Category: Wage & Hour Litigation

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Emilee N. Crowther

Duane Morris Takeaways: In Martinez v. Fedex Ground Package System, Inc., No. 20-CV-1052, 2024 WL 418801 (D.N.M. Feb. 5, 2024), Judge Steven C. Yarbrough of the U.S. District Court for the District of New Mexico granted the intervention motion of 16 putative class members to join the lawsuit,  The Court held that the plaintiff-intervenors met the standard for permissive intervention under Rule 24(b)(2).  The Court’s decision in this case serves as an important reminder that Rule 23 and Rule 24 employ two separate commonality standards, and that class action cases are not automatically over when a court denies class certification.

Case Background

On October 12, 2020, Plaintiffs Fernandez Martinez and Shawnee Barrett (collectively, “Plaintiffs”) filed suit against Defendant Fedex Ground Package System, Inc. (“Fedex”), alleging that Fedex misclassified them as independent contractors and failed to pay them and putative class members overtime wages in violation of the New Mexico Minimum Wage Act (“NMMWA”).

On November 8, 2022, Plaintiffs moved to certify a class of all current or former New Mexico FedEx drivers who were paid a day rate without overtime compensation.  On October 27, 2023, the Court denied Plaintiffs’ motion on the basis that Plaintiffs failed to demonstrate that common questions predominated over individualized issues pursuant to Rule 23(b)(3).  Martinez v. FedEx Ground Package Sys., No. 20-CV-1052, 2023 WL 7114678 (D.N.M. Oct. 27, 2023).

On December 15, 2023, a group of 16 putative class members (the “Intervenors”) filed a motion to intervene as plaintiffs in the Lawsuit under Rule 24.  Martinez, 2024 WL 418801, at 1. In their motion, the Intervenors alleged that they, like Plaintiffs, were “current or former New Mexico FedEx delivery drivers who were paid the same amount of money regardless of how many hours they worked in a day, resulting in no premium payment for overtime hours worked in violation of the [NMMWA].”  Id.

The Court’s Decision

The Court granted the Intervenors’ motion.  Id. at 2.  It held that the Intervenors presented sufficient “questions of law and fact in common with the main action” under Rule 24.  Id.

The Court noted that permissive intervention under Rule 24 is appropriate where (i) a federal statute creates a conditional right, or (ii) where the “intervenor has a claim or defense that shares with the main action a common question of law or fact.”  Id.

In its opposition, FedEx asserted that because the Intervenors were employed by independent service providers (“ISPs”) to deliver packages on behalf of FedEx, and were not employed by FedEx directly, FedEx was not liable under the NMMWA for allegedly unpaid overtime.  Id.  Further, FedEx argued that the commonality requirement of Rule 24 was not met because the Court already found the absence of a common question when it denied class certification.  Id.

While the Court recognized that it denied class certification under Rule 23’s commonality requirement, it was not persuaded by FedEx’s arguments.  The Court underscored that under Rule 24, “rather than asking whether a question is susceptible to resolution ‘in one stroke,’ courts must ask whether intervenors present ‘questions of law and fact in common with’ the main action.”  Id.

The Court concluded that the “existing plaintiffs and every intervenor [would] assert that certain common aspects of [FedEx’s] contracts with ISPs [made FedEx] a joint employer and, consequently, jointly liable for any [NMMWA] violations.”  Id.  Accordingly, the Court ruled that the Intervenors satisfied the Rule 24 commonality standard and were permitted to join the lawsuit as plaintiffs.  Id. at 3.

Implications For Companies

The decision in Martinez v. FedEx serves as an important reminder for defendants that class actions are not necessarily over once class certification is denied – and some members of the putative class may take a run at joining the lawsuit per Rule 24.  Additionally, it underscores the distinct commonality analyses under Rule 23 and Rule 24.

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Derek Franklin 

Duane Morris Takeaways:  In Evans III, et al v. Dart, et al., No. 1:20-CV-02453 (N.D. Ill. Sept. 15, 2023), Judge Rebecca R. Pallmeyer of the U.S. District Court for the Northern District Of Illinois denied Plaintiffs’ motion for conditional certification of a collective action of Cook County Jail Guards who were not compensated for time spent off-the-clock decontaminating their work gear to prevent the spread of COVID-19.  In rejecting the jail correctional officers’ bid for conditional certification under 29 U.S.C. § 216(b), the Court ruled the Plaintiffs could not establish that they were victims of a common policy or plan that violated the law, as there was no evidence that the jail even had an off-the-clock decontamination policy. Thus, the Court concluded that Plaintiffs failed to establish that their cleaning efforts outside of work resulted from any requirement imposed by their employer.  The ruling is a blueprint for corporate counsel in terms of a solid approach for opposing employment-related conditional certification motions.

Case Background

The factual origins of the case stem from a COVID-19 outbreak at the Cook County Department of Corrections (“Cook County Jail”) in April 2020.  Plaintiffs allege that, amid the outbreak, the Cook County Jail required correctional officers to “engag[e] in decontamination/sanitation activities” before and/or after their shifts within the CCDOC, “including washing and sanitizing their uniforms, sanitizing their persons, sanitizing and maintaining personal protective equipment (‘PPE’), and showering.”  Id. at 2.

