We have repeatedly cautioned that employers who are prepared to take on unpaid interns should enter into these arrangements with their eyes fully open.  New developments emphasize this yet again.

The Fox Searchlight Litigation

We reported in March 2012 that Fox Searchlight Pictures had been sued under the federal Fair Labor Standards Act and New York law by unpaid interns who were claiming to be due wages and other sums.  The court has now ruled (link to decision below) that at least two of these individuals were indeed "employees" for purposes of the FLSA and state law.

The judge concluded among other things that these interns:

♦   Received nothing approximating the education they would receive in an academic setting or in a vocational school;

♦   Received no benefits from the relationship other than those that were "incidental to working in the office like any other employee and were not the result of internships intentionally structured to benefit them"; and

♦   Performed "essential" unpaid work that would otherwise have been done by paid employees.

Furthermore, the court was not swayed by the facts that:

♦   The interns were not, and did not think themselves to be, entitled to a job at the conclusion of their internships; and

♦   The interns understood that they would not be paid for their activities.

It is noteworthy that the judge reached his decision in granting the interns' summary-judgment motion.  Essentially, he was saying that the answer is so clear as to leave no need for a jury trial.

And Yet Another High-Profile Lawsuit

Moreover, a former unpaid intern has now filed a federal-court lawsuit (link to copy below) against prominent fashion designer Norma Kamali and her companies.  The former intern alleges violations of both the FLSA and New York law.

One of the assertions is that her circumstances were "part of a broader trend where formerly entry level employees are being misclassified as unpaid 'interns' or 'apprentices' in an effort by employers to avoid paying [the required] wages . . .."  The intern asks for an unspecified award of minimum wages, overtime compensation, and other sums.

*    *    *

It has been clear for some time now that a new "hot issue" in wage-hour law is the employment status of unpaid interns.  The Fox Searchlight ruling is likely to spur even more claims of this kind.

One must wonder how much longer those who have been willing to provide unpaid internships will continue to do so in this environment.  We suspect that educational institutions, students, and others seeking these opportunities will find few of them available by next summer, if not before then.

Glatt v. Fox Searchlight Order.pdf (1.74 mb)

Van Rabenswaay v. Kamali.pdf (7.42 mb)

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There has always been a great deal of mistaken conventional wisdom afoot where the federal Fair Labor Standards Act is concerned.  We have blogged previously about the common misconception that one pay practice or another has just got to be lawful, because "everybody does it" that way.

But this is by no means the only one.  Among others that continue to crop up all-too-often are:

♦   "Salaried Employees Don't Have To Be Paid Overtime"

The truth is that only salaried employees who meet all of the requirements to be exempt from FLSA overtime need not be paid FLSA overtime compensation.  This is also true as to employees paid piece-rates, day-rates, commissions, and in many other ways than the perhaps-more-traditional hourly basis.

Furthermore, the employer must be sure that an FLSA-overtime-exempt employee in a jurisdiction imposing its own overtime requirements also qualifies for exemption from that provision.

♦   "This Is What Our Employees Want Us To Do."

If a compensation practice does not comply with the FLSA, then the fact that the affected employees urged the employer to implement it or to continue it is not a reliable defense to FLSA liability.  This is sometimes what leads employers to adopt an unlawful "comp time" policy giving non-exempt employees paid-time-off later in lieu of the FLSA-required overtime compensation.

♦   "Our Employees Agree To What We Do."

This is broader than the preceding misapprehension.  For example, some employers believe that, if an employee signs an agreement allowing it, they can withhold all of his or her final pay until the employer's property has been returned.  Again, having an employee agree to something that the FLSA prohibits does not trump the FLSA.

♦   "Our Employees Will Actually Make More Money This Way."

FLSA compliance can depend upon more than just comparing the amount the employee is actually paid to how much he or she would receive under the FLSA if the facts were different.  As an illustration, assume that a non-exempt employee is due $400 in sales commissions for a workweek in which he worked 50 hours.  If he had instead been paid by the hour at the FLSA minimum-wage rate of $7.25, his FLSA-required wages would have been:

($7.25 × 40 ST Hrs.) = $290 ST Pay

($7.25 × 1.5 × 10 OT Hrs.) = $108.75 OT Pay

($290 + $108.75) = $398.75.

