Recent Cases and New Laws Affecting Employers

Texas District Court Invalidates Obama-Era DOL Overtime Rule

Decision: On August 31, 2017, the federal court for the Eastern District of Texas invalidated an Obama-era overtime rule issued by the US Department of Labor (DOL) that had increased the minimum salary needed to qualify for the “white collar” exemption from overtime rules. The minimum salary had been increased under the rule from $23,600 per year to just over $47,000 per year. In addition, the rule increased the salary threshold for highly compensated workers from $100,000 to about $134,000. The case consolidated lawsuits brought by 21 states and dozens of business groups, and the court ruled that the “significant increase” in the salary threshold was simply too high, effectively substituting a “salary-level” test for the test intended by Congress, which looks at an employee’s job duties.

Impact: Following the court’s ruling, the Trump administration is expected to propose a more modest increase in the salary threshold or to redefine the “duties” test that employees must meet to qualify for the exemption. Employers should monitor future developments at the DOL, which may require employers to review the status of their exempt and nonexempt employees.

Department of Labor Holds That SOX Whistleblower Provision Applies Extraterritorially

Decision: On August 29, 2017, the Administrative Review Board (ARB) of the US Department of Labor (DOL) held in Blanchard v. Exelis Systems Corp. (ARB No. 15-031, ALJ No. 2014-SOX-20)that the whistleblower provisions of the Sarbanes-Oxley Act of 2002 (SOX) apply to conduct that occurs outside the United States. Gary Blanchard was a US national hired by Exelis Systems Corp. to work as a security supervisor under a contract that Exelis held with the US Department of Defense (DOD) at the Bagram Air Force Base in Afghanistan. Blanchard reported to Exelis human resources personnel at both the base and at the company’s Colorado offices allegations that his supervisors engaged in violations of DOD security policy and mail and wire fraud at the base. Shortly after Blanchard made these reports, an Exelis supervisor interrogated and threatened him, held him against his will and demoted him. Three months later, Exelis terminated Blanchard’s employment.

Blanchard filed a complaint with the Occupational Safety and Health Administration (OSHA) for violation of SOX’s whistleblower protection provision. OSHA, and subsequently a DOL administrative law judge, concluded that SOX did not protect Blanchard because the statute did not extend extraterritorially. The ARB reversed, finding clear indications in the statute that Congress intended it to apply extraterritorially. Those indications include the fact that the whistleblower provision extends to “foreign private issuers” that are subject to US securities laws because they elected to trade in the United States and that SOX’s anti-retaliation provision incorporates extraterritorial statutes into its protected activity provisions.

The ARB was careful to note that its holding did not extend to all foreign conduct of publicly traded foreign companies: “The misconduct of a foreign issuer/employer under the statute must still ‘affect in some significant way’ the United States.” Blanchard had alleged “significant domestic connections” involving a US-based corporation submitting false claims to the US government involving US security and military operation on a US air force base and violations of domestic law, not the law of another foreign country.

Impact: This decision clarifies that SOX will apply extraterritorially so long as the reported misconduct affects the United States in “some significant way” and thus exposes certain employers to greater liability. (SOX is more troublesome than the False Claims Act, which has a higher causation standard, a materiality requirement and a narrower scope of adverse employment actions than SOX.) However, that limitation may provide a significant defense against application of SOX to international companies whose only connection is that they have stock that is publicly traded on a US exchange.

Ninth Circuit Rejects Department of Labor’s FLSA Tip Credit Regulation, Creating Split with Eighth Circuit

Decision: On September 6, 2017, in Marsch v. J. Alexander’s, No. 15-15791, the US Court of Appeals for the Ninth Circuit rejected the US Department of Labor’s (DOL) interpretive guidance on paying employees who earn tips the federal minimum wage for non-tipped work.

The Fair Labor Standards Act (FLSA) creates a special rule that allows employers to pay a “tipped employee” a reduced hourly wage if the employee “customarily and regularly receives more than $30 per month in tips.” In other words, employers can use the employee’s tips as a credit toward the $7.25 federal minimum wage. The Marsch case addressed a situation in which the employee worked a dual job (as both a server, for which he earned tips, and a janitor, for which he did not.) In 2016, the DOL provided guidance (the “80/20 rule”) in that the tip credit may not be taken for time spent by the employee on non-tipped duties, even if they are related to the tipped task, if the employee spends more than 20 percent of the hours worked performing these related duties. Accordingly, if a server spent more than 20 percent of his time on non-tipped tasks, such as making coffee, toasting bread and washing dishes, a tip credit would not apply to time spent performing those tasks.

