The Top FLSA Litigation Issues of 2016 Part I & Part II

Bloomberg BNA-Labor & Employment Blog Jesse Butler
October 11, 2016

The Top FLSA Litigation Issues of 2016 Part I

For more than a decade, courts across the country have seen an explosion in the number of claims filed under the Fair Labor Standards Act. The volume of recent filings especially in the collective action context continues to raise complex considerations for regulators, courts and practitioners.

In a recent Bloomberg BNA webinar, Louis Pechman of the Pechman Law Group discussed this year’s top FLSA litigation issues with U.S. Magistrate Judge Steven M. Gold, Outten & Golden’s Jahan Sagafi and Colin Dougherty of Fox Rothschild LLP.

My coverage will describe the panel’s detailed discussion in two blog posts. Part I covers recent case law developments on class-action waivers in arbitration agreements, the flurry of activity in response to the Labor Department’s updated white collar regulations and increased enforcement efforts related to independent contractor misclassifications and joint employer liability.

Part II will address strategies for navigating Rule 68 offers of judgment and the Tyson Foods  decision. Judge Gold offers practitioners valuable insights on drafting effective FLSA pleadings and smoothing the settlement approval process.

DOL Focus on Independent Contractor Misclassifications

According to Dougherty, the misclassification of employees as independent contractors is one of the issues that is exploding and will continue to grow ” due to the DOL’s aggressive misclassification initiative. He notes that 37 states have entered into formal memoranda of understanding in partnership with the DOL to tackle misclassification.

In no uncertain terms, the Federal DOL’s position is that it’s the rare exception that a 1099 is properly classified and that they are seeking out [violators] for a number of reasons not the least of which is the tax benefit that the government will receive if the classification is changed, ” Dougherty said.

For this reason, defense counsel is seeing increased litigation and client contact on this issue. Dougherty noted that the initiative is causing everyone to get serious and to do a deep-dive ” reexamination of their policies. Companies are starting to realize that a prior lack of government scrutiny isn’t a defense employers are on the hook and must be able to properly prove 1099 status.

For the company, the implications of misclassification can be huge unpaid back taxes, unpaid overtime, unpaid minimum wages, liquidated damages, attorney’s fees and even injunctive relief, ” Dougherty said.

Sagafi added that industries historically reliant on independent contractors as a significant portion of their workforce face particular scrutiny from both the government and the plaintiffs’ bar.

Although the analysis may change slightly between the federal circuits, Dougherty said that courts generally are using the economic realities test described in a DOL memorandum.

In reviewing economic reality factors, it’s important to look at how plaintiffs have treated their income and expenses for tax purposes, Judge Gold added. It may be probative to the analysis, for example, if they have taken deductions consistent with independent contractor status but are making allegations that they are employees.

The fact that tax treatment may not ultimately be dispositive doesn’t mean that it’s irrelevant, ” he said.

Increasing Scrutiny of Joint Employment Relationships

Often intertwined with the independent contractor issue are questions of joint employment. According to Sagafi, union lobbying over frustrations with the tempification ” of work forces in tech support, fast-food franchises and staffing companies has finally achieved traction with the Obama administration and the DOL.

Perma-temps ” loaned out to clients for long periods of time can easily become employees of the client company as well as the formal employer, Sagafi said. Dougherty agreed that the concept of the fissured workplace ” has gained traction, with staffing and operations entities getting rolled up to include the highest corporate entities in the pyramid.

Adding these entities provides plaintiffs with additional avenues for discovery and access to the deepest pockets and may even trigger indemnification obligations from defense clients. According to Doherty, this trend puts an affirmative obligation on companies to review and to be sure that what’s happening under their flag is proper. ”

Pechman noted an increase in cases where a franchisor mothership ” is brought in because of its role in controlling franchisees. For those on the management side, the world is getting much scarier for the franchisor-franchisee relationship. On the one hand, you want control, but the more control exhibited feeds further into the joint employer issue, he said.