Even though his commission pay is more than this hourly calculation, paying him only the commissions will not comply with the FLSA.  The fact is that he was not paid on an hourly basis at the FLSA minimum wage.  Instead, he was paid on a commission basis, and his commissions represent only his straight-time wages.  Under the FLSA he is due:

($400 ÷ 50 Hrs.) = $8.00 Per Hr. Regular Rate

[($8.00 ÷ 2) × 10 OT Hrs.] = $40 OT Premium Pay

($400 + $40) = $440.

Don't Be Misled

Erroneous beliefs about the FLSA have plagued employers for years.  One difference is that, today, there is far more risk that they will lead to U.S. Labor Department investigations and/or to FLSA lawsuits.

Employers should be certain that none of their pay practices rests upon an incorrect understanding of the FLSA's principles and requirements.

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The best answer to our May 8, 2013 Quick Quiz is, "$110.00".  In declining percentage order, the responses were:

"None":          (80.4%)

"$110.00":     (15.7%)

"$137.50":     (3.9%)

"$412.50":     (0.0%)

Does The FLSA Allow Day-Rate Plans?

The federal Fair Labor Standards Act does permit employers to pay non-exempt workers on a day-rate basis.  See 29 C.F.R. § 778.112.  Under this approach, employees receive a fixed amount of daily pay for each workday on which they perform any work, regardless of the number of hours worked in the workday.  The day-rate payments represent straight-time compensation for all work done in the workweek, both those hours worked up to 40 and those worked over 40.

But the point we intended to illustrate is that a day-rate payment cannot "include" or "build in" any FLSA overtime premium pay, no matter how the day-rate sum was set.  Cf. 29 C.F.R. §§ 778.310, 778.500.  When a day-rate employee works more than 40 hours in a workweek, he or she must receive FLSA overtime premium pay in addition to the total day-rate wages for the workweek.  Figuring the overtime amount due begins with the proper computation of the FLSA regular hourly rate of pay.

Because the employee's total day-rate pay is remuneration for all hours worked in the workweek, the regular rate is determined by dividing the person's total day-rate compensation for the workweek by his or her total hours worked in that workweek.  Of course, this regular rate can never be less than the FLSA minimum wage (or any higher required rate).  This also assumes that the employee has received no other compensation that must be included in the regular rate.

The total day-rate pay is compensation for both straight-time and overtime hours (in other words, it is the "one" of "one and one-half").  Therefore, the employee is due an additional 50% of the regular rate times the FLSA overtime hours worked.

How Is Technician Tom's Total Pay Determined?

For these reasons, Technician Tom is due additional FLSA overtime premium pay for his ten overtime hours worked, despite how his day-rate payment was established.  The overtime amount is calculated this way:

($1,100 Day-Rate Pay) ÷ (50 Hrs.) = $22.00 Per Hr. Regular Rate

($22.00 Per Hr. × 50%) = $11.00 Per Hr. OT Premium Rate

($11.00 Per Hr.) × (10 OT Hrs.) = $110.00 OT Premium Due.

Technician Tom's total pay for the workweek is therefore ($1,100.00 + $110.00) = $1,210.00.  If he had instead worked 45 hours in the workweek, then his total pay would have been:

($1,100 Day-Rate Pay) ÷ (45 Hrs.) = $24.44 Per Hr. Regular Rate

($24.44 Per Hr. × 50%) = $12.22 Per Hr. OT Premium Rate

($12.22 Per Hr.) × (5 OT Hrs.) = $61.10 OT Premium Due.

($1,100 + $61.10) = $1,161.10.

As always, employers must also take into account the relevant requirements of different laws and the laws of other jurisdictions. It is important to ensure that whatever overtime computation the employer uses complies with all of the applicable overtime provisions.

