The Court of Appeals for the Third Circuit ruled that the Fair Labor Standards Act requires employers to compensate non-exempt employees for all rest breaks of 20 minutes or less.
On October 13, 2017, the Court of Appeals for the Third Circuit (with jurisdiction over Pennsylvania, New Jersey, Delaware and the U.S. Virgin Islands) ruled in Secretary United States Department of Labor v. American Future Systems, Inc., that the Fair Labor Standards Act (FLSA) requires employers to compensate non-exempt employees for all rest breaks of 20 minutes or less.
Legal Background and Facts
The FLSA does not require employers to provide employees with breaks (although some state laws might). If an employer allows employees to take “short breaks,” under the FLSA regulations (which are not legally binding but highly persuasive guidance), “[r]est periods of short duration, running from 5 minutes to about 20 minutes … must be counted as hours worked. Compensable time of rest periods may not be offset against other working time such as compensable waiting time or on-call time.” 29 C.F.R. § 785.18.
Against this backdrop, the Secretary of Labor filed suit alleging that publisher American Future Systems, Inc., d/b/a Progressive Business Publications (Progressive), and its president (who was sued in his individual and official capacities), violated the FLSA by failing to pay the federal minimum wage to non-exempt sales representatives (sales reps). The Secretary also alleged that Progressive failed to maintain mandatory time records in violation of the FLSA.
The Secretary’s claims arose out of Progressive’s 2009 implementation of what it called a “flexible time” policy that eliminated paid breaks, but allowed employees to log off of their computers at “any time, for any reason, and for any duration.” When logged off, sales reps were free to leave the office. Prior to 2009, Progressive’s policies gave employees two 15-minute paid breaks per day.
Under Progressive’s flexible time policy, a sales rep was only paid for time: (1) logged on to the computer, or (2) log off periods of less than 90 seconds. If a sales rep was logged off of her computer for more than 90 seconds, Progressive would not pay the sales rep for this period (even if the sales rep logged off to use the bathroom, get coffee or prepare for the next call following a difficult sales call). On average, Progressive paid each sales rep for just over five hours per day at the federal minimum wage of $7.25 per hour.
Although the flexible time policy imposed some requirements on sales reps (like a bar against working more than 40 hours in a week), in the general case, sales reps were free to decide when between 8:30 a.m. and 5:00 p.m. they would work during the Monday to Friday workweek. Sales reps could also choose their starting and ending times. The flexible time policy had no stated limit on the number of breaks sales reps could take.
Adopting a Bright-Line Rule: Short Breaks Are Time “Worked” Under the FLSA That Must Be Compensated
The Third Circuit held that, as a matter of basic interpretive principles, the specific “rest periods of short duration… must be counted as hours worked” language of Section 785.18 of the regulations was fatal to Progressive’s argument that it did not have to compensate employees for this time pursuant to a general regulation addressing the non-compensability of unrestricted periods (and not short breaks specifically). See 29 C.F.R. § 785.16.
The Third Circuit fortified its holding by citing its prior holdings that: the FLSA is humanitarian and remedial legislation that is to be liberally interpreted; “hours worked is not limited to the time an employee actually performs his or her job duties”; and “some breaks constitute ‘hours worked’ under the FLSA.”
The Third Circuit also rejected Progressive’s argument that courts should avoid a bright-line rule that requires employers to compensate employees for all breaks 20 minutes or less. Progressive instead proposed that the court adopt a standard that requires a case-by-case analysis as to whether a given break is intended to benefit the employer or the employee. The Third Circuit rejected this argument reasoning that it lacked support in the case law, undermined the FLSA’s regulatory scheme, and would impose unworkable and burdensome obligations on employers. The court was also not persuaded by Progressive’s claims that the bright-line rule would encourage employee abuses of employer break policies and practices.
For these reasons, the Third Circuit affirmed the district court’s grant of summary judgment in favor of the Secretary and against Progressive and its president on the Secretary’s minimum wage claim.
Liquidated Damages Were Appropriate Against Progressive
Where an employer violates the FLSA’s minimum wage requirements, it is liable for “double damages”: a sum equal to unpaid wages and liquidated damages in an amount equal to the unpaid wages. An employer can defend itself against the mandatory liquidated damages if it can “show that it acted in good faith and that it had reasonable grounds for believing that it was not violating the Act.”
The Third Circuit held that liquidated damages were not inappropriately imposed against Progressive in this case because, in viewing the record as a whole, the company:
- Implemented the flexible time policy around the time the federal minimum wage was increased (implying that this suggested an ulterior motive);
- Insufficiently investigated and complied with the FLSA’s minimum wage obligations because its officers selectively interpreted DOL guidelines and case law on the compensability of breaks 20 minutes or less; and
- Refused to waive its attorney-client privilege relating to Progressive’s conversations with counsel about the flexible time policy, thus leaving open the possibility that Progressive “implemented the new break policy in 2009, despite being told by one or more of its lawyers that the policy violated the FLSA.”
What This Decision Means for Employers
The Third Circuit’s adoption of the bright-line rule that non-exempt employees must be compensated for all breaks 20 minutes or less has significant implications for employers beyond the straightforward announcement of a wage and hour rule.
First, the decision is a reminder that employers should periodically review wage and hour policies and practices to make sure appropriate records are being maintained and employees are properly compensated for all types of breaks (short breaks and meal period breaks) in accordance with federal and state law. Remember: Employees get the benefit of federal or state law, whichever is more favorable.
Second, the case warns employers that when an employee abuses workplace wage and hour policies regarding breaks, the employer is still obligated to compensate the employee for all hours worked. If the employer determines that any corrective action is necessary, the employer may impose discipline or terminate the employee as appropriate.
Third, the court’s reasoning suggests that an employer’s good faith reliance on the advice of counsel in wage and hour audits and policy design might help undermine liquidated damages exposure in the event of inadvertent federal wage and hour violations. However, employers must appreciate that they will likely have to disclose the substance of counsel’s advice to avail themselves of the benefit of any “advice of counsel” factor.
Fourth, the ruling increases the risk that final certification will be granted to employees in costly, high-risk FLSA collective actions because non-exempt employees who do not receive compensation for all breaks 20 minutes or less are now more likely to be deemed “similarly situated” regardless of the reasons employees take such breaks. This case may also increase the risk of class certification in cases involving similar break-related state wage and hour claims.
Finally, the opinion highlights the risk high-ranking company executives or business owners may face if they are sued in their individual capacities (as Progressive’s president was) for a wage and hour violation.