Category Archives: Wages and Hours

Supreme Court: Severance Pay is Subject to FICA Tax

supctLast week, the Supreme Court decided a case about how severance pay must be treated for tax purposes. The employer in the case (United States v. Quality Stores) had declared Chapter 11 bankruptcy. The employer provided severance pay in two programs: One paid employees who were terminated immediately, and the other paid employees who stayed with the company through its bankruptcy reorganization, until an agreed-upon termination date. Like most severance plans, the company’s program was based on length of employment and job grade.

The employer and the IRS agreed that the severance pay should be treated as income for purposes of income tax withholding. What they disagreed about was FICA taxes: the payroll taxes, split between employer and employee, that fund Social Security and Medicare. Although the employer initially paid it share of these taxes and withheld the employees’ share from their severance, it later asked the IRS for this money back, to the tune of more than a million dollars. The employer’s claim was that the severance payments didn’t count as “wages” under IRS rules.

The Supreme Court disagreed. In a unanimous decision, the Court found that severance pay is subject not only to income tax withholding, but to FICA tax withholding as well. (And, employers must pay their half of these taxes on severance.) The Court found that severance pay falls squarely within the definition of wages as “remuneration for employment,” especially where, as here, they are based on the employee’s tenure and role at the company. Not a big surprise, but at least employers can now blame the Supreme Court when terminated employees complain that their severance pay is less than they thought it would be.

Fired for Jury Duty

gavelOne New York employer thought it had a bright idea: Lay off an employee who is called to serve on a jury, allow her to collect unemployment, then decide, once the trial is over, whether to offer her job back. That’s how the New York Times described an employer’s response when its employee gave notice that she had been selected to serve on a jury in a criminal case against Osama Bin Laden’s son-in-law (“Juror Loses Job for Serving in Terror Trial“).

Apparently it wasn’t bad enough to be called for jury duty, then actually selected for a case that will undoubtedly be lengthy and difficult, then apparently told that the trial is so “sensitive” that all jurors will be referred to only as numbers. No, poor Juror 21 had to suffer the additional indignity of hearing from her employer that she would be paid for only three days, then demoted, and finally laid off.

The judge in the case pointed out that this violates federal law, and it does. It’s a federal case, so perhaps the judge can be forgiven for not pointing out that it violates New York law as well. Most states prohibit employers from coercing an employee to avoid jury duty, or from disciplining or firing employees called to serve. (See Taking Time Off for Jury Duty for a list of every state’s rules.)

So far, so good. But the real problem is getting paid. Only a few states require employers to pay their employees for the time they spend serving on a jury. State laws may provide for nominal juror fees paid by the court, but these amounts are quite small. In fact, Juror 21′s employer offered more than New York law requires. Although state law requires employers to pay for three days (only) of service, the amount they have to pay is capped at the princely sum of 40 bucks a day.

The judge has appointed a lawyer to represent Juror 21 in contacting her employer and trying to work things out.

Will Congress Change the Tip Credit?

waiterThe federal minimum wage law has a special exception for servers, bartenders, and other employees who receive tips: These tipped employees can be paid much less than the minimum wage per hour (in most states), as long as they earn enough in tips to bring their hourly total up to at least the full minimum. Right now, the federal minimum wage is $7.25 an hour. But federal law allows employers to pay tipped employees as little as $2.13 an hour!

This practice of paying tipped employees less is called taking a “tip credit,” meaning the employer gets to credit part of the employee’s tips against its minimum wage obligation. Not all states allow a tip credit: California, for example, requires employers to pay tipped employees the full state minimum wage. And some states allow a lower tip credit, requiring employers to pay more per hour than federal law would mandate. (The more protective law governs in wage and hour matters.)

