Employees Entitled to Compensation for Business Use of Personal Cell Phones Regardless of Plan Terms -- Cochran v. Schwan's Home Services, Inc.

California law requires that employers must reimburse workers for all "necessary expenditures" incurred in performing their jobs.  But what if the employee has already purchased an item for his own personal use and can continue using it for his employment at no extra cost.  Does the employer still have to pay for the benefit of using the employee's property?   

The Second District Court of Appeal held in Cochran v. Schwan's Home Services, Inc., that -- at least in the context of cell phone usage -- the answer is "yes."

In Cochran a group of employees claimed that they were owed reimbursement for business-related calls made on their personal cell phones.  In opposing class certification, the employer argued that “many people now have unlimited data plans for which they do not actually incur an additional expense when they use their cell phone."  As a result, the employer claimed that "determin[ing] whether an expense was incurred . . . will require an examination of each class member's cell phone plan.”  The appellate court rejected this argument.  

Instead, the court explained:

If an employee is required to make work-related calls on a personal cell phone, then he or she is incurring an expense for purposes of section 2802. It does not matter whether the phone bill is paid for by a third person, or at all. In other words, it is no concern to the employer that the employee may pass on the expense to a family member or friend, or to a carrier that has to then write off a loss. It is irrelevant whether the employee changed plans to accommodate worked-related cell phone usage. Also, the details of the employee's cell phone plan do not factor into the liability analysis. Not only does our interpretation prevent employers from passing on operating expenses, it also prevents them from digging into the private lives of their employees to unearth how they handle their finances vis-a-vis family, friends and creditors. To show liability under section 2802, an employee need only show that he or she was required to use a personal cell phone to make work-related calls, and he or she was not reimbursed. Damages, of course, raise issues that are more complicated.

Thus,

We hold that when employees must use their personal cell phones for work-related calls, Labor Code section 2802 requires the employer to reimburse them. Whether the employees have cell phone plans with unlimited minutes or limited minutes, the reimbursement owed is a reasonable percentage of their cell phone bills.

The exact calculation of reimbursement amounts was left to the trial court on remand.  But the ruling suggests that dividing the total plan cost by the proportion of minutes devoted to business use would be a proper rate of reimbursement.   

Of course, the logic of Cochran could be applied to any personal items that an employee may use for both personal and work purposes -- for example, tools, car insurance, computers, Internet access, or even a home office.  Cochran thus strongly suggests that employers may have a duty to reimburse the "reasonable percentage" of such costs which corresponds to the proportion of their use for work.    

 

 

Employees Entitled to Compensation for Business Use of Personal Cell Phones Regardless of Plan Terms -- Cochran v. Schwan's Home Services, Inc.

California law requires that employers must reimburse workers for all "necessary expenditures" incurred in performing their jobs.  But what if the employee has already purchased an item for his own personal use and can continue using it for his employment at no extra cost.  Does the employer still have to pay for the benefit of using the employee's property?   

The Second District Court of Appeal held in Cochran v. Schwan's Home Services, Inc., that -- at least in the context of cell phone usage -- the answer is "yes."

In Cochran a group of employees claimed that they were owed reimbursement for business-related calls made on their personal cell phones.  In opposing class certification, the employer argued that “many people now have unlimited data plans for which they do not actually incur an additional expense when they use their cell phone."  As a result, the employer claimed that "determin[ing] whether an expense was incurred . . . will require an examination of each class member's cell phone plan.”  The appellate court rejected this argument.  

Instead, the court explained:

If an employee is required to make work-related calls on a personal cell phone, then he or she is incurring an expense for purposes of section 2802. It does not matter whether the phone bill is paid for by a third person, or at all. In other words, it is no concern to the employer that the employee may pass on the expense to a family member or friend, or to a carrier that has to then write off a loss. It is irrelevant whether the employee changed plans to accommodate worked-related cell phone usage. Also, the details of the employee's cell phone plan do not factor into the liability analysis. Not only does our interpretation prevent employers from passing on operating expenses, it also prevents them from digging into the private lives of their employees to unearth how they handle their finances vis-a-vis family, friends and creditors. To show liability under section 2802, an employee need only show that he or she was required to use a personal cell phone to make work-related calls, and he or she was not reimbursed. Damages, of course, raise issues that are more complicated.

Thus,

We hold that when employees must use their personal cell phones for work-related calls, Labor Code section 2802 requires the employer to reimburse them. Whether the employees have cell phone plans with unlimited minutes or limited minutes, the reimbursement owed is a reasonable percentage of their cell phone bills.

The exact calculation of reimbursement amounts was left to the trial court on remand.  But the ruling suggests that dividing the total plan cost by the proportion of minutes devoted to business use would be a proper rate of reimbursement.   

Of course, the logic of Cochran could be applied to any personal items that an employee may use for both personal and work purposes -- for example, tools, car insurance, computers, Internet access, or even a home office.  Cochran thus strongly suggests that employers may have a duty to reimburse the "reasonable percentage" of such costs which corresponds to the proportion of their use for work.    

 

 

Delivery Drivers are Employees, Not Contractors -- Ruiz v. Affinity Logistics, Inc.

 In Ruiz v. Affinity Logistics Corp., ("Ruiz II"), the Ninth Circuit determined that a class of delivery drivers had been improperly classified as independent contractors.  The decision reversed the lower court's finding of employee status following a bench trial.  

The Defendant had required that its drivers form their own companies and execute contracts designating their relationship as independent contractors.  Nevertheless, the company still controlled every aspect of the drivers' operation from their rates and routes to the "color of their socks."  Based on this extensive record of control the Ninth Circuit had no trouble concluding that they were not bona fide contractors.  But the court's analysis did address several points that may be of interest in other, closer, fact patterns.

First, the Court emphasized that anytime personal services are provided an employment relationship is presumed.  Thus, while not using the precise terminology, a claim of an independent contractor relationship is effectively an affirmative defense.

Second, the Court rejected the argument that the drivers' ability to hire their own "helpers" took them outside of an employment relationship.  In particular, this fact did not support contractor status as "the drivers did not have an unrestricted right to choose these persons which is an important right that would normally inure to a self-employed contractor."  

A service provider can legitimately be an independent contractor if he has real autonomy and the opportunity to make a profit by exercising his own business judgment and discretion.  But Ruiz II illustrates that courts will generally reject any arrangement that functions merely as de facto employment dressed up with the appearance of independence.   

 

 

'Right to Control' and 'At-Will' Termination Are Keys to Employment vs. Independent Contractor Status -- Ayala v. Antelope Valley Newspapers, Inc.

Courts and agencies have traditionally invoked the familiar "multi-factor" common law test to distinguish between an employee and an independent contractor.  The trend over time, however, has been to focus ever more tightly on the single factor of who has "control" over the individual's work.  

In Ayala v. Antelope Valley Newspaper, Inc., the California Supreme Court has now made clear that the issue is even narrower than "control" -- it is the "right to control."   

As the parties and trial court correctly recognized, control over how a result is achieved lies at the heart of the common law test for employment. . . . Significantly, what matters under the common law is not how much control a hirer exercises, but how much control the hirer retains the right to exercise.

Thus, a company objecting that it has no history of micro-managing its workers may find that this argument carries little weight because, "That a hirer chooses not to wield power does not prove it lacks power." 

Rather, the "right" of control will inevitably flow from the rights set forth in the parties' contract.  It is extremely significant how Ayala formulates the litmus test for determining whether a contract creates a right of control.    

Whether a right of control exists may be measured by asking whether or not, if instructions were given, they would have to be obeyed on pain of at-will discharge for disobedience.

(Internal punctuation omitted).  The Supreme Court has thus essentially laid down a bright-line rule that a contractual power to fire at-will creates a corresponding right to control the performance of the work.

The newspaper delivery workers at issue in Ayala all had contracts providing the company with a "right to terminate the contract without cause on 30 days' notice."  The Court did not quite reach the merits.  However, it did reverse the trial court's denial of class certification on the ground that the contract terms might well negate the independent contractor status of the entire class.  This is a pretty strong indication that at-will termination is considered inconsistent with independent contractor status.

