"Stand-By" or "On-Call" Time Must Be Paid When Employee Activities Are Restricted -- Mediola v. CPS Security Solutions, Inc.

As the name suggests, "wage and hour" claims involve two equal determinations  -- i.e., the "wage" paid to the employee and the number of "hours" that he worked to receive it.  All too often, however, employers focus only on the wage rate being paid and simply assume that the number of "hours worked" can be defined as whatever time the employee is "clocked in" or whatever time the employer considers "productive work."

In fact, the calculation of "hours worked" for entitlement to overtime and minimum wage compensation is a specific legal definition, and cannot be defined by the agreement of the parties or the unilateral designation of the employer.  Rather, as illustrated in the recent decision in Mediola v. CPS Security Solutions, Inc., the test for compensation is whether the worker is sufficiently restricted from engaging in personal pursuits that he is deemed to be "subject to" the employer's control. 

In practice, this means that workers will be frequently entitled to compensation for literally "doing nothing."  Indeed, according to the venerable and oft-quoted 1944 U.S. Supreme Court decision in Armour & Co. v. Wantock:

“[A]n employer, if he chooses, may hire a man to do nothing, or to do nothing but wait for something to happen. Refraining from other activity often is a factor of instant readiness to serve, and idleness plays a part in all employments in a stand-by capacity. Readiness to serve may be hired, quite as much as service itself . . .

In Mediola, the court applied this rule to security guards who were required to be "on-call" to respond to emergencies at construction sites where they temporarily resided in trailer homes.  As the Court explained, under California law they were entitled to be paid for this time.            

[The guards] are required to live on the jobsite. They are expected to respond immediately, in uniform, when an alarm sounds or they hear suspicious noise or activity. During the relevant hours, they are geo-graphically limited to the trailer and/or the jobsite unless a reliever arrives; even then, they are required to take a pager or radio telephone so they may be called back; and they are required to remain within 30 minutes of the site unless other arrangements have been made. They may not easily trade their responsibilities, but can only call for a reliever and hope one will be found.

Most important, the trailer guards do not enjoy the normal freedoms of a typical off-duty worker, as they are forbidden to have children, pets or alcohol in the trailers and cannot entertain or visit with adult friends or family without special permission. On this record, we conclude the degree of control exercised by the employer compels the conclusion that the trailer guards' on-call time falls under the definition of “hours worked” under California law.

In its everyday usage most people would probably define "work" as some form of productive activity requiring mental or physical effort.  But as the Mediola case illustrates this common understanding bears little resemblance to the actual legal test for triggering compensation. 

Employers should thus take a hard look at any policy that restricts personal activities during "non-working" hours.  Employees subject to these restrictions may be entitled to substantial recoveries of unpaid wages.     





Independent Contractor Status May Turn on Whether Worker Has "Meaningful Discretion" In Deciding How to Accomplish Results -- Beaumont-Jacques v. Farmers Group, Inc.

Determining whether a service provider is a bona fide independent contractor or a mislabeled employee will trigger a host of important legal consequences -- from tax law compliance, to expense reimbursement, to obligations to pay overtime wages.  In California the Labor Code was recently amended to impose a $5,000-25,000 penalty on top of whatever remedies are otherwise recoverable by a misclassified employee.

Given the importance of the distinction, Courts and administrative agencies have not been particularly helpful in creating a clear-cut test.  All too often they have treated independent contractor status like pornography -- hard to define, but they think they know it when they see it.  They have thus tended to favor muddled "multi-factor" balancing tests in which the various factors will often point in different directions, producing no clear outcome.  (One of the least helpful tests for example is the IRS 20-Factor balancing test).     

The recent California Appellate Court decision in Beaumont-Jacques v. Farmers Group, Inc., is significant because it represents a potential counter-trend in which courts are dispensing with the multi-factor muddle and are instead honing in on the key "right to control" factor.  Indeed, in Beaumont-Jacques, the appellate court upheld grant of summary judgment on the ground that the legitimacy of the plaintiff's independent contractor status could be determined as a matter of law based on the parties agreement without the need to resolve any factual disputes.      