According to Plaintiffs, they would spend approximately 20 to 30 minutes before and after shifts completing these protocols but were not paid for that time.  As the Court noted, “each Plaintiff described slightly different activities that took slightly different amounts of time,” which formed “a consistent narrative of enhanced decontamination activities, significantly exceeding what they did prior to COVID.”  Id. at 4.

In the same month that the April 2020 outbreak began, Plaintiffs filed this lawsuit on behalf of themselves and a proposed group of all persons who worked at the Cook County Jail between January 27, 2020 and June 11, 2021 who engaged in the purported COVID-19 decontamination protocols, but who were not paid for time spent on those activities. Id. at 3.

The Court’s Decision

The Court declined to certify the proposed collective action based on finding that Plaintiffs fell short in identifying a common policy requiring workers in the proposed collective action to engage in those [decontamination] activities as a condition of their employment.”  Id. at 1.  Importantly, the Court noted that the Plaintiffs themselves acknowledged that there was no express written policy requiring correctional officers to decontaminate outside of work, and that the only instructions that they received from supervisors about decontamination was during roll call meetings, when supervisors would merely “read and disseminate general advice from the CDC” and instruct guards to not bring items home from the jail. Id. at 4-5.

Another key finding by the Court was that Plaintiffs “did not report their off-duty decontamination activities to their supervisors, nor were they asked about those efforts or disciplined for failing to decontaminate proper.”  Id. at 5. Further, the Court made important note of how “no named Plaintiff reported monitoring the time consumed by their daily decontamination activities, submitting any decontamination overtime, or asking their supervisors about decontamination overtime, although many testified that there was no clear way to submit an overtime claim for these activities in the CCDOC “Workforce” record system.” Id.

In reaching its determination, the Court also rejected the relevance of a Communicable Diseases Policy that Cook County had in place requiring workers to “use good judgment and follow training and procedures related to mitigating the risks associated with communicable disease,” and if exposed to one, to “begin decontamination procedures immediately, obtain medical attention if needed, and “notify a supervisor as soon as practical.”  Id. at 7.  According to the Court, because this policy specified that its aim was to “provide a safe work environment,” the Court found it “hard to imagine how a pre-shift shower or laundering one’s uniform after a drive home is consistent with that language” and concluded, in turn, that the policy did not require the Plaintiffs to engage in COVID-19 protocols at issue outside of work at the jail. Id. at 11.

Finally, the Court discussed how, even if the Communicable Diseases Policy applied to activities outside of work, an “insurmountable” problem for Plaintiffs was that “none of them seemed to know about the policy at the time they were undertaking those activities.”  Id. at 12.  As a result, the Court found that there was no evidence showing that the Defendants had actual or constructive knowledge of any de facto policy requiring the Plaintiffs to engage in decontamination activities away from the jail.  Id. at 15.

For these reasons, the Court concluded that the Plaintiffs fell short of satisfying the requirements for conditional certification of their proposed collective action.

Implications For Employers

The Evans ruling underscores the importance of maintaining and utilizing well-organized clearly-delineated employee conduct policies for activities at and away from the workplace, in anticipation of arguing the absence of uniform policies and procedures in collective actions under 29 U.S.C. § 216(b). In dismissing all of Plaintiffs’ arguments after finding an absence of policy or plan for all proposed collective action members that violated the law, the Court signaled its steady reliance on the well-established standards for these types of claims, providing a valuable reaffirmation to employers’ reliable defense strategies.

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Kathryn Brown

Duane Morris Takeaways: In Hogan v. Cleveland Ave Restaurant, Inc. d/b/a Sirens, et al., 15-CV-2883 (S.D. Ohio Sept. 6, 2023), Chief Judge Algenon L. Marbley of the U.S. District Court for the Southern District of Ohio authorized notice to potential opt-in plaintiffs and conditionally certified a collective action of thousands of adult club dancers in a case asserting violations of the Fair Labor Standards Act (“FLSA”) and Ohio law, including claims of unpaid minimum wages, unlawfully withheld tips, and unlawful deductions and/or kickbacks. For good measure, the Court also granted class certification on the plaintiffs’ state law claims. The opinion is a must-read for employers in the Sixth Circuit facing — or hoping to avoid facing — class and collective wage & hour claims.

Case Background

On October 6, 2015, the named plaintiff Hogan filed the lawsuit as a class and collective action asserting violations of the FLSA and Ohio law. After amending the complaint in May 2017 to add additional defendants, on May 14, 2020, Hogan filed a Second Amended Class and Collective Action Complaint, the operative complaint, with a second named plaintiff, Valentine.

In the operative complaint, the named plaintiffs asserted claims against seven adult entertainment clubs and their owners and managers as well as two club associations and an individual defendant with which the clubs were associated. The plaintiffs later settled their claims against one of the seven clubs.

