New York City Passes Trailblazing Freelancer Wage Theft Protection Law

On November 16, 2016, New York City Mayor Bill de Blasio signed into law the “Freelance Isn’t Free” Act (“the Act”).  The Act generally grants freelancers the right to a written contract, timely payment and to be free from retaliation. The Act also bars wage theft against contractors and imposes substantial penalties on businesses that fail to comply with these and other requirements surrounding the independent contractor relationship. The Act, the first of its kind in the United States, will take effect on May 15, 2017.

Covered persons – Under the Act, freelancers include individuals and organizations made up of no more than one person, who are hired as independent contractors to provide services in exchange for monetary compensation.  Excluded from the Act are most sales representatives, lawyers and doctors.

The Act’s Requirements

  1. Written Contract – The Act requires a written contract for freelance work that is valued at $800 or more (either alone or aggregated with all service contracts between the same parties over the preceding 120 days). The written contract must include the names and addresses of the hiring party and freelancer, an itemization of services to be performed with corresponding values, and the date of payment or a method of determining said date.
  2. Timely Payment – In addition, the Act requires that the agreed-upon compensation be paid to the freelancer on or before the payment date specified in the written contract. If the contract does not specify a payment date or a method by which the payment date can be determined, the freelancer is to be paid no later than 30 days after completing the services.  Notably, once a freelancer has started performing the services, the employer cannot condition timely payment on the freelancer accepting an amount of compensation that is less than that stated in the contract.
  3. No Retaliation – Finally, the Act has an anti-retaliation clause that prohibits discrimination, threats, intimation, discipline, harassment and denying future work opportunities to freelancers. Employers are also protected from penalizing a freelancer for, or acting in way that would likely deter a freelancer from, exercising his rights under the Act.

Remedies & Exposure

Freelancers whose rights have been violated under the Act may file a complaint with the Office of Labor Standards within 2 years of the alleged violation.  Aggrieved freelancers also have the option to file a civil action.  For claims based on the failure to provide a written contract, the civil action must be filed within 2 years of the alleged violation.  For claims arising out of non-payment, late payment, or retaliation, the civil action must be filed within 6 years.

Failure to enter into a written contract alone subjects an employer to payment of the freelancer’s attorneys’ fees, a statutory damages award of $250, and, if found to have also violated the timely payment and/or anti-retaliation provisions, damages could equal the value of the underlying contract.  Non-payment or late payment alone exposes the employer to double damages, injunctive relief and other damages.  Retaliation alone subjects the employer to damages equal to the value of the underlying contract.

In addition, New York City Corporation Counsel may institute an action against repeat offenders of the Act.  Employers who are found to frequently violate the Act are subject to up to $25,000.00 in civil penalties.

No Waiver – Freelancers cannot waive their rights under the Act.  The Act expressly provides that any contract provisions purporting to waive rights under the Act are void as against public policy.

Potential Impact

The purpose of the Act is to make employers accountable for paying freelancers.  The concept is respectable in theory.  Testimony was given to the New York City Council suggesting that over 70% of freelance workers reported non-payment or late payment of wages and that freelancers were being denied an average of $6,000 of owed compensation per year.

However, the Act’s practical effect may pose significant problems.  First, unlike other wage and hour laws, employers cannot avoid or diminish liability by demonstrating that they acted in good faith.  For example, employers can avoid paying liquidated damages under the Fair Labor Standards Act if they demonstrate good faith and reasonable grounds for their non-payment of wages or other unlawful conduct. Second, the Act does not require freelancers to provide invoices for completed work.  Accordingly, companies who operate on the basis of invoicing by contractors are at an elevated risk, even if they intend to pay a freelance worker for contracted services.