  

Wal-Mart v. Dukes does not apply to California Wage and Hour Class Actions -- Williams v. Superior Court (Allstate Ins. Co.)

In Wal-Mart v. Dukes, the U.S. Supreme Court rejected a proposed class of 1.5 million women who claimed they were discriminated against in separate hiring and promotion decisions by different managers throughout the nation.  Many defendants (and a few courts) read this federal Title VII decision for the proposition that statistical evidence was somehow an improper method of proof in class actions -- a method which was denigrated by the short-hand term "trial by formula."

The decision of the California Court of Appeal in Williams v. Superior Court (Allstate) makes clear, however, that the analysis of the proposed Title VII class in Dukes has little or no application to California wage and hour claims.   As the Court explained, “We agree with those courts that have found Dukes distinguishable in comparable situations.”

Indeed, the Court's four-page distinguishing analysis of Dukes is extremely thorough. In particular, the Williams Court noted that Dukes was concerned with provisions of federal Rule 23 that do not apply under California Code of Civil Procedure Section 382.  As a result, "the trial court's reliance on Dukes analysis of subpart (b)(2) of Rule 23 – a class action seeking injunctive relief – was thus misplaced because appellant’s class members here were seeking principally, if not exclusively, monetary damages."  

In addition, wage and hour claims normally turn on objective standards regarding the number of hours worked and wages paid.  For class certification purposes such claims are thus fundamentally different from the discrimination claims at issue in Dukes "which depended on proof of the subjective intents of thousands of individual supervisors."

Finally, the Williams Court clarified the phrase "Trial by Formula," explaining that statistical inference is a perfectly valid method of establishing damages, and is no obstacle to certification where a class-wide policy or practice is alleged as the basis for liability.

Trial by Formula is a method of calculating damages. Damage calculations have little, if any, relevance at the certification stage before the trial court and parties have reached the merits of the class claims. At the certification stage, the concern is whether class members have raised a justiciable question applicable to all class members. Although Allstate may have presented evidence that its official policies are lawful, this showing does not end the inquiry.  Here, the question is whether Allstate had a practice of not paying adjusters for off-the-clock time.  The answer to that question will apply to the entire class of adjusters. If the answer to that question is “yes” – which is the answer the trial court initially assumed when it first certified the Off-the-Clock class, and is the answer we must presume in reviewing decertification (Brinker, supra, 53 Cal.4th at p. 1023) – then, in Duke’s phrase, that answer is the “glue” that binds all the class members. If some adjusters had more uncompensated time off the clock than other adjusters, that difference goes to damages.

(Internal punctuation and citations omitted). 

Williams continues the recent post-Brinker trend of finding that class treatment of California wage and hour claims is generally proper so long as the question of liability is tied to an alleged class-wide policy or practice of the employer.  It also clarifies that the U.S. Supreme Court holding in Dukes is no impediment to certification in such a case.

 

 

An Employer's Failure to Affirmatively Authorize Meal and Rest Breaks Is Grounds for Class Certification -- Benton v. Telecom Network Specialists, Inc.

Benton v. Telecom Network Specialists reversed the trial court's decision not to certify a class of employees for purposes of determining whether they had been denied meal and rest breaks.  In doing so, the decision also clarifies the affirmative nature of an employer's legal obligation to provide off-duty breaks. 

Last year's Supreme Court decision in Brinker explained that an employer cannot avoid liability merely by establishing that it has not actively prohibited or prevented breaks.  To the contrary, employers have a legal duty under the Labor Code to affirmatively publish and implement internal policies that expressly authorize and permit employees to take compliant off-duty meal and rest breaks.  An employer who fails to discharge this affirmative duty may be liable. 

Benton continues the recent trend of appellate court decisions (including Bradley v. Networkers Int'l), which have instructed trial courts to follow this aspect of Brinker when evaluating a motion for class certification.  The putative class of security guards in Benton claimed that they could establish class-wide liability based on their employer's lack of a compliant policy.

[T]he plaintiffs' “theory of legal liability” is that TNS violated wage and hour requirements by failing to adopt a policy authorizing and permitting its technicians to take meal or rest break periods. In plaintiffs' view, TNS was obligated to implement procedures ensuring that technicians received notice of their meal and rest period rights and were permitted to exercise those rights. For the purposes of class certification, the question is whether this theory of recovery can be “proved (or disproved) through common facts and law.”

In response, the employer argued that it could avoid liability by establishing that individual employees might nevertheless have had "opportunities" to take compliant breaks when they were not busy even if no company policy specifically authorized them to do so.  The lower court bought this argument, finding that an assessment of the scope of these "opportunities" for each employee would prevent class certification. The appellate court in Benton held that this was error. 

Rather than focusing on whether plaintiffs' theory of liability—that TNS violated wage and hour requirements by failing to adopt a meal and rest period policy—was susceptible to common proof, the court improperly focused on whether individualized inquiry would be required to determine which technicians had missed their meal and rest periods. The written order (as well as statements made at the motion hearing) make clear that the trial court did not believe TNS would be liable upon a determination that its lack of a meal and rest policy violated applicable wage and hour requirements; rather, it concluded that TNS would become liable only upon a showing that a technician had missed breaks as a result of TNS's policies.

[H]owever, Brinker “expressly rejected” this mode of analysis. As succinctly stated in Faulkinbury [v. Superior Court]: “the employer's liability arises by adopting a uniform policy that violates the wage and hour laws. Whether or not the employee was able to take the required break goes to damages, and ‘[t]he fact that individual [employees] may have different damages does not require denial of the class certification motion.'"

Benton therefore reinforces the message that class certification will normally be proper where the predominant issue is the legal sufficiency of the employer's meal and rest break policies, or the lack thereof.     

 

California Minimum Wage Increase has Ripple Effect on Other Laws

Under recently signed legislation (AB 10) the minimum wage in California will increase on July 1, 2014 from $8.00 to $9.00 per hour; and will increase again on January 1, 2016 to $10.00 per hour.

The unusual mid-year implementation of the 2014 increase may catch some businesses by surprise, so employers should mark their calendars and make plans to implement the change. Also, anytime the base minimum wage increases it necessarily has a ripple-effect on other compensation thresholds.  For example:

  • The minimum salary necessary to avoid overtime payments to exempt "white collar" managerial, administrative and professional employees is pegged at twice the minimum wage rate for a 40-hour workweek.  This weekly salary threshold will thus rise to $720 on July 1, 2014, and $800 on January 1, 2016.
  • The "regular rate of pay" for exempt commissioned salespeople is pegged at 1.5 times the minimum wage and will thus increase in 2014 and 2016 to $13.50 and $15.00, respectively. 
  • Unlike federal law, California's minimum wage rate must be separately paid for "each hour worked" rather than as the average of the compensation for all hours worked in a week.  As a result, "piece rate" or performance-based compensation systems must ensure that each category of employee work time is generating sufficient compensation to comply with the new standards.

Under the new rates, California's minimum wage rates will be the highest in the nation.   But stay posted, a high-profile movement is under way to push for a base minimum wage rate of $15.00. 

 

   

Can an Employer Require On-Duty Meal Breaks Because it Understaffs its Own Locations? -- Abdullah v. U.S. Security Associates, Inc.

In Abdullah v. U.S. Security Associates, Inc., the Ninth Circuit upheld the lower court’s grant of class certification where the employer required “on-duty meal period agreements” based on its contention that off-duty breaks were incompatible with “the nature of the work.” 

In the course of reaching this result the Ninth Circuit fleshed out the scope of this often misunderstood defense. The Court explained, for example, that an employer might legitimately require on-duty meal breaks "where the employee is the only person employed in the establishment and closing the business would work an undue hardship on the employer."  But the Court also noted that this defense may be dicey where, as in most cases, it was the employer who made the decision to staff only one employee in the first place.  

In Abdullah, the employer claimed that its security guards could not take off-duty breaks because they were assigned to work by themselves and could not leave their posts unattended.  The Ninth Circuit did not purport to prejudge this defense.  But it was clear in holding that the lower could reject this defense on a class-wide basis.  