The allegations in the operative complaint center on the clubs’ use of a landlord-tenant system by which the defendant clubs charged dancers “rent” to perform at the clubs for tips from customers in lieu of paying them wages for hours worked.

On September 26, 2022, the plaintiffs moved for certification of their claims as a class and collective action. The parties concluded briefing on the motion five months before May 2023, when the Sixth Circuit issued its pivotal decision in Clark v. A&L Homecare and Training Center, LLC, 68 F.4th 1003 (6th Cir. 2023). In Clark, the Sixth Circuit ushered in a new, more employer-favorable standard for deciding motions for conditional certification pursuant to 29 U.S.C. § 216(b) of the FLSA.

The District Court’s Decision

First, the court articulated the standard by which it would decide the plaintiffs’ motion for court-supervised notice of their FLSA claims.  The court described the Sixth Circuit’s opinion in Clark as “maintain[ing] the two-step process for FLSA collective actions but alter[ing] the calculus.” Slip Op. at 7. Whereas pre-Clark case law authorized notice at step one of the two-step process after only a modest showing of similarly-situated status, the standard post-Clark demands that plaintiffs show a “strong likelihood” exists that there are others similarly situated to the named plaintiffs with respect to the defendants’ alleged violations of the FLSA prior to authorizing notice.  Defendants after Clark retain the ability, after fact discovery concludes, to demonstrate that the named plaintiffs in fact are not similarly- situated to any individual who files a consent to join the lawsuit as a so-called opt-in plaintiff. Also unchanged by Clark is the standard for determining similarly-situated status for FLSA purposes.

The court in Hogan concluded that the plaintiffs adequately demonstrated a “strong likelihood” that they are in fact similar to the proposed group of dancers who too were classified as “tenants” of the six defendant clubs who paid rent to lease space at the clubs to earn tips from customers without receiving any wages from the defendant clubs.

In support of their motion, the plaintiffs submitted sworn declarations, deposition testimony, and documentary evidence of the defendants’ policies and practices with respect to dancers. The court found that the plaintiffs showed that the clubs maintained a system in which the defendants acted together to require dancers to pay rent for leasing space, often documented in lease agreements, instead of being paid as employees for performing work.

Among the defendants’ arguments opposing the plaintiff’s motion, the court considered, but ultimately rejected, the defendants’ argument that arbitration provisions in the lease agreements should preclude court-authorized notice of the FLSA claims. The court cited Clark for the proposition that it may consider as a relevant factor the defense of mandatory arbitration agreements in deciding whether to authorize notice of FLSA claims. Homing in on the facts, the court reasoned that members of the potential collective action did not all sign the lease agreements and that those who signed the lease agreements had the option to agree to forgo arbitration of their claims.  According to the court, the defendants would have a stronger basis to defeat court-authorized notice if they could show that all dancers had to sign the lease agreement and the lease agreement made arbitration mandatory.

In addition, the court evaluated whether the plaintiffs satisfied the Rule 23 standards for seeking to certify a class of dancers on their state law claims. The court concluded that the plaintiffs met the requirements for class certification under Rule 23(b)(3), because questions of law or fact common to class members predominated over any questions affecting only individual members (the predominance inquiry), and that a class action was superior to other available methods for fairly and efficiently adjudicating the case (the superiority inquiry).

As to predominance, the court reasoned that the issue of the defendants’ alleged unlawful system of treating dancers as tenants rather than paying them wages predominated over individualized issues such as whether a particular dancer signed a lease agreement. As to superiority, the court concluded that the relatively small size of each dancer’s wage claim demonstrated that individuals would have little incentive to pursue their claims alone.  Finding no factors pointing against class treatment of the claims, the court concluded that treating the claims as a class action was the superior method for adjudicating liability efficiently.

Implications For Employers

Hogan is the latest in a series of opinions applying the Sixth Circuit’s novel “strong likelihood” standard to plaintiffs’ efforts to expand the scope of their FLSA claims to potential opt-in plaintiffs. The developing case law in this area reflects a highly fact-specific approach to deciding whether plaintiffs have made the necessary showing to unlock court-authorized notice of their claims to potential opt-in plaintiffs.  The opinion in Hogan is significant in that it grapples with the “strong likelihood” standard alongside the well-established test for certifying a class pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure.

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Kathryn Brown

Duane Morris Takeaways: In Hutt v. Greenix Pest Control, LLC, et al., No. 2:20-CV-1108 (S.D. Ohio July 12, 2023), U.S. District Judge Sarah D. Morrison denied plaintiff’s motion for court-supervised notice to potential opt-in plaintiffs under 29 U.S.C. § 216(b) in one of the first applications of the Sixth Circuit’s new standard for ruling on such motions in Clark v. A&L Homecare and Training Center, LLC, 68 F.4th 1003 (6th Cir. 2023). 

On May 19, 2023, the Sixth Circuit replaced the long-standing lenient test for facilitating notice under the Fair Labor Standards Act (FLSA) with a more rigorous test akin to the standard used to obtain a preliminary injunction.  Whereas under the prior framework a plaintiff need only make a “modest factual showing” that other employees are “similarly situated,” Clark requires plaintiffs to demonstrate a “strong likelihood” that “similarly situated” employees exist to warrant notifying other potential plaintiffs about the lawsuit.  

