Tuesday, November 28, 2006

Time to rethink minimum wage agreements?

For some time now, some PEOs have adopted minimum wage agreements in an effort to moderate the financial risk posed by a client company that fails to pay. A recent Department of Labor opinion letter may require rethinking the wisdom of that strategy.

In a March 10, 2006 opinion letter, the Acting Administrator of the DOL weighed in on the question of whether (& how) an employer may make deductions from an employee's wages. DOL Opinion Letter FLSA2006-7.

Specifically, the DOL was asked to consider whether an employer could make deduction from an employee's wages if the employee damaged company provided equipment, such as a laptop computer or cellphone. The opinion letter flatly says "No" to such deductions for all exempt employees, and warns that any such deduction from the wages of a non-exempt employee cannot reduce the employee below minimum wage.

OK, so how does this impact PEO minimum wage agreements? First, lets review the basic strategy. The idea is that the PEO enters into an agreement with the worksite employees providing for a reduced wage rate for any pay period that the client company fails to pay its invoice from the PEO. In essence, the worksite employees agree, in advance, to a lower (usually minimum wage) rate of pay when the client fails to pay.

The DOL opinion letter calls this strategy in question. First, the opinion letter notes that the regulations require exempt employees to receive their full salary, without reductions.
"an exempt employee must receive the full salary for any week in which the employee performs any work." 29 C.F.R. 541.602(a). More worrisome is the comment - "The Wage and Hour Division (WHD) interprets these regulatory provisions to mean that if a particular type of deduction is not specifically listed in Section 541.602(b) (formerly section 541.118(a)) then that deduction would result in a violation of the 'salary basis' test."

In addition, the opinion letter notes: "It is WHD's long-standing position that an exempt employee must actually receive the full predetermined salary amount for any week in which the employee performs any work unless one of the specific regulatory exceptions is met."

The risk is that under the DOL's view, such deductions are incompatible with exempt status. In otherword, you risk the loss of the employee's status as exempt from overtime, and could end up owing the employee overtime.

The opinion letter focused on deductions or charges for damage to company provided equipment. In the typical minimum wage agreement, the PEO and the worksite agree in advance to two different wage rates depending on whether or not the client pays the invoice. It is not at all clear that this distinction will be enough to survive the scrutiny of either the DOL or the courts.

Further, the opinion letter looked at similar deductions made from the wages of non-exempt employees, usually those paid on an hourly basis. In the case of non-exempt employees, the DOL cautioned that deductions from wages should not take the employee below minimum wage.
So where does this leave PEOs? I think this opinion letter requires PEOs to reconsider their use of minimum wage agreements. Certainly any such agreement with an exempt employee must be looked at very carefully. The DOL opinion letter seems to support the idea with respect to non-exempt/hourly employees.

Joint Employment, PEOs & the Fair Labor Standards Act

What does an FLSA case against a Saudi Prince have to do with overtime pay risks for PEOs? Surprisingly enough, quite a lot. The federal court of appeals for the Fourth Circuit recently decided an FLSA unpaid overtime case on the basis of joint employment. Schultz et al v. Capital International Security, 4th Circuit, 2006.

The plaintiffs were five bodyguards employed through a security company that had the contract to supply personal protection to a Saudi Prince. The plaintiffs worked 12 hours shifts at the Prince's residence, but were paid a flat salary with no overtime. The bodyguards worked for several different security companies that held successive contracts to provide a security detail for the Prince.

Ultimately, the Prince fired the security company and one of the Prince's employees set up a new security company (Capital International Security) to provide the security detail. Capital International Security exercised little to no supervision over the bodyguards, for example the Prince's personal staff replaced personnel without consulting Capital International Security. The Prince's personnel staff also handled such details as scheduling, compensation, discipline, and termination of the bodyguards. Capital International Security had little involvement in these matters. Although Capital International Security provided the bodyguards with some equipment, the Prince provided cars, cellphones, cameras and office supplies.

At one point Capital International Security made a half-hearted attempt to convert bodyguards from employees into independent contractors. The Fourth Circuit had no trouble seeing past the ruse, and coming to the obvious conclusion that the bodyguards were truly employees.

From a PEO point of view the more interesting questions related to whether the bodyguards could only sue Capital International Security, the Prince or both. The Fourth Circuit began by quoting from the FLSA joint employment regulations "all joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of" the Fair Labor Standards Act. See, 29 C.F.R. 791.2(a). In addition, joint employment must be determined by taking "into account the real economic relationship between the employer who uses and benefits from the services of the workers and the party that hires or assigns the workers to that employer." The ultimate determination must be based upon the "circumstances of the whole activity." Given the regulations, the Court easily determined that the Prince and Capital International Security were joint employers of the bodyguards. The Court thus found that Capital International Security was jointly and severally liable for the unpaid overtime owed the Plaintiffs.

This case clearly suggests how a court might analyze an FLSA claim involving a PEO and its client company. Under the facts of this case, Capital International Security was functioning somewhat like a PEO, with the Prince as its client. As in a PEO arrangement, the Prince (i.e. Prince) effectively set the wage rates, controlled hiring/firing/discipline, established the rules governing the details of the work to be done, and supplied virtually all of the supplies and equipment needed by the workers.

The regulations make this determination by the Fourth Circuit easy:
If the facts establish that the employee is employed jointly by two or more employers, i.e. that employment by one employer is not completely disassociated from employment by the other employer(s), all of the employee's work for all of the joint employers during the workweek is considered as one employment for the purposes of the [FLSA].
29 C.F.R. 791(2)(a). Section 791.1(2)(b) gives additional examples of situations in which "a joint employment relationship will be considered to exist." For example, "where one employer is acting directly or indirectly in the interest of the other employer (or employers) in relation to the employee."

The Fourth Circuits opinion clearly shows how the Department of Labor or a private litigant could easily argue for PEO liability for wage & hour violations that were actually the fault of the client company.

As always, bear in mind that this article is a brief discussion of a complex issue. Treat this a magazine article, not as legal advice for a specific situation.