The Ninth Circuit rejected the DOL’s guidance, holding that it was both inconsistent with the FLSA and attempted to “create a de facto new regulation,” noting that the “dual jobs regulation is concerned with when an employee has two [distinct] jobs, not with differentiating between tasks within a job.” Thus, “if the employer has hired a person for one job (such as waitress or counterman), but that job includes a range of tasks not necessarily directed towards producing tips, the person is still considered a tipped employee engaged in a single job.” In so ruling, the court expressly disagreed with the US Court of Appeals for the Eighth Circuit’s 2011 decision in Fast v. Applebee’s International, Inc., which had deferred to the DOL’s guidance.

Impact: The Ninth Circuit’s decision marks a significant victory for employers who utilize the FLSA’s tip credit. Based on the court’s ruling, the 80/20 rule that essentially required employers to track and account for the time employees spend on tipped versus untipped tasks is inapplicable to employers in the Ninth Circuit. Nonetheless, employers must still assess whether their tipped employees have two different “jobs” or whether they are merely performing tasks associated with one job. If an employee spends a significant amount of time on non-tip-generating jobs, such as washing dishes, the employee may still claim that he has dual jobs (as a server and a dishwasher) and that a tip credit would not be applicable to the non-tipped job. Furthermore, given the split between the Eighth and Ninth Circuits, employers should tread carefully in this area.

Seventh Circuit Holds That Long-Term Leaves of Absence Are Not Reasonable Accommodations Required by the ADA

Decision: On September 20, 2017, the US Court of Appeals for the Seventh Circuit held in Severson v. Heartland Woodcraft, Inc., No. 15-3754, that “a long-term leave of absence cannot be a reasonable accommodation” under the Americans with Disabilities Act (ADA). The Equal Employment Opportunity Commission (EEOC) argued in Severson that a long-term leave qualifies as a required reasonable accommodation under the ADA when the leave is of a definite, time-limited duration; requested in advance; and likely to enable the employee to perform the essential functions of his job when he returns. The Seventh Circuit disagreed, ruling that “[t]he ADA is an antidiscrimination statute, not a medical-leave entitlement” and that an “[i]nability to work for a multi-month period removes a person from the class protected by the ADA.” The court also noted, however, that “intermittent time off or a short leave ... may, in appropriate circumstances, be analogous to a part-time or modified work schedule.”

Impact: Employers in Illinois, Indiana and Wisconsin now have a strong basis to argue that they are not required to accommodate employees with long-term leaves of absence under the ADA. However, employers should nonetheless exercise caution and stay apprised of any developments in this area because the EEOC’s position has not changed and courts in other jurisdictions have previously reached differing conclusions on this issue.

Third Circuit Holds That Claims for Title VII and ADA Violations Cannot Be Brought under Section 1983

Decision: In Williams v. Pennsylvania Human Relations Commission, No. 16-4383 (3d Cir. Aug. 30, 2017), the US Court of Appeals for the Third Circuit held that civil rights claims for violations of Title VII of the Civil Rights Act of 1964 (Title VII) and the Americans with Disabilities Act (ADA) cannot be brought under 42 U.S.C. § 1983 (Section 1983) because both Title VII and the ADA have their own “comprehensive remedial schemes” which “forestall” Section 1983 suits. Section 1983 allows litigants to sue state and federal actors and entities (or those acting on their behalf) for alleged civil rights violations. However, since section 1983 does not include any of the administrative exhaustion prerequisites that a litigant must satisfy prior to filing suit under Title VII or the ADA, the Third Circuit reasoned that allowing such claims to proceed under Section 1983 would allow litigants to avoid those procedural requirements.

Impact: The Third Circuit joined the Second, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits, which have each previously ruled similarly as to Title VII claims, and the Seventh, Eighth, Ninth and Eleventh Circuits, which have each previously ruled similarly as to claims under the ADA.