The Court’s opinion in Hutt sends a clear message that the “strong likelihood” evidentiary standard has teeth.  The ruling is a boon for employers defending FLSA claims on behalf of multiple employees. 

Case Background

In Hutt, the plaintiff, a former pest control technician, filed a Complaint against his former employer, Greenix, on February 28, 2020.  The plaintiff sought to recover unpaid minimum wages and overtime wages allegedly owed to him under the FLSA.  He alleged that Greenix failed to pay him an overtime rate of pay for overtime hours worked, did not pay for certain tasks performed “off the clock” and took improper deductions from his pay.  In his Complaint, the plaintiff alleged that approximately 186 other pest control technicians were subject to the same wage violations as he had experienced.

On February 27, 2022, the plaintiff filed a motion for conditional certification.  The plaintiff sought to issue notice to all pest control technicians employed at any of Greenix’s four facilities in Ohio during the three-year period before he filed the Complaint.  In support of the motion, the plaintiff relied on his own declaration, various pleadings, and Greenix’s responses to written discovery requests.  Greenix opposed the motion.  Although the motion was fully briefed, the Court held the motion in abeyance pending the Sixth Circuit’s ruling in Clark.

Following the Sixth Circuit’s ruling in Clark, the Court ordered the parties in Hutt to brief the issue of whether the plaintiff could satisfy the new, stricter standard to facilitate notice under 29 U.S.C. § 216(b).  In the plaintiff’s supplemental brief, he argued that he had submitted enough evidence to satisfy the new standard.  The plaintiff emphasized Greenix’s prior statement in a discovery response that each of its Ohio facilities had consistent pay policies.  In its supplemental brief, Greenix asserted that its statement did not mean that all putative class members perform the same job duties or work the same schedules, among other arguments.

The Court’s Decision

The Court held that the plaintiff fell short of the evidentiary showing necessary to demonstrate a “strong likelihood” that there is a group of potential plaintiff employees “similarly situated” to him under the standard in Clark.

First, the Court explained the FLSA is silent as to the procedure for a plaintiff to advance claims with others who are “similarly situated.”  In the absence of statutory guidance, courts have exercised their discretion to set the procedure governing collective treatment of FLSA claims.

For this reason, the Court analyzed the two-step standard announced in Clark.  The first step evaluates whether the plaintiff has shown a “strong likelihood” that other employees are similarly-situated to the plaintiff.  Overcoming the first step requires a plaintiff to submit evidence that the plaintiff’s FLSA injury “resulted from a corporate-wide decision” to violate the FLSA, not human error or a rogue manager.

Under the second step, the plaintiff must prove, by a preponderance of the evidence, that the employees who have opted to join the lawsuit are similarly situated to the plaintiff.  If the plaintiff makes that showing, the opt-in plaintiffs become actual parties to the lawsuit and proceed with the named plaintiff to trial.  As the Court reasoned, the Sixth Circuit’s opinion in Clark left the second step of the analysis relatively unchanged from the prior standard.

In assessing the plaintiff’s status as similarly-situated to others, the Court opined that no single factor is determinative.  Among the relevant factors are whether the named plaintiff performed the same tasks and was subject to the same policies as the potential other plaintiffs, whether the potential other plaintiffs are subject to individualized defenses, and whether other potential plaintiffs have submitted affidavits.

In applying the Clark standard, the Court found insufficient the plaintiff’s reliance on hearsay statements in his own declaration, including what co-workers allegedly told him, to argue that Greenix had company-wide pay practices.  Further, the plaintiff put forth no evidence of the company’s actual compensation plan.  The Court explained that even if the plaintiff proved that Greenix has a company-wide compensation plan, that fact alone would not prove company-wide FLSA violations.  In essence, the Clark standard required the plaintiff to show more.

Therefore, the Court denied the plaintiff’s motion seeking court-supervised notice to potential plaintiffs pursuant to 29 U.S.C. § 216(b) of the FLSA.

Implications For Employers

The ruling in Hutt has persuasive value to other district courts in Ohio, Tennessee, Michigan and Kentucky.  Gone are the days of plaintiffs in the Sixth Circuit winning the right to send notice to dozens, hundreds, or even thousands of other employees on hearsay evidence alone.  The Court roundly rejected the notion that a sole declaration from the named plaintiff is enough to obtain court-sanctioned notice.  It remains to be seen how other courts will apply Hutt to a different set of facts.

Given the emerging trend among federal courts across the country in rejecting the lenient two-step standard, the decision in Hutt is an indicator of a major shift in leverage from plaintiffs to defendants in FLSA litigation.