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Recent U.S. Labor Department enforcement activities, along with its collaborations with other governments and agencies, demonstrate its continued emphasis upon rooting-out the erroneous classification of workers as independent contractors.  And if U.S. Labor Secretary nominee Thomas Perez is eventually confirmed, officials can be expected to pursue the matter at least as aggressively as they have up to now.

Our Forbes.com article summarizes some important points to keep in mind with respect to the federal Fair Labor Standards Act status of "contract laborers", "freelancers", "casual workers", "contract employees", or independent contractors by any other name.

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The Big Corporation decides that it will start paying its Field Service Technicians on a day-rate basis, instead of on an hourly basis.  Under the day-rate plan, a Technician will now receive a fixed amount of money for each workday in which he or she performs any work, regardless of the number of hours the Technician works in the workday.  The day-rate payments represent compensation for all hours worked in a workday and in a workweek.

A Technician's schedule is to work ten hours a day, five days a week.  Management therefore sets each Technician's day-rate payment based upon (i) eight hours times the Technician's hourly rate at the time of the change, plus (ii) 1.5 times that hourly rate times two hours.  For example, Technician Tom's day-rate sum is set at [($20 × 8 hrs.) + ($20 × 2 hrs. × 1.5) = $220.

During the first workweek under the new plan, Technician Tom performs work on five workdays and works exactly 50 hours, for total day-rate pay of (5 days × $220) = $1,100.  How much more must The Big Corporation pay Tom in order to comply with the federal Fair Labor Standards Act?

Please use the poll buttons to the right to register your answer.

The U.S. House of Representatives will consider amending the federal Fair Labor Standards Act to permit private-sector employers to offer compensatory time off in lieu of monetary overtime compensation.  The fast-tracked "Working Families Flexibility Act of 2013" (H.R. 1406) was approved by a House committee only eight days after its introduction.

Under the proposal, eligible non-union employees could agree to a comp-time arrangement "in writing or [in an] otherwise verifiable record."  The policy could be implemented for eligible unionized employees via a collective bargaining agreement.  Participating employees would then receive at least 1.5 hours of comp time for each overtime hour worked.

The Devil Is In The Details

Private-sector employers are understandably cheered by such news – comp time has been a long-sought goal.  But the bill contains a number of impact-diluting, unclear, or complicating provisions, including these examples:

♦   No more than 160 hours of comp time could be accrued at any time (representing approximately 106 overtime hours worked).  An employee who works 10 overtime hours each workweek would reach that cap in about 10 workweeks.

♦   Employers would be required to cash-out unused comp time annually and when a worker's employment ends.  The payment would be calculated at the higher of (i) the employee's regular rate at the time the comp time was earned, or (ii) the employee's final regular rate.  But the "regular rate" is not necessarily just the employee's stated hourly rate.  Typically, it also includes remuneration such as bonuses, commissions, incentive payments, and compensation of many other kinds.  Figuring the "regular rate" for cashing-out purposes could therefore be a complex and daunting process as to employees who received such supplemental compensation over a period of time.

♦   On 30 days' notice, an employer could cash-out a worker's accrued comp time exceeding 80 hours.  But this too must be based upon the "regular rate" and entails the same potential complications.  Maybe the payment would normally be based upon the regular rate when the comp time was earned, unless the alternative "final regular rate" is later read to have some broader-than-apparent meaning.

♦   The employer would have to (i) determine and monitor each employee's eligibility to "agree to receive" or to "receive" comp time, which apparently could change over time; (ii) compute and record the hours accrued and keep up with when the balance must be (and perhaps may be) cashed-out; and (iii) administer both employees' cash-out requests and any notices that a non-union employee opts-out of the policy (including keeping up with who's "in" and who's "out").

♦   The employee would be entitled to use comp time "within a reasonable period" after requesting it, unless this would "unduly disrupt" the employer's operations.  By contrast, the employer could not so much as "attempt to" require employees to use comp time. 

The proposal would neither instruct nor even authorize the U.S. Labor Department to issue any regulations.  Nevertheless, employers should also anticipate extensive, convoluted USDOL interpretative provisions.

Is It Better Than Nothing?