Although cases against larger corporations get more press, Judge Gold said the majority of cases in the courts are brought against smaller businesses such as family owned restaurants, car washes and supermarkets.

The decision to add individual owners and managers as defendants may increase the judgment-worthiness of a case where the business itself doesn’t have significant assets. However, Judge Gold warned that adding such defendants can have a significant impact on the temperature ” of litigation where long term personal and family relationships are intermingled with a case.

Class Waivers in Arbitration Agreements on Shaky Ground

According to Sagafi, another key development this year is that the NLRA’s concerted activities ” argument against class-action waivers in arbitration agreements has suddenly achieved traction in the circuit courts.

He cautioned, however, that not all circuits are in agreement. There is a clear circuit split, and these cases are clearly going to the Supreme Court. ”

This is illustrative of how the tide is turning on arbitration, ” Sagafi said. He noted that the election will have a huge impact and pointed to analysis suggesting that Judge Garland if nominated to the Supreme Court would probably vote with the liberal justices on these issues. The question remains, however, whether such a Supreme Court would fully adopt the Seventh Circuit’s substantive right argument or take a middle-ground approach similar to that used in the Ninth Circuit.

Dougherty is advising management clients to vet the pros and cons of arbitration agreements but to be firm in whatever decision they make. Though arbitration may be cheaper and faster, agreements may not always be enforceable. Even if they are, he notes that employers likely are losing the right of appeal.

DOL White Collar Regs and the New Normal “

The DOL recently published a final rule revising regulations implementing the FLSA’s white-collar exemptions, raising the overtime exemption salary thresholds and rendering millions of employees newly eligible for overtime.

Dougherty said that the new regulations are causing clients to really scramble, examine, and drive to review whether people can be exempt from overtime. It’s having a trickle-down effect on a number of different issues. ” Barring a dramatic shift in the composition of the government, this looks like our new normal. ”

The Top FLSA Litigation Issues of 2016 Part II

In a recent Bloomberg BNA webinar, a panel of experts discussed this year’s top FLSA litigation issues. Part I of my blog highlighted the panel’s insights on the uncertain fate of class waivers in arbitration agreements and how the Labor Department’s recent regulatory updates and enforcement priorities have impacted employers.

Part II addresses the strategic use of Rule 68 in FLSA actions, the impact of the U.S. Supreme Court’s Tyson Foods decision, and advice from a judge on drafting effective FLSA pleadings and smoothing the settlement approval process.

Increased Specificity in FLSA Pleadings

According to Judge Steven M. Gold, one hot issue is the impact of Iqbal and Twombly on pleading standards for FLSA claims.

The bottom line is the more specific you can be the better off you are in withstanding a Rule 12 motion, but of course the more specific you are before discovery, the more susceptible plaintiffs will be to cross-examination based upon what’s in the complaint once the records come forward. It’s a really delicate balancing act, ” he said.

The judge also observed that unlike a Rule 23 claim, a § 216(b) collective action allegation doesn’t toll the statute of limitations. So if the court decides to hear the Rule 12 motion before the collective action motion, actionable time is being lost while the Rule 12 motion is being litigated. ”

He cautioned defendants against bringing Rule 12 motions merely to run out the clock, though he noted that where such a motion is colorable, it’s a benefit defense counselors will be thinking about.

Judge Gold offered practitioners a few bits of advice related to FLSA pleadings:

  • Defaults aren’t uncommon in this area given the number of small businesses sued. Even if a defendant defaults, however, the complaint still must adequately plead the FLSA claim to withstand the court’s scrutiny before default judgment will be entered.
  • If you’re thinking about bringing a § 216(b) collective action,  consider whether you’ll be better situated to make the certification motion early on if you have at least two plaintiffs.
  • Defendants should consider going beyond bare bones responsive pleadings to incorporate available and helpful facts such as the use of a payroll company, the existence of a proper tip credit or prior unsubstantiated DOL investigations as a way to alert the court that certain defenses are available and to enhance its understanding of the issues as it considers discovery and conference schedules.

