Helix Energy v. Hewitt: Day Rates Do Not Meet the Salary-Basis Test Under the FLSA

In Helix Energy Sols. Grp., Inc. v. Hewitt, 143 S. Ct. 677 (2023), the Supreme Court held that the salary-basis test for certain exemptions to the Fair Labor Standards Act is not met when the employee at issue is paid a day rate, even when the day rate exceeds the required minimum weekly salary level. More specifically, the Department of Labor regulation setting out the salary-basis test requires predetermined weekly compensation for the FLSA’s overtime exemption for executive employees. The Court held that this rule applies only to employees paid by the week or longer, and therefore is not met when an employer pays an employee by the day. The case is important because, inter alia, it shows that even highly compensated employees can be entitled to overtime pay if they are not paid on a salary basis.

Statutory and Regulatory Background – FLSA Exemptions and the Salary Basis Test

Relevant to the decision in Helix, Section 213(a)(1) of the Fair Labor Standards Act provides an exemption from its minimum wage and overtime requirements for employees who qualify as bona fide executive, administrative, or professional employees:

Minimum wage and maximum hour requirements

The provisions of sections 206 … and 207 of this title shall not apply with respect to—

any employee employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools) …

29 U.S.C. § 213(a)(1).

The Court in Helix Energy further explained that under Department of Labor regulations, an employee is considered a bona fide “executive” under this exemption if the employee meets three tests:

(1) the “salary basis” test, which requires that an employee receive a predetermined and fixed salary that does not vary with the amount of time worked;

(2) the “salary level” test, which requires that preset salary to exceed a specified amount; and

(3) the job “duties” test.

Helix Energy, 143 S. Ct. 677, 678 (citing 84 Fed. Reg. 51230).

The Court further observed that the Department of Labor implemented the bona fide executive exemption through two different rules. One is the “general rule for executive employees,” which at the time of the facts in Helix applied to employees making less than $100,000 per year. 29 C.F.R. §§ 541.100; 541.601(a), (b)(1). A different rule sets out the exemption criteria for “highly compensated employees” (HCEs) who at the time of the facts in Helix were employees who made at least $100,000 per year. 541.601(a), (b)(1). (The HCE salary threshold was later increased to $ 107,432. Id.). Helix Energy, 143 S. Ct. 677, 678, 683-84.

The Court pointed out that the general rule considers employees to be FLSA-exempt executives when they meet the following criteria:

“Compensated on a salary basis” (called the “salary-basis” test); “at a rate of not less than $455 per week” (called the “salary-level” test) (after the facts in Helix Energy, that weekly amount was later increased to $684);

Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;

Who customarily and regularly directs the work of two or more other employees; and

Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

29 C.F.R. § 541.100(a); 143 S. Ct. 677, 678, 683-84. The duties-related requirements in parts 2, 3, and 4 of the general rule are referred to as the “duties test.” Id.

The Court noted that the HCE rule relaxes only the duties test, while keeping the same salary-basis and salary-level tests. “In the HCE rule, the duties test becomes easier to satisfy: an employee must “regularly perform[ ]” just one (not all) of the three responsibilities listed in the general rule.” 143 S. Ct. 677, 678, 683 (citing § 541.601(a); and 69 Fed. Reg. 22174 (2004) (explaining that the HCE rule uses a “more flexible duties standard” and thus leads to more exemptions)).

Facts

From 2014-2017, Hewitt worked for Helix Energy as a “toolpusher” on an offshore oil rig. Helix paid Hewitt on a daily-rate basis, with no overtime compensation. The daily rate ranged, over the course of his employment, from $963 to $1,341 per day. Under this compensation scheme, Helix paid Hewitt over $200,000 annually. 143 S. Ct. 677, 678, 684.

Hewitt filed suit against Helix for failure to pay him overtime compensation. Helix argued that he was an FLSA-exempt executive or highly compensated employee. 143 S. Ct. 677, 678, 684-85.

In Helix, the question for the Court whether the employee Hewitt was an FLSA-exempt executive not entitled to overtime pay. This question turned solely on whether Hewitt was paid on a salary basis. More specifically, the issue for the Court was whether the salary basis test is met when an employee is paid a day rate that exceeds the minimum weekly salary threshold. 143 S. Ct. 677, 678, 684-85.

