FLSA Amendment Eases Restrictions on Tip Pooling

On April 6, 2018, the U.S. Department of Labor, Wage and Hour Division (“WHD”) issued Field Assistance Bulletin No. 2018-3 in response to Congress’ amendment to Section 3(m) of the Fair Labor Standards Act (“FLSA”) with the Consolidated Appropriations Act, 2018 (the “Act”). The Act, passed in March 2018, prohibits employers from keeping tips received by their employees and states that the WHD’s prior regulations that barred certain tip pooling practices have no further force or effect.

As stated by the WHD, “given these developments, employers who pay the full FLSA minimum wage are no longer prohibited from allowing employees who are not customarily and regularly tipped – such as cooks and dishwashers – to participate in tip pools.” Stated differently, as long as the tipped employees are paid at least the federal minimum wage, employers can require traditionally tipped employees to share their tips with traditionally non-tipped employees.  Notably, however, managers and supervisors are still prohibited by the FLSA from participating in tip pools.

Despite the change in the federal law, Massachusetts employers are prohibited from requiring or even permitting tip pools if any of the money is distributed to “any person who is not a wait staff employee, service employee, or service bartender.” See M.G.L. c. 149, § 152A.  The term “service employee” is defined by the statute to mean a person who works in an occupation in which employees customarily receive tips or gratuities, and who provides service directly to customers or consumers.

Accordingly, despite the Consolidated Appropriations Act and guidance from the WHD, hospitality employers in Massachusetts are prohibited from allowing employees who are not customarily and regularly tipped (such as cooks and dishwashers) to participate in tip pools.

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Are You In Compliance with the Pregnant Workers Fairness Act That Went Into Effect April 1st?

If you have not taken steps to comply with the Pregnant Workers Fairness Act (“PWFA”), you are already in violation of the statutory mandate related to required postings.  Specifically, all employers with six or more employees were required to provide a notice as of April 1st to all employees (either in an Employee Handbook, stand-alone policy, or other written means) setting forth employee rights under the PWFA, including rights to be free from discrimination and to an accommodation.  In addition to this initial notice, employers are required to provide the same notice to all new employees at date of hire on a going-forward basis, as well as to any pregnant employee or employee with a pregnancy-related condition within 10 days of the employer being notified by the employee of the pregnancy or pregnancy-related condition, including but not limited to lactation or the need to express breast milk for a nursing child.

If you need any assistance in drafting an appropriate notice for distribution, please contact any member of Mirick O’Connell’s Labor, Employment & Employee Benefits Group.

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Attorney General’s Office Releases Guidance Interpreting an Act to Establish Pay Equity

On March 1, 2018, the Massachusetts Attorney General’s Office released guidance in the form of an “Overview and Frequently Asked Questions” (the “Guidance”) interpreting An Act to Establish Pay Equity, which goes into effect July 1, 2018.  A copy of the Attorney General’s Guidance can be found here.

Many of you will recall that, in August 2016, Governor Baker signed into law An Act to Establish Pay Equity which amends M.G.L. c. 149 s. 105A, the Massachusetts Equal Pay Act (“Equal Pay Act” or the “Act”), to strengthen the prohibition on discrimination in wages based on gender, and to ensure Massachusetts employees receive equal wages for comparable work.  The Equal Pay Act defines comparable work as work involving “substantially similar skill, effort and responsibility” and that is “performed under similar working conditions.”

Despite its equal pay mandate, the law permits employers, in certain circumstances, to establish variations in the payment of wages among employees. Such variations may only be based on:  seniority, merit, a system that “measures earnings by quantity or quality of production, sales, or revenue” (e.g., commission payments), the geographic location where a job is performed, education, training, or experience if such factors are reasonably related to the particular job, and/or travel (if the travel is a regular and necessary condition of the job).

The Act also prohibits employers from (i) screening applicants based on wage or salary history, (ii) seeking the salary history of an applicant (with two exceptions), and (iii) restricting employees from discussing their compensation with co-workers or colleagues. The Act creates an affirmative defense if, within the three previous years, the employer has completed a good faith self-evaluation of its pay practice that is reasonable in detail and scope and can demonstrate reasonable progress to eliminate pay differential based on gender.

The Guidance addresses several important aspects of the Equal Pay Act, including, among others, its applicability, the terms “comparable work” and “wages,” the prohibition on seeking salary history, and the affirmative defense afforded to employers.

