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Offering employees a flexible workday with unlimited, yet unpaid, time off, can be a beneficial policy for employers and employees. In such circumstances, employees have the freedom to take breaks whenever needed for any reason, and employers do not have to compensate employees for time not spent performing services for the employer. However, in Secretary United States Department of Labor v. American Future Systems, 873 F.3d 420 (2017), the Third Circuit held that employers must compensate employees for short break periods as hours worked, regardless of what these breaks are called.

The Employer’s “Flex Time” Policy

American Future Systems, d/b/a Progressive Business Publications, creates and sells business publications. Progressive’s sales representatives are non-exempt, hourly employees who are incentivized with a bonus structure that pays them based on the number of sales per hour while they are logged onto their computer workstation. Progressive also pays the sales representatives an additional amount if they sustain their sales-per-hour numbers over a two-week period.

In 2009, Progressive instituted a new policy in which employees could take breaks for non-work activities by logging off their computers at any time and for any duration. Although employees could leave the office and use the time as they desired, Progressive did not pay employees when they logged off their computers. Progressive called this policy “flexible time” or “flex time” and touted it as a way to permit employees to take breaks whenever necessary, for whatever reason, and for as long as needed.

The flex-time policy required sales representatives to approximate how many hours they would work over the following two weeks, and subjected them to discipline if they missed their target. In addition, Progressive also relieved employees for the day if their sales were low. Outside of these requirements, the sales representatives could freely determine when they worked between the hours of 8:30 a.m. and 5:00 p.m., as long as they worked less than 40 hours in a given week. Progressive permitted employees to take unlimited breaks, at whatever duration they desired, and to leave the office during the breaks. However, Progressive only paid its sales representatives for time logged on to the computer and log-off periods of less than 90 seconds.  This rule included, in non-compensable breaks, time attributable to restroom use or short periods used to get coffee or decompress after a challenging sales call. Sales representatives worked approximately five hours per day and were paid the federally-mandated $7.25 per hour.

The Secretary for the U.S. Department of Labor filed a lawsuit against Progressive and Edward Satell, who served as its president, CEO and owner, in the United States District Court for the District of New Jersey. The lawsuit alleged, among other things, that Progressive violated the FLSA because its flex-time policy resulted in sales representatives taking breaks of 20 minutes or less without being compensated for those breaks, in violation of the FLSA. The lawsuit sought unpaid compensation, liquidated damages, and a permanent injunction.

Progressive moved for summary judgment, seeking to dismiss the entirety of the claims. The Secretary moved for partial summary judgment on its minimum wage claim, its claim for liquidated damages, a finding of whether Satell was an employer under the FLSA, and its claim that Progressive willfully violated the FLSA. The district court denied Progressive’s motion and granted all of the Secretary’s motion except as to the claim of willfulness. In connection with its motion, the Department of Labor (DOL) relied on its consistent application of the Wage and Hour Division’s (WHD) interpretation of the FLSA. Pursuant to the WHD regulations, which interpret and guide the application of the FLSA, “[r]est periods of short duration, running from 5 minutes to about 20 minutes … must be counted as hours worked.” 29 C.F.R. §785.18. The court agreed with the DOL, deferring to the regulation and holding that the regulation created a “bright-line rule” that Progressive’s policy violated.

The Third Circuit’s Decision

On appeal, Progressive argued: (1) time spent while on break under the flex-time policy did not count as time worked that must be paid; (2) the regulation should not be entitled to substantial deference; and (3) there should be no bright-line rule, and each case should be analyzed on its own facts. The Third Circuit rejected all three arguments.

First, Progressive argued that because the FLSA does not require breaks, and its employees were free to use this flex time as they desired and in any location, the time did not count as “hours worked” for FLSA purposes. While noting that Progressive’s argument had some “superficial appeal,” the court rejected the argument finding that simply characterizing the policy as one of flex time rather than break time did not circumvent the FLSA’s protections. The court held that the time employees were logged off from their computers was certainly break time, emphasizing that an employee would not be paid if it took more than 90 seconds to use the restroom or get coffee — essentials of the workday. Highlighting the FLSA’s “humanitarian and remedial” intent, the court determined that Progressive’s policy contradicted such purpose.

Second, Progressive argued the district court should not have deferred to the application of the WHD regulation. The Third Circuit disagreed and, instead, held that the WHD’s regulation should be afforded the highest level of deference. The court noted that the regulation has been on the books for nearly 80 years, and the DOL has consistently applied it to effectuate the broad language and purpose of the FLSA. Because the regulation was a rule that was longstanding and unchanged, the court deferred to its application.

Finally, the court rejected Progressive’s argument that there should be no bright-line rule and whether breaks benefit the employer or employee should be evaluated on a case-by-case basis. The court held that the regulation’s bright-line test better serves both employers and employees, limiting the government intrusion into the nature of employees’ breaks and reducing employers’ analysis of break time.

The court also affirmed the district court’s award of liquidated damages. These double damages are mandated by the FLSA unless the employer can affirmatively demonstrate that it reasonably and in good faith believed it was in compliance with the act. Here, the Third Circuit agreed with the district court and held that, although Progressive conducted minimal research into the FLSA’s requirements, the evidence demonstrated that Progressive was aware of the regulation yet still changed its policy to conflict with it. Although Progressive claimed it obtained advice from legal counsel, it refused to waive the attorney-client privilege and disclose the advice to the court. The Third Circuit agreed that this refusal allowed an inference that Progressive’s counsel had advised of the pertinent regulation and that Progressive instituted its flex-time policy anyway.

Bottom Line for Employers

This decision serves as a reminder to employers that irrespective of what they label break time for non-exempt employees, or any benefit derived from such break time, employers must compensate employees for all breaks of 20 minutes or less. Employers should review all policies that involve employee breaks or flex-time to ensure they are appropriately compensating all non-exempt employees. Employers should evaluate time-keeping for their non-exempt workforce and preservation of employee time records. A current failure to compensate employees for short rest breaks during the work day in violation of the FLSA may later result in significant exposure including liquidated damages.

 

Brochin is a partner, and Tabakman is an associate, with Day Pitney in Parsippany. They both represent employers in employment litigation and provide counseling on all aspects of the employer-employee relationship.