The Court’s Decision; Salary Basis Regulations

The Court held that Hewitt was not paid on a salary basis, and therefore was not exempt from the FLSA’s overtime requirements.

Important to the Court’s decision in Helix, a pair of regulations describe the “salary basis” test in more detail.

The Court noted that the main salary basis provision, 29 C.F.R. § 541.602(a), states in relevant part:

“An employee will be considered to be paid on a ‘salary basis’ … if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to [certain exceptions], an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.”

143 S. Ct. 677, 678, 683 (quoting 29 C.F.R. § 541.602(a)).

The Court further observed that a separate provision, 29 C.F.R. § 541.604(b), focuses on workers whose compensation is “computed on an hourly, a daily or a shift basis,” rather than a weekly or less frequent one. The Court noted that under § 604(b) an employer may base an employee’s pay on an hourly, daily, or shift rate without “violating the salary basis requirement” or “losing the [bona fide executive] exemption” if two conditions are met:

The employer must “also” guarantee the employee at least $455 each week [the minimum salary level at the time] “regardless of the number of hours, days or shifts worked.”

That promised amount must bear a “reasonable relationship” to the “amount actually earned” in a typical week. This “reasonable relationship test” will be met if the weekly guarantee is “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.”

143 S. Ct. 677, 678, 684 (citing 29 C.F.R. § 541.604(b)).

The Court noted that the “critical question” was “whether Hewitt was paid on a salary basis under § 602(a) of the Secretary’s regulations. 143 S. Ct. 677, 685. This was because Helix acknowledged that Hewitt’s compensation did not satisfy § 604(b)’s conditions: Helix did not guarantee that Hewitt would receive each week an amount (above $455) bearing a “reasonable relationship” to the weekly amount he usually earned. Id. So, the Court observed, “everything turns on whether Helix paid Hewitt on a salary basis as described in § 602(a). If yes, Hewitt was exempt from the FLSA and not entitled to overtime pay; if no, he was covered under the statute and can claim that extra money.” 143 S. Ct. 677, 685.

Examining the text of § 602(a) and the overall regulatory structure, the Court concluded that the answer was “no.”

The Court first observed that the salary basis test of § 602(a) “applies solely to employees paid by the week (or longer); it is not met when an employer pays an employee by the day, as Helix paid Hewitt.” 143 S. Ct. 677, 685.

The Court then pointed out that Helix did not pay Hewitt on a salary basis under § 602(a) because he was paid by the day, rather than by the week or longer. “Daily-rate workers, of whatever income level, are paid on a salary basis only through the test set out in § 604(b) (which, again, Helix’s payment scheme did not satisfy).” Thus, the fact that Hewitt was paid on a daily basis meant that was not paid on a salary basis under § 602(a), since his compensation was based on the day, rather than by the week or longer. 143 S. Ct. 677, 685, 685-692.

The Court further explained that these conclusions “follow from both the text and the structure of the regulations.” 143 S. Ct. 677, 685, 686-692. It also addressed Helix’s policy-based objections to this conclusion, such as its operational and cost-based objections from having to pay overtime to highly-paid daily-rate workers, and found that those objections did not justify departing from the text of the rules. 143 S. Ct. 677, 690-692.

Therefore, the Court held that because Hewitt was paid on a daily basis, Hewitt did not meet the salary basis test. As the Court observed, “A daily-rate employee like Hewitt is not paid on a salary basis under § 602(a) of the Secretary’s regulations. He may qualify as paid on salary only under § 604(b). Because Hewitt’s compensation did not meet § 604(b)’s conditions, it could not count as a salary. So Hewitt was not exempt from the FLSA; instead, he was eligible under that statute for overtime pay.” 143 S. Ct. 677, 692.