Applicability

The Equal Pay Act applies to all “employees with a primary place of work in Massachusetts.”  An employee’s primary place of work is where the employee does most of his/her work for the employer.  The Guidance provides several examples illustrating the Equal Pay Act’s applicability.

Comparable Work

As noted above, for work to be comparable, it must involve “substantially similar skill, effort, and responsibility, and [be] performed under similar working conditions.”

  • Work is “substantially similar” if two employees’ skill, effort, and responsibility are “alike to a great or significant extent,  but are not necessarily identical or alike in all respects.”  The fact that two jobs may differ slightly in skill, effort and responsibility will not prevent two jobs from being classified as comparable.
  • “Skill” includes an employee’s “experience, training, education, and ability to perform the jobs.” An employee’s skill must be “measured in terms of the performance requirements of a job….”
  • “‘Effort’ refers to the amount of physical or mental exertion needed to perform a job.”
  • “‘Responsibility encompasses the degree of discretion or accountability involved in performing the essential functions of a job….”

Wages

Wages are defined broadly under the Equal Pay Act to include “all forms of remuneration for work performed, including commissions, bonuses, profit sharing, paid personal time off, vacation and holiday pay, expense accounts, car and gas allowances, retirement plans, insurance, and other benefits, whether paid directly to the employee or to a third-party on the employee’s behalf.” Although relevant for the determination of equal pay, the Guidance does not change the definition of “wages” for the purposes of the Payment of Wages law.

Prohibition on Seeking Salary History

With limited exceptions, employers (and agents acting on their behalf) are prohibited from seeking salary/wage history from prospective employees.  Employers can seek such information to confirm salary/wage history if the applicant volunteers his/her prior salary/wage history, or after the employer has made an offer of employment with compensation.

Notably, an employer is entitled to ask a prospective employee about his/her salary requirements or expectations.  The Guidance advises employers to proceed with caution and to frame this question in a manner that is not designed or intended to elicit the prospective employee’s salary/wage history.

In addition, multi-state employers are required to comply with the Equal Pay Act if there is a possibility that the prospective employee “will be chosen or assigned to work in Massachusetts (or have Massachusetts as their primary place of work)[.]…”

Affirmative Defense

The Equal Pay Act provides a complete defense to a claim if an employer has conducted a “good faith, reasonable self-evaluation of its pay practices within the previous three years and before an action is filed against it.”  According to the Guidance, an employer’s eligibility for the affirmative defense “turns on whether the self-evaluation is conducted in good faith and was reasonable in detail and scope and the employer must also show reasonable progress towards eliminating any unlawful gender-based wage differentials that its self-evaluation reveals.”

The Guidance considers a good-faith self-evaluation to be one the “employer conducts in a genuine attempt to identify unlawful pay disparities among employees performing comparable work.”  An employer’s good faith must apply to its analysis regarding which jobs are comparable, and to the pay differentials themselves.

A self-evaluation that is reasonable in detail and scope is likely going to be one that takes into account a reasonable number of jobs and employees, relevant and reasonably available information, and has a reasonably sophisticated analysis of potentially comparable jobs, employee compensation, and whether the employer is appropriately using the six permissible reasons for pay disparities.

Assuming the self-evaluation was done in good faith and was reasonable in detail and scope, the employer must still demonstrate that it has made reasonable progress to eliminate any pay disparities that were identified.  To make this showing, an employer will be required to specifically identify the steps it is taking to remedy the problem.

The Guidance includes a basic guide of the steps “employers should consider undertaking as part of a comprehensive self-evaluation.” The Guidance also includes a link to the Attorney General’s “Calculation Tool” to assist employers in the evaluation of comparable job groupings that have thirty (30) or fewer employees and a relatively simple pay structure.

If you have any questions about the Equal Pay Act and its interpreting Guidance, please contact a member of the Labor and Employment Group.

 

Our Keynote Speaker at our annual Labor, Employment, and Employee Benefits Seminar is Genevieve Nadeau, Chief of the Civil Rights Division for the Massachusetts Attorney General’s Office.  Ms. Nadeau is one of the architects of the Equal Pay Act’s Guidance.  Register today: 2018 Mirick O’Connell Labor, Employment and Employee Benefits Seminar . We hope to see you there!

