Staff

On October 7, 2016, the Third Circuit underscored the need for employers to compensate all hours worked by non-exempt employees even when employers pay employees for break time they could treat as non-compensable under the Fair Labor Standards Act (“FLSA”).

In Smiley v. E.I. DuPont De Nemours & Company, plaintiffs filed an FLSA collective action and Pennsylvania state law class action seeking compensation for unpaid time spent donning and doffing uniforms and safety gear and performing other activities before and after their shifts. Unpaid time averaged 30-60 minutes per day.

Under DuPont’s written policy, plaintiffs working 12-hour shifts were paid for a 30-minute meal break and two other 30-minute breaks per shift. DuPont classified paid break time as hours worked for overtime purposes even though the FLSA does not require it to do so. For the employees at issue, paid break time always exceeded the unpaid pre-shift and post-shift donning and doffing time.

DuPont argued plaintiffs’ claims for unpaid overtime failed because it voluntarily treated break time as hours worked, such that the time qualified as an offset against the 30-60 minutes of daily unpaid pre-shift and post-shift time. The District Court agreed with DuPont and dismissed plaintiffs’ lawsuit in its entirety.

On appeal, the Third Circuit rejected DuPont’s offset argument and overturned the dismissal. After focusing on the FLSA’s “broad remedial purpose,” the Court noted that employers have some flexibility when considering whether to treat bona fide meal breaks as hours worked but held the FLSA explicitly permits offsets against overtime pay only in three specific situations, none of which addressed paid meal breaks.

The Third Circuit concluded that nothing in the FLSA authorized an employer to offset discretionary compensation the employer included in calculating employees’ regular rate of pay. Even though the FLSA does not require DuPont to pay for meal and other breaks or to treat such time as hours worked, once it did so voluntarily, it could not use this time as an offset against other time spent working that it did not count for overtime purposes.

Smiley is an important lesson for employers to review pay practices and ensure that all hours worked by non-exempt employees are compensated. Even if an employer goes beyond what the FLSA requires and pays an employees for meal breaks, that generosity cannot be used to offset other potential overtime violations in the Third Circuit.

The Third Circuit’s decision underscores the need for technical compliance with FLSA requirements. If a pay practice is not expressly authorized by the FLSA or implementing regulations, the practice may be held to run afoul of its mandates and expose employers to class-based liability even if they have the best of intentions and are attempting to exceed its mandates. Smiley highlights the need for companies, particularly smaller companies and startups, to seek review of employment practices by sophisticated employment counsel.

CONTACTS

If you have any questions or would like more information on the issues discussed in this article, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys provide employment counseling and litigate employment matters on behalf of both employers and employees.

Ninth Circuit Court of Appeals Holds Employers Cannot Require Employees to Individually Arbitrate Claims By Way of “Separate Proceedings.”

OVERVIEW

In late August 2016, a divided panel of the Ninth Circuit Court of Appeals held that employers cannot require employees to individually arbitrate their claims by way of “separate proceedings,” even if executing a class action waiver in an employee arbitration agreement. Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 20016). The decision deepens a Circuit split and will likely have significant consequences for employers.

The Ninth Circuit joined the National Relations Board (“NLRB”) and the Seventh Circuit by holding that requiring employees to sign an agreement bringing concerted legal claims violates § 7 and § 8 of the National Labor Relations Act (“NLRA”). By contrast, the Fifth, Second, and Eighth Circuits previously rejected the NLRB’s interpretation and allow enforcement of class and collective action waivers in employee arbitration agreements. E.g. Murphy Oil USA v. NLRB, No. 14-60800 (5th Cir., October 26, 2015); D.R. Horton, Inc. v. NLRB, 737 F. 3d. 344 (5th Cir. 2013).

REASONING 

As a condition of employment, Ernst & Young required its employees to execute agreements hat legal claims had to be brought through arbitration, and in “separate proceedings.” After signing this agreement, two plaintiffs brought a wage and hour class and collective action in federal court against Ernst & Young. Invoking the employee arbitration agreement, Ernst & Young filed a motion to compel arbitration, which the district court granted.

The Ninth Circuit reversed the order compelling arbitration, holding that the NLRA § 7’s “mutual aid or protection clause” provides a substantive right to collectively “seek to improve working conditions through resort to administrative and judicial forums.” The court rejected defendant’s argument that the Federal Arbitration Act (“FAA”) mandates a different result, holding that the FAA’s savings clause  prevents enforcement of an arbitration contract’s waiver of a substantive federal right. Critically, the Court left open the possibility that the FAA can prevent enforcement of procedural federal rights but exempted enforcement of arbitration provisions from its ambit by deeming the  “[t]he rights established in § 7 of the NLRA — including the right of employees to pursue legal claims together” to be substantive. The Ninth Circuit explained that these rights are “central, fundamental protections of the act, so the FAA does not mandate the enforcement of a contract that alleges their waiver.”

The panel also remanded the case to the district court to determine whether the “separate proceedings” clause was severable from the remainder of the contract.

The majority emphasized that the contract’s requirement of aribration did not, alone, cause problems. Rather, the problem with the contract was not that it required arbitration, but that it precluded concerted action, stating:

The illegality of the “separate proceeding” term here has nothing to do with arbitration as a forum. It would equally violate the NLRA for Ernst & Young to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in separate proceedings. The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism, if the contract (1) limited resolution to that mechanism and (2) required separate individual proceedings. The problem with the contract at issue is not that it requires arbitration; it is that the contract term defeats a substantive federal right to pursue concerted worked-related legal claims. (emphasis added).

In her dissent, Judge Sandra S. Ikuta criticized the decision as “breathtaking in its scope and in its error,” writing that the majority had joined “the wrong side of a circuit split.” She reasoned that “when a party claims that a federal statute makes an arbitration agreement unenforceable … the Supreme Court requires a showing that such a federal statute includes an express “contrary congressional command.” Finding no such express congressional command within the NLRA, she concluded it could not override the FAA.

Judge Ikuta also disagreed that §§ 7 or 8 of the NLRA create a substantive right to the availability of classwide claims, stating that “[w]hile the NLRA protects concerted activity, it does not give employees an unwaivable right to proceed as a group to arbitrate or litigate disputes.” Finally, Judge Ikuta asserted that “[t]o the extent the Supreme Court has held that class actions are inconsistent with arbitration … the majority effectively cripples the ability of the employers and employees to enter into binding agreements to arbitrate.”

IMPLICATIONS 

The decision deepens an existing Circuit splits and leaves the enforceability of agreements which mandate arbitration by way of separate proceedings and preclude class and/or collective actions in the employment context uncertain.

RECOMMENDATIONS

As a protective measure, employers should consider amending their arbitration agreements to provide that the entire agreement is rendered null and void and that the class or collective waiver is not to be severed from the remainder of the agreement if found unenforceable. This approach is advisable because defending against class or collective action certification in arbitration is generally more difficult in arbitration than federal court. Ernst & Young faces the possibility it may have to do just that depending on the district court’s decision on remand, but other employers can minimize this possibility through effective drafting of arbitration agreements.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys provide employment counseling and litigate on behalf of both employers and employees.