Analysis

In sum, Helix held that the salary-basis test for certain FLSA exemptions is not met when the employee is paid a day rate. This is the case even when the day rate exceeds the minimum weekly salary requirement. The DOL regulation setting out the salary-basis test requires predetermined weekly compensation for the FLSA’s overtime exemption for executive and highly compensated employees. The Court held that this rule applies only to employees paid by the week or longer, and therefore the test is not met when an employer pays an employee by the day. The case is important because, inter alia, it shows that even highly compensated employees can be entitled to overtime pay if they are not paid on a salary basis.

This site is intended to provide general information only. The information you obtain at this site is not legal advice and does not create an attorney-client relationship between you and attorney Tim Coffield or Coffield PLC. Parts of this site may be considered attorney advertising. If you have questions about any particular issue or problem, you should contact your attorney. Please view the full disclaimer. If you would like to request a consultation with attorney Tim Coffield, you may call 1-434-218-3133 or send an email to info@coffieldlaw.com.

This blog was previously published on April 14, 2023 at timcoffieldattorney.com

Virginia Misclassification Anti-Retaliation Law: Protections for Employees And Independent Contractors Who Report Misclassification

Virginia’s Misclassification Anti-Retaliation Law, Va. Code § 40.1–33.1 (“MARL,” titled “Retaliatory actions prohibited; civil penalty”), provides that employers shall not discharge, penalize, or take any retaliatory action against an employee or independent contractor for reporting, or planning to report, to an appropriate authority an employer’s failure to properly classify an individual as an employee and failure to pay required benefits or other contributions.

The MARL is important because it prohibits employers from retaliating against employees or independent contractors for reporting possible independent contractor misclassification to appropriate authorities.

PROHIBITION ON RETALIATION FOR REPORTING MISCLASSIFICATION

The MARL contains a broad prohibition on employers taking retaliatory actions against employees or independent contractors who engage in either of two “protected activities.” First, the employer cannot retaliate against an individual for reporting or planning to report to appropriate authorities the employer’s failure to properly classify an individual as an employee. Second, the employer cannot retaliate against an individual for being requested or subpoenaed by an appropriate authority to participate in an investigation, hearing, or inquiry by an appropriate authority or in a court action:

A. An employer shall not discharge, discipline, threaten, discriminate against, or penalize an employee or independent contractor, or take other retaliatory action regarding an employee or independent contractor’s compensation, terms, conditions, location, or privileges of employment, because the employee or independent contractor:

1. Has reported or plans to report to an appropriate authority that an employer, or any officer or agent of the employer, has failed to properly classify an individual as an employee and failed to pay required benefits or other contributions; or

2. Is requested or subpoenaed by an appropriate authority to participate in an investigation, hearing, or inquiry by an appropriate authority or in a court action.

Va. Code § 40.1–33.1(A).

GOOD FAITH AND REASONABLE BELIEF

Importantly, the MARL provides that its anti-retaliation protections only apply if the employee or independent contractor who discloses information about suspected worker misclassification has done so in good faith and upon a reasonable belief that the information is accurate:

B. The provisions of subsection A shall apply only if an employee or independent contractor who discloses information about suspected worker misclassification has done so in good faith and upon a reasonable belief that the information is accurate. Disclosures that are reckless or the employee knew or should have known were false, confidential by law, or malicious shall not be deemed good faith reports and shall not be subject to the protections provided by subsection A.

Va. Code § 40.1–33.1(B).

ADMINISTRATIVE PROCESS

The MARL provides an administrative process for individuals who experience retaliation in violation of its provisions. Under this process, an individual who experiences retaliation in violation of MARL may file a complaint with the Commissioner of Labor and Industry. See Va. Code § 40.1–2 (defining “Commissioner” as meaning the Commissioner of Labor and Industry.) The Commission, with the employee’s signed consent, may then institute proceedings against the employer to recover appropriate remedies, including reinstatement and lost wages:

C. Any employee who is discharged, disciplined, threatened, discriminated against, or penalized in a manner prohibited by this section may file a complaint with the Commissioner. The Commissioner, with the written and signed consent of such an employee, may institute proceedings against the employer for appropriate remedies for such action, including reinstatement of the employee and recovering lost wages.

Va. Code § 40.1–33.1(C).