[T]he merits inquiry will turn on whether USSA is permitted to adopt a single-guard staffing model that does not allow for off-duty meal periods—namely, whether it can invoke a “nature of the work” defense on a class-wide basis, where the need for on-duty meal periods results from its own staffing decisions.

Presumably this inquiry would involve an analysis of the feasibility or "undue  burden" of alternative staffing models such as having guards work in shifts, hiring "relief" guards to cover during breaks, etc.  At the very least, however, the Abdullah decision signals that employers cannot merely rely on their own desire to avoid additional staffing expenses as a rationale for requiring on-duty meal breaks.    

Finding of Independent Contractor Status for Tax Purposes is Binding for Wage and Hour Purposes -- Happy Nails & Spa v. Su

The legal determination of whether a worker is properly classified as an employee or an independent contractor triggers a variety of legal consequences under various statutes.  These include whether the employer is required to: (a) withhold and pay various federal and state payroll taxes;  and (b) whether the employer must comply with minimum wage, overtime and expense reimbursement under the California Labor Code or federal FLSA.  

These separate legal obligations are enforced by different governmental agencies which may each use slightly different tests for distinguishing between employees and independent contractors.  This could result in multiple prosecutions with different results -- e.g., that the same workers may be contractors for tax purposes but employees for wage payment purposes.  The Fourth District Court of Appeal opinion in Happy Nails & Spa of Fashion Valley L.P. v. Su, addressed this precise scenario. 

In 2004 the California Employment Development Department (the "EDD"), which is charged with collecting unemployment insurance taxes and paying benefits to employees, brought an action claiming that the manicurists at Happy Nails were employees subject to these provisions.  After an administrative trial an administrative law judge decided that they were properly classified as contractors.

In 2008, however, the Division of Labor Standards Enforcement ("DLSE"), which is charged with enforcing the California Labor Code and Wage Orders, brought its own action claiming the manicurists were  employees for purposes of the Labor Code. Despite the company's objection that the issue had already been decided the Labor Commissioner decided that Happy Nails was properly "subject to the civil penalties because the cosmetologists are employees, not independent contractors."    

The Appellate Court overturned this second decision however on the ground that it was barred by the result of the 2004 EDD determination.  In particular, the Court explained that different enforcement divisions of the same government are should be deemed to be in "privity" with one another.  Moreover, the independent contractor test used both agencies was essentially the same and, despite the passage of time, there had been no "material" changes in the facts.  Thus,

Giving preclusive effect to the Board's decisions [that the workers were independent contractors] fosters the integrity of both administrative and judicial proceedings. The California Supreme Court has held that “the possibility of inconsistent judgments which may undermine the integrity of the judicial system would be prevented by applying collateral estoppel to the [administrative] decision.”

The rule in Happy Nails will help employers avoid multiple challenges to the classification of their independent contractors.  But it is just as clearly a double-edged sword because an administrative determination that a contractor is misclassified will be equally binding in future actions for unpaid taxes or wages.  

In short, Happy Nails raises the stakes in administrative proceedings involving independent contractor status.           

Finding of Independent Contractor Status for Tax Purposes is Binding for Wage and Hour Purposes -- Happy Nails & Spa v. Su

The legal determination of whether a worker is properly classified as an employee or an independent contractor triggers a variety of legal consequences under various statutes.  These include whether the employer is required to: (a) withhold and pay various federal and state payroll taxes;  and (b) whether the employer must comply with minimum wage, overtime and expense reimbursement under the California Labor Code or federal FLSA.  

These separate legal obligations are enforced by different governmental agencies which may each use slightly different tests for distinguishing between employees and independent contractors.  This could result in multiple prosecutions with different results -- e.g., that the same workers may be contractors for tax purposes but employees for wage payment purposes.  The Fourth District Court of Appeal opinion in Happy Nails & Spa of Fashion Valley L.P. v. Su, addressed this precise scenario. 

In 2004 the California Employment Development Department (the "EDD"), which is charged with collecting unemployment insurance taxes and paying benefits to employees, brought an action claiming that the manicurists at Happy Nails were employees subject to these provisions.  After an administrative trial an administrative law judge decided that they were properly classified as contractors.

In 2008, however, the Division of Labor Standards Enforcement ("DLSE"), which is charged with enforcing the California Labor Code and Wage Orders, brought its own action claiming the manicurists were  employees for purposes of the Labor Code. Despite the company's objection that the issue had already been decided the Labor Commissioner decided that Happy Nails was properly "subject to the civil penalties because the cosmetologists are employees, not independent contractors."    

The Appellate Court overturned this second decision however on the ground that it was barred by the result of the 2004 EDD determination.  In particular, the Court explained that different enforcement divisions of the same government are should be deemed to be in "privity" with one another.  Moreover, the independent contractor test used both agencies was essentially the same and, despite the passage of time, there had been no "material" changes in the facts.  Thus,

Giving preclusive effect to the Board's decisions [that the workers were independent contractors] fosters the integrity of both administrative and judicial proceedings. The California Supreme Court has held that “the possibility of inconsistent judgments which may undermine the integrity of the judicial system would be prevented by applying collateral estoppel to the [administrative] decision.”

The rule in Happy Nails will help employers avoid multiple challenges to the classification of their independent contractors.  But it is just as clearly a double-edged sword because an administrative determination that a contractor is misclassified will be equally binding in future actions for unpaid taxes or wages.  

In short, Happy Nails raises the stakes in administrative proceedings involving independent contractor status.           

"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.               

Class Certification is Appropriate Where Employer has No Break Policy -- Bradley v. Networkers International, LLC

The Fourth District Court of Appeal decision in Bradley v. Networkers International, LLC is significant because it directly addresses how the landmark Brinker decision should effect class certification of meal and rest break claims.  (Bradley is also significant concerning misclassification of independent contractors but that warrants a whole separate post). 

The employer in Bradley had never promulgated any policy specifically authorizing meal and rest breaks.  Originally the trial court had denied certification and the appellate court had upheld the denial on the ground that it would be necessary to individually determine which workers had the opportunity to take breaks and whether they had voluntary chosen to waive the breaks.  The Supreme Court issued a "grant and hold" and then remanded for reconsideration in light of its Brinker decision.   

The Bradley Court explained upon remand that Brinker had changed everything.  Under the Supreme Court's new rules the same record now required class certification of the meal and rest period claims.  First, because Brinker clarified that employers have a legal obligation to affirmatively provide breaks, not having a policy is itself a common class-wide policy that warrants certification.       

Networkers argues Brinker is not controlling because in Brinker the plaintiffs challenged an express meal and break policy whereas here plaintiffs are challenging the fact that the employer's lack of a policy violated the law. This is not a material distinction on the record before us. Under Brinker and under the facts here, the employer engaged in uniform companywide conduct that allegedly violated state law.

Secondly, the lack of an affirmative meal and rest break policy effectively takes the issue of "waiver" off the table, removing it as an obstacle to certification as well.

[A]s Brinker made clear, an employer is obligated to provide the rest and meal breaks, and if an employer does not do so, the fact that an employee did not take the break cannot reasonably be considered a waiver. “No issue of waiver ever arises for a rest break that was required by law but never authorized; if a break is not authorized, an employee has no opportunity to decline to take it.”

Prior to Brinker many employers got by with arguing that they did not prohibit breaks and that it was therefore up to their workers to take meal and rest breaks and that they could not prove that they had not voluntarily chosen to take breaks.  Bradley is crystal clear in holding that this is no longer an option.  

Under Brinker, the failure to implement and enforce an affirmative break policy (including records of whether the breaks were actually taken), is a substantive violation of the employer's legal duty under the Labor Code.  Under Bradley this substantive violation will also be certified as a class action.   In short, an employer without an affirmative break policy is now officially a sitting duck.     

 

Time "Rounding" and "Grace Period" Policies -- See's Candy Shops v. Superior Court

In See's Candy Shops v. Superior Court, the Court addressed two separate issues concerning the recording and calculation of hours worked by non-exempt employees: (a) to what extent may employers "round" worker time entries; and (b) to what extent may employers base hours of pay on "scheduled" work times that differ from the actual time punch records. 

