The Supreme Court Evens the Playing Field Under the FLSA

On April 2, 2018, the United States Supreme Court issued an opinion that could have significant impact in the defense of misclassification claims under the Fair Labor Standards Act (“FLSA”). In Encino Motorcars, LLC v. Navarro, the Court held that the longstanding principle that exemptions under the FLSA should be construed narrowly was not supported by the statute. Justice Clarence Thomas, writing for himself and four other justices, wrote:

The Ninth Circuit also invoked the principle that exemptions to the FLSA should be construed narrowly. We reject this principle as a useful guidepost for interpreting the FLSA. Because the FLSA gives no “textual indication” that its exemptions should be construed narrowly. “there is no reason to give [them] anything other than a fair (rather than ‘narrow’) interpretation.” The narrow construction principle relies on the flawed premise that the FLSA “pursues” its remedial purposes “at all costs.” . . . But the FLSA has over two dozen exemptions in §213(b) alone . . . . Those exemptions are as much a part of the FLSA’s purpose as the overtime-pay requirement.

This holding departs from decades of case law (ironically emanating from a 1960 Supreme Court opinion) which made defending misclassification cases even more difficult, including because all “ties” would be decided in favor of the employee.

What This Means

Since the explosion of FLSA claims began approximately a decade ago, plaintiffs and their attorneys have taken advantage of the stacked deck against an employer who is accused of having improperly classified an employee as exempt under the FLSA. The FLSA was enacted in 1938, during the Depression, when the economy and the nature of the workforce were vastly different from today. The statutory guidance for exemptions is sparse and virtually useless in guiding employers on making exemption decisions. The Department of Labor’s regulations, which have been modified several times over the years, speak in general concepts and are woefully inadequate in applying the exemptions to the modern workforce. Further, hanging over every FLSA case is the attorneys’ fees provision in the FLSA that opens the door to significant attorney fees awards to plaintiffs who prevail on their claims even if only for minimal damages.  As a consequence, plaintiffs’ attorneys have practically engaged in daylight muggings in that the fees they demand in settling an FLSA claim likely have no realistic relationship to the amount of time they have spent on the case or plaintiffs’ actual alleged damages.  Nonetheless, employers in misclassification cases often feel compelled to settle irrespective of the merits of plaintiffs’ claims.

Encino Motorcars changes the equation. The Court’s rejection of a “narrow construction” of exemptions, and its recognition that the exemptions are entitled to a fair reading, means that plaintiffs and their lawyers can no longer rely on a virtual presumption that the employer has misclassified its workers. In other words, plaintiffs and their attorneys now must face a more realistic prospect that they will ultimately lose on their claims. For the attorneys, this means that they will have to invest much more time and effort to win a case where each party’s position must be given equal consideration and in which the deck is no longer stacked against the employer. Encino Motorcars could very well sound a death-knell for what has become a cottage industry of extracting settlements from employers who have legitimately applied the law in making their exemption decisions.

Employer compliance with the FLSA has been on a roller-coaster in the last three years starting with the Department of Labor’s failed attempt to unreasonably increase the salary thresholds required in order for exemptions to be available. Encino Motorcars potentially allows employers to exhale and to be more confident about their classification decisions.

However, it must be cautioned that FLSA exemptions are defenses to minimum wage and/or overtime claims on which the employer has the burden of proof. Encino Motorcars does nothing to change this obligation.