CIVIL PENALTY

Finally, the MARL further provides that an employer that violates its provisions will be subject to a civil penalty in an amount up to the amount of lost wages resulting from the violation:

D. Any employer who discharges, disciplines, threatens, discriminates against, or penalizes an employee in a manner prohibited by this section shall be subject to a civil penalty not to exceed the amount of the employee’s wages that are lost as a result of the violation. Civil penalties under this section shall be assessed by the Commissioner and paid to the Literary Fund.

Va. Code § 40.1–33.1(D).

This site is intended to provide general information only. The information you obtain at this site is not legal advice and does not create an attorney-client relationship between you and attorney Tim Coffield or Coffield PLC. Parts of this site may be considered attorney advertising. If you have questions about any particular issue or problem, you should contact your attorney. Please view the full disclaimer. If you would like to request a consultation with attorney Tim Coffield, you may call 1–434–218–3133 or send an email to info@coffieldlaw.com.

Originally published on Tim Coffield’s website.

Virginia Employee Social Media Privacy Act: Protections for Employee Social Media Information

The Virginia Employee Social Media Privacy Act, VA Code § 40.1–28.7:5 (“VESMPA”), titled “Social media accounts of current and prospective employees,” generally prohibits Virginia employers from (1) requiring employees or prospective employees to disclose their social media usernames and passwords or (2) to “friend” or “connect” with the employer on social media. As with many laws, however, the VESMPA has some exceptions to the general rule.

EMPLOYER DEFINED

The VESMPA defines “employer” broadly. The definition includes the catch-all definition under VA Code § 40.1–2:

“Employer” means an individual, partnership, association, corporation, legal representative, receiver, trustee, or trustee in bankruptcy doing business in or operating within this Commonwealth who employs another to work for wages, salaries, or on commission and shall include any similar entity acting directly or indirectly in the interest of an employer in relation to an employee.

VA Code § 40.1–2.

In addition, the VESMPA applies to government employers:

“Employer” includes, in addition to the persons enumerated in the definition of employer in § 40.1–2, (i) any unit of state or local government and (ii) any agent, representative, or designee of a person or unit of government that constitutes an employer.

VA Code § 40.1–28.7:5(A).

SOCIAL MEDIA ACCOUNTS DEFINED

The VESMPA defines social media accounts broadly, to include a wide variety of private social media activity:

“Social media account” means a personal account with an electronic medium or service where users may create, share, or view user-generated content, including, without limitation, videos, photographs, blogs, podcasts, messages, emails, or website profiles or locations.

There are limitations, however. Importantly, “social media accounts” protected by the VESMPA do not include accounts associated with the employer:

“Social media account” does not include an account

(i) opened by an employee at the request of an employer;

(ii) provided to an employee by an employer such as the employer’s email account or other software program owned or operated exclusively by an employer;

(iii) set up by an employee on behalf of an employer; or

(iv) set up by an employee to impersonate an employer through the use of the employer’s name, logos, or trademarks.

VA Code § 40.1–28.7:5(A).

PROTECTIONS

The VESMPA provides, as a general rule, that employers cannot require employees or prospective employees to disclose their social media usernames and passwords or to “friend” or “connect” with the employer on social media:

B. An employer shall not require a current or prospective employee to:

1. Disclose the username and password to the current or prospective employee’s social media account; or

2. Add an employee, supervisor, or administrator to the list of contacts associated with the current or prospective employee’s social media account.

VA Code § 40.1–28.7:5(B).

INADVERTENT RECEIPT OF SOCIAL MEDIA ACCOUNT INFORMATION AND PROHIBITION ON USE

The VESMPA clarifies that an employer does not violate the law by only inadvertently receiving an employee’s social media login information through an employer-provided device or an employer’s network-monitoring program. However, the employer still may not use the information to access the employee’s social media account:

C. If an employer inadvertently receives an employee’s username and password to, or other login information associated with, the employee’s social media account through the use of an electronic device provided to the employee by the employer or a program that monitors an employer’s network, the employer shall not be liable for having the information but shall not use the information to gain access to an employee’s social media account.

VA Code § 40.1–28.7:5(C).

