For employers in Pennsylvania, 2012 was another eventful year in the world of wage and hour law. Even in the absence of new federal legislation, a number of noteworthy developments occurred at both the federal and state levels. These developments confirm that wage and hour compliance remains a moving target for employers. A number of these developments also reinforce the often ignored principle that the requirements of the federal Fair Labor Standards Act (“FLSA”) and Pennsylvania’s own wage and hour laws are not identical. Below is a summary of ten of the more significant wage and hour developments in 2012 for Pennsylvania employers.
1. Health Care Institutions Again Can Use 8/80 Method to Calculate Overtime
In 2010, the Philadelphia Court of Common Pleas held that the FLSA’s “8/80” method of calculating overtime for certain health care employers conflicted with the overtime compensation requirements of the Pennsylvania Minimum Wage Act (“PMWA”). This decision meant that health care employers who used the 8/80 method in compliance with the FLSA still could be liable for unpaid overtime under Pennsylvania law.
In July 2012, Governor Corbett signed into law a bill that amended the PMWA to permit use of the 8/80 method for covered health care employers in Pennsylvania. The new law confirmed that employers who comply with the FLSA’s 8/80 method also comply with the PMWA. Going forward, Pennsylvania health care employers again may consider use of the 8/80 method to control overtime costs.
2. Court Holds that Pennsylvania Law Prohibits Use of Fluctuating Workweek Method for Overtime Compensation
In another example of the differences between the FLSA and Pennsylvania’s wage and hour laws, a federal court in August 2012 held that the PMWA did not allow use of the FLSA’s fluctuating workweek method to calculate overtime.
Under the fluctuating workweek method, an employee receives a guaranteed fixed weekly salary for all straight-time earnings, regardless of the number of hours worked, and an additional one-half of the employee’s regular rate for all hours worked over forty in the workweek. The fluctuating workweek method is expressly permitted by the FLSA regulations, but the court in Foster v. Kraft Foods Global, Inc. held that the method violated the PMWA’s overtime compensation requirements. Absent future legislative action, Pennsylvania employers who continue to use the fluctuating workweek method to calculate overtime are subjecting themselves to risk of liability under the PMWA.
3. Third Circuit Confirms that Employees Can Pursue Class-Based FLSA and State Law Wage and Hour Claims in Same Litigation
In recent years, federal courts have split on the issue of whether plaintiffs could pursue both an FLSA collective action and a state law wage and hour class action under Rule 23 of the Federal Rules of Civil Procedure based upon the same underlying factual allegations. Because the class certification requirements of the FLSA and Rule 23 differ significantly, some courts held that simultaneous pursuit of class-based claims under both the FLSA and state law was “inherently incompatible” and prohibited. Other courts found no inherent conflict and allowed such hybrid claims.
In January 2012, the Third Circuit in Knepper v. Rite Aid Corp. resolved this dispute and confirmed that hybrid FLSA collective action/state law class actions are not inherently incompatible. With this clarifying decision, plaintiffs now may pursue both types of claims in the same litigation, which may allow for broader coverage and a longer statute of limitations than typically provided by the FLSA collective action mechanism.
4. Supreme Court Agrees to Consider Whether Employers May Use An “Offer of Judgment” to Defeat An FLSA Collective Action
In 2011, the Third Circuit held in Symczyk v. Genesis Healthcare Corp. that employers may not use an offer of judgment made to an individual plaintiff pursuant to Rule 68 of the Federal Rules of Civil Procedure to make the plaintiff’s entire FLSA collective action moot. Employers’ attorneys increasingly had used offers of judgment to “pick off” individual plaintiffs and defeat FLSA collective actions before they could be certified.
In June 2012, the Supreme Court granted the defendants-employers’ petition for writ of certiorari and agreed to review the Third Circuit’s decision in Symczyk. A decision is expected in 2013, which should provide a final definitive answer on the fate of the offer of judgment strategy for FLSA collective action defenses.
5. Third Circuit Clarifies FLSA “Joint Employer” Test
In June 2012, the Third Circuit defined the test for determining “joint employment” for purposes of FLSA coverage and liability. Joint employment status can be critical in FLSA collective actions, where plaintiffs seek to define a class as broadly as possible and often include employees of the defendant-employer’s related corporate entities. In In re Enterprise Rent-a-Car Wage & Hour Employment Practices Litigation, the Third Circuit stated the test for determining “joint employment” status and the factors relevant to this analysis. A discussion of the Third Circuit’s analysis and its impact on Pennsylvania employers can be found at our prior blog entry.
6. Third Circuit Defines Standard for Final Certification of FLSA Collective Actions
In August 2012, the Third Circuit issued a decision that arguably will make it more difficult for plaintiffs in an FLSA collective action to obtain final certification of a class for trial. In Zavala v. Wal-Mart Stores, Inc., the Third Circuit for the first time articulated the standard to be used when determining whether a class that was “conditionally certified” before discovery should receive “final certification” for trial. Specifically, the Third Circuit held that at the second stage of the two-step certification process, named plaintiffs must prove by a preponderance of the evidence that the potential class members are similarly situated to them to allow the class to be certified for trial. In Zavala, the Third Circuit concluded that the plaintiffs had failed to meet their evidentiary burden because of differences among the proposed class members and their failure to prove that they were subject to a common employer policy.