The other significant aspect of Beaumont-Jacques is that it seems to be proposing a new formulation of the control test -- i.e., whether the putative contractor had the right to exercise "meaningful discretion" in determining how to accomplish her assigned objectives.  The Plaintiff was therefore found to be a bona fide independent contractor as a matter of law, where she was hired to run an insurance agency office under the following conditions:

Undisputed evidence establishes . . . that Appellant exercised meaningful discretion by, for instance: recruiting agents for and, when selected, training and motivating those agents to sell the Signatory Defendants' products; determining her own day-to-day hours, including her vacations; on most days, fixing the time for her arrival and departure at her office and elsewhere, including lunch and breaks; preparing reports for and attending meetings of the Signatory Defendants; hiring and supervising her staff, i.e., those who worked at her office, while remitting payroll taxes for them as employees; performing other administrative tasks, including resolving problems; paying for her costs such as marketing, office lease, telephone service and office supplies; deducting those costs as a business expense in her personal tax returns; and, identifying herself as self-employed in those returns. Lastly, the [parties’ agreement] specifically provided there was no employer/employee relationship.

It remains to be seen whether this "meaningful discretion" test will gain traction as the controlling standard in future decisions.  If so, it would be a positive development in providing legal clarity to a traditionally fact-specific area of dispute.   



Hiring Unpaid Interns Is Only Allowed If They Are Useless -- Glatt v. Fox Searchlight

Many employers maintain programs in which inexperienced "interns" perform work for no pay.   The idea is that the transaction is a win-win: The company gets a little low-level help; while an intern who is too inexperienced to have ever been hired as a regular employee in the first place gets some real-world work experience and a resume boost that should help in getting a permanent job later.  

This "unpaid intern" model is at odds, however, with federal and state minimum wage laws, which are designed to ensure that all workers receive minimum pay for time spent working.  Employers thus cannot avoid paying workers merely by calling them "interns," "trainees," or "learners."  Rather, the only way to avoid paying these individuals is to show that they add so little value that they can't even be considered to be productive "employees" at all.  

The key precedent is the 1947 U.S. Supreme Court decision in Walling v. Portland Terminal Co.  In that case the Court held that certain trainees were not covered employees because they did "not displace any of the regular employees," their work did "not expedite the company business," and instead "sometimes does, actually impede and retard it."  Thus, because the employer received no "immediate advantage from any work done by the trainees" they were "not employees" entitled to the legal minimum wage.   

The recent 2013 New York District Court case of Glatt v. Fox Searchlight Pictures, Inc., applied this same test to determine that interns who worked on the film "Black Swan" and other projects were employees who should have been paid minimum wage.  The interns did classic "gofer" work  -- they "obtained documents for personnel files, picked up paychecks for coworkers, tracked and reconciled purchase orders and invoices, and traveled to the set to get managers' signatures."  The problem for the company was that it actually got some benefit from this work that otherwise "would have required paid employees."  Nor could the company prove that the interns "ever impeded work" by their activities.  Thus minimum wage was owed.  

For employers the message is clear -- if you want to hire an unpaid intern you must be prepared to prove that he was utterly useless and, preferably, just got in the way.  (Note to Interns: When describing your internship duties on your resume you may want to punch up this description to sound a bit better.)               

Managerial Purpose Determines Whether A Tasks Is Exempt from Overtime -- Heyen v. Safeway, Inc.

Despite the view of many employers, the legal duty to pay overtime cannot be avoided by simply giving an employee a managerial title and paying him a salary. Rather, employees working in "white collar" positions must still receive overtime pay unless they are "primarily engaged" in executive, professional, or administrative activities.

This generally involves a three-part analysis: (1) The activities of the job are identified; (2) The activities are defined as either "exempt" or "non-exempt" based on the standards set forth in the Wage Orders and incorporated regulations; and (3) The hours actually spent by the employee on each activity are counted up and compared.  If the number of hours spent on "exempt" tasks is less than 50% of the total, the employee is entitled to overtime pay.

Performing this analysis is a lot harder than describing it.  But in Heyen  v. Safeway, Inc., the California Court of Appeal has provided some potentially useful guidance for performing step #2, above -- i.e., sorting particular activities between the "exempt" and "non-exempt" sides of the ledger.

One point of clarification is that there is no such thing as "hybrid" or "multi-tasking" activities during which an employee can be "managing" at the same time he is also performing non-exempt production work.  For example, in the context of a retail business, the employer cannot claim that a supervisor who is stocking the shelves or running a cash register is simultaneously "managing" because he is "keeping an eye" on his subordinates at the same time.