We are not convinced that it is.  Many employers will see this as being more trouble than it is worth, especially if (as the bill currently provides) it would expire in five years anyway.  Some who implement such a policy might later find themselves embroiled in litigation over its pitfalls and complexities.

Perhaps there is still time to simplify and refine the measure before it becomes the latest ineffectual minimum-wage tradeoff.

UPDATE 05/09/13:  H.R. 1406 was passed by the House of Representatives on May 8 by a vote of 223 to 204.  The Obama Administration has expressed opposition to the proposal, so one may question whether the bill will even be considered by the Senate.  On the other hand, there is still reason to surmise that the atypical speed with which H.R. 1406 has moved along means that proponents want to make it part of a bargain involving a minimum-wage increase.

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Pressure continues to mount for raising the federal Fair Labor Standards Act's minimum wage in three stages from the current $7.25 per hour to (so far) $10.10 per hour.  Under pending proposals, the rate would thereafter be subject to annual increases linked to rises in the Consumer Price Index.

Leaving aside for now questions about the wisdom of these measures, history suggests that Congressional negotiations are or soon will be underway to strike a bargain – one under which the increases will be passed in exchange for something that ostensibly alleviates some of the impact upon employers.  Experience also counsels vigilance in the interests of steering these discussions toward a tradeoff that actually has value.

The Past Should Not Be Prologue

A good example of what not to do is found in the gimmick that was proudly held up as a worthwhile exchange for the minimum-wage increases beginning in 1990.  This "training wage" temporarily allowed employers to pay 85% of the FLSA minimum wage for up to 90 days to workers less than 20 years old under a variety of restrictions and conditions.  The employee could be paid the training wage for another 90 days by a different employer under certain circumstances.

This exception was soon hamstrung by complicated U.S. Labor Department rules consuming more than 9,000 words, 41 sections, and over 15 pages in the Code of Federal Regulations.  By the time the "training wage" expired in 1993, whatever limited utility it might otherwise have had was entirely undercut by what one large employer referred to as an "administrative nightmare".

A similar provision was part of the agreement for minimum-wage hikes that began in 1996.  We have addressed the still-existing "opportunity wage" elsewhere; suffice it to say that this too has been ineffectual.

Address Matters Of Substance Instead

If there is to be a deal, especially a groundbreaking one that puts future increases on "autopilot", then it should consist of truly meaningful FLSA reform.  There are many worthy possibilities, but some we have discussed before include:

An amendment creating at least a presumption of accuracy for time records kept by non-exempt employees under a clear employer procedure requiring and facilitating accurate timekeeping;

A revision allowing employees to be deemed exempt from the FLSA's minimum-wage, overtime, and timekeeping requirements based simply upon their being paid compensation beyond a specific threshold;

A modification excluding many, most, or even all bonuses and incentive pay from the "regular rate of pay" used to compute FLSA overtime compensation; and

Raising the annual-dollar-volume threshold for FLSA "enterprise" coverage to a level higher than $500,000 (an amount set 23 years ago that equates to over $930,000 today) so as to protect small businesses from the impact of minimum-wage increases.

Another candidate would be permitting the private sector's use of compensatory time off in lieu of overtime pay.  A bill to that effect was recently introduced in the U.S. House of Representatives and has already been the subject of a committee hearing; perhaps this is in the offing as a tradeoff.  Assuming for the moment that this amendment (as filtered through the inevitable U.S. Labor Department interpretations) would be of appreciable benefit, it would expire in five years.  The proposed indexing of the minimum wage would not expire in five years; it seems ill-advised to sunset the benefit of the bargain.

Unless employers clearly and vigorously make their desires known to Congress without delay, the most that can probably be expected is something that will turn out to be as meaningless and soon-to-be-forgotten as the "training wage".

UPDATE 04/19/13:   The "comp time" bill referred to in the post, H.R. 1406, has been approved by the Committee on Education and the Workforce for consideration by the full House of Representatives.  The current version still contains the five-year "sunset" provision.