The Zavala decision may significantly affect how FLSA collective actions are litigated in Pennsylvania courts going forward. By confirming that the evidentiary burden rests on the named plaintiffs to prove that opt-in class members are “similarly situated,” Zavala gives employers a strong basis to contest motions for final certification and claim that plaintiffs have failed to meet their evidentiary burden on this critical issue.
7. Next Chapter in Wal-Mart/Paid Breaks Litigation
You may recall that in 2011, the Pennsylvania Superior Court upheld an award of $187.6 million against Wal-Mart in a class-action case that alleged that Wal-Mart’s hourly employees in Pennsylvania did not receive paid rest breaks promised in an employee handbook, in violation of the Pennsylvania Wage Payment and Collection Law (“WPCL”). In response to the petition for allowance of appeal filed by Wal-Mart, the Pennsylvania Supreme Court in July 2012 agreed to consider on appeal only the issue of whether it violated Pennsylvania law to subject Wal-Mart to a “trial by formula” that relieved the plaintiffs of their burden of producing class-wide “common” evidence on key elements of their claims. A decision from the Pennsylvania Supreme Court is expected in 2013.
Even with these most recent developments in this long-running case, the key lesson for Pennsylvania employers remains the same. Review your employee handbook and other written communications to employees to ensure that you do not promise or implicitly guarantee anything (e.g., paid or unpaid meal or rest breaks, benefits, etc.) that you may not provide in all circumstances. In other words, do not be undone by something you yourself created and disseminated to employees.
8. Continued Enforcement Focus on Employers Who Fail to Properly Calculate and Pay Minimum Wage and Overtime Compensation
Many employers continue to face government investigations and class-based litigation for non-compliance with the FLSA’s minimum wage and overtime requirements for those employees that the employers properly classified as non-exempt. For example, in April 2012, the U.S. Department of Labor (“DOL”) announced that Klaasmeyer Construction Co. paid $222,602 in back overtime wages to 204 current and former employees after an investigation confirmed that the company failed to include bonus payments in the employees’ regular rate for overtime compensation purposes. Similarly, the DOL announced in October 2012 that Pancho’s Inc., a restaurant company, agreed to pay 85 employees a total of $485,913 in back wages. The FLSA violations uncovered by this DOL investigation included impermissible deductions from the employees’ wages for uniforms and other work-related expenses that reduced their wages below the minimum wage.
Properly classifying employees as exempt or non-exempt is only one piece in the wage and hour compliance puzzle. As recent DOL investigations have shown, other compensation rules applicable to non-exempt employees also continue to present pitfalls for the unwary employer.
9. Tipped Employees – The Latest Wave of Wage and Hour Trouble
Investigations and lawsuits related to tip credits, tip pooling, and other tip-related issues are a relatively recent and growing trend in wage and hour law. In May 2011, a DOL final rule took effect that confirmed that tips are the property of the employee, whether or not the employer has taken a tip credit under the FLSA, and that the employer is prohibited from using an employee’s tips for any reason other than that which is statutorily permitted by the FLSA (i.e., as a credit against its minimum wage obligations to the employee or in furtherance of a valid tip pool). The 2011 rule also required employers to provide notice to tipped employees of the requirements of the FLSA’s tip credit provisions before using the tip credit against the FLSA’s minimum wage requirements. In response to a challenge by the National Restaurant Association, a federal District Court in May 2012 upheld the tip credit notice requirements.
In addition to recent regulatory action, employers with tipped employees increasingly are facing class claims challenging their tip practices. For example, in 2011, the Eighth Circuit confirmed that 5,000 former and current Applebee’s servers and bartenders may proceed with an FLSA collective action. This decision effectively ratified language in the DOL’s Field Operations Handbook stating that if tipped employees spend more than 20% of their time performing non-tipped duties such as general preparation work or maintenance, no tip credit may be taken for the time spent performing these duties.
In January 2012, the Supreme Court declined Applebee’s request to review the Eighth Circuit’s decision.
An overview of the FLSA rules as they apply to tipped employees can be found here. Employers with tipped employees should review their pay practices, especially if they use a tip credit against the minimum wage requirement, to ensure compliance in light of the increased and class-based enforcement activity in this area.
10. Binding Private Settlement of FLSA Claims?
As a general rule, employers must obtain approval by a court or the DOL to make any settlement and release of FLSA claims legally binding. However, the Fifth Circuit held in July 2012 that a union-negotiated settlement of unpaid wage claims was enforceable and precluded the individual union-represented employees from pursuing their claims under the FLSA, even though the settlement was not approved by a court or the DOL. In upholding the private settlement and release of claims, the Fifth Circuit noted in Martin v. Spring Break ‘83 Productions, LLC that the settlement resolved a genuine dispute over hours worked and occurred in an adversarial setting after the employees had consulted an attorney.
The Martin decision is not binding precedent in Pennsylvania, and it remains risky to settle FLSA claims absent judicial or DOL approval [See, e.g., Dietz v. Budget Innovations & Roofing, Inc., No. 4:12-CV-0718 (M.D.Pa. Dec. 13, 2013)]. Nevertheless, it will be interesting to see if other courts adopt the rationale expressed in Martin to enforce private settlements of FLSA claims in similar or other contexts.