National Labor Relations Board Vacates Joint Employer Ruling, Reverts to Browning-Ferris Standard

Decision: On February 26, the National Labor Relations Board (NLRB) changed its joint-employer standard for the second time in just the last three months, returning to the standard set in its 2015 decision in Browning-Ferris Industries, 362 NLRB No. 186 (2015). After the NLRB voted 3-2 in December 2017 along party lines to overturn the Browning-Ferris decision in Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156 (2017), the NLRB vacated the Hy-Brand decision, after the NLRB’s inspector general determined that board member William Emanuel should have recused himself from that decision. Hy-Brand had resurrected a longstanding narrower standard for joint-employer liability under which only those employers who exercised “direct and immediate” control over essential employment terms would be considered joint employers. By reinstating Browning-Ferris, the current NLRB standard is that a joint-employer relationship exists whenever “two or more entities . . . share or codetermine those matters governing the essential terms and conditions of employment.” That is, an employer is a joint employer as long as it has the ability to control the terms and conditions of employment (or has any input into those decisions), regardless of actual control.

Impact: The NLRB reinstatement of a controversial Obama-era standard of broader joint-employer liability, which many saw as a setback to the franchisor/franchisee business model, has caused concern among the many companies that use staffing services or outsourcing arrangements. Given the NLRB’s recent action, employers should once again look closely at the National Labor Relations Act (NLRA) and union implications of any franchisor, staffing agency, and outsourcing agreements they are considering entering into and continue to closely monitor further developments in the joint-employer area, both at the NLRB and under other employment laws.

Employers should also continue to monitor these cases. At the time Hy-Brand was decided, Browning-Ferris was on appeal to the DC Circuit. Following the Hy-Brand ruling, the DC Circuit remanded Browning-Ferris to the NLRB for further proceedings under the new standard. However, after Hy-Brand was vacated, the NLRB asked the DC Circuit to restore the appeal, which had been fully briefed and argued, to the court’s docket. The motion to restore the appeal is currently pending. If the DC Circuit does restore the Browning-Ferris appeal, there may be further development in this dynamic area.

California Supreme Court Clarifies Method for Calculating Overtime Rate of Pay Related to Flat-Sum Bonuses

Decision: The California Supreme Court’s recent decision in Alvarado v. Dart Container has significant implications for employers when determining the “regular rate of pay” used to calculate overtime following the payment of flat-sum bonuses. California law and the federal Fair Labor Standards Act require employers to pay employees 1.5 times their regular rate of pay for every overtime hour they work, and all forms of compensation paid to the employee, including nondiscretionary bonuses, must be factored in. For example, an employee whose hourly rate is $10/hr but who receives a $2,000 performance bonus at the end of the year would have a regular rate of pay of roughly $11.00, and his/her overtime rate of pay would be $16.50/hr, not $15.00/hr.

The plaintiff in Alvarado claimed that he was underpaid overtime because the employer did not properly account for a flat $15 attendance bonus that he was paid each week for working on Saturdays and Sundays in determining his regular rate of pay. The employer had performed the regular rate of pay calculation but had allocated the attendance bonus over all hours the employee had worked during the pay period, including overtime, rather than just the employee’s regular, nonovertime work hours.

The issue before the California Supreme Court was whether a flat-sum bonus must be spread across (a) all hours actually worked by the employee, including overtime, (b) all nonovertime hours actually worked by the employee or (c) the nonovertime hours that exist in the relevant pay period, regardless of whether they were actually worked. The court held that the correct answer is b): employers must calculate the overtime rate of pay in pay periods in which an employee earns a flat-sum bonus by dividing the flat-sum by the nonovertime hours actually worked in that pay period, not the total hours worked (including overtime). In doing so, the court explained that, because a flat-sum bonus is payable regardless of how many hours the employee works (i.e., irrespective of whether the employee works overtime during the relevant pay period), it should be treated as being earned during only the nonovertime hours worked in the pay period. The court further reasoned that a formula that takes into account overtime hours “must be rejected because it results in a progressively decreasing regular rate of pay as the number of overtime hours increases, thus undermining the state’s policy of discouraging overtime.”

The court “limited” its decision to “flat sum bonuses comparable to the attendance bonus at issue,” stating that it was not addressing “[o]ther types of nonhourly compensation, such as a production or piecework bonus or a commission” which “may increase in size in rough proportion to the number of hours worked, including overtime hours” and therefore warrant a different analysis.

Impact: The California Supreme Court’s decision that employers should consider only nonovertime hours worked results in a higher regular rate of pay for employees who receive flat-sum bonuses because the bonus is divided among fewer hours. Because the court ruled that its decision applies retroactively, employers in California may wish to review their pay policies relating to any flat-sum bonuses—i.e., bonuses that are not dependent on the number of hours worked, such as safety, retention or longevity bonuses, and flat bonuses covering certain shifts or for taking on extra duties. Employers also should note that the court’s ruling could impact the “regular rate” employers must use to calculate the amounts owed to employees for paid sick leave pursuant to California’s Paid Sick Leave law under one of the methods set forth in that statute.