Rounding of Time Entries.

It is a fairly common practice for employers -- especially those using commercial time tracking software such as Kronos -- to calculate work time based on "rounded" time entries. For example, if an employee clocks in for work at 8:53 a.m. the policy may "round" this entry to the nearest 15-minute interval and therefore pay the worker only for time worked after 9:00 a.m.

See's Candy reached the common sense conclusion that rounding is fine as long as the incidents of "rounding up" and "rounding down" roughly  cancel each other out, thereby resulting in a generally accurate  measure of hours worked.

Assuming a rounding-over-time policy is neutral, both facially and as applied, the practice is proper under California law because its net effect is to permit employers to efficiently calculate hours worked without imposing any burden on employees.

Employers cannot assume, however, that a policy is always permissible merely because it rounds up as well as down.  The key phrase here is that the policy must also be fair to the employee "as applied." 

For example, consider an employer that requires its workers to be on the job by no later than 9:00 a.m. but also prohibits unauthorized overtime or clocking in early.  This combination of policies would basically require (or at least strongly encourage) employees to always clock in between 8:53 a.m. and 9:00 a.m. but never later.   Over time, and over the course of an entire labor force, this systemic rounding bias could result in a substantial amount of unpaid work time. 

Unpaid "Grace Period" Time.

A related practice evaluated in See's Candy is a a so-called "grace period"  policy.  Under this policy "employees whose schedules have been programmed into the Kronos system may voluntarily punch in up to 10 minutes before their scheduled start time and 10 minutes after their scheduled end time."   However, "Because See's Candy assumes the employees are not working during the 10–minute grace period, if an employee punches into the system during the grace period, the employee is paid based on his or her scheduled start/stop time, rather than the punch time."

As the Court explained the "grace period" policy presented a different issue from rounding.  Under the rounding policy the employees were admitedly working and the issue was whether the policy resulted in an accurate record of their work hours.  Under the "grace period" policy the employer "assumed" that no work was being performed and the issue was whether that assumption was accurate.

If the evidence later shows that the employees were working or “under the control” of See's Candy during the grace period and they were not paid for this time, they may be entitled to recover those amounts in the litigation and any applicable penalties.

Conclusion

Internal policies like "rounding" or "grace periods" do not create special defenses to wage claims.   Rather, like any other employer policy, they are valid or invalid only to the extent they comply with the standard legal obligation to accurately record and pay for all hours actually worked.   The test is therefore how the polices operate in practice in combination with the Company's actual work requirements and other policies.  

Supperior Court Issues a $90 Million Cautionary Tale Against Playing Too Close to "The Cliff" With Meal and Rest Break Policies -- Augustus v. American Commercial Security

At this point employers should not need any further "wake up" call to get their meal and rest policies in compliance with California law.  But if anyone is still unconvinced of the potential exposure the granting of a summary judgment in the amount of $89,741,426 in Augustus v.  American Commercial  Security should be persuasive.  

As the ruling in Brinker made clear, the essence of a compliant meal or rest break is that the employer has affirmatively relieved the employee of all work duties within the prescribed time windows and for prescribed durations.  Once the employer has discharged this obligation it has "provided" a break and it doesn't have the further obligation to force the employee to actually go off duty or stay off duty for the entire break period.   

But woe unto the employer whose policies fall short of actually "providing" a compliant break in the first place.  In that case the employer forfeits any argument that any missed break was the result of the employee voluntary decision to waive it. (Since an employee can't waive something he never received.)  

That is exactly what happened in the Augustus case.  The defendant was a security guard company which required its guard to remain "on-call" during breaks.  Judge Wiley's order granting summary judgment explains how this one policy error ended up costing the company nearly $90 million:

In general, ACSS balks at the notion that the employer must relieve workers of all duties for the rest break to be legally valid.  Put simply, if you are on call, you are not on break. . . . [¶] . . .Substantively, California's labor law gave advance notice of the penalties for depriving workers of rest breaks.  Those penalties are straightforward and chastening.  When the view is clear and the exposure chastening , the rational hiker steers clear of the cliff.  ACSS broke the law and must pay according to that law.

 

 

 

Court Clarifies Scope of Permissible Commission Chargebacks -- DeLeon v. Verizon Wireless, LLC

In DeLeon v. Verizon Wireless, LLC the California  Court of Appeal upheld the right of an employer to reclaim or "charge back" commissions which are provisionally advanced for sales that are later canceled.

California case law has been clear for some time in holding that the claw back of an "advance" that was never actually earned is not an illegal deduction from wages.  The usual scenario is an advance on a seemingly valid sale that is never finally consummated because the customer either cancels the order or fails to pay. 

DeLeon represents a slight variation on these facts only because it allowed commission advances to be reversed up to a year after the initial sale had been made where a customer canceled his cell phone service.  But in the context of an ongoing service plan (which may well have included loss leader incentives for the initial sign up), this is just a natural extension of the general rule that earning a commission may be legitimately conditioned on completing a final sale.          

Nevertheless, the discussion in DeLeon, especially when considered in conjunction with last month's decision in Sciborski v. Pacific Bell, begins to shed light on how courts will distinguish a legitimate contractual condition on earning a commission from an unlawful "deduction" or "withholding" of wages. 

Under the principles discussed in these two opinions it appears that courts will generally allow employers to deny a commission payment if an employee fails to fulfill a term that:

  • Is clearly expressed , preferably in writing, before the employee performs the work; and 
  • Is related to the sale itself.  

 By contrast, courts will tend to find a violation of California law where an employer denies a commission payment for a reason that:

  • Is unrelated to the successful completion of the particular sale itself;
  • Is outside the employee's ability to control or influence;
  • Is unpredictable or arbitrary; or
  • Is shifting a cost of doing business which the employer should pay to the employee.   

 It may be a long time before the case law is crystal clear in this area but the main outline of the rules is starting to come into focus.

Court Clarifies When Commissions Are "Earned" or "Vested" -- Sciborski v. Pacific Bell Directory

Most commission plans contain some sort of caveat to the effect that the employer reserves the right to change or modify the commission calculation at any time before the commission is earned or paid out.  This can be problematic in California, as commissions are a form of "wages" which are fully protected by the Labor Code.  And the Labor Code generally prohibits the reduction of any wage once it has become earned and vested.        

Determing when a commission is vested (and thus no longer subject to reduction) is a tricky business that involves an interplay between private contract terms and public wage protection statutes.  The recent opinion of the Fourth District Court of Appeals in Sciborski v. Pac. Bell Directory contains some very useful guidance, however.

Sciborski had been paid a commission on an account that the Company claimed she had been assigned only due to a "clerical error."  The Company claimed that proper assignment of the account was a threshold condition that had not been satisfied and that no commission had been properly earned.  The Court disagreed.  It found that the parties' commission agreement did not expressly address this scenario.  More importantly, the Court also found that any implied contract term that would deny a commission under these circumstances would be unenforceable under California law in any event. 

[A]n employer's right to define an “earned” commission in the employment contract is not unlimited. Generally, the essence of an advance is that at the time of payment the employer cannot determine whether the commission will eventually be earned because a condition to the employee's right to the commission has yet to occur or its occurrence as yet is otherwise unascertainable.  Thus, for example, an employer may expressly condition an earned sales commission on the sale becoming final (e.g., no returns within a specified time or final payment received) or on the employee completing work in providing follow-up services to the customer.  But an employer may not require an employee to agree to a wage deduction in the guise of recouping an advance based on conditions that are unrelated to the sale and/or that merely reflect the employer's attempt to shift the cost of doing business to an employee.  Where a deduction is unpredictable, and is taken without regard to whether the losses were due to factors beyond the employee's control, an employer cannot avoid a finding that its sales commission policy is unlawful simply by asserting that the deduction is just a step in its calculation of commission income.