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Readers will recall that, in April 2011, the U.S. Labor Department declined to adopt an interpretation proposed in 2008 that would have acknowledged the federal Fair Labor Standards Act overtime-exempt status of employees doing the typical work of service writers, service advisors, etc. in automobile dealerships and truck dealerships.  Prospects were that USDOL would reverse an enforcement policy of two decades' standing and would begin challenging the FLSA Section 13(b)(10)(A) overtime exemption as applied to these workers.

However, Congress's 2012 Department of Labor Appropriations Act specifically prohibited USDOL from using any appropriated funds for this purpose.  Later comments by a U.S. Wage and Hour Division investigator led us to conclude that, unless Congress renewed this limitation in 2013 appropriations, dealerships should anticipate USDOL attacks on their treating these employees as being overtime-exempt.

Although the 2013 appropriation does not expressly refer to such a restriction, we conclude that the prohibition has been extended.  Among other things, Division F, Section 1105 of the recent appropriation calls for the continuation through September 30, 2013 of "the requirements, authorities, conditions, limitations, and other provisions" of the 2012 law.  Another example is Section 1104's statement that money allocated for 2013 may not be used to "initiate or resume any project or activity for which appropriations, funds, or other authority were not available" during the federal government's 2012 fiscal year.

Even if USDOL is unable to pursue such claims, current or former service writers or similar employees remain free to argue against overtime-exempt status in their own FLSA lawsuits.  And, as we said previously, employers embroiled in these lawsuits should be alert for any signs that USDOL is extending background assistance to these individuals.

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A decision from the Seventh Circuit U.S. Court of Appeals (with jurisdiction over Illinois, Indiana, and Wisconsin) offers an important reminder to employers about the potential for successor liability under the federal Fair Labor Standards Act.

In Teed v. Thomas & Betts Power Solutions LLC, a company that acquired another business's assets at a receiver's auction was held to be responsible for paying a $500,000 settlement reached in an FLSA lawsuit between the predecessor business and its employees.  The acquiring company knew about the FLSA lawsuit prior to the asset acquisition and specifically disclaimed liability for the lawsuit as a condition of the asset-transfer agreement.

Contractually Disclaiming Liability Was Not Enough

The court first said that a multi-factor federal analysis trumps state law in FLSA cases involving possible successor liability.  It also saw the "default rule" as being that a predecessor's FLSA liability should normally be imposed upon the successor, unless there are good reasons not to do this.

And in what is perhaps one of the most-instructive aspects of the decision for other employers, the court ruled that an explicit contractual disclaimer of the FLSA liability was not a good enough reason standing alone to avoid the default rule.  The court concluded among other things that, if an acquiring employer could contractually disclaim liability in this fashion, the "statutory goals" of the FLSA would be frustrated, and "a violator of the Act could escape liability or at least make relief much more difficult to obtain."  The court also rejected a variety of other arguments to the effect that finding successor liability would be inequitable or economically unwise.

Due-Diligence Prior to Acquiring Assets

This case demonstrates that employers should carefully analyze any potential FLSA successor liability in evaluating whether and upon what terms to acquire another company.  While the decision might at first appear to discourage due-diligence on this score – the court referred to the acquirer's knowledge of the pending FLSA lawsuit as favoring successor liability – this would not be the wisest approach.  For one thing, the opinion addressed some circumstances under which a court might decide not to impose successor liability even if the acquirer had such knowledge.

The more prudent course would instead seem to be to determine early on whether potential FLSA liability exists, and then to consider the prospects for successor liability under the specific facts presented, what might be done to decrease the chances that successor liability would be found, and whether the acquisition might be structured in such a way as to provide a financial cushion if successor liability is imposed.  The employer can then give these matters informed consideration in evaluating the overall risks and benefits of proceeding with the transaction.

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The publication Corporate Compliance Insights (which focuses upon matters of interest regarding compliance, governance, and risk in the business community) recently published an article we authored regarding the federal Fair Labor Standards Act's requirement that covered employers provide breaktime to a worker for the purpose of expressing breast milk for her nursing child.

The item summarizes the break requirements, raises some planning considerations, gives examples of unanswered questions, and highlights selected enforcement developments.  The piece is entitled, "Are You Ready To Accommodate Nursing Mothers?", and it can be accessed at this link.

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