What To Do

Although the Act does not go into effect until May of 2017 and it will not have retroactive effect, there are certain steps that New York City companies hiring independent contractors should take to ensure they are in compliance with the Act by that time.  First, ensure that service contracts for freelancer work valued at $800 or more are in writing and that they specify the work to be done, attach a value to each itemized service, and provide for the rate, method and date of payment.  Companies who operate on the basis of invoicing by contractors may consider imposing additional requirements on the freelancer, such as the submission of invoices, although it has yet to be seen whether a clause conditioning payment upon the submission of an invoice would be enforceable under the Act.  New York City businesses that use independent contractors should also review and update their independent contractor agreements as appropriate, or speak with counsel about preparing such an agreement, to align their payment practices with the Act.

For more information on the Act and how the new requirements will affect your business, please contact John C. Petrella, Esq., Chair of the firm’s Employment Litigation Practice Group at jpetrella@nullgenovaburns.com, or Dina M. Mastellone, Esq., Chair of the firm’s Human Resources Practices Group, at dmastellone@nullgenovaburns.com, or 973-533-0777.

Supreme Court Punts on Whether Service Advisors Are Exempt from FLSA Overtime Premium Pay

The United States Supreme Court recently issued its long awaited decision in Encino Motorcars, LLC v. Navarro. At issue in the case was whether “service advisors” employed by car dealerships are exempt from the Fair Labor Standards Act’s overtime premium pay requirement, as well as the validity of a related 2011 United States Department of Labor regulation. Unfortunately, the Court did not decide whether service advisors are exempt. Instead, the Court remanded the case to the Ninth Circuit Court of Appeals with the instruction that the Ninth Circuit decide the issue “without placing controlling weight” on the DOL’s 2011 regulation.

The issues in Encino Motorcars were rooted in a provision of the FLSA that expressly provides that “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” is exempt from the FLSA’s overtime premium pay requirement. The FLSA is silent as to whether service advisors qualify for this exemption. In 1970, the DOL issued an interpretive regulation in which it concluded that service advisors do not fall within the exemption. Several courts rejected the DOL’s interpretation, and in a 1978 Opinion Letter the DOL changed course and took the position that service advisors are exempt. The DOL maintained this position until 2011, when it issued a regulation that, without explanation, excluded service advisors from the exemption.

The Supreme Court’s opinion in Encino Motorcars arose from a Ninth Circuit decision in which the Ninth Circuit relied on the DOL’s 2011 regulation to hold that a group of service advisors were eligible for overtime premium pay. The service advisors at issue would meet with a customer, evaluate the customer’s car, suggest repairs and dealership service plans, and then send the car to a mechanic who repaired and/or serviced the car. In remanding the case, the Supreme Court found that the DOL failed to follow basic procedural requirements of administrative rulemaking, which require administrative agencies to explain their rules. The Supreme Court found this especially important here, where the DOL issued a rule contrary to its prior position. The Supreme Court was critical of the DOL for its failure to explain adequately its rationale for changing its position, and its failure to consider the public’s reliance on the DOL’s longstanding policy. Car dealerships will have to wait for the Ninth Circuit’s subsequent decision, and possibly another Supreme Court decision, before the issue of whether service advisors are exempt from the FLSA’s overtime premium pay requirement is resolved.

For more information regarding the potential impact of the Supreme Court’s decision, or regarding any other wage and hour issues, please contact John R. Vreeland, Esq. Director of the Firm’s Wage & Hour Compliance Practice Group, at 973-535-7118 or jvreeland@nullgenovaburns.com, or Joseph V. Manney, Esq. at 973-646-3297 or jmanney@nullgenovaburns.com.

Second Circuit Rules Court Approval or USDOL Supervision of Settlements Required in FLSA Suits

On August 7, 2015, the Second Circuit ruled that suits brought under the Fair Labor Standards Act (“FLSA”) cannot be resolved privately and require approval of a federal court or supervision by the U.S. Department of Labor (“DOL”).