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Shaina Wolfe

Duane Morris Takeaways: On July 6, 2023, in Restaurant Law Center, et al. v. U.S. Department of Labor, No. 1:21-CV-1106 (W.D. Tex. July 5, 2023) (ECF No. 67), federal district judge Robert Pitman of the U.S. District Court for the Western District of Texas denied the Restaurant Groups’ motion for preliminary injunction as to the new “80/20 Rule” – after being reversed by the Fifth Circuit several months prior – and denied the Restaurant Groups’ motion for summary judgment and granted the Department of Labor’s (“DOL”) motion for summary judgment. Judge Pitman determined that the DOL’s decision to construct and enforce the Final Rule was a permissible construction of the Fair Labor Standards Act (“FLSA”) and is not arbitrary and capricious.  ECF 67 at 28.  The ruling is nowhere close to the end of this litigation and the service and hospitality industry should pay close attention to what comes next as the Restaurant Law Center will inevitably appeal the district court’s decisions to the Fifth Circuit and as the U.S. Supreme Court has decided to reconsider the authority of agencies during the next term.  The next set of decisions will be part of a broader analysis of the rules regarding tip credit, and more generally, the DOL’s authority.

The Final Rule

In late 2021, the DOL revived and revised the 80/20 Rule by providing that employers can utilize the tip credit only so long as 80 percent or more of the work is tip-producing, and not more than 20 percent is “directly supporting work.” See 29 C.F.R. § 531.56. Under the Final Rule, no tip credit can be taken for any non-tipped work. “Tip-producing work” is defined as work the employee performs directly providing services to customers for which the employee receives tips (i.e., taking orders and serving food). “Directly supporting work” is defined as work that is performed by a tipped employee in preparation of or to otherwise assist tip-producing customer service work (i.e., rolling silverware and setting tables). Non-tipped work includes preparing food or cleaning the kitchen, dining room, or bathrooms.

The Final Rule also includes a new requirement that an employer cannot utilize the tip credit when an employee performs more than 30 consecutive minutes of “directly supporting work.”  Directly supporting work done in intervals of less than 30 minutes scattered throughout the workday would not invalidate the tip credit, subject to the 80/20 Rule. However, employers must pay minimum wages for “directly supporting work” performed after the lapse of the first 30 continuous minutes.

Procedural Background

In December 2021, the Restaurant Law Center challenged the Final Rule in the U.S. District Court in the Western District of Texas, on the grounds that, among other things, it violated the Fair Labor Standards Act.  Restaurant Law Center, No. 1:21-CV-1106 at 4. The Texas federal district court denied the preliminary injunction after finding that the Plaintiffs failed to show that they would suffer irreparable harm absent the preliminary injunction. Id.

On April 28, 2023, the Fifth Circuit reversed the Texas federal district court, finding that the Restaurant Groups “sufficiently showed irreparable harm in unrecoverable compliance costs . . . .” Rest. L. Ctr. v. U.S. DOL, 66 F.4th 593, 595 (5th Cir. 2023).  Significantly, the Fifth Circuit noted that that compliance costs would likely be necessary to track the number of minutes worked on nontipped labor and that the new 30-minute rule would impose additional monitoring costs. Id. The Fifth Circuit remanded the case for further proceedings. Id. [Our previous blog post on that ruling is here.]

The Texas Federal District Court’s Decision on Summary Judgment

At the second go-around, the district court had two fully-briefed motions, including: (1) the Restaurant Groups’ motion for preliminary injunction; and (2) the parties’ cross-motions for summary judgment. The district court denied the Restaurant Groups’ motion for summary judgment and granted the DOL’s cross-motion for summary judgment after finding that, contrary to the Restaurant Groups’ assertions, the DOL’s decision to construct and implement the Final Rule was a permissible construction of the FLSA and is not arbitrary and capricious. Id. at 28.  In addition, the Texas federal district court denied the Restaurant Groups’ motion for preliminary injunction after finding that the Restaurant Groups did not succeed, and were likely not to succeed, on the merits of the case, that the balance of equities did not tip in the Restaurant Groups’ favor, and that an injunction was not in the public interest. Id.

In determining the Final Rule’s validity, the district court used a two-step framework articulated in Chevron, USA, Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837 (1984). Id. at 8. Under Chevron, if a statute has a gap that needs to be filled, Congress gave the agency administering the rule, rather than courts, authority to resolve it. Id. The district court found that Chevron deference applied to the case because Congress “delegated authority to the agency generally to make rules carrying the force of law,” and that the Final Rule “was promulgated in the exercise of that authority.”  Id. at 10.

The federal district court also analyzed the FLSA’s text, structure and purpose, and legislative history, and found that, contrary to the Restaurant Group’s assertions, the statute was ambiguous. Id. at 17. The district court explained that “Congress has crafted an ambiguous statute and tasked DOL with implementing the ambiguous provisions,” and the Court “must defer to the agency’s regulation so long as it is not arbitrary, capricious, or manifestly contrary to the statute.” Id. at 17. The district judge further found that the Final Rule “accomplishes” the purposes of the FLSA “by adopting a ‘functional test’ to determine when an employee may be considered engaged in a tipped occupation.” Id. at 19.