That measly $2.13 took effect back when the minimum wage was $4.25 an hour. In other words, the tip credit was supposed to be half of the minimum wage. But as the minimum wage increased, the wage for tipped employees stayed the same, part of a compromise to get the wage hikes passed. Now, Congress is contemplating raising both the minimum wage and the amount tipped employees must be paid. According to an article in today’s New York Times (“Proposal to Raise Tip Wages Resisted“), Senator Tom Harkin has introduced a bill that would raise the minimum wage to $10.10 and the tipped employee wage by 95 cents per year until it reaches $7.10. Further increases would be tied to inflation.

As is perhaps evident from the title of the article, this proposal is facing plenty of pushback, primarily from restaurant owners. And of course, it’s unclear how Congress would agree on a minimum wage and tipped employees wage increase when they can’t pass a farm bill or extend unemployment benefits. But at least this problem has hit the radar of the U.S. Senate and the nation’s paper of record.

Want to know more about your state’s law on tips, including tip credits, tip pooling, and who gets to keep those mandatory service charges the house tacks on to the bill? We’ve got a set of articles — one for each state and the District of Columbia — on this very topic; select your state from the list at State Laws for Tipped Employees.

State Minimum Wage Increases for 2014

Last week, California Governor Jerry Brown signed a bill that will increase the state’s minimum wage to $9 on July 1, 2014, and $10 at the beginning of 2016. (The state’s current minimum wage is $8.) So far, three other states have passed minimum wage increases that will take effect in 2014: Connecticut’s wage will increase to $8.70 for 2014, then $9 for 2015; New York’s wage will increase to $8 at the end of this year, then $8.75 at the end of 2014, then $9 at the end of 2015; and Rhode Island’s minimum will hit $8 at the beginning of 2014. (Nolo has minimum wage information for all 50 states and the District of Columbia at our Wage & Hour page.)

The federal minimum wage, currently $7.25 an hour, is now lower than the minimum wage in more than a third of the states. About half of the states have the same minimum wage as the federal government, and a handful of states either have a lower minimum wage or have no minimum wage at all. As a practical matter, this final group of states also uses the federal minimum wage. The federal wage rate is a floor, not a ceiling. States are free to adopt a higher minimum wage, and employers within the state must pay the higher rate. But in states with a lower minimum wage, employers must generally comply with the federal law unless they are so small and local as to not be subject to the Fair Labor Standards Act.

States generally adopt higher minimum wage rates to try to bring wages into line with the cost of living. But, according to the Center for Poverty Research at U.C. Davis, the federal minimum wage is not cutting the mustard. A full-time employee who works 40 hours a week for a full year, without taking a single unpaid day off, earns about $15,000 annually, just a few thousand dollars above the poverty level for a single person (and well below the poverty level for a family with one or more children).

President Obama has called for an increase in the federal minimum wage to $9; he also appointed a Secretary of Labor, Thomas Perez, who supports raising the minimum wage. However, based on the current climate in Congress (which today is on the verge of shutting the government down), it doesn’t seem likely that a federal wage increase will happen any time soon. And that means the real action will remain at the state and local level.

Wage and Hour Violations at Restaurants

A couple of days ago, the New York Times published an article about wage and hour violations at Urasawa, a very trendy — and expensive — sushi restaurant in Beverly Hills. According to the article, workers were not paid overtime and not allowed to take legally required breaks. An employee interviewed for the article also noted that he was required to buy his own $700 set of knives, at a time when he was earning between $9 and $11 an hour. (Although the article didn’t mention it, this is a separate violation of California law, which requires employers to bear the cost of uniforms, tools, and other items necessary for employees to do their jobs.)

Restaurants are too frequently in violation of wage and hour laws, from overtime and break rules to minimum wage, uniform, and tip requirements. If the violator is extremely upscale, like the restaurant cited in the Times article, employees are often willing to put up with substandard conditions in exchange for the opportunity to gain the experience and cachet that stem from working at a trendy spot. (Apparently, diners are also willing to put up with a lot to eat there, from a $1,000 price tag for dinner for two to rules about how the food must be treated that would make Sienfeld’s Soup Nazi blush.) At the other end of the spectrum, employees working at fast-food franchises and low-budget eateries often don’t know their rights and work for an owner who is operating on a financial shoestring.