In Cheeks v. Freeport Pancakes House, Inc., 2d Cir., No. 14-299, 8/7/15, the plaintiff sued his former employer seeking to recover unpaid overtime wages, liquidated damages and attorneys’ fees under the FLSA and New York labor laws.  After engaging in some discovery, the parties reached a private settlement to dismiss the employee’s claims with prejudice and, pursuant to Rule 41 of the Federal Rules of Civil Procedure (“Rule 41”), filed a joint stipulation and order to dismiss the lawsuit.  Under Rule 41, parties may voluntarily agree to dismiss an action without court order unless there is a federal statute prohibiting such agreement.  The District Court denied the parties’ application to dismiss the lawsuit.

As part of its ruling, the District Court directed the parties to file a copy of the settlement agreement on the public docket and to “show cause why the proposed settlement reflects a reasonable compromise of disputed issues rather than a mere waiver of statutory rights brought by an employer’s overreaching.”  The parties jointly sought certification of an appeal to the Second Circuit instead, seeking a ruling on whether the parties could stipulate to dismissal of the action without court approval.

In affirming the lower court’s decision to deny the stipulation of settlement, the Second Circuit decided, given the unique policy considerations underlying the FLSA, that the FLSA fell within Rule 41’s “applicable federal statute” exception, thus making district court or DOL approval a requirement to dismiss an FLSA cause of action with prejudice via private settlement.  The Court reasoned that “the FLSA is a uniquely protective statute … with a strong remedial purpose: to prevent abuses by unscrupulous employers and remedy the disparate bargaining power between employers and employees.”  Accordingly, the Second Circuit held that judicial or DOL approval will protect susceptible employees from feeling coerced into accepting unreasonable or discounted settlement offers quickly.

The Cheeks ruling makes it clear that, at least in the Second Circuit, a privately negotiated settlement agreement requires court or DOL approval in order to extinguish FLSA claims in a lawsuit. This means the settlement agreement must be filed in open court.  Failure to do so in New York, Connecticut and Vermont puts the employer at risk that it will be sued again by the same claimants.

For more information regarding this decision and best practices, please contact John Vreeland, Esq., Director of the Wage & Hour Compliance Practice Group, at jvreeland@nullgenovaburns.com or 973-533-0777.

 

 

Wage and Hour Issues in the Summer Camp Industry

Summer camps, typically a go-to option for many parents to send their kids when school lets out, are now faced with a myriad of other non-traditional competitors.  Specialty camps, teen tours, and other options have affected the entire industry and forced some traditional camps out of business.  To compensate for revenue losses, many camps have turned to alternative sources of income, such as bringing in outside groups and renting out their facilities during off-season months.  Camp administrators must be mindful, however, that their expanded operating season can have severe implications under federal wage and hour law.

Section 13(a)(3) of the Fair Labor Standards Act (“FLSA”) exempts “organized camps,” such as summer camps, from most of the FLSA’s minimum wage and overtime requirements.  However, to qualify for such exemptions, the camp must meet one of the following criteria:  (1) the camp must not operate for more than seven months in any calendar year, or (2) in the previous calendar year, the average receipts for any six months must not have been greater than one-third of the camp’s average receipts for the other six months of the year.  Determining whether the camp satisfies one of these criteria is not always clear.

In determining whether the camp has operated for more than seven months in the calendar year, not all activities count.  Maintenance completed in the offseason, for example, is not considered operations. Construction to build new facilities would be analyzed similarly.  However, renting the facility during the offseason may need to be counted in the equation, especially if the camp provides staff such as cooks, waiters, lifeguards, and maintenance workers.

Even if a camp does “operate” for more than seven months in a calendar year, it could still qualify for the FLSA exemptions if, in the previous calendar year, the average receipts for any six months were not greater than one-third of the average receipts for the other six months.  This calculation can be based on any six months in the year, which need not be consecutive.  For example, the six months with the highest average receipts might include the following:  (1) January:  $10,000; (2) May:  $10,000; (3) June:  $25,000; (4) July:  $50,000; (5) August: $50,000; (6) September:  $20,000.  The total revenue is $165,000 which averages $27,500 per month.  The six months with the lowest monthly receipts might include the following:  (1) February:  $5,000; (2) March:  $5,000; (3) April:  $5,000; (4) October:  $5,000; (5) November:  $5,000; (6) December:  $5,000.  The total revenue is $30,000, which averages $5,000 per month.  Because the average revenue for the lowest six revenue months ($5,000) is not greater than one-third of the average revenue of the other six months of the year (one-third of $27,500 is $9,167), this hypothetical camp would be exempt.  Obviously, camps with extended summer seasons and/or winterized facilities must be particularly mindful of this calculation.