PROHIBITIONS ON RETALIATION AND DISCRIMINATION

The VESMPA prohibits employers from taking action against current employees or failing to hire prospective employees for exercising their rights not to disclose social media account information under the VESMPA:

D. An employer shall not:

1. Take action against or threaten to discharge, discipline, or otherwise penalize a current employee for exercising his rights under this section; or

2. Fail or refuse to hire a prospective employee for exercising his rights under this section.

VA Code § 40.1–28.7:5(D).

SAFE HARBOR FOR VIEWING PUBLICLY AVAILABLE INFORMATION

The VESMPA clarifies that it does not prohibit an employer from viewing information about a current or prospective employee that is publicly available:

E. This section does not prohibit an employer from viewing information about a current or prospective employee that is publicly available.

VA Code § 40.1–28.7:5(E).

EXCEPTIONS

As noted above, the VESMPA contains several exceptions, under which an employer is permitted to require employees to disclose social media usernames and passwords. Generally, these exceptions allow an employer to require disclosure of social media account credentials if necessary to comply with laws or regulations.

In addition, the VESMPA does not prohibit an employer from requesting disclosure of an employee’s credentials for purposes of accessing a social media account if the employer “reasonably believes” the employee’s social media account activity is relevant to a formal investigation or related proceeding by the employer into allegations that the employee violated law or the employer’s written policies.

F. Nothing in this section:

1. Prevents an employer from complying with the requirements of federal, state, or local laws, rules, or regulations or the rules or regulations of self-regulatory organizations; or

2. Affects an employer’s existing rights or obligations to request an employee to disclose his username and password for the purpose of accessing a social media account if the employee’s social media account activity is reasonably believed to be relevant to a formal investigation or related proceeding by the employer of allegations of an employee’s violation of federal, state, or local laws or regulations or of the employer’s written policies. If an employer exercises its rights under this subdivision, the employee’s username and password shall only be used for the purpose of the formal investigation or a related proceeding.

VA Code § 40.1–28.7:5(F). If the employer obtains social media account information under this part of the law, the employee’s username and password may only be used for the purpose of the formal investigation or proceeding.

REMEDIES

The VESMPA does not provide a statutory civil right of action for any employee harmed by a violation of its provisions. However, if an employee is terminated in violation of the policy stated in VESMPA, or because the employee exercised the rights created by the VESMPA, the employee may have a common law Bowman claim of wrongful discharge in violation of public policy.

This site is intended to provide general information only. The information you obtain at this site is not legal advice and does not create an attorney-client relationship between you and attorney Tim Coffield or Coffield PLC. Parts of this site may be considered attorney advertising. If you have questions about any particular issue or problem, you should contact your attorney. Please view the full disclaimer. If you would like to request a consultation with attorney Tim Coffield, you may call 1–434–218–3133 or send an email to info@coffieldlaw.com.

Originally published on Tim Coffield’s website.

Virginia Worker Misclassification Law: Protections for Employees Asked to Sign Agreements that Misclassify Them As Independent Contractors

Virginia’s Worker Misclassification Law, VA Code § 58.1–1900–05 (“WML”), emphasizes the rights of employees to be properly classified as such, and makes it unlawful for employers to require or request that employees sign documents incorrectly classifying them as independent contractors. While the WML does not provide a statutory right of action, an employee terminated in violation of the policy stated in this law may have a common law claim for wrongful discharge.

The WML is important because it prohibits employers from asking or requiring workers sign documents that seek to deny them basic employment rights, like payroll taxes, unemployment protections, and overtime and minimum wages, by misclassifying them as independent contractors.

CLASSIFICATION OF EMPLOYEES

Section 1900 creates a default rule that, for purposes of Virginia employment, tax, worker’s compensation, and unemployment benefits laws, an individual is an employee of the company that pays for his services, unless the company or individual can prove that the individual is an independent contractor under IRS guidelines:

A. For the purposes of this title and Title 40.1, Title 60.2, and Title 65.2, if an individual performs services for an employer for remuneration, that individual shall be considered an employee of the party that pays that remuneration unless such individual or his employer demonstrates that such individual is an independent contractor. The Department shall determine whether an individual is an independent contractor by applying Internal Revenue Service guidelines.