Significantly, the district court also considered whether the Major Questions Doctrine was triggered, as discussed in West Virginia v. EPA, 142 S. Ct. 2587 (2022). Id. at 24.  The district court found that the Major Questions Doctrine was not triggered because an agency action was only considered to be of “vast economic significance” if it requires “billions of dollars in spending.’”  Id. at 25.  The district court found that the DOL “pointed out that the average annual cost of the Rule in this case is $183.6 million” and explained that this amount was “far less than the billions considered in the cited cases.  Id. The district court further opined that the “DOL has been interpreting the tip credit provision of the FLSA, as well as its other provisions, for decades.”  Id.

The Texas Federal District Court’s Decision on the Preliminary Injunction

In addition, as instructed by the Fifth Circuit, the district court reconsidered the Restaurant Groups’ Motion for Preliminary Injunction.  At the outset, the district court noted that “[a]lthough a failure to show likelihood of success on the merits is grounds alone for denial of a preliminary injunction, the Court will address the two remaining Rule 65 factors pursuant to the Fifth Circuit’s mandate to ‘proceed expeditiously to consider the remaining prongs of the preliminary injunction analysis.’” Id. at 26 (citing Rest. L. Ctr., 66 F.4th at 600). Despite the Fifth Circuit’s finding that Restaurant Groups will suffer irreparable harm because their compliance costs are non-recoverable, Rest. L. Ctr, 66 F.4th at 595, in balancing the equities, the district court essentially found the opposite – – that the Restaurant Groups, again, failed to show irreparable harm from complying with the Final Rule.  See id. at 26-27.

Significantly, the Fifth Circuit previously disagreed with the DOL’s assertion that “employers need not engage in ‘minute to minute’ tracking of an employee’s time in order to ensure that they qualify for the tip credit.”  Rest. Law Ctr., 66 F.4th at 599 (“No explanation is given (nor can we imagine one) why an employer would not have to track employee minutes to comply with a rule premised on the exact number of consecutive minutes an employee works.”).  Contrary to the Fifth Circuit, the district court agreed with the DOL and found that “restaurants must already monitor the amount of time employees spend on non-tipped labor under the 80/20 rule, and the new 30-minute rule does not impose a new form of monitoring.”  ECF 67 at 26.  In addition, the district court noted that it is not clear that the Rule imposes significantly greater costs than restaurants incurred under the preexisting guidance because the Restaurant Groups failed to “provide an estimate of this additional monitoring.”  Id.  In essence, contrary to the Fifth Circuit’s Order, the district court, again, “emphasized the weakness of [the Restaurant Groups’] evidence.”  Rest. Law Ctr., 66 F.4th at 598 (“For instance, the court found [the Restaurant Groups] claimed ongoing costs “to be overstate[d]” because the rule does not require “the level of detailed monitoring of which [the Restaurant Groups] warn. . . [this point is] meritless”).

Further, the district court explained that eighteen months had passed since the parties filed their briefs on the preliminary injunction, and that the Rule took effect on December 28, 2021 and has remained in place.  Id.  Without citing to any evidentiary support, the district court noted that “[r]estaurants and DOL have complied with the Rule since that time.”  Id. at 27.

Moreover, similar to the district’s court’s first order, which was reversed by the Fifth Circuit, the district court explained “that even if there are ongoing management costs, the most significant compliance costs associated with the Rule were familiarization and adjustment costs, which have now already been incurred, and that granting an emergency motion to rescind the Rule now cannot undo these costs, and may very well force restaurants to incur additional costs adjusting to the policy that takes its place.”  Id. Ultimately, the district court found that the Restaurant Groups’ “compliance costs do not outweigh the substantial harm that DOL may endure from essentially starting from scratch on a rule that serves to codify long-standing guidance.”  Id.

Thus, the district court found that even if Restaurant Groups showed a likelihood of success on the merits, “neither the balance of equities nor the public interest would support a nationwide preliminary injunction.”  Id. at 28.

Implications For The Service & Hospitality Industry

The fight to end and/or limit the Department of Labor’s authority and promulgation of the tip credit rule is far from over.  Although the Texas federal district court sent a clear indication that it did not agree with the Fifth Circuit’s decision, and that it would not disturb the Department of Labor’s authority, the service and hospitality industry should be watchful for what has yet to come.  The Restaurant Law Center will undoubtedly appeal both of the Texas federal district court’s rulings, and the Fifth Circuit has already indicated that preventing enforcement of the Final Rule may be on the horizon.  Moreover, the Supreme Court’s decision to reconsider the Chevron doctrine in Loper Bright Enterprises v. Gina Raimondo, Case No. 22-451 – which will be heard in the next term – to the extent that it narrows or eliminates federal courts’ deference to agencies’ decisions, could substantially impact the agenda the Department of Labor can pursue.  The service and hospitality industry should stay tuned for the Fifth Circuit’s rulings in Restaurant Law Center and Supreme Court’s forthcoming ruling Loper Bright Enterprises.