(Internal citations and punctuation omitted)

     The message of Sciborski is that one-sided conditions on an employee's right to finally "earn" a commission are likely unenforceable.   If the employee has done all of the work necessary to make the sale and the revenue is received by the employer, then a court may reject attempts to impose additional conditions -- especially where these conditions are  "unrelated to the sale," "unpredictable," or "beyond the employee's control." 

Employers Shalt Not "Encourage" Employees to Work During Meal Breaks -- Brinker v. Superior Court

The California Supreme Court's long-awaited decision in Brinker v. Superior Court finally addressed the question of what an employer must do to effectively "provide" a meal break and thereby avoid the one-hour of pay due as premium or penalty pay.

In Brinker the plaintiffs advocated for a rule that merely allowing an employee to work during his meal period must trigger a penalty.  The defense bar advocated for a rule that no penalty is owed unless the employer has affirmatively "forced" the employee to work. The Court however went for a middle ground.  Under the new rule an employer must take certain affirmative steps (and refrain from others) in order to meet its legal obligation to provide a compliant meal break. 

What An Employer Must Do to Avoid A Penalty.

In particular, the employer must have a policy and affirmatively create the actual conditions that will "relieve the employee of all duty" and allow him to engage in any personal business or leave the premises during for the entire 30-minute break period.   If an employer takes these afirmative steps in good faith and the employee nevertheless performs work during his break no penalty is owed.    

What An Employer Cannot Do Without Paying a Penalty.

Many employers are clearly over-reading Brinker as simply allowing them to propound a policy and then having their workers "waive" their breaks.   In reality, Brinker is replete with warnings that this "waiver" defense will be difficult to establish and will be forfeited if the company engages in any practices that have the intent or effect of "undermining" break rights.  These forbidden practices include:

  • "discouraging" or "impeding" workers from taking breaks.
  • “pressuring employees to perform their duties in ways that omit breaks.”
  • “creating incentives to forego” breaks.
  • “otherwise encouraging the skipping of legally protected breaks.”

 Courts and parties will have to grapple with the meaning of these terms in individual cases and different industries.  But it seems to me that meal break litigation will start to resemble nothing so much as Title VII disparate impact cases -- i.e., the focus of litigation will be on whether facially neutral business practices may have crossed the line into having an impermissible (and perhaps unintended) effect on employee rights.  

Brinker v. Superior Court Decision To Be Published Tomorrow

The California Supreme Court announced today that the opinion in Brinker v. Superior Court (Hohnbaum) will be published tomorrow at 10:00 a.m. The opinion will address many issues surrounding meal and rest break requirements under the California Labor Code, such as whether employers need to ensure or simply provide meal breaks, and when breaks should be taken during a shift.

For more information on the decision we will be holding a webinar next Wednesday at 10:00 a.m. PST. Registration information is here.

Webinar - The Impact of Brinker: Understanding The Supreme Court's Decision On Meal & Rest Breaks

Be among the first in California to understand the complete impact the monumental decision in Brinker v. Superior Court will have on employers. The Court’s decision is expected on April 12, and Anthony Zaller and Daniel Turner will analyze and discuss the impact of the decision. The webinar will explain the decision and what it means for employers and wage and hour class actions, discussing among other items:

  • Can meal periods be offered to employees, or do they need to be ensured?
  • When during the shift can meal and rest periods be taken?
  • What does the Court’s ruling mean for the status of meal and rest break class actions and class certification issues?
  • What is the impact for cases currently being litigated?

The cost is $150 per connection. 

Date: Wednesday, April 18
Time: 10:00 a.m. PST

Click here to register.  Existing clients can email us here to have the fee waived.

California Supreme Court Decision in Brinker Delayed

The California Supreme Court may generally take as long as it likes to decide a case.  The only semi-firm deadline is created by California Rule of Court 8.524(h)(1), providing that a case is deemed "submitted" upon completion of oral argument, and the Constitutional requirement to decide a matter within 90 days of submission (See Cal. Const. Article IV, Sec. 9).

The completion of oral arguments in Brinker v. Superior Court on November 9, 2011 thus stoked expectations that the blockbuster meal break and class action issues raised in the case were finally on the verge of resolution after more than three years on the Supreme Court's docket.

But not so fast . . . the Supreme Court has now ordered further briefing and has vacated the "submitted" status of the case.  Under this latest order the case will be deemed "resubmitted" on January 13, 2012.  This gives the court until at least April 12, 2012 to issue its decision.

This delay is frustrating for all the courts, attorneys, and parties who are awaiting some clarity on these thorny legal issues.  

However, I do find it interesting that the further briefing ordered by the court concerns the extent to which its ultimate decision may apply prospectively only.  To me this suggests that: (a) The Court's decision will not merely uphold the (pro-employer) decision below; and (b) The opinion will set forth a new and detailed quasi-legislative standard for determining whether an employer has successfully provided timely and realistic meal and rest breaks to its employees.  

   

Breaking News -- Brinker Set for Oral Argument

According to the automated notice from the California Supreme Court, oral argument in Brinker v. Superior Court (Hornbaum) has been set for November 8, 2011.  This means the Court's long-awaited opinion (which will presumably clarify the standards for providing meal periods for employees) will likely be issued some time early next year.

Does Wal-Mart v. Dukes Impact California Wage and Hour Claims -- U.S. Supreme Court Vacates Certification Order in Chinese Daily News v. Wang

The U.S. Supreme Court yesterday vacated the Ninth Circuit decision in Chinese Daily News v. Wang, which had upheld class certification of various California Labor Code claims.  The Supreme Court makes no substantive analysis of the opinion but merely directed that it be remanded back to the Ninth Circuit "for further consideration in light of Wal-Mart Stores, Inc. v. Dukes."  

Some may see this as a vindication of the view that Dukes is a "game changer" for certification of wage and hour claims.  But I tend to disagree. 

The unusual aspect of the Chinese Daily News decision was that it had based certification of the plaintiffs' monetary wage claims under both Rule 23(b)(2) (applicable to equitable claims) and Rule 23(b)(3) (applicable to damage claims).  Dukes however rejected the use of Rule 23(b)(2) for certifying monetary claims.   So it is understandable that the case was vacated and remanded. 

The vast majority of wage claims, however, are certified exclusively under Rule 23(b)(3).  And Dukes did not change the standard applicable to that prong of the rule.   Consequently, I predict that the Ninth Circuit will merely decide on remand that certification in the Chinese Daily News case was independently proper under Rule 23(b)(3). 

For example, in the recent Second Circuit opinion of Shahriar v. Smith & Wollensky Restaurant Group, the Court upheld class certification of wage claims under Rule 23(b)(3) without finding the need to even mention Dukes. 

In short, at this point there is really no reason to believe that Dukes will have any significant impact on class certification of California wage and hour claims.  

  

Court Clarifies Pay Stub Requirements -- McKenzie v. FedEx

 The federal district court decision in McKenzie v. FedEx, provided some useful guidance to employers and employees regarding what information must be included in pay statements under Labor Code section 226(a).  For example, in fulfilling the requirement to show "all hours worked," a wage statement doesn't necessarily have to contain a separate line item listing that number.  However, the wage statement must contain sufficient information for an employee to easily add up the total hours from the other lines.  

In McKenzie, the court granted summary judgment to the employee on the ground that FedEx's "idiosyncratic" wage statements were not self-explanatory and therefore failed the test.  

[T]he total regular and overtime hours listed in FedEx's wage statements, when added together, do not sum up to the total hours worked by the employee during the pertinent time period. Without additional information regarding the wage statement, an employee cannot simply “arrive at the sum of hours worked.”  Evidence of this can be seen in the sample wage statement provided by FedEx for McKenzie's pay period ending on March 21, 2009. When the total overtime categories and the regular rate hours listed in that document are added together, the sum of these figures is 58.24, which represents a total of 40 regular hours and 18.24 overtime hours. However, because information provided by FedEx (and not disclosed on the wage statement itself) explains that the overtime hours are always listed twice, the sum of all of the figures on the wage statement during the relevant period is actually 49.12, not 58.24.  Thus, the Morgan rationale, which contemplates that an employee can determine his or her total hours worked by summing up the figures on a wage statement without need to reference any other time records or other documents, does not apply to FedEx's somewhat idiosyncratic wage statement.  Accordingly, the Court finds that FedEx violated Section 226(a)(2) by failing to state the “total hours worked by [an] employee” in its wage statements.

