages for all hours she worked over 40 in a particular workweek. The Third Circuit affirmed the District Court’s decision. Simply put, “covered employees” are subject to the FLSA’s overtime rules, despite the Motor Carrier Act’s provisions. The Court declined to define the term “in part” and determined that “[w]hatever ‘in part’ means, it is certainly satisfied by McMaster, who spent 49% of her days on vehicles less than 10,000 pounds.”

This case demonstrates that compensating employees properly within the statutory framework of the FLSA and its myriad exemptions and “exceptions to exemptions” is a complicated task. Employers should regularly review their compensation practices with counsel to ensure compliance with the changing statutory landscape and judicial interpretation and application of new statutes.

In a unanimous opinion issued on January 14, 2015, the New Jersey Supreme Court determined that the “ABC test” governs whether an individual is an “employee” or an “independent contractor” entitled to the protections of New Jersey’s Wage Payment Law and Wage and Hour Law.  See Hargrove v. Sleep’s, LLC, A-70-12 (Jan. 14, 2015) (Slip Op.).  The Supreme Court issued this ruling in response to a question from the Third Circuit Court of Appeals in connection with litigation over whether Sleepy’s, LLC misclassified delivery drivers as independent contractors to avoid providing benefits, such as overtime pay, to those workers.  A copy of the New Jersey Supreme Court’s decision is available here.

New Jersey’s Wage Payment Law governs the timing and mode for the payment of an employee’s wages, while New Jersey’s Wage and Hour Law mandates the minimum wage and overtime benefits that employers must pay to their employees.  The so-called “ABC test” is one of many different tests utilized to determine whether a particular individual qualifies as an “employee” or an “independent contractor”.  N.J.S.A. 43:21-19(i)(6).  Under the ABC test, the court presumes an individual bringing a claim qualifies as an “employee”.  The burden then shifts to the employer to demonstrate that the individual should instead be classified as an “independent contractor”.  The ABC test includes the following three factors:

(a)    Whether the employee has been and will continue to be free from control or direction over the performance of his or her services, both under a contract of service and in fact;

(b)   Whether the services provided are either outside the usual course of the business for which the service is performed, or that service is performed outside of all the places of business for the enterprise for which the service is performed; and

(c)    Whether the individual is customarily engaged in an independently established trade, occupation, profession, or business.

In holding the ABC test applies to both statutes, Judge Mary Catherine Cuff explained it provides predictability.  She also noted that the New Jersey Department of Labor had been utilizing the ABC test in determining whether an individual qualified as an “employee” under both statutes since 1995, without challenge.

For employers, the Hargrove decision underscores the importance of properly classifying workers as employees or independent contractors, both through contractual relationships and in practice.  Employers should examine their policies and procedures with legal counsel to determine compliance with the distinction between employees and independent contractors in order to avoid costly litigation and penalties for any violations.

Last week, Trenton and Montclair became the latest in a series of New Jersey municipalities to pass paid sick leave ordinances, joining East Orange, Irvington, Jersey City, Newark, Passaic and Paterson.  Under both the Trenton and Montclair legislation, which are largely modeled after the measures previously adopted by Newark in January, employers with 10 or more workers must provide their employees with up to 40 hours of paid sick time accrued on an annual basis, with smaller employers only being required to offer up to 24 hours of paid sick time per year.  Employees earn one hour of paid sick leave for every 30 hours worked.  However, irrespective of the employer’s size, child care, home health care and food service workers are entitled to the full 40 hours of paid benefits per year.

At the same time, the New Jersey Legislature continues to review proposed State-wide legislation designed to provide paid sick leave in a more uniform fashion.  Under the current proposals (Assembly Bill A2354 and Senate Bill S785), New Jersey employees would accrue one hour of paid sick leave for every 30 hours worked, up to a total of 40 hours of earned paid sick time annually for employers with less than 10 workers, and up to 72 hours per year for employers meeting or exceeding the 10 employee threshold.  If employees do not use all of their accrued hours in a year, they would be permitted to carry them forward for an additional year.  Employers would also be required to maintain detailed records concerning employees’ accrued paid sick time hours, and the legislation would clearly define when employees could be required to provide advance notice of sick time and/or documentation to their employers.  Employers would further be prohibited from retaliating against any employees using their paid sick time.

Given the current trend of state and local governments enacting paid sick leave laws, now is the time for employers to consult with counsel to ensure that their handbooks, policies and practices comply with the recent, and anticipated, changes in the law.