By Gerald L. Maatman, Jr., Maria Caceres-Boneau, and Gregory Slotnick

Duane Morris Takeaways: In Carabajo v. APCO Insulation Co Inc., Case No. 22-CV-04175 (E.D.N.Y. June 9, 2023), Magistrate Judge Sanket J. Bulsara of the U.S. District Court for the Eastern District of New York granted Plaintiffs’ motion for conditional certification and found an employer’s enforcement of a written policy, unlawful on its face, was evidence enough to secure a conditional certification of a collective action under the Fair Labor Standards Act, despite questions of fact concerning supporting declarations.  The ruling is a warning and reminder to employers, especially those in the Second Circuit, that a written policy on its own may support conditional certification where enforcement of the policy would violate the law on its face.

Case Background

On July 15, 2022, Miguel Carabajo (“Carabajo”), a former insulation prep and installer working at APCO Insulation (“APCO”), a building insulation and construction company in New York City, filed a class and collective action claiming APCO and its president (“Defendants”) violated the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) by failing to pay him and others similarly situated overtime pay for weekly hours worked over 40, unlawfully deducting 30 minutes per day for meal breaks they did not actually take, and requiring them to come into work 15 minutes early before they could clock-in.  On December 8, 2022, Carabajo moved for conditional certification of a collective action under the FLSA consisting of all current and former employees employed by APCO as non-exempt laborers or similarly situated employees between July 15, 2016 and December 8, 2022.  Carabajo filed a declaration in support of his motion, and APCO filed a brief and declarations in opposition.

The Court’s Ruling

As detailed in the Court’s ruling of June 9, 2023, the Magistrate Judge found Carabajo met his burden to show that while employed by APCO and its owner, he and others similarly situated were subject to a policy running afoul of the FLSA per se from at least March 2019 forward: “the practice of not paying for all hours worked (including overtime) when workers failed to clock in and out correctly.” Id. at 4. In support of its conclusion, the Court pointed to APCO’s written policy notifying Carabajo and other laborers they would not be paid for a day’s work if they did not clock-in or clock-out properly.  The Court also found support in APCO’s Employee Agreement, which stated that if laborers fail to punch-in when they get to a job site, or fail to punch-out when they leave the job site, they “will not be paid.” Id.  The Magistrate Judge found it significant that APCO did not dispute the existence and application of the policy to Carabajo and other similarly situated laborers.

The Court faulted Defendants for attempting to “skirt liability” under the FLSA by justifying implementation of their unlawful policy in a number of ways, such as stating the policy was necessary to convey to workers the importance of clocking-in and out each day and that overtime and breaks will be compensated, except if there is a failure to correctly log their time.  Defendants did not contest that their employees worked overtime and did not unequivocally state the policy was not enforced or deductions were not taken under its application.  The Court explained that if an employee believed the policy to be lawful and was docked pay for improperly clocking-in or out, the employee would mistakenly believe they were paid correctly; however, they would still have a FLSA claim, be entitled to such docked pay, and the policy would still be illegal on its face.

Carabajo claimed Defendants enforced the policy against him and other similarly situated workers, that he did not receive payment for at least 8 overtime hours a month as a result, and that discussions with other workers revealed Defendants failed to pay them for all the days they worked.

The Magistrate Judge found that resolution of the merits of Defendants’ denials and contradictory declarations in response to Carabajo’s motion was inappropriate at the conditional certification stage of a lawsuit, and that the only pertinent question was whether Carabajo satisfied the required modest factual showing there was an illegal policy that applied to him and others.  The Court ruled in the affirmative and determined that Defendants’ written policy was illegal on its face and that Defendants applied it to Carabajo and others similarly situated.  The Magistrate Judge also held that the existence of the illegal written policy rendered much of the parties’ briefing and arguments irrelevant.  The Court noted even if Defendants could prove Carabajo never spoke with other employees about the issues, the policy alone was sufficient to warrant conditional certification because it was illegal on its face and applied to all employees.

Although the Court granted the motion for conditional certification in part, the Court agreed with Defendants that the scope of the collective action that Carabajo sought to conditionally certify was overbroad.  Since Carabajo alleged he only worked as a mechanical engineer and had not shown that other workers to whom he had spoken worked in a different position, notice to “all non-exempt employees at APCO” was not appropriate. Id. at 10. The Court limited the collective action to non-exempt mechanical insulators or individuals who had the same job duties as Carabajo since he had only demonstrated enforcement of the illegal written policy as to those individuals.  The Magistrate Judge also reduced the six-year notice period sought by Carabajo to three years, differentiating between the appropriate statute of limitations periods under the NYLL and the applicable FLSA.

Implications Of The Decision

The Carabajo decision is a stern reminder that employers must always analyze their internal wage and hour policies for potentially widespread compliance issues based on enforcement.  While APCO’s written policy of not paying wages to employees for days on which they did not properly clock-in or clock-out was on its face improper, the ruling is an example of a Court using such an implemented per se unlawful policy as the sole basis to grant conditional certification of an FLSA collective action regardless of factual concerns based on plaintiff-supplied declarations and allegations.  As a result, and in light of the minimal burden district courts in the Second Circuit require plaintiffs meet to satisfy the first step of conditional certification, employers are reminded of the need to consult with experienced wage and hour counsel well in advance of enforcing internal policies.  It also bears noting that under the law, employers must pay employees for all of their hours worked, regardless of timekeeping issues and employees incorrectly punching-in or out.