 

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Violation of Sick Time Payout Policy Not a Wage Act Violation

The Massachusetts Wage Act, G.L. c. 149, §148, is in the news again, the subject of another noteworthy decision by the Massachusetts Supreme Judicial Court. Like the decision declining to extend personal liability to Board members and investors for Wage Act violations reported in an earlier post this year, the Court in Mui v. Massachusetts Port Authority again opted for a narrow interpretation of that important statute.

The Wage Act protects an employee’s right to receive earned wages and salary. These rights are enforced through strict treble damages remedies if prompt payment is not made.  The Act also provides for personal liability of upper management of the employer.

The Wage Act also protects accrued, but unused vacation pay due an employee under an oral or written agreement. Once vacation pay has been earned, it must be paid upon termination.  Failure to do so calls forth the treble damages penalty and potential personal liability.

The Wage Act, however, is silent about accrued, but unused sick pay.  MassPort had a policy, common in the public sector but rare in the private sector, whereby an employee was entitled to be paid a percentage of his unused sick time upon termination.  The plaintiff argued that this benefit was the equivalent of earned vacation time.  Because that benefit had been earned through his labors, the plaintiff argued that the important public policy rationale underlying the Wage Act protections should apply.  Treble damages should therefore be imposed to deter employers from depriving an employee of this earned benefit.

The Court refused to read such language into the Wage Act.  Adopting a strict construction of the statute, the Court found “no reason to conclude that the Legislature intended to include sick pay as ‘wages’ under the Wage Act.”  Because the Wage Act did not apply, the Court held that the enhanced remedies of that statute similarly did not apply in this situation.

In my earlier post regarding the Segal v. Genitrix, LLC case, I asked the question as to whether a decision by a Court comprised of five (of seven) justices appointed by Governor Baker signaled a trend toward a narrower reading of employees’ rights.  While it is still too early to tell, this case is one more data point to consider in attempting to read those tea leaves.

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EEOC Releases 2017 Enforcement & Litigation Statistics

The Equal Employment Opportunity Commission (“EEOC”) – the federal agency tasked with enforcing certain federal employment laws – recently released its fiscal year 2017 Enforcement and Litigation Statistics. In fiscal year 2017, the EEOC resolved 99,109 charges of discrimination.  In doing so, the EEOC made significant headway by reducing its current workload of charges to 61,621 – its lowest level in 10 years.[1]  The EEOC attributes this decrease to its deployment of “new strategies to more efficiently prioritize charges with merit, more quickly resolv[ing] investigations, and improv[ing] the agency’s digital systems.”

The EEOC further announced that employees filed 84,254 charges of workplace discrimination last year – a 7,249 decrease as compared to fiscal year 2016.  Retaliation charges were the most frequently filed, followed by race, disability, sex, and age.  The EEOC specifically noted that it received 6,696 sexual harassment charges, which claims are encompassed in the sex discrimination numbers detailed below.  A complete breakdown of the charges filed is as follows:[2]

  • Retaliation: 41,097 (48.8 percent of all charges filed)
  • Race: 28,528 (33.9 percent)
  • Disability: 26,838 (31.9 percent)
  • Sex: 25,605 (30.4 percent)
  • Age: 18,376 (21.8 percent)
  • National Origin: 8,299 (9.8 percent)
  • Religion: 3,436 (4.1 percent)
  • Color: 3,240 (3.8 percent)
  • Equal Pay Act: 996 (1.2 percent)
  • Genetic Information: 206 (.2 percent)

Fiscal year 2017 also saw a significant uptick in the amount of private lawsuits the EEOC has filed as compared to 2016. Specifically, in 2017, EEOC lawyers filed 184 discrimination lawsuits, as compared to the 86 lawsuits that were filed in fiscal year 2016.

[1]   By way of reference, in fiscal year 2016, the EEOC had 73,508 charges pending.

[2]   When added together, the percentages total more the 100% because some charges allege multiple claims.

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IRS Issues New Withholding Tables

On January 11, 2018, the Internal Revenue Service (“IRS”) issued Notice 1036, Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding (“Notice 1036”) and published IRS Withholding Tables Frequently Asked Questions.

Notice 1036 sets forth the income tax withholding tables applicable for 2018 (the “2018 Withholding Tables”), which show employers how much federal income tax to withhold from employee paychecks, given each employee’s wages, marital status, and the number of withholding allowances claimed. The new 2018 Withholding Tables were made necessary by the 2017 Tax Act’s changes to tax rates and tax brackets, increase of the standard deduction, and repeal of personal exemptions.