Rather, the Heyen Court held that the test for categorizing each activity is not what work is being performed but rather the reason it is being performed.    As the Court explained:

As we have said, the federal regulations cited in Wage Order 7 expressly recognize that managers sometimes engage in tasks that do not involve the “actual management of the department [or] the supervision of the employees therein.” (§ 541.108(a).) In those circumstances, the regulations do not say, as Safeway would have us hold, that those tasks should be considered “exempt” so long as the manager continues to supervise while performing them. Instead, the regulations look to the supervisor's reason or purpose for undertaking the task. If a task is performed because it is “helpful in supervising the employees or contribute[s] to the smooth functioning of the department for which [the supervisors] are responsible” (§ 541.108(a), (c)), the work is exempt; if not, it is nonexempt.

Thus, if a supervisor operates a cash register to show a trainee how it is done he is performing an exempt activity.  If he performs the identical task because the store is short staffed and he is the only one available to do the job he is performing a non-exempt activity.    

This clarification should tend to favor employees in most cases, as the occasions when a manager needs to perform "grunt work" for a truly managerial purpose are going to be few and far between in practice. 



"Piecework" Compensation Systems Must Separately Compensate Each and Every Hour Worked -- Gonzalez v. Downtown LA Motors

As most practitioners in the field are well aware, California's Labor Code and Wage Order protections are generally intended to be more beneficial to employees than federal law.  California's minimum wage protections are a case in point. 

California Law Requires That Each and Every Hour Worked Must Be Separately Compensated

California's minimum wage rate ($8.00 per hour) is obviously higher than the federal minimum ($7.25).  In addition, however, California law calculates the accrual of minimum wage payments in a very different way.  Federal law simply divides weekly compensation by the number of hours worked in the week.  The employer satisfies the federal standard so long as the average compensation is greater than $7.25 per hour. 

California minimum wage law is very different because it requires that the minimum rate of $8.00 per hour must be separately accrued and paid for each hour worked. For example, suppose a truck driver earns $20 per hour for time spent driving but receives no additional compensation for time spent on other tasks.  Now suppose he spends 30 hours per week driving and ten hours on other tasks such as loading and inspecting his vehicle, filing out paperwork, etc.  The driver has worked 40 hours and earned $600 ($20/hr. x 30 hrs. driving).  This easily satisfies federal law because the driver's average hourly rate of compensation is $15 ($600/40hrs.). 

But this pay system just as clearly violates California's per hour minimum wage standard because the driver earned nothing for the ten hours when he was not driving.  Under California law, the driver is entitled to an additional $8.00 in compensation for each of these ten hours of work irrespective of what he may have been paid for any other time worked.

California's "Each and Every" Hour Standard Applies Equally to Piecework Compensation Plans

The recent case of Gonzalez Downtown LA Motors, LP, explained that the requirement to provide separate minimum compensation for each hour worked is not limited to hours-based compensation systems.  Rather, the same standard must also be applied to compensation systems based on commissions, piecework, or other productivity-based metrics.    

By its terms, Wage Order No. 4 does not allow any variance in its application based on the manner of compensation. Subdivision 1 of the wage order states that subject to exceptions that are not applicable here: “This order shall apply to all persons employed in professional, technical, clerical, mechanical, and similar occupations whether paid on a time, piece rate, commission, or other basis.” (Cal. Code Regs., tit. 8, § 11040, subd. 1, italics added.) Subdivision 4(B) similarly requires uniform application of the minimum wage requirements regardless of how an employee is paid: “Every employer shall pay to each employee, on the established payday for the period involved, not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise.” (Cal. Code Regs., tit. 8, § 11040, subd. (4)(B), italics added.) That DTLA compensated its technicians on a piece-rate basis is not a valid ground for varying either the application or interpretation of the wage order.

There is an obvious tension between pay systems that seek to compensate for performance or productivity alone and a legal standard that requires minimum payments for time alone.  Reconciling these two standards is problematic to say the least and I will try to explore the nuances of doing so in future posts. 

In the meantime, however, employers and their workers should be aware that any "creative" compensation scheme that does not expressly pay a flat minimum rate for each and every hour is legally suspect under California law.               

Is Arbitration The New "Lochnerism?" -- American Express v. Italian Colors

Some of our readers may recall from their days taking Constitutional Law that Lochner v. New York was a landmark 1905 Supreme Court decision striking down a maximum 60-hour workweek law in the baking industry as contrary to a Constitutional "right to contract."  During the New Deal the Court eventually had a change of heart (arguably in response to FDR's Court-packing scheme) and came to the epiphany that contract rights may be overridden by legislation with at least a "rational basis" in public policy.  