Be Strategic With Rule 68 Offers

According to Colin Dougherty, there’s still a lot of uncertainty on whether opt-ins’ FLSA collective claims might be mooted by a named plaintiff’s acceptance of a Rule 68 offer.

Despite this uncertainty, Dougherty said a Rule 68 offer of judgment can be an effective tool for defendants to jumpstart serious negotiations or to protect themselves from plaintiffs’ counsel’s demands for high damages as a way of driving up fees. Remember that Rule 68 offers are analyzed strictly against the drafter, he said.  For this reason,  defendants should be sure to establish whether attorney’s fees are covered.

Conversely, to protect plaintiffs against defense Rule 68 tactics, Jahan Sagafi recommends that counsel explicitly mention service payments for class representatives so that they become part of the substantive relief sought.

Another technique he suggested is to bring placeholder FLSA certification or Rule 23 motions very early in the litigation process to give the judge a heads-up regarding plaintiffs’ intention to push for collective proceedings.

All Sides Claim Victory in Tyson Foods

The Tyson Foods case was the first time in several years that the U.S. Supreme Court addressed class certification, Sagafi noted.

Sagafi said that Tyson Foods  underscores the viability of the FLSA and representative actions generally both in terms of the trial of an action and the procedural mechanisms plaintiffs should utilize. The case reinforces the availability of representative evidence and the substantive rights the FLSA is intended to protect, he averred.

Most significantly, the case permits plaintiffs to make reasonable inferences from imperfect data where no accurate records of hours worked are available. He acknowledged, however, that the case seems to open the door for more Daubert litigation at the class certification and pretrial phases.

Sagafi said the case should be helpful in streamlining litigation to make sure we don’t boil the ocean ” to get every piece of discovery but noted that plaintiffs must use representative evidence in a way that would withstand a Daubert challenge.

Dougherty offered the defense perspective on the Tyson Foods holding. He said the lack of a Daubert challenge and even the concession in that case that both experts were reliable, relevant and representative is a huge distinguishing factor that defendants can point to in future cases.

I don’t think it necessarily resolved anything because both sides have been mining it for tidbits for their cases, ” Dougherty said. We’re going to need more information from the Supreme Court before these issues get resolved. ”

Heightened Scrutiny and Questionable Work-Arounds for FLSA Settlements

According to Judge Gold, courts across the country have been devoting more time to settlement approvals in light of cases like the Second Circuit’s  Cheeks decision, which lays out factors a court must consider in analyzing the reasonableness of an FLSA settlement.

Dougherty added that, from the management perspective, these rulings are making it difficult for defendants to settle because they preclude confidentiality of the agreement, thereby creating a fear of setting a public precedent for future claims.

The judge urged practitioners to consider the following in anticipation of the settlement approval process:

  • When preparing complaints and damages charts, keep in mind that you must justify the reasonableness of any compromise.
  • When filing a joint motion for approval, collectability becomes an issue. Think about what you need to gather regarding the defendant’s ability to pay if it’s the reason a case settles for far less than the damages sought.
  • An FLSA settlement agreement is a judicial document not a confidential one. Defense counsel should make sure their client understands this upfront.
  • Often, cases settle after conferences before the magistrate judge. If this happens, consider having the case reassigned to the magistrate for all purposes because the judge presiding over the settlement conference is typically satisfied that the settlement is reasonable and conducted at arm’s length. Otherwise you’ll need to remake the case to the presiding district judge.
  • The fact that the case has to be reviewed for reasonableness under cases like Cheeks can be a significant negotiating tool against low offers or unreasonable fee requests.

Judge Gold also mentioned that lawyers have been submitting Rule 68 offers that were agreed upon during settlement negotiations as a way to circumvent Cheeks. He said this practice raises a troublesome question for the courts. ”