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US Supreme Court Rejects Longstanding Principle That FLSA Exemptions Must Be Construed Narrowly

Decision: On April 2, 2018, the Supreme Court held in a 5-4 decision in Encino Motorcars, LLC v. Navarro (No. 16-1362) that automobile dealership service advisors are exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). The majority concluded that service advisors “sell[] goods or services” and “are integral to the servicing process” and thus fall within the specific FLSA exemption for salespersons “primarily engaged in ... servicing automobiles” despite the fact that they do not spend most of their time physically repairing automobiles. Importantly, in reaching that conclusion, the majority explicitly rejected the longstanding and widely adopted principle that FLSA exemptions must be “narrowly construed.” The majority explained that “[t]he narrow construction principle relies on the flawed premise that the FLSA pursues its remedial purpose at all costs” and concluded that “[b]ecause the FLSA gives no textual indication that its exemptions should be construed narrowly, there is no reason to give them anything other than a fair (rather than a ‘narrow’) interpretation.” The majority added that “the FLSA has over two dozen exemptions in § 213(b) alone” and “[t]hose exemptions are as much a part of the FLSA’s purpose as the overtime-pay requirement.”

Impact: Although the most immediate impact of Encino Motorcars is that automobile dealership service advisors are exempt from the FLSA’s overtime requirements, the majority’s explicit rejection of the principle that FLSA exemptions be narrowly construed should affect, on a broader level, how lower courts assess FLSA misclassification claims in future cases. For more than 50 years, employers seeking to show that they have properly classified an employee as exempt have had to overcome the “narrow interpretation” principle that federal courts regularly applied when analyzing the FLSA’s overtime exemptions. By rejecting this principle of construction, the Supreme Court has clearly signaled to district and appellate courts that FLSA’s exemptions should be construed as written, based on a “fair interpretation” of the exemption. This, in turn, will give employers greater latitude to argue that their employees fall within one of the overtime exemptions. Given the significant impact that Encino Motorcars is likely to have on the wage and hour landscape, employers should closely monitor future developments in this area. 

California Court of Appeal Rejects Imposition of Vicarious Liability on Staffing Agency for Client’s Alleged Meal Break Violations

Decision: In Serrano v. Aerotek, Inc., the California Court of Appeal recently found that a staffing agency employer was not vicariously liable for its co-employer client’s meal break violations. The plaintiff had been employed by a staffing agency that placed temporary employees at its client’s facilities. The contract between the staffing agency and its client provided that it was the client’s responsibility to control, manage and supervise the temporary employee’s work and that the client would comply with applicable federal, state and local laws. Nonetheless, the staffing agency provided temporary employees with its employee handbook setting forth its policies, including a meal period policy that was compliant with state law. The staffing agency also trained the temporary employees about the policy during orientation notwithstanding the fact that they were going to be placed at the client’s facilities. 

The plaintiff sued both the staffing agency and its client for various wage and hour violations, including meal period violations. The staffing agency moved for summary judgment, asserting that it should not be held liable for any meal period violations because it satisfied its duty to provide employees with meal periods. The trial court granted the motion and the Court of Appeal affirmed, holding that there was no additional duty for the staffing agency to police its client to ensure that meal periods were provided beyond providing the employee with its legally compliant meal period policy. In doing so, the court expressly rejected the plaintiff’s contention that “time records show[ing] late and missed meal periods creat[ed] a presumption of violations.” The court then explained that even if the staffing agency “had actual or constructive knowledge that [the temporary employee] was not taking her meal breaks within five hours of starting work, Brinker [Restaurant Corp. v. Superior Court, 53 Cal.4th 1004, 1041 (2012)] makes clear that such knowledge does not establish liability because the employer has no obligation to ensure that employees actually take provided breaks.” The court also declined to impose vicarious liability on the staffing agency, finding that once it had fulfilled its duty to provide meal periods, it is not automatically liable for any meal period violation by a co-employer.

Impact: The decision in Serrano is helpful to employers because it recognizes that time records reflecting missed or late meal periods do not create a presumption of liability under California wage and hour laws. The employer’s duty under California law is simply to make a meal period available, not to police employees to ensure that they take them. The decision also underscores the importance for staffing agencies to have written, compliant meal period and other employment policies that are distributed to all employees, even where the employees are controlled and supervised by the client, and to enter into written contracts with their clients that clearly define each party’s roles and responsibilities, including the obligation to comply with applicable federal, state and local employment laws. 