VA Code § 58.1–1900(A).

CIVIL PENALTIES

Section 1901 imposes civil penalties on employers, and officers and agents of employers, who fail to properly classify employees as such, and fails to pay taxes, benefits, or other contributions required to be paid with respect to the employee:

Any employer, or any officer or agent of the employer, that fails to properly classify an individual as an employee in accordance with § 58.1–1900 for purposes of this title, Title 40.1, Title 60.2, or Title 65.2 and fails to pay taxes, benefits, or other contributions required to be paid with respect to an employee shall, upon notice by the Department to the affected party, be subject to a civil penalty of up to $1,000 per misclassified individual for a first offense, up to $2,500 per misclassified individual for a second offense, and up to $5,000 per misclassified individual for a third or subsequent offense. Each civil penalty assessed under this chapter shall be paid into the general fund.

VA Code § 58.1–1901.

Debarment Penalty

Section 1902 imposes a debarment penalty, which prohibits public bodies and covered institutions from doing business with a employer that fails to properly classify a worker as an employee:

A. Whenever the Department determines, after notice to the employer, that an employer failed to properly classify an individual as an employee under the provisions of § 58.1–1900, the Department shall notify all public bodies and covered institutions of the name of the employer.

B. Upon an employer’s subsequent violations of subsection A, all public bodies and covered institutions shall not award a contract to such employer or to any firm, corporation, or partnership in which the employer has an interest in the following manner:

1. For a period of up to one year, as determined by the Department, from the date of the notice for a second offense.

2. For a period of up to three years, as determined by the Department, from the date of the notice for a third or subsequent offense.

VA Code § 58.1–1902.

PROHIBITION ON AGREEMENTS MISCLASSIFYING EMPLOYEES AS INDEPENDENT CONTRACTORS

Importantly, Section 1903 prohibits employers from requiring or requesting that a worker sign an agreement or document that results in the misclassification of the employee as an independent contractor, or otherwise does not accurately reflect the worker’s relationship with the employer:

No person shall require or request that an individual enter into an agreement or sign a document that results in the misclassification of the individual as an independent contractor or otherwise does not accurately reflect the relationship with the employer.

VA Code § 58.1–1903.

PROHIBITION ON TERMINATING AN EMPLOYEE FOR REFUSING TO SIGN AN AGREEMENT MISCLASSIFYING THE EMPLOYEE AS AN INDEPENDENT CONTRACTOR

Section 1904 makes it unlawful for an employer to terminate or otherwise discriminate against an employee to refuses to sign a document misclassifying the employee as an independent contract, or for exercising other rights under the WML:

It shall be unlawful for an employer or any other party to discriminate in any manner or take adverse action against any person in retaliation for exercising rights protected under this chapter.

VA Code § 58.1–1904.

REMEDIES

While the WML does not contain a statutory remedy, an employee terminated in violation of the WML’s provisions may be able to bring a common law claim for wrongful discharge in violation of public policy under Bowman v. State Bank of Keysville, 331 S.E.2d 797 (Va. 1985) and its progeny.

RECORDKEEPING

Section 1905 imposes on the Virginia Department of Taxation recordkeeping and reporting requirements relating to the misclassification of employees as independent contractors:

The Department shall report annually to the Governor and the General Assembly regarding compliance with and enforcement of this chapter. The Department’s report shall include information regarding the number of investigated reports of worker misclassification; the findings of such reports; the amount of combined tax, interest, and fines collected; the number of referrals to the Department of Labor and Industry, Virginia Employment Commission, Department of Small Business and Supplier Diversity, Virginia Workers’ Compensation Commission, and Department of Professional and Occupational Regulation; and the number of notifications of failure to properly classify to all public bodies and institutions.

VA Code § 58.1–1905.

This site is intended to provide general information only. The information you obtain at this site is not legal advice and does not create an attorney-client relationship between you and attorney Tim Coffield or Coffield PLC. Parts of this site may be considered attorney advertising. If you have questions about any particular issue or problem, you should contact your attorney. Please view the full disclaimer. If you would like to request a consultation with attorney Tim Coffield, you may call 1–434–218–3133 or send an email to info@coffieldlaw.com.