The Court also found that FedEx's wage statements violated Section 226(a)(6) because they listed only the end date and not the start date of the covered pay period, and violated Section 226(a)(9) because they failed to separately list the applicable overtime rate of pay.   The Court further held that these violations would trigger penalties on behalf of all similarly situated employees under the Private Attorney General Act of 2004 ("PAGA"), regardless of whether the employees had suffered any specific injury.

It is surprising how many employers, even large employers like FedEx, will incorrectly assume that the design and content of their pay stubs is a trivial issue.  In reality, the Labor Code recognizes that supplying employees with the information necessary to review their own wages and hours for legal compliance is a crucial part of the overall enforcement scheme. 

As a result, Labor Code Section 226(a) requires the issuance of accurate, itemized wage statements that contain the specific categories of information spelled out in the Labor Code. The good news for employers is that Section 226(a) sets up clear, bright-line requirements which should be easy to follow.  The bad news is that Section 226(e) and PAGA impose penalties for issuing defective statements.  And due to the typically uniform nature of a wage statement program these penalties claims are likely to be assessed on behalf of every employee who ever received a statement.

  

 

California Wage Laws Apply to Non-California Residents Working Temporarily In The State -- Sullivan v. Oracle

As the "global economy" becomes more fluid it is increasingly common for employees to cross borders for short-term assignments.  This can lead to confusion concerning the proper calculation of wages for these assignments  -- e.g., should it be based on the law where the work is performed, or where the employee lives?

In Sullivan v. Oracle the California Supreme Court has clarified that California's overtime rules apply to anyone performing work within the state, regardless of their state of residency or how long they may be working in California. 

Although the Court's ruling is technically limited to overtime rules the same analysis would necessarily also apply to most other Labor Code protections.  Thus, employers and workers alike should assume that the provisions of the Labor Code will generally govern any work performed in California. 

In a secondary part of the decision the Court also held that plaintiffs could not use California's unfair competition law ("UCL") to recover overtime payments which were earned under federal law in another state.  That would be stretching the long arm of California law a bit too far.

 

 

Department of Labor Releases Smartphone Application for Tracking Employee Work Hours

Employers are required by law to keep records of all hours worked by their non-exempt employees.  However, when the employer either fails to keep records or there is a dispute over the exempt status of an employee the lack of contemporaneous time entries can greatly complicated the dispute. 

In an effort to alleviate this problem, the federal Department of Labor has released a free, downloadable smart phone app that employees can use to track their time and create their own, independent time sheets.   Here is the text of the DOL announcement:

The U.S. Department of Labor today announced the launch of its first application for smartphones, a timesheet to help employees independently track the hours they work and determine the wages they are owed. Available in English and Spanish, users conveniently can track regular work hours, break time and any overtime hours for one or more employers. This new technology is significant because, instead of relying on their employers’ records, workers now can keep their own records. This information could prove invaluable during a Wage and Hour Division investigation when an employer has failed to maintain accurate employment records.
 

The free app is currently compatible with the iPhone and iPod Touch. The Labor Department will explore updates that could enable similar versions for other smartphone platforms, such as Android and BlackBerry, and other pay features not currently provided for, such as tips, commissions, bonuses, deductions, holiday pay, pay for weekends, shift differentials and pay for regular days of rest.
 

I have not had a chance to try it out yet, but this seems like a very useful tool for employees and employers alike, especially for employee working in the field where timeclocks or paper timesheets are not practical.   

Class Action Waivers Alive Again In California - AT&T Mobility v. Concepcion

California employers have long argued that arbitration agreements that require employees to only bring their cases as individual cases and not class actions should be enforceable. California courts routinely disagreed with this rational, arguing that class action waivers effectively obstructed employees’ rights because the employees were less likely to sue if only suing to recover their individual damages. The California Supreme Court explained in Discover Bank v. Superior Court that most arbitration agreements in the consumer context waiving the right to bring a class action were unconscionable contracts under California law. This rule has also carried over into the employment context and invalidating most employment arbitration agreements in which the employee waived any right to bring a class action for claims that arose during employment. But this week, the California Supreme Court’s decision was expressly overturned by the United Stated Supreme Court in AT&T Mobility LLC v. Concepcion.

The United States Supreme Court held in AT&T Mobility LLC v. Concepcion that the California Discovery Bank ruling “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” by enacting the Federal Arbitration Act (FAA). In the case, Plaintiffs brought suit against AT&T for false advertising and fraud by claiming that it provided consumers with a free phone, but the Plaintiffs were required to pay sales tax on the phones, and Plaintiffs alleged therefore the phones were not “free.” AT&T had an arbitration agreement that prevented Plaintiffs from bringing a class action, and required the Plaintiffs to arbitrate their claims. The lower courts held that California’s Discover Bank rule invalidated the class action waiver in the agreement as “unconscionable”. In overturning the lower courts, the US Supreme Court held that California’s Discover Bank rule “classifying most collective-arbitration waivers in consumer contracts as unconscionable” is a clear obstacle to the goals of the FAA. Therefore the FAA preempted California’s Discover Bank rule, allowing the class action waiver in the arbitration agreement to be enforceable.

Ramifications For California Employers

Until now, most class action waivers contained in arbitration agreements entered into with employees were unenforceable under California law. Now the AT&T Mobility decision gives employers an argument again that these types of agreements are permitted under Federal law, and therefore are enforceable. California employers still must be careful to follow other considerations to make such agreements enforceable, and it is important to keep in mind that the AT&T decision was in the consumer context – not an employment agreement.

Employers Cannot Avoid Overtime by Dividing A Single Worshift Between Two Different Days or Weeks -- Seymore v. Metson Marine, Inc.

Unlike federal law, California requires premium overtime pay for all hours worked in excess of eight per day and all hours worked on the seventh consecutive day of work.  This sets up a potential anomaly for employees who work long graveyard shifts. 

For example, consider an employee who is scheduled to work from 6:00 p.m. Monday night to 6:00 a.m. Tuesday morning.  Despite working twelve straight hours, his employer's payroll system may pay for only six hours of straight time on Monday and another six hours of straight time on Tuesday.  By contrast, a co-worker who pulled a similar twelve-hour shift from 6:00 a.m. Tuesday morning to 6:00 p.m. Tuesday evening would get credit for eight hours of straight time plus four hours of daily overtime.

In Seymore v. Metson Marine, Inc. the same problem existed for purposes of calculating seventh-day premium pay.  Metson's employees were stationed on oil spill recovery ships and worked two-week "hitches" that began and ended on Tuesday.   But -- like most employers -- Metson used a Monday-to-Monday workweek.  As a result, the employees who worked seven days in a row would get credit for six days worked in one week and one day worked in the next week -- with no seventh-day premium pay for the last Tuesday in their "hitch," which fell into the next workweek.

The First District Court of Appeal found, however, that the accounting convention of a fixed workday and workweek could not be allowed to override the purposes of California's overtime law.

Plaintiffs contend that premium pay must be calculated based on the “fixed and regular” schedule actually worked and that Metson should not be allowed to subvert the employee protections of section 510 by designating an artificial workweek that does not correspond with the period actually worked. Asserting that their workweek actually began and ended on Tuesday, plaintiffs argue that Metson was required to pay overtime wages for work performed on the seventh and 14th day of each hitch. We agree.

In light of the Metson decision, employers should carefully review their payroll practices to make sure that they are not inadvertently dividing consecutive workshifts or workdays when calculating overtime.  By the same token, employees who work graveyard shifts or extended "hitches" of seven days or more should carefully review their wage statements to ensure that they are receiving credit for all overtime due.