Pay-Equity Movement Continues to Achieve Wins

Over the past few years, advocates seeking to eliminate gender-based pay disparities have achieved significant legal victories both in courts and in legislatures nationwide. For example, an increasing number of jurisdictions—most recently, New York City and the State of California—have passed laws prohibiting employers from asking prospective employees questions about their prior compensation and wage history because of concerns that consideration of an employee’s prior salary history can perpetuate gender-based pay disparities. In the past month, several developments have continued this trend by imposing liability where the use of salary history may result in pay disparities:

  • The Ninth Circuit Rejects Use of Salary History as Affirmative Defense in Equal Pay Cases: On April 9, in Rizo v. Yovino, the US Court of Appeals for the Ninth Circuit, sitting en banc, held that a prospective employee’s salary history cannot be used as a defense to an unequal pay claim under the federal Equal Pay Act. While the Ninth Circuit panel that initially decided the case held that an employee’s salary history could qualify as a “factor other than sex” for purposes of the defense, the en banc court disagreed, reasoning that Congress did not intend to create an exception that would perpetuate the same pay disparities that the Equal Pay Act was designed to correct. The Ninth Circuit explained that a “factor other than sex” is “limited to legitimate, job-related factors” such as the prospective employee’s “experience, educational background, ability or prior job performance.” The court opined that the relationship between an employee’s prior salary history and his/her training, education, ability or experience is “attenuated” and a “second-rate surrogate.” With its en banc opinion in Rizo, the Ninth Circuit joins the majority of other federal appellate courts by concluding that considering salary history, by itself, violates the Equal Pay Act. However, the Ninth Circuit is the first federal appellate court to strike down prior salary history per se, even when presented in combination with other factors. The Seventh Circuit, in contrast, has held that salary history is always a “factor other than sex.”

  • New Jersey Equal Pay Legislation: On April 24, New Jersey passed one of the strictest equal pay laws in the United States. The new law—called the Diane B. Allen Equal Pay Act—amends New Jersey’s Law Against Discrimination to require that employees of a particular sex (or another protected class, such as race, gender, nationality or sexual orientation) be paid the same compensation as other employees for “substantially similar” work. If there is a pay differential, the employer has the burden to show that the difference is based on a “seniority” or “merit” system. Alternatively, the employer must show that the differential is based on other bona fide factors—such as experience or work quality—and not a factor such as salary history that may perpetuate pay disparities. Under the new law, a plaintiff would be able to recover damages equal to three times the amount of any pay disparity, as well as back pay going back up to six years—potentially resulting in hefty damages for employers. The new law takes effect on July 1, 2018.

Impact: While employers who have employees in New Jersey will need to work quickly to ensure compliance before the state’s new Equal Pay Act takes effect, employers nationwide should also take note of the developments discussed above, which underscore a national trend toward imposing liability where employers’ use of salary history—even unintentionally—results in unequal pay between male and female employees. Accordingly, in the long term, all employers should review their payroll for potential pay discrepancies, identify any practices that may result in sex-based pay disparities and revise their hiring, promotion and compensation policies as appropriate.

New York State and City Pass Legislation to Strengthen Protections Against Workplace Sexual Harassment

In April, the New York State Legislature and the New York City Council passed sweeping legislation to provide employees with greater protection from sexual harassment in the workplace. Governor Andrew Cuomo signed into law the New York State Budget Bill for Fiscal Year 2019 (the “Budget Bill”), and the New York City Stop Sexual Harassment in NYC Act currently awaits the expected signature of Mayor Bill de Blasio. Both pieces of legislation significantly expand employer obligations with respect to sexual harassment by mandating annual “interactive” sexual harassment training and expanding the protections of sexual harassment laws. 

Below are many of the key highlights of the legislation applicable to private employers:

New York State Sexual Harassment Law

  • Expands sexual harassment protections under the New York State Human Rights Law to “non-employees” (e.g., independent contractors, consultants and vendors) who provide contract services in the employer’s workplace “when the employer . . . knew or should have known that such non-employee was subject to sexual harassment in the employer’s workplace, and the employer failed to take immediate and appropriate corrective action.” 

  • Directs the New York State Department of Labor (“NYSDOL”) to collaborate with the state Division of Human Rights (“NYSDHR”) to develop a model sexual harassment prevention policy, which all employers in New York will be required to adopt (or to develop their own policy that meets or exceeds the model’s standards). The model policy must include, inter alia, (a) a standard complaint form, (b) information concerning the federal and state statutory provisions concerning sexual harassment and remedies available to victims, (c) a procedure for timely and confidential investigation of complaints and (d) a statement informing employees of their right of redress and available forums for adjudicating sexual harassment complaints administratively and judicially.

