The following was written collectively by our Labor & Employment Department.

A. Federal Court Decisions

1.No Administrative Exemption for Mortgage Underwriters

In McKeen-Chaplin v. Provident Sav. Bank, 862 F.3d 847 (9th Cir. 2017), the Ninth Circuit reversed the district court’s holding that mortgage underwriters qualified for the “administrative exemption” under the Fair Labor Standards Act (“FLSA”). In particular, the plaintiff alleged that she and other underwriters often worked in excess of 40 hours in a workweek and, therefore, were owed overtime compensation. The defendant argued that mortgage underwriters were exempt under the administrative exemption, and the district court agreed. The Ninth Circuit reversed, and focused on the distinction, imposed by Department of Labor (“DOL”) regulations interpreting the scope of the FLSA exemptions, between “work directly related to running or servicing of the business” and “working on a manufacturing production line or selling a product in a retail or service establishment,” also known as the “administrative-production dichotomy.” According to the DOL, those engaged in management of the business are exempt from the overtime-pay requirements of the FLSA, while those involved in making the goods it sells or performing the services a business provides to the marketplace are not exempt. The Ninth Circuit noted that two other circuit Court of Appeals, the Second Circuit (which ruled underwriters are non-exempt) and the Sixth Circuit (which ruled they are exempt) have reached opposite conclusions.

The Ninth Circuit determined that, although underwriters evaluated whether a particular loan fit within the bank’s guidelines, the employees did not formulate those guidelines themselves. Underwriters did not set credit policy, were not involved in setting future strategy or business direction, did not “manage, guide, and administer the business,” and did not perform functions related to the bank’s overall efficiency or mode of operation. The Ninth Circuit, therefore, held that mortgage underwriters are not exempt from overtime pay and ordered summary judgment in favor of the plaintiff.

2. 2nd Circuit: Unpaid Interns Not Employees of Hearst Corporation

In Wang v. Hearst Corp., 877 F.3d 69 (2d Cir. 2017), the Second Circuit held that, based on an examination of the seven factors enumerated in Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d 376 (2d Cir. 2015) (i.e., no expectation of compensation, training similar to educational environment, internship tied to formal education program for receipt of credit, internship corresponding to academic calendar, duration limited to beneficial learning, no displacement of paid employees, and no entitlement to paid job after internship), Hearst’s unpaid interns were not employees under the FLSA. In particular, the plaintiffs were six individuals who participated in Hearst’s fashion-related internship programs and later sued for minimum wage violations under the FLSA and New York labor laws. The Second Circuit held that, even though some of the Glatt “primary beneficiary” factors supported the plaintiffs’ claims, the factors overall demonstrated that the interns were the primary beneficiaries of the relationship. As such, the interns were properly classified as interns and not employees.

3. 9th Circuit: Applying Glatt Test, Unpaid Interns Are Not Employees

On December 28, 2017, the Ninth Circuit held that three beauty school students, who alleged they were employees while they studied for their degrees, were interns under the FLSA. In Benjamin v. B & H Education, the plaintiffs claimed that they were employees because they were unsupervised when they provided services to the public through the school’s salons and performed repetitive tasks they already had learned. The Ninth Circuit applied the test set forth by the Second Circuit in Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536-37 (2d Cir. 2016) to hold that the “application of the Glatt factors establishes that students were the primary beneficiaries of their labors. Their participation in Marinello’s clinic provided them with the hands-on training they needed to sit for the state licensing exams.” The Court also found that, even if it applied the more restrictive 2010 test adopted by the DOL, the students still would not be employees. Lastly, the Court determined that, even under California law (which defines “employment” more broadly than the FLSA), the Glatt factors are more appropriate than the DOL factors for an occupational training or educational program.

B. California Court Decisions

1. Right to Statewide Discovery of Contact Information in PAGA Actions

In Williams v. Superior Court, 3 Cal. 5th 531 (2017), a retail employee brought a representative action against Marshalls under the Private Attorneys General Act of 2004 (“PAGA”), alleging wage and hour violations. In the course of discovery, the plaintiff sought contact information for fellow California employees through special interrogatories. When Marshalls objected, the plaintiff filed a motion to compel, which was granted by the trial court as to the plaintiff’s specific store (subject to an opt-out notice), but denied as to the rest of the stores in California. The trial court further conditioned any renewed motion for discovery on the plaintiff sitting for a deposition and showing some merit to the underlying action. The plaintiff filed a petition for writ of mandate, which was denied. In denying the writ, the Court of Appeal held that third party privacy interests were implicated, and the plaintiff had to demonstrate a compelling need for discovery by showing the discovery sought was directly relevant and essential to the fair resolution of the lawsuit.

The California Supreme Court reversed and held that the trial court abused its discretion by requiring Williams to demonstrate good cause for the production of contact information. Specifically, the Court rejected the notion that any special discovery rules apply to PAGA actions, and confirmed that liberal discovery rules have been in place for many years for collective actions, including class actions. The Court stated that the civil procedure rules do not impose any good cause requirement or any requirement to prove up the merits of claims prior to seeking information by interrogatory. Further, with respect to any privacy concerns, the Court held that fellow employees likely would not want to conceal their contact information from plaintiffs asserting wage and hour violations, and any residual privacy concerns could be protected by issuing notices that afford an opportunity to opt out from disclosure. The Court lastly held that Marshalls failed to show that supplying the contact information would be in any way burdensome.