Generations of legal scholars have since wielded the phrase "Lochnerism" as a term of abuse for judicial activism that would judicially preempt remedial legislation enacted by democratically elected state and federal representatives.  And the supremacy of contract rights espoused by "Lochnerism" seemed to be a historical dead letter. 

Until now, that is.  The recent Supreme Court decision in American Express Co. v. Italian Colors Restaurant (aka "Amex III"), seems to have breathed new life into the idea that private contract rights may once again reign supreme at the expense of public legislation.    

In Amex III, a small merchant sought to file a class action lawsuit alleging that Amex exploited its monopoly position in the market for revolving charge cards to impose anti-competitive prices.  However, the "take-it-or-leave-it" arbitration agreement which Amex required merchants to sign contained a "divide-and-conquer" clause that barred them from joining together to share litigation costs or to jointly prove-up their mutual allegations of a common anti-competitive scheme by Amex.  

The Majority recognized that under these ground rules no individual merchant would have the financial incentive to prosecute an anti-trust claim against Amex, which would thereby avoid any exposure to the claims regardless of their merit.  As the court explained, however, federal arbitration law "reflects the overarching principle that arbitration is a matter of contract" and the Court is therefore duty-bound to "rigorously enforce arbitration agreements according to their terms."  Thus, the Majority held that Amex's right to contract for arbitration rules of its choosing must preempt any right to effectively enforce anti-trust laws for the benefit of the public.  In the summary of the Dissent, if the arbitration agreement is framed in a way that prevents anti-trust enforcement that's just "too darn bad." 

Of course the Court's rationale is different from good, old-fashioned Lochnerism in that the source of the right to contract is now located in the federal arbitration act rather than the Due Process Clause of the Constitution itself.  But the principle is largely the same  -- by invoking the right to contract a company may effectively "opt-out" of unfavorable legislation.  

It remains to be seen whether an arbitration agreement can be so aggressively one-sided that even the present Court would not enforce it "according to its terms."  But in response to Amex III, corporate lawyers across the country are undoubtedly drafting agreements that will be testing these limits in short order.  For the time being, however, it appears that contract rights are once again clearly ascendant over statutory rights.                  




Strict Liability for Harassment Is Limited to "Supervisors" Who Can Hire and Fire -- Vance v. Ball State University

When a company is sued for sexual harassment it makes a big difference who the alleged perpetrator is. If the perp is a low level "co-employee," the Company is not responsible for his conduct unless it was negligent in failing to prevent his harassment or in failing to investigate or remedy the harassment after it was brought to light. By contrast, if the harasser is a "supervisor" the employer is strictly liable for his conduct regardless of its diligence or good faith.

In Vance v. Ball State University, the U.S. Supreme Court thus gave employers a big win by using a restrictive standard for who qualifies as a "supervisor" under Title VII. EEOC regulations defined a supervisor as anyone whose workplace authority was sufficient "to assist the harasser explicitly or implicitly in carrying out the harassment." The Court rejected this definition as a "study in ambiguity." Instead, it defined the term to include only those who are "empowered by the employer to take tangible employment actions against the victim."

There are probably three main points worth making about this definition. First, it definitely tightens the standard and, as a result, reduces the number of managers for whom employers will be strictly liable.

Second, this new test is not as unambiguous as the Majority seems to imagine. Large companies often require consensus decision-making and there may be precious few individuals who are individually "empowered" to fire or demote employees. For example, consider a line manager who can give an employee a poor performance review. Another higher-up manager can rely on that negative review to recommend the elimination of the position. An executive VP can act on that recommendation, but only so long as the CEO and head of the HR Department give their permission. Who "had the power" to fire the employee?

Finally, the Vance decision may not have much impact in California, as the state law anti-discrimination statute contains its own definition of "supervisor." The California Fair Employment and Housing Act ("FEHA"), defines a supervisor in much broader terms:

"Supervisor" means any individual having the authority, in the interest of the employer, to hire, transfer, suspend, layoff, recall, promote, discharge, assign, reward, or discipline other employees, or the responsibility to direct them, or to adjust their grievances, or effectively to recommend that action, if, in connection with the foregoing, the exercise of that authority is not of a merely routine or clerical nature, but requires the use of independent judgment.

So, at least in California, employers will still be strictly liable for anyone who can control the alleged victim's job assignments or who can "effectively recommend" rewards or discipline.