California Court of Appeal Invalidates Employee Arbitration Clause on Basis of Exemption to Federal Arbitration Act

Decision: In Muro v. Cornerstone Staffing Solutions, Inc., the Fourth District of the California Court of Appeal ruled that a truck driver could not be compelled to arbitrate his claims in a state wage and hour class action against his staffing company employer, notwithstanding an arbitration clause in his employment contract that required individual arbitration rather than class actions. The truck driver contended that he was a “transportation worker” and therefore exempt from the Federal Arbitration Act (FAA), while the defendant staffing company—relying on a 2005 Eleventh Circuit decision—argued that the FAA’s so called “transportation worker” exemption applies only if the relevant employer is part of the “transportation industry.” The California appellate court declined to adopt the Eleventh Circuit’s interpretation, and further held that the staffing company’s significant (if not primary) focus on transportation would qualify under that standard in any event. After concluding that the FAA did not apply, the court held that, under the California Supreme Court’s 2007 decision in Gentry v. Superior Court (which would be preempted if the FAA were applicable), the class waiver provision in the staffing company’s agreement was unenforceable under California law.

Impact: Muro continues a line of California state court decisions giving a broad reading to the FAA’s “transportation worker” exception, which excludes from the FAA’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Relatedly, the Supreme Court agreed in late February 2018 to hear New Prime Inc. v. Oliveira, which concerns the scope of the transportation worker exception in the FAA and, in particular, whether that exception applies to independent contractors as well as employees. New Prime will be argued before the Supreme Court next fall.

Sixth Circuit Rules That Discrimination Based on Transgender and Gender Transitioning Status Violates Title VII and Overrides the Religious Freedom Restoration Act

Decision: The US Court of Appeals for the Sixth Circuit has held that a funeral home violated Title VII of the Civil Rights Act of 1964 when it fired a director because she was planning to undergo sex reassignment surgery and requested to dress in women’s clothing at work (EEOC v. R.G. & G.R. Harris Funeral Homes, Inc., No. 16-2424.) The funeral home argued that the director’s transgender status was not protected under Title VII, but the Sixth Circuit held that the termination “fell squarely within the ambit of sex-based discrimination” because “it is analytically impossible to fire an employee based on that employee’s status as a transgender person without being motivated, at least in part, by the employee’s sex.” The court also rejected the funeral home’s argument that requiring it to employ the director while she presented herself as a woman would be an unjustified substantial burden on its sincerely held religious beliefs in violation of the Religious Freedom Restoration Act (RFRA). The court opined that even if the funeral home had demonstrated a substantial burden, the termination would still have been unlawful because enforcing Title VII in this way is the least restrictive means of furthering the government’s compelling interest in eradicating workplace discrimination on the basis of sex.

Impact: Employers, particularly those in the Sixth Circuit (Michigan, Ohio, Kentucky and Tennessee), should consider reviewing their employment policies and hiring practices to ensure that they are treating transgender status as a protected category. While the Sixth Circuit is the first federal appellate court to expressly hold that discrimination on the basis of transgender and gender transitioning status violates Title VII, the Second and Seventh Circuits have recently issued decisions expanding Title VII’s protections beyond traditional gender concepts to include sexual orientation. We will be closely watching legal developments in this now fast-evolving area of the law (as discussed in the next case note). Employers should also exercise caution when considering whether to base a negative employment decision on the exercise of a sincerely held religious belief under the RFRA. As the Sixth Circuit’s holding demonstrates, courts are likely to closely scrutinize or reject any such defense.

Second Circuit Reverses Course and Holds That Sexual Orientation Discrimination Is Sex Discrimination Under Title VII

Decision: On February 26, 2018, the US Court of Appeals for the Second Circuit in Zarda v. Altitude Express reversed its prior precedent and joined the Seventh Circuit in holding that Title VII’s prohibition on sex discrimination includes a prohibition on sexual orientation discrimination. The plaintiff (through his estate) had sued his former employer under both Title VII and New York State’s Human Rights Law, alleging that he was fired because of his sexual orientation. The district court had granted summary judgment to the employer on the Title VII claim, relying on the Second Circuit’s prior holding in Simonton v. Runyon, 232 F.3d 33 (2d Cir. 2000) that Title VII does not cover sexual orientation discrimination. After a Second Circuit panel initially upheld the district court’s ruling, the full Second Circuit overruled Simonton and held that, under Title VII, “sex discrimination” includes discrimination on the basis of sexual orientation.

Impact: For years, states and municipalities have been adding laws prohibiting discrimination on the basis of sexual orientation. However, whether Title VII prohibits discrimination on the basis of sexual orientation under federal sex discrimination prohibitions has been actively debated in both courts and administrative agencies. In 2015, the Equal Employment Opportunity Commission (EEOC), which filed an amicus brief in support of the Zarda plaintiff, took the position that sexual orientation discrimination is a form of sex stereotyping, and the courts have consistently held that sex stereotyping constitutes sex discrimination. By contrast, the Department of Justice filed an amicus brief in Zarda taking the opposite view. Among the circuit courts, the Eleventh Circuit has held that Title VII’s prohibition on sex discrimination does not prohibit sexual orientation discrimination, a view that the Second Circuit shared until last month when it joined the Seventh Circuit. District courts have likewise been split on the issue. If the split in the circuits continues, the issue is likely to reach the Supreme Court.