2. Day of Rest Explained

In Mendoza v. Nordstrom, Inc., 2 Cal. 5th 1074 (2017), the California Supreme Court answered unsettled questions regarding the state’s day of rest statutes. In short, the California Labor Code provides that employees are entitled to at least one day’s rest out of seven. Specifically, Section 551 of the Labor Code states that “[e]very person employed in any occupation of labor is entitled to one day’s rest therefrom in seven.” Section 552 states that “[n]o employer of labor shall cause his employees to work more than six days in seven.” Section 556 provides an exception to Sections 551 and 552, stating that they “shall not apply to any employer or employee when the total hours of employment do not exceed 30 hours in any week or six hours in any one day thereof.”

First, considering the text and history of Sections 551 and 552, Wage Orders, and the statutory scheme of the day of rest provisions, the Court concluded that employees are entitled to one day of rest each work week (as defined by the employer) rather than one day in seven on a rolling basis. Thus, the Court acknowledged that an employee could be required to work up to twelve consecutive days without violating Sections 551 and 552. Second, the Court held that the exemption set forth in Section 556 applies only to those employees who never exceed six hours of work on any day of the workweek. Third, the Court clarified the definition of what it is to “cause” an employee to go without a day of rest, stating that an employer causes its employee to go without a day of rest when it “induces the employee to forgo rest to which he or she is entitled.” The Court explained that an employer’s obligation is to apprise employees of their entitlement to a day of rest and “thereafter to maintain absolute neutrality as to the exercise of that right.” An employer may not encourage its employees to forgo the day of rest or conceal the entitlement to the day of rest, but is not liable simply because an employee chooses to work a seventh day.

3. Waiting Periods for Vacation Entitlements Are Lawful

In Minnick v. Auto. Creations, Inc., 13 Cal. App. 5th 1000 (2017), the employer had a policy requiring employees to work a full year before they earned/accrued vacation. The plaintiff, who had worked for only six months, brought a representative action under PAGA, claiming the vacation policy forfeited his “vested” vacation right and therefore violated state law. The trial court sustained the employers’ demurrer, and the Court of Appeal affirmed. The Court of Appeal held that an employer may require a waiting period before an employee becomes eligible to earn vacation, and if the employer’s policy is clearly stated, the waiting period policy is enforceable. The Court also found that such vacation policy does not contract around the rule against forfeiture of wages. An employer may lawfully decide it will not provide vacation and, by logical extension, can decide it will not provide paid vacation until after a specified waiting period. Because the defendants’ vacation policy clearly provided for a waiting period and reasonably informed employees that their vacation accrual began after the completion of their first year, the policy was lawful.

4. Rest Breaks for Commission-Based Employees

In Vaquero v. Stoneledge Furniture LLC, 9 Cal. App. 5th 98 (2017), the plaintiffs were employed as sales associates for a furniture company and filed a class action, alleging that the defendant’s commission pay plan violated California law because it did not compensate employees for any non-selling time, such as time spent in meetings, training sessions, or rest periods. Under the defendant’s commission plan, if a sales associate failed to earn minimum pay of at least $12.01 per hour in any pay period, defendant paid the associate a “draw” against “future Advanced Commissions” in that minimum amount. The Court held that the defendant did not compensate employees for rest breaks under this structure. Specifically, drawing analogies to piece-rate employees, the Court held that sales employees must separately receive at least one paid rest period of 10 minutes for every four hours worked or major fraction thereof. If 100% of an employee’s pay is attributable to commissions, then he or she is not being compensated for rest periods – i.e., an employee cannot earn a commission while “resting,” so an employee paid only in commissions necessarily does not receive pay for rest periods.

C. Department of Labor

1. The DOL’s Overtime Rule Cut Down

In 2016, the DOL finalized an expansion of the FLSA’s overtime exemptions for executive, administrative and professional workers, designed to increase their wages. The rule would have doubled the minimum salary required to qualify for the exemptions and increased the overtime eligibility threshold for highly-compensated workers.

Texas, Nevada and 19 other states filed suit challenging the rule, and their case was consolidated with a similar lawsuit lodged by various business groups in the U.S. District Court for the Eastern District of Texas, State of Nevada v. U.S. Department of Labor, Case No. 4:16-cv-00731. In late 2016, the Texas District Court issued a nationwide order temporarily enjoining enforcement of the rule pending a final decision on the merits. The Obama DOL appealed the injunction to the Fifth Circuit. However, after President Trump’s inauguration, the DOL was silent regarding its position on the appeal.

On June 30, 2017, the DOL informed the Fifth Circuit that the DOL was dropping its defense of the salary levels established by the rule, but requested that the Fifth Circuit approve the DOL’s use of both a “salary” and “duties” test to demonstrate eligibility for the “white collar” overtime exemptions. The DOL also informed the Fifth Circuit that it would commence further rulemaking to determine the appropriate salary levels for such exemptions.

In August 2017, the Texas District Court invalidated the DOL rule in its entirety, holding that, by setting the salary level where it did, the DOL effectively eliminated the so-called duties test for determining which workers are eligible for the exemptions. The DOL announced that it would not appeal this ruling. It also requested public comment regarding a new overtime rule; however, no proposed rule has been announced.

2. DOL Adopts “Primary Beneficiary” Test to Determine Whether Interns Are Employees

On January 5, 2018, the DOL embraced the Glatt test (already applied by several Circuit courts, including the Ninth Circuit) to assess whether interns are employees under the FLSA. In doing so, the DOL rescinded its guidance from 2010, which set forth a stricter standard. Under the DOL’s 2010 test, an intern was considered an employee unless all of the six enumerated factors favored the company.

The new 7-factor DOL test, available here, was set forth by the Second Circuit in Glatt v. Fox Searchlight Pictures Inc., 811 F.3d 528, 536-37 (2d Cir. 2016). The test analyzes interns’ relationships with the company to determine which party is the “primary beneficiary” of the relationship. The DOL has noted that courts describe the primary beneficiary standard as “flexible” and that a review of the unique circumstances of each case should be made.