 

 

             

Employees are Entitled to At Least Two Hours' Compensation for Attending Meetings -- Price v. Starbucks

As we have previously blogged, reporting time pay -- i.e., the requirement to pay a minimum of two to four hours of compensation each time an employee is required to report to work -- is one of the most overlooked requirements of California wage and hour law.   The decision in Price v. Starbucks, while not currently for publication, is therefore significant as perhaps the first opinion to seriously grapple with the calculation of reporting time wages.  

Price was a less-than-stellar barista who was asked to come in to work on his day off to get fired.  Since the employer had required him to come to work to get the bad news he was clearly entitled to some "reporting time pay."  The question was: how much? 

The canned barista didn't have a regularly scheduled shift time but he averaged about six hours per day when he did work.  So he contended that he was entitled to half of this average or about three hours of pay.  The Court, however, focused on the fact that when Price reported to work on his last day he knew he was there only for a brief meeting and had no expectation of being put to work.  As a result, the Court concluded that he was only entitled to the minimum payment of two hours' pay:

Section 5(A) of Wage Order Number 5-2001 states: Each workday an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee's usual or scheduled day's work, the employee shall be paid for half the usual or scheduled day's work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee's regular rate of pay, which shall not be less than the minimum wage.

The use of the disjunctive “or” in this regulation, is used in the ordinary sense, suggesting alternatives. If an employee is required to work, reports to work, and is not put to work or does not work half of the employees' usual or scheduled day's work, the employee is paid a half-shift reporting wage not to exceed four hours. If an employee is not scheduled to work or does not expect to work his usual shift, but must report to work for a meeting, the employee falls into the regulatory category of those employees called to work on their day off for a scheduled meeting. Price was entitled to the minimum payment, which is what he received.

Thus, the Court seems to have created a bright-line rule that employees are entitled to only two hours of pay when they are called in to work to "attend a meeting for an unspecified number of hours."  

 

  

 

Court Condemns Employer Policies that "Discourage" Meal Breaks -- Tien v. Tenet Healthcare Corporation

The opinion in Tien v. Tenet Healthcare Corporation is a bit of a split decision on meal breaks.  On one hand, the Court upheld the trial court's denial of class certification in a meal break case.  On the other hand, the Court endorsed an interpretation of the meal law in which an employer may be liable merely for creating "a work environment that discourages employees from taking their breaks."

Consistent with the purpose of requiring employers to provide employees with meal breaks, the Labor Code uses mandatory language . . . precluding employers from pressuring employees to skip breaks, declining to schedule breaks, or establishing a work environment that discourages employees from taking their breaks.

While this is hardly a strict liability standard, it does focus attention on the employer's overall "work environment," which would tend to favor class certification in many cases.  Once again, the take-away message for employers is to have an active, good faith compliance program. 

         

Employees Can Recover At Least Two Hours Per Day For Missed Meal and Rest Breaks -- United Parcel Service v. Superior Court

If anyone were to present an award for the statute that has created the most interpretation issues per word, the meal and rest break provision of Labor Code section 226.7 would have to be a finalist. 

The first big issue was how to characterize the one-hour of additional wages provided by the statute.  This was finally settled by the California Supreme Court's Murphy v. Kenneth Cole decision, holding that this amount was a premium "wage" akin to premium overtime pay.  The next high-profile dispute was the extent to which an employer must take affirmative steps to "provide" breaks in order to avoid the penalty/premium wage payments required by the statue.  This is the subject of the pending Brinker case.

Another long-festering interpretation issue (which is also likely to eventually end up before the Supreme Court), is the number of penalty/premium wage payments that an employee may accrue in a single day under Section 226.7.   The Second District Court of Appeal confronted this damages question head on in United Parcel Service v. Superior Court.  It is probably not worth recounting the blow-by-blow statutory construction analysis used by the Court but the bottom line is that employees may recover two penalties per day:

In short, we conclude, based upon the wording of section 226.7, subdivision (b), the legislative and administrative history of the statute and IWC wage orders, the public policy behind the statute and wage orders, and also the principle that we are to construe section 266.7 broadly in favor of protecting employees, that the employees in this case may recover up to two additional hours of pay on a single work day for meal period and rest period violations-one for failure to provide a meal period and another for failure to provide a rest period.

The take-away for employers is that it more important than ever to have an effective break policy, as the potential liability has now been effectively doubled.

California Minimum Wage Law Applies to State Employees -- Sheppard v. North Orange County Regional Occupational Program

On December 23, the Fourth District Court of Appeal gave an early Christmas present to government employees by holding that they are covered by the same California minimum wage laws as private employees. 

The Court reached this conclusion in Sheppard v. North Orange County Regional Occupational Program, through its interpretation of the plain language of Wage Order 4-2001, which generally applies to all Californians employed in white-collar, "clerical," or "office" jobs.  

The Court's textual analysis centered on the qualified nature of the Wage Order provision that exempts government employees from most of its protections:  i.e., the language in Section 1(b) stating that “Except as provided in Sections 1 [‘Applicability of Order’], 2 [‘Definitions'], 4 [‘Minimum Wages'], 10 [‘Meals and Lodging’], and 20 [‘Penalties'], the provisions of this order shall not apply to any employees directly employed by the State or any political subdivision thereof, including any city, county, or special district.” 

The Court interpreted this language as creating a limited exception to the general exclusion of government employees from the protections of the Wage Order.  As a result, the Court held that "we interpret the language of Wage Order No. 4-2001, by its terms, to impose the minimum wage provision as to all employees in the occupations described therein, including employees directly employed by the state or any political subdivision of the state."  (Emphasis added).

This is a very big deal for state workers because California's minimum wage law is far more liberal than federal law.  In particular, California law does not allow employers to average wages over an entire work week in order to determine if the minimum wage threshold (currently $8.00 per hour) has been met.  Instead, California employers must ensure that their compensation plan guarantees that "each hour" is separately and independently compensated at the minimum rate.  Thus, regardless of a workers overall level of weekly or monthly compensation, any amount of unpaid work during the week will trigger a claim for unpaid "off the clock work."  

(This requirement of separate compensation for each hour is sufficiently important to warrant its own separate blog post, so watch for that coming out soon).      

Employer Cannot Unilaterally Reduce Promised Commission Rates -- McCaskey v. California State Automobile Association

When an employer reserves the right to modify or amend a sales commission plan it create a dangerous conflict of interest with the sales person.  This is especially true where the employer believes it has the ability to unilaterally modify the terms of the agreement even after the employee has already performed his end of the bargain.  

In McClaskey v. California State Automobile Association, the California Appellate Court has clarified that under certain conditions a commission contract may become "vested" so that its benefits cannot be unilaterally reduced.   

The California State Automobile Association (CSAA), promised McClaskey and other insurance salesmen that if they had worked for the company for at least 15 years their minimum sales quotas would be reduced by 15% when they reached age 55.  After each of the plaintiffs had met the conditions for this "relaxed commission" benefit, the employer decided to rescind it.  Each of the plaintiffs was subsequently fired for either failing to meet the regular quota or for refusing to sign a new contract that waived this provision.

First, the Court rejected the employer's theory that it could not be required to honor its promise forever and must therefore be allowed to rescind it so long as the policy had been in effect for a "reasonable time."  Assuming arguendo that this theory was valid in the first place, the Court held that the "reasonableness" of any time limit for modification must be judged from the perspective of whether the employee has had time to receive a fair exchange in return for his performance.

Determining what constituted a reasonable time under the circumstances would seem to require consideration of the facts we have already noted, i.e., that the benefit is readily understood as a way to ease plaintiffs into retirement, that plaintiffs had in fact devoted their careers to CSAA's service in anticipation of the benefit, and that CSAA had therefore received everything it bargained for while yielding nothing whatever in return.  So understood, it would seem patently unreasonable to refuse the promised benefit when CSAA did.     

Next, the Court rejected the argument that an employer has carte blanche to do anything it likes merely because the employment relationship is generally terminable "at-will."

It may indeed be true, and can in any event be assumed for present purposes, that the employment was “at will” in the sense that CSAA was generally entitled to discharge plaintiffs without having to establish good cause to do so. It does not follow, however, that it could discharge them-as it explicitly did-for failing to meet production quotas after they had qualified for the promised reductions, or for refusing to relinquish the right to those reductions. The governing question is not CSAA's general power to discharge plaintiffs without cause, but its power to discharge them, as it expressly did, for a reason it had promised not to use as a basis for their discharge.