Determining what constitutes a “receipt” and when it is received can also present challenges.  Certainly revenue from tuition, camp fees, and the camp store, would clearly be included in the average monthly receipt calculation.  Yet, for other types of revenue, such as vendor incentives and donations to the camp, the line is not as clear.  Similarly, if money is paid in January for a camper to attend in July, to which month should this “receipt” be applied?

The answers to these questions are not always clear; the analyses are fact-sensitive and require close attention to the particular details of each camp.  What is clear, however, is that camps forced to rely more heavily on outside income must be aware of these issues. The loss of the exemption in any given year requires full compliance with the FLSA’s minimum wage and overtime requirements and can lead to significant exposure for unpaid wages, including liquidated damages and fines in the event of a Department of Labor audit.

For more information, please contact John R. Vreeland, Esq., Director of the firm’s Wage & Hour Compliance Practice Group, jvreeland@nullgenovaburns.com, or Brett M. Pugach, Esq., bpugach@nullgenovaburns.com.

THIRD CIRCUIT CLARIFIES FINAL CERTIFICATION STANDARD FOR FLSA COLLECTIVE ACTIONS

The Third Circuit Court of Appeals recently clarified the procedure applicable to collective actions filed under the Fair Labor Standards Act. Still certain questions remain regarding the implications of a plaintiff’s failing to seek final certification and how the Third Circuit’s standard will be applied.
The increasingly popular FLSA collective action can be maintained and proceed to trial only on behalf of a group of similarly situated plaintiffs. There are two steps to collective action certification – conditional certification and final certification. Conditional certification is determined shortly after the action is filed but before discovery begins and requires only a modest factual showing that plaintiffs are similarly situated. Allegations that employees were victims of a single employer decision, policy, or plan can be enough to support conditional certification. Upon conditional certification the court orders notices sent to potential claimants to advise them of their rights to opt into the action and sets a discovery schedule. At least until the Third Circuit’s recent ruling, the practice had been that unless the employer challenged the conditional certification, plaintiffs were not required to ask the court for a final certification of the collective action and there was no clear standard in the Third Circuit for final certification of a FLSA collective action.
In Zavala v. Wal-Mart Stores, 691 F.3d 527 (3rd Cir. 2012), the Third Circuit clarified the procedure and the standard applicable to final certification. The court held that final certification must be proven by a preponderance of the evidence, using an ad hoc approach, with the burden of proof borne by the plaintiffs. Further, any appeal from the district court’s determination will be reviewed under a clearly erroneous standard.
The ad hoc approach requires the court at the second step, generally after discovery concludes, to consider all factors relevant to whether the plaintiffs are similarly situated. These factors include, but are not limited to, whether the plaintiffs: are employed in the same corporate department, division, and location; advance similar claims; seek substantially the same form of relief; and have similar salaries and circumstances of employment. Additionally, the court will consider whether the defendant has individualized defenses as to each plaintiff. This factor can be sufficient grounds for decertification. The court can also take into account other fairness and efficiency concerns.
In Zavala the conditionally certified class consisted of 114 Wal-Mart janitorial workers who alleged FLSA overtime violations. The Third Circuit found that the plaintiffs did not establish by a preponderance of the evidence that they were similarly situated. The plaintiffs worked at more than 180 different stores in 33 states and were employed by 70 different contractors and sub-contractors. The plaintiffs alleged a common scheme to hire and underpay illegal immigrant workers, but the court found that these allegations were not useful in streamlining resolution of the claims because of the many differences among the plaintiffs’ claims. Accordingly the Third Circuit affirmed the lower court’s decertification of the action.
To date, no District Court within the Third Circuit has applied Zavala to a motion for final certification of a collective action. Outside of the Third Circuit, however, the Zavala decision has been considered in connection with the disposition of a motion for final certification. In Marshall v. Amsted Rail Co., 2012 U.S. Dist. LEXIS 161768 (S.D. Ill. Nov. 13, 2012), 478 plaintiffs alleged FLSA underpayment and overtime violations. The District Court noted that the Seventh Circuit “has not announced a test to determine this FLSA ‘similarly situated’ question” so the court looked to the Zavala decision and others and decertified the claims of 476 opt-in plaintiffs, leaving only the two named plaintiffs to proceed in the action. The Illinois court considered the factual and employment settings of all the plaintiffs, individualized defenses of the employer, and other fairness and procedural concerns and found that each consideration weighed in favor of decertification.
The Zavala decision has important implications for FLSA collective actions going forward. At the close of discovery in a conditionally certified FLSA collective action, the plaintiff has the affirmative burden to prove, by a preponderance of the evidence, that the claimants are not only similarly situated to each other, but arguably are similarly situated to the named plaintiff as well, in order to have the action finally certified. As of this writing, it is unclear how courts within the Third Circuit will treat a conditionally certified FLSA action when the plaintiff fails to move for final certification after discovery and the employer fails to move to decertify the action.
If you have any questions or for more information about decertifying FLSA collective actions, please contact Patrick W. McGovern, Esq., pmcgovern@nullgenovaburns.com, or Rebecca Fink, Esq., rfink@nullgenovaburns.com, in the Labor Law Practice Group.