In recent years, the Department of Labor has taken steps to remedy this situation, from revising the regulations on tip credits to partnering with the Subway restaurant chain to make sure that employees know their rights. Let’s hope it works! Because I don’t know about you, but for my own selfish reasons, I’d prefer to have my food prepared by workers who are allowed to go to the bathroom when they need to.

Take This Internship and . . . Pay For It

blackswaneditLast week, two unpaid interns who worked on the film “Black Swan” won a lawsuit against Fox Searchlight Pictures. The interns claimed that they should have been paid for their work, which included such important cinematic tasks as taking out the garbage, ordering lunch, booking flights for their bosses, and assembling office furniture. The judge for the federal District Court in Manhattan agreed, finding that the two interns were treated as employees and were, therefore, entitled to compensation for their time.

These days, internships are an increasingly popular option, especially for students and recent graduates who can’t find paid work in their fields. CNN Money recently reported an 8.8% unemployment rate — and an almost 19% “underemployment” rate — among recent college grads, both rates still higher than before the economic downturn began. Many young people are willing (or desperate enough) to work without pay to get their foot in the door of their chosen profession. Of course, they’d rather get paid. But if the only way to break into a field is by doing grunt work day and night without pay, some people will take that deal.

This is where the law steps in to set some boundaries. Employment law pushes back against the metric of “whatever the market will bear” to require employers to pay at least the minimum wage, to protect employees from unsafe working conditions, and to prohibit harassment, for example — even if plenty of employees might tolerate mistreatment and subsistence wages just to get and keep a job. That desperate job seekers are willing to put up with almost anything in exchange for work doesn’t mean it’s legal.

That’s what Fox learned last week, and what employers in other popular industries are starting to understand. According to an article about the case in the New York Times, similar lawsuits have been filed against television, modeling, and fashion magazine employers, claiming interns should have been paid. Employers in these sexy fields have been some of the worst offenders in not paying interns, presumably because so many people are desperate to work in film and fashion.

There’s nothing shocking about desperate job seekers or employers willing to exploit them, sadly. There’s nothing surprising about the outcome of the case, either. The law about unpaid internships is very clear. Employers may hire people to work without pay only if the job meets a strict six-part test, including that the job must benefit the intern, must not provide the employer with an immediate advantage, must be closely supervised, and must not be a required stepping stone to a paid position. (You can find details on the six factors in Am I really an intern or just an employee who isn’t getting paid?) But Fox argued that the judge should forget the factors and instead simply weigh whether the intern or the employer gained more from the arrangement. If the intern benefitted more, then it’s a legal internship. The judge was not impressed by this argument, nor by the college credits offered for some internships, nor by the fact that the interns who sued undoubtedly did learn some things about the film industry during their unpaid time at Fox.

All beside the point, as the judge made clear. The six-part test is strict for a reason: Internships are a somewhat disruptive exception to the usual workplace exchange of labor for money. As such, they are intended to be rare.

 

Wage and Hour Lawsuits: Tips, Overtime, and Hours Worked Top the List

This month’s issue of Corporate Counsel includes an interesting article on wage and hour lawsuits brought under the Fair Labor Standards Act. The article includes a graph showing that the number of FLSA cases filed in federal court has risen steadily over the last five years. More than 7,700 cases were filed in the 12 months that ended on March 31, 2013, a new record.

According to Noah Finkel, a partner at Seyfarth Shaw who was interviewed for the article, the cases fall into three categories:

  • overtime exemptions, particularly employees who are paid a salary but believe they are entitled to overtime. 
  • hours worked cases, in which employees claim that they were not paid for all of their work time, and
  • disputes about the tip credit.

Finkel said he’s seen an increase in tip credit cases recently. Not all states allow a tip credit. In states that allow it, a tip credit lets employers pay less than the minimum hourly wage, as long as the tipped employee earns enough in tips to make up the difference. (The credit is the amount the employer doesn’t have to pay. For example, if a state’s minimum wage is $7.25, and the state allows employers to pay tipped employees a minimum wage of $4.25, the tip credit is $3.)