Employers must begin using the 2018 Withholding Tables by February 15, 2018.

The 2018 Withholding Tables were designed to work with existing Form W-4, Employee’s Withholding Allowance Certificate.  Therefore, employers do not need to require employees to execute new Forms W-4 at this time.  However, the IRS is working to revise the Form W-4 and its withholding calculator and expects to issue both “soon.”

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Sexual Harassment Settlements as Tax Policy: Non-Deductibility of Payments and Legal Expenses

The Tax Cuts and Job Act passed by Congress on December 22, 2017, includes a surprising provision that may have a significant impact on settlements of sexual harassment and other claims. Under Section 13307 of that Act, the Internal Revenue Code provision relative to the deductibility of expenses in carrying on a trade or business was amended to read:

Payments Related to Sexual Harassment and Sexual Abuse – No deduction shall be allowed under this chapter for (1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney’s fees related to such a settlement or payment.

The amendment (which becomes Section 162(q) in the tax code) takes effect immediately.

What this now means is that the standard practice of including a confidentiality provision in employment settlement agreements must be undertaken with caution or not at all. The impact of the tax code amendment can arise in two ways.

Settlement of Sexual Harassment Claims.  First, in a case that directly involves a sexual harassment (or sexual abuse) claim, the inclusion of a provision by which the claimant agrees to keep the existence and terms of the settlement private and confidential will mean that neither the settlement payment amount nor any attorney’s fees related to that settlement may be taken as deductible business expenses.  In such case, the employer should make the determination as to whether the confidentiality of the settlement is of sufficient importance to forego the deductions.

Blanket Releases of all Employment Related Claims.  Second, even in a case in which no sexual harassment (or sexual abuse) claim is made, the amendment can be a trap for the unwary.  If the settlement agreement contains a nondisclosure provision, but is otherwise not carefully drafted, it can potentially have the same ramification.

In virtually every settlement of a claim made by a present or former employee (and even in the documentation surrounding severance payments where no claims have been made), it has been common practice to include a broad release of any and all claims arising out of the employment relationship. In some iterations, the language contains not only a broad release, but also the specific delineation of every possible type of employment-related claim (e.g., release of claims arising under any federal, state, or local law relating to employment, discrimination, retaliation, harassment, breach of contract, fraud, identity theft, tortious interference, emotional distress, or any common law claim).  Certainly the latter and possibly even the former approach may also result in the loss of the deductions.

Express Disclaimer and Attendant Risk.  In such cases, one approach that should preserve the deductions would be to expressly disclaim that the release applies to claims of sexual harassment or sexual abuse.  As can often be the case, fixing one problem may create a different one.  While such a disclaimer would preserve the deductibility of the settlement payment and legal expenses, it could expose the employer to a subsequent claim of sexual harassment.

Exclusion by Omission and Attendant Risk.  Another possible approach would be to use only the broad form release or omit “sexual harassment,” “sexual abuse,” “harassment,” “abuse” or similar words from the litany of specific types of claims.  If the Internal Revenue Service takes an aggressive approach, however, either form of release (broad or specific) could potentially jeopardize the employer’s deductibility of the settlement payment amount and attorney’s fees.

 

Questions, Questions and More Questions. Will the IRS take an aggressive approach to this exclusion?  How will it interpret the phrase “any settlement or payment related to sexual harassment or sexual abuse?”  Will this provision apply to agreements required in return for the payment of severance?  Must a claim first be made by the employee?  If so, must that claim be for sexual harassment or sexual abuse?  How will the phrase “related to” be interpreted in practice?  Will “nondisclosure” be specific to the terms of the settlement?  Will a non-disparagement provision prohibiting the disclosure of negative statements about the employer also trigger the non-deductibility penalty?

Is Clarification Forthcoming?  By the enactment of the Tax Cuts and Job Act, Congress has dramatically increased the workload of the IRS.  Any clarification from that agency on how this relatively obscure provision will be interpreted is not likely to be coming soon.  Employers should therefore discuss the risks and potential ramifications with counsel in deciding the form of their concluding agreements.

The recent tax bill has certainly stirred considerable debate about its economic merits. It is probably safe to say, however, that not many of us anticipated that the current revelations about sexual harassment would also become part of that tax bill’s landscape.

 

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