Third Circuit Clarifies Test for Joint Employer Status under FLSA

On June 28 the U.S. Court of Appeals for the Third Circuit refined the standard for deciding whether an organization is a joint employer under the Fair Labor Standards Act (“FLSA”) for purposes of liability for unpaid minimum and overtime wages owed another entity’s employees.

This issue arose in a collective action suit by assistant branch managers at Enterprise Rent-A-Car locations who claimed they were denied overtime pay in violation of the FLSA. Both the subsidiary company Enterprise Rent-A-Car and the parent company Enterprise Holdings, Inc. were named defendants. The District Court granted Enterprise Holdings’ motion for summary judgment on the basis that Enterprise Holdings did not qualify as a joint employer, and the Third Circuit affirmed.

In determining whether a company is a joint employer for purposes of FLSA liability, the Third Circuit articulated a four-prong, “economic reality” test. The Court stated it would require proof of significant control, instead of ultimate control, by one entity over another’s employees and “even indirect control may be sufficient.” The test is as follows:
1) Does the entity have authority to hire and fire?
2) Does the entity have authority to promulgate work rules and assignments, and set conditions of employment, including compensation, benefits and hours?
3) Does the entity conduct day-to-day supervision, including employee discipline?
4) Does the entity control employee records, including payroll, insurance, taxes?

The plaintiffs argued that Enterprise Holdings was a joint employer because it provided its Rent-A-Car branches with human resources best practices guides, employee benefit plans and compensation recommendations, constituting sufficient control under the four prong test for joint employer. The Third Circuit disagreed and found controlling the facts that the subsidiary branch offices were free to choose whether to use any or all of the parent’s suggested guidelines at their own discretion and none of the parent’s guidelines was mandatory. The Court also stressed that the four factors were by no means an exhaustive list and should not be blindly applied. Instead, according to the Court, they should be evaluated in light of other relevant factors that show the first entity is exerting significant control over the other entity’s employees, such as interlocking directorates and the common nature of the businesses each conducted.

Joint employer status under the FLSA continues to require a fact-specific analysis consistent with the Third Circuit’s guidance. If your organization needs assistance in reviewing potential joint employer issues, please contact Jim McGovern, Pat McGovern or Doug Solomon in our Labor Law Practice Group.