Originally published on Tim Coffield Attorney’s website.

Morgan v. Sundance: Waiver, Prejudice, and Arbitration Under Federal Law

In Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), the Supreme Court held that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the Federal Arbitration Act.

Facts

Morgan worked as an hourly employee at a Taco Bell franchise owned by Sundance. When she applied for the job, Morgan signed an agreement to arbitrate employment disputes. Morgan later filed in court a collective action asserting that Sundance had violated federal law regarding overtime compensation. Initially, Sundance defended against the lawsuit in court, filing an unsuccessful motion to dismiss and engaging in an unsuccessful mediation. Then, nearly eight months after Morgan filed the lawsuit, Sundance moved to stay the litigation and compel arbitration under the Federal Arbitration Act (FAA). Morgan opposed the motion, arguing that Sundance had waived its right to arbitrate by litigating for so long.

The Eight Circuit granted the motion holding, in relevant part, that Sundance’s delay had not prejudiced Morgan. That decision applied Eighth Circuit precedent, under which a party waives its right to arbitration if it knew of the right; “acted inconsistently with that right”; and “prejudiced the other party by its inconsistent actions. However, the prejudice requirement is not a feature of federal waiver law generally. The Eighth Circuit adopted that requirement because of the “federal policy favoring arbitration.” Other courts had rejected such a requirement. The Supreme Court took the case to resolve the split over whether federal courts may adopt an arbitration-specific waiver rule demanding a showing of prejudice. 142 S. Ct. at 1708–1712.

The Court’s Decision

The Court vacated and remanded, holding that there was no arbitration-specific waiver rule requiring a showing of prejudice. Assuming that federal law governed the issue, the Court observed that federal courts may not create “arbitration-specific variants” of federal procedural rules, like those concerning waiver, based on the FAA’s “policy favoring arbitration.” The Court observed that that policy “is merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” Granite Rock Co. v. Teamsters, 561 U.S. 287, 302, 130 S.Ct. 2847 (2010) (internal quotation marks omitted). 142 S. Ct. at 1712–1714.

The Morgan Court therefore held that a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation. The Court emphasized that the federal policy is about treating arbitration contracts like all others, not about fostering arbitration. 142 S. Ct. at 1712–1714.

Supporting this conclusion, the Court observed that the text of the FAA makes clear that courts are not to create arbitration-specific procedural rules like the one the Eight Circuit applied. For example, Section 6 of the FAA provides that any application under the FAA — including an application to stay litigation or compel arbitration — “shall be made and heard in the manner provided by law for the making and hearing of motions” (unless the statute says otherwise). The Court noted that this directive to treat arbitration applications “in the manner provided by law” for all other motions is simply a command to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness. Therefore, the Court reasoned, because the usual federal rule of waiver does not require prejudice, Section 6 of the FAA supports the conclusion that prejudice is not a condition of finding that a party waived its right to stay litigation or compel arbitration under the FAA. 142 S. Ct. at 1712–1714.

The Court then concluded that after eliminating the prejudice requirement, the waiver inquiry would focus on Sundance’s conduct: for example, whether Sundance knowingly relinquished the right to arbitrate by acting inconsistently with that right. The Court noted that on remand, the Court of Appeals could resolve that question, or could determine that a different procedural framework was appropriate. The Court’s sole holding was that courts were not permitted to make up a new procedural rule based on the FAA’s “policy favoring arbitration.” 142 S. Ct. at 1712–1714.

Analysis

In sum, Morgan held that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the Federal Arbitration Act. This is because courts are not permitted to make up new arbitration-specific procedural rules based on the FAA’s “policy favoring arbitration.”

This site is intended to provide general information only. The information you obtain at this site is not legal advice and does not create an attorney-client relationship between you and attorney Tim Coffield or Coffield PLC. Parts of this site may be considered attorney advertising. If you have questions about any particular issue or problem, you should contact your attorney. Please view the full disclaimer. If you would like to request a consultation with attorney Tim Coffield, you may call 1–434–218–3133 or send an email to info@coffieldlaw.com.

Originally published on Tim Coffield Attorney’s website.