In 2011, the Department of Labor issued revised regulations on tip credits. Among other things, these regulations clarify the rules for tip pooling and require employers to give employees notice if they will be subject to a tip credit. Often, new regulations lead to more lawsuits, as employees and their attorneys test how the new rules will play out in practice. So, I guess the increase in tip credit cases isn’t much of a surprise. (For more on the rules, see our update Labor Department’s Final Regulations Clarify Tip Credit Rules.)

Supreme Court’s FLSA Decision on Collective Actions

Last week, the Supreme Court decided a case about collective actions under the Fair Labor Standards Act (FLSA). Collective actions are similar to class actions, in that they give an employee the right to file a lawsuit on behalf of a group of employees who have the same basic claim against the employer. The Court’s decision took a strange turn, resulting in a victory for the employer that skirted a primary issue in the case.

Here’s what happened: Laura Symczyk filed a collective action against her employer, Genesis Healthcare, claiming that it had an unfair policy of docking employees for a 30-minute meal break every shift, whether or not the employee had to work during that time. (If an employee must work through a meal, the employee is entitled to be paid; nobody disputes this basic assertion underlying the employee’s case.) Symczyk was the only named employee in the case, but anticipated that others would join in once the collective action was conditionally certified: that is, once the court found that the group of employees were similarly situated to Symczyk because they were subject to the same policy or practice.

Before Symczyk tried to certify the collective action, Genesis offered to settle her claim. Genesis said it would pay her $7,500, plus fees and costs. Symczyk didn’t respond, and Genesis withdrew the offer.

This settlement offer was made under Rule 68 of the Federal Rules of Civil Procedure. Under Rule 68, if one party doesn’t accept a settlement offer, that party will be responsible for all of its lawsuit costs after the date the offer was made, unless that party gets a judgment that’s better than the settlement offer. The purpose of this Rule is to give both sides a strong incentive to settle: The defendant has good reason to offer a generous settlement, both to get out of the lawsuit and to make it more likely that the plaintiff won’t do better at trial. The plaintiff has a good reason to accept, both because the offer is likely to be generous and because the plaintiff may have to foot a large litigation bill if the judgment isn’t better than the settlement.

With me so far? Because here’s where things get weird. The trial court threw out the lawsuit, finding that Symczyk no longer had an active dispute against the company because she had been offered all of the relief to which she was entitled. Because Symczyk no longer had a claim, she couldn’t represent other employees, and so the whole case got tossed.

The problem is that Symczyk didn’t accept the settlement offer; she turned it down. She didn’t get any money in settlement and, because the court tossed her case, she won’t get any money at trial. This should not be possible: Plaintiffs who turn down a Rule 64 settlement offer have a right to take their chances in court. The plaintiffs may win or they may lose, but they buy the opportunity to take their best shot by forgoing the settlement. It isn’t fair to throw a case out when the plaintiffs have neither settlement nor judgment in hand. Nonetheless, one federal judiciary circuit has interpreted Rule 64 to allow this type of penalty, presumably in an effort to put a stop to unnecessary litigation.

But the Court skipped right past this issue to decide that, if Symczyk’s case was properly dismissed, then she can no longer represent the group. Employee attorneys take issue with this, arguing that employees should have a chance to replace the named plaintiff-employee when this happens and continue with the lawsuit. Otherwise, defendant-employers could “pick off” the named employee (by making a Rule 68 offer) and get any collective action filed against it thrown out of court.

This is an interesting argument, but not the one the Court should have decided. In almost any federal court, Symczyk’s case would not have been dismissed and she would still be capable of representing the group. By leaving this fundamental issue undecided, the Court hasn’t clarified things very much for those on either side of an FLSA collective action.