By: Gerald L. Maatman Jr., Jennifer A. Riley, and Aaron A. Bauer

Duane Morris Takeaways – In Hornady v. Outokumpu Stainless USA, No. 1:18-CV-317 (S.D. Ala. Oct. 4, 2022), the U.S. District Court for the Southern District of Alabama upheld its sanction of a default judgement against the defendant on all of the Fair Labor Standards Act claims brought by a collective action of current and former employees. In affirming a default judgment of approximately $13 million, the Court cited the employer’s repeated failure to produce pay records, time records and incentive plan data during discovery.  Such a catastrophic outcome demonstrates the importance of reliable and honest client communication and responsible and reasonable conduct at all stages of discovery in complex employment-related litigation.

Background Of The Case

In 2018, Plaintiff William Hornady filed a collective action against his former employer Outokumpu Stainless (“OTK”) alleging violations of the Fair Labor Standards Act (“FLSA”) for overtime and timekeeping record violations.  The case proceeded to discovery, and on November 18, 2021, things quickly unraveled for OTK when the Court found that the company had “acted in pervasive bad faith throughout the discovery process of this entire case…”  Id. at 3.  As a result, the Court sanctioned OTK by entering non-final default judgement against the company, thereby holding it liable for all of plaintiffs’ FLSA claims.  Id. at 6-7.  Earlier this year, OTK challenged this ruling by filing a motion to reconsider the order granting default judgement.

The Court’s Ruling Denying Reconsideration Of The Default Judgement

In seeking reconsideration of the decision to grant default judgement, OTK urged the Court to apply the “good cause” standard of review, under Rule 55 of the Federal Rules of Civil Procedure, which allows courts to evaluate many different factors such as willfulness, prejudice, and whether the defaulting party might have a meritorious defense for purposes of determining whether to reconsider an order of a default judgement.  Id. at 7.  However, the Court declined to apply this “good cause” standard. Instead, it to use the stricter standard of Rule 54, which allows courts to reconsider interlocutory decisions if there is “evidence of an intervening change in the controlling law, the availability of new evidence, or the need to correct clear error or manifest injustice.”  Id. at 12.

Given OTK’s failure to introduce newly available evidence disputing the Court’s previous finding that defense counsel had failed to meet its “discovery obligations,” the Court rejected OTK’s argument that the Court had abused its discretion by improperly imposing “death penalty” sanctions in the form of default judgement.  Id. at 14.  Specifically, the Court noted that it had ordered OTK to produce pay, time, and incentive plan records on “twelve (12) separate occasions spanning almost three years.”  Id. at 17-18.  When OTK finally did produce pay records, they were incomplete, and did not even include rate of pay data.  Id.  The Court also noted that the Magistrate Judge assigned to the case had originally recommended lesser sanctions against OTK.  However, while a ruling on this lesser sanction was pending, the Court opined that OTK “engaged in additional sanction-worthy behavior” during discovery.  Id. at 15.

OTK attempted to shift the blame for these discovery shortcomings to its payroll software provider and former outside counsel for the case.  OTK argued that it could not have produced the formula used to calculate the regular rate of pay (“RROP”) for its employees, as the Court had ordered, because this formula came from the proprietary software of ADP, which OTK would have had to obtain through a subpoena.  Id. at 23-24.  In reality, the Court observed that it had previously ordered OTK to subpoena ADP for this data in 2020, a year before the entry of default judgement.  Id. at 24.  For this reason, OTK could no longer argue that the requirement to subpoena ADP was newly available evidence that might allow the Court to reconsider its sanctions order.  Moreover, the Court noted that OTK’s failure to produce the RROP data had not been its “primary failing” because OTK also failed to produce hourly pay rates.  Id. at 25.

The Court also rejected OTK’s contention that its failures during the discovery process should be attributed to its former outside counsel in the case.  Id. at 27-28.  In support of this position, OTK submitted emails of its former counsel that purported to show that it had been “kept in the dark… as to what was actually occurring” in discovery.  Id.  However, the Court found that these emails could only “provide insight into a fraction of the circumstances” leading to the default judgement.  Id. at 29.  Regardless of whether these emails provided a legitimate excuse for all of OTK’s failures during the discovery process, the Court determined that the emails did not constitute newly available evidence, as OTK had failed to submit them to the Court when it was first facing default judgement sanctions.  Id. at 30.  Given this record, the Court placed the blame squarely on OTK for failing to “produce accurate and complete time and pay records.”

Implications for Employers

The $13 million sanction of a default judgment in the case is an eye-opener for any litigant. The Hornady decision demonstrates that employers who fail to actively engage and communicate with their outside counsel on a regular basis do so at their own peril.  To avoid such a disastrous outcome, clients should always expect and demand regular and truthful case status updates, especially in class and collective actions where the stakes can be so high.