  • Effective July 11, 2018, prohibits employers, their officers and other employees from including nondisclosure provisions prohibiting the disclosure “of the underlying facts and circumstances to the claim or action,” in sexual harassment claim settlements unless (a) the confidentiality provision is the complainant’s preference, (b) the complainant has 21 days to consider the confidentiality condition, and (c) the complainant has seven days for executing the agreement to revoke it. 

  • Also effective July 11, 2018, prohibits employers from requiring confidential arbitration to resolve sexual harassment claims unless such a provision is part of a collective bargaining agreement or would be “inconsistent with federal law.” 

  • Effective October 9, 2018, requires employers to provide all employees with “interactive” annual sexual harassment prevention training, based on a model to be developed and published by the NYSDOL and NYSDHR. 

  • Also effective October 9, 2018, requires employers to distribute written anti-harassment policies in the workplace.

  • Effective January 1, 2019, requires bids on certain state contracts to contain language affirming that the bidding entity has implemented a written sexual harassment policy and that it provides annual sexual harassment prevention training to all of its employees.

Stop Sexual Harassment in NYC Legislation

  • The legislation expands the New York City Human Rights Law (“NYCHRL”) to cover all employers for purposes of sexual harassment claims, regardless of size.

  • Starting April 1, 2019, employers in New York City with at least 15 employees will be required to conduct mandatory annual “interactive” sexual harassment training for employees, including supervisors, managers and interns. The training must be conducted after 90 days of initial hire for new employees, and employers must maintain records of compliance with the law, including signed employee acknowledgements.

  • The New York City Commission on Human Rights (the “Commission”) is tasked with creating model training programs that employers may access and use and making certain information about sexual harassment available online for the public, including examples of sexual harassment, a description of the Commission’s complaint process and other agency resources.

  • All employers in New York City are required to conspicuously post an anti-sexual harassment rights and responsibilities poster and to provide an information sheet on sexual harassment to each new hire. 

  • The legislation also lengthens the statute of limitations for filing harassment claims arising under the NYCHRL with the Commission from one year to three years after the alleged conduct, which makes the limitations period coextensive with the limitations period for filing claims in court.

Eleventh Circuit Issues Cautionary Decision Regarding Non-Discriminatory But Discretionary Hiring Policies

Decision: The US Court of Appeals for the Eleventh Circuit recently issued an important decision for employers with respect to discriminatory hiring practices. In EEOC v. Exel, Inc., the Equal Employment Opportunity Commission (EEOC) sued an employer under Title VII of the federal Civil Rights Act, alleging gender discrimination on behalf of a woman who applied for a promotion with Exel but was passed over in favor of a male applicant. The employer’s claimed non-discriminatory justification for the decision to promote the male applicant was its adherence to its Priority Transfer Practice (“PTP”) policy, which gave hiring and promotional preferences to candidates who were otherwise about to lose their jobs in workforce reductions or other layoffs unrelated to job performance. After the case went to trial, the jury found the employer liable for gender discrimination and awarded punitive damages against the employer. The trial court denied Exel’s motion for judgment as a matter of law on liability but vacated the punitive damages award.

The Eleventh Circuit affirmed both of the trial court’s rulings. With respect to the jury’s verdict in favor of the EEOC, the court explained that, notwithstanding the employer’s PTP policy, the company’s policy also provided the hiring manger with discretion on whom to promote. Evidence of the hiring manager’s generalized bias against women, including a statement that he would never put a woman in a management position, coupled with evidence of his dismissive (but not overtly discriminatory) response to the female employee’s interest in the position, supported the jury’s verdict on liability. On the question of punitive damages, the Eleventh Circuit concluded that punitive damages were not appropriate because, among other reasons, the EEOC failed to produce sufficient evidence that the hiring manager was sufficiently “high[] up in the corporate hierarchy.” There were 329 other employees with the same title as the offending manager, and he also only supervised 25 employees, which amounted to 0.1 percent of the company’s North American workforce. Based on the high number of other employees with his title and the low number of employees under his supervision, the Eleventh Circuit agreed with the district court that it would be inappropriate to impute liability for his actions to the employer. 

Impact: The Eleventh Circuit’s holding on liability should serve as a cautionary tale for employers. The hiring manager’s comments to and about women, along with evidence that he had discretion about the promotion decision notwithstanding a seemingly neutral PTP policy, were key factors in the court’s reasoning that the promotion decision was the product of discriminatory animus. This case thus illustrates the risks of deviating from a policy, which may later be used as evidence of discriminatory pretext. This case also highlights the importance of ensuring that managers and supervisors receive regular training on discrimination and harassment in the workplace. Finally, employers should provide clear guidance to managers regarding the appropriate criteria to be used in making hiring, promotion and other personnel decisions.