President Obama’s Proposed Minimum Wage Increase

In last week’s State of the Union address, President Obama spoke of many things. Not shoes and ships and sealing wax, but immigration reform, proposals to stop gun violence, climate change, and energy policy. The proposal that seemed to get the most press afterwards, however, was his call to raise the minimum wage to $9 (from the current rate of $7.25 an hour) and tie further increases to the cost of living.

Perhaps one reason this got the most press is that it’s so concise. Unlike, for example, immigration reform or steps to halt climate change, raising the minimum wage is simple and straightforward. The details of the proposal are clear. No comprehensive plan is necessary, and there aren’t a lot of moving parts. Of course, that doesn’t mean the proposal is without controversy. The Chamber of Commerce has long opposed increases in the minimum wage, and other business groups have come out against any increases.

What would be the practical effect of the President’s proposal? Currently, 19 states and the District of Columbia require employers to pay a higher minimum wage than the federal rate of $7.25 an hour. As of today, however, only one state — Washington — has a minimum wage of at least $9. As a practical matter, this means wages would go up in virtually every state if the rate were raised all at once. (Except in cities that have their own higher minimum wages. In San Francisco, for example, employers must pay at least $10.55 an hour; where I work, in Berkeley, vendors with the city must pay at least $13.03 an hour with medical benefits, or $15.20 an hour without.)

Final FMLA Regulations Cover Veterans and More

On February 6, 2013, the Department of Labor issued its final regulations implementing statutory amendments to the FMLA. These regulations incorporate the amendments Congress passed in 2010. Among other things, the 2010 amendments:

  • tweaked the way eligibility and hours are calculated for flight crews
  • expanded the right to take qualifying exigency leave to cover not only employees with family members in the National Guard and Reserves, but also employees with family members in the regular armed forces, and
  • expanded the right to take military caregiver leave to cover not only employees with family members who were seriously injured while on active military duty, but also employees with family members who exacerbated a preexisting injury while on active duty and employees with family members who are veterans suffering from a serious injury incurred while on active duty.

About a year ago, the Department of Labor issued proposed regulations implementing these provisions and seeking input from the public on a few key issues, including how to implement the leave provision to care for a veteran. Rather than issuing proposed regulations on this topic, the Department decided to hold off until it had received comments and issued its final regulations. As a result, the Department delayed the effective date of this provision. Until it issued final regulations defining the key terms (including who qualifies as a veteran and what constitutes a serious injury for a veteran), the Department took the position that employers were not legally required to provide this type of FMLA leave.

That has now changed. As of the effective date of the final regulations (March 8, 2013), employers are now required to provide FMLA leave to employees who need time off to care for a family member who is a veteran and suffered a serious injury while on active duty.

The final regulations have changed military family leave in a few important ways:

  • Veterans defined. One of the reasons why Congress amended the FMLA was to allow time off for employees to care for family members who had served in the military and later manifested serious health problems, notably PTSD. The final regulations define “serious injury,” and make clear that injuries are covered whether they manifest before or after the veteran leaves the military. The veteran must have been in the military in the five years before the employee first takes FMLA leave. However, the time between the Congressional amendments (October 28, 2009) and the effective date of the final regulations (March 8, 2013) doesn’t count against this five-year limit. The Department excluded this time because employers weren’t required to give leave to care for an injured veteran during this period. 
  • Qualifying exigencies expanded. As required by Congress, the final rule expands qualifying exigency leave to cover not only family members who are members of the National Guard and Reserves, but also family members who are in the regular armed forces and are deployed to a foreign country. This type of leave is intended to allow employers to handle practical matters arising from a family member’s deployment. The final regulations make a few changes to this type of leave. For example, employees may take up to 15 days off for a family member’s rest and recuperation leave (the previous limit was five days). The final regulations also add a new type of qualifying exigency leave, to allow employees to take time off to make arrangements for a military family member’s parent who is incapable of self-care. For example, the employee might need to hire a caretaker for the parent, tour care facilities, and so on.

The Department of Labor has issued a helpful FAQ set on the final regulations.