Finally, the Court rejected the employer's ability to rely on the standard commission plan language under which the employer reserved a right to "modify" the plan at its sole discretion whenever it wanted. 

[T]he reserved power to modify the compensation plan does not pose an insuperable barrier to plaintiffs recovery because it can easily be understood as qualified by the obligation to honor the promise of reduced [quotas] as to those representatives who had qualified for it-i.e., earned it-while it was still in effect.

Taken together, these holdings are a major victory for the rights of commissioned employees.  Indeed, the McClaskey Court rejected the most common contract arguments offered by unscrupulous employers who might otherwise be tempted to evade their promises to pay commissions even after their employees have performed every condition asked of them.    

California Supreme Court Extends Statute of Limitations for Late Wage Penalties -- Pineda v. Bank of America

Labor Code section 201(a) requires employers to pay final wages "immediately" upon terminating an employee.  Labor Code section 203, in turn, adds "teeth" to this requirement by imposing a "waiting time" formula that continues the unpaid wages for up to 30 days while they remain unpaid.  (In addition, Labor Code section 208 provides that "Every employee who is discharged shall be paid at the place of discharge.")

Employers -- especially out-of-state employers doing business in California -- will sometimes implement policies that result in the systematic late payment of final wages.  These policies may include waiting until the next regular payday to cut a final paycheck, or issuing final paychecks by mail from a central payroll location so that the checks are not received until days or weeks after termination.  

This type of systemic late payment may not trigger a very large late penalty for any single employee but the cumulative liability across an entire work force can be huge.  As a result, such late payment policies are a prime target for class action litigation.       

In Pineda v. Bank America, the California Supreme Court gave a boost to such class actions by holding that late penalties under Section 203 can be collected for up to three years after the underlying final wages were paid.  Prior caselaw had applied a one-year statute of limitations.  So Pineda effectively triples the class-wide exposure of employers.

In light of Pineda, employers may want to reexamine their procedures for generating final paychecks.  On the other hand, their former employees may want to take a trip down memory lane to think back about when they received their final pay at their various jobs over the past three years.      

 

Monetary PAGA Penalties Appy to Violation of Wage Order Working Condition Provisions -- Bright v. 99 Cent Only Stores

In Bright v. 99 Cent Only Stores, the Second Appellate District reversed the dismissal of a cashier's claim for penalties because her employer failed to give her a place to sit while she was working.  One unfamiliar with California's unique employment law enforcement scheme may be excused for reacting along the lines of "so what? that sounds like no big deal." 

Au contraire gentle reader. In fact, this may be a very big deal and may signal a whole new wave of employment litigation in California.

The reason is that providing "suitable seats" to employees is one of the many "working condition" provisions contained solely in the administrative Wage Orders.  These requirements generally provide no express remedy or private right of action.  To the extent employers have even been aware of these administrative working condition provisions at all (which most aren't) they have generally been ignored on the assumption that they could be enforced only through a governmental prosecution for injunctive relief.  And given budget restrictions and the lack of any realistic monetary penalty these "Wage Order only" regulatory requirements have gone essentially unenforced. 

By contrast, since the advent of the Labor Code Private Attorney General Act of 2004 ("PAGA"), violations of the Labor Code have triggered penalties of at least $100-200 for each pay period that the violation continues.  In a class or collective action on behalf on an entire workforce these penalties can add up very quickly indeed.  By its terms, however, PAGA applies only to violations of the "Labor Code." 

The great innovation of Bright v. 99 Cent Only Stores, is that it extends PAGA remedies to the violation of obligations which are contained solely in the administrative Wage Orders and which are not independently set forth in the Labor Code.  It does this with an assist from Labor Code section 1198, which states that:

“The maximum hours of work and the standard conditions of labor fixed by the commission shall be the maximum hours of work and the standard conditions of labor for employees. The employment of any employee for longer hours than those fixed by the order or under conditions of labor prohibited by the order is unlawful.”             

The Court in Bright reasoned that Labor Code section 1198 effectively incorporates the provisions of the Wage Orders and converts them into a separate violation of Labor Code section 1198 itself.  Once converted to a "Labor Code" violation, the non compliance now triggers the scary penalty and collective action remedies set forth in PAGA.

For example, by failing to provide a chair at its cashier stations 99 Cent Only Stores could owe $200 per month to every cashier in California for the entire limitations period -- which could certainly equal many million of dollars in the aggregate.    

Cataloging the previously unenforced Wage Order provisions which are now enforceable under PAGA is probably worthy of a separate blog post.  But the Bright decision noted that these obligations may include topics as diverse as keeping adequate records of hours worked, supplying tools and uniforms, providing changing rooms and rest facilities, providing adequate seating, and maintaining an appropriate workplace temperature.  

In light of the Bright decision, employers would be well advised to familiarize themselves with the more obscure Wage Order working condition requirements that they have probably been ignoring and to begin aggressive compliance efforts.    

    

Class of Newspaper Reporters Entitled to Overtime -- Wang v. Chinese Daily News

The Ninth Circuit's Decision in Wang v. Chinese Daily News is an important decision on several levels.  One of these is to demonstrate just how difficult it can be for an employer to prove a defense to overtime under the professional exemption.   

The Chinese Daily News argued that its reporters qualified as exempt "creative professionals," because their primary work duties required "invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work.” 

As the court explained, however, "newspaper reporters who merely rewrite press releases or who write standard recounts of public information by gathering facts on routine community events are not exempt creative professionals."  Rather, exempt duties include "performing on the air in radio, television or other electronic media; conducting investigative interviews; analyzing or interpreting public events; writing editorials, opinion columns or other commentary; or acting as a narrator or commentator."  

In short, the difference is between being a mere conduit for facts and being an investigator, analyst or interpreter of those facts.  The Court opined that this "creative professional" standard should only apply to the "small minority of journalists" who work at national papers such as "The New York Times" or "Washington Post."  But reporters at "small or unsophisticated" "community" papers such as the Chinese Daily News in Monterrey Park are presumably not exempt professionals.   

I have to imagine this is a slightly bitter-sweet victory for the reporters.  On the one hand, they won the right to collect back overtime pay.  On the other hand, the Ninth Circuit has essentially declared that, as a matter of law, they are a bunch of "unsophisticated" hacks who can't pretend to the title of a "professional" journalist.  In the law it's sometimes impossible to eat your cake and have it, too.

Labor Code Protections Do Not Apply To Government Employees -- California Correctional Peace Officers Assoc. v. State of California

In California Correctional Peace Officers' Association v. State of California, the correctional officers union brought a class action against the state of California alleging that they were entitled to penalties for missed meal periods under Labor Code section 226.7

The meal period requirement does not explicitly exclude public sector employees and the plaintiffs argued that this indicated an intent to cover all employees -- both public and private.  The Appellate Court held that plaintiffs arguments about alleged legislative intent were trumped by a more general presumption that the Labor Code does not apply to government employees:

 This argument runs contrary to well-established principles of statutory construction. Our Supreme Court has noted: “A traditional rule of statutory construction is that, absent express words to the contrary, governmental agencies are not included within the general words of a statute.” The Legislature has acknowledged that this rule applies to the Labor Code.

Government employees should be aware, however, that they are still protected by the federal Federal Fair Labor Standards Act ("FLSA").  Although the FLSA contains no requirement to provide meal periods, its core protections are largely the same as under state law.  Thus, California state and local employees may sue under the FLSA for violations, including:

  • Failure to pay overtime for all hours worked over 40 in a week.
  • Failure to pay for all hours actually worked, including time spent working during unpaid lunch breaks, at home, or "off-the-clock" outside of regular shift times.
  • Failure to timely pay the full amount of all wages earned on each pay period.     

Special rules apply to the calculation of minimum wage and overtime for certain police and fire employees.  But state and local employees who believe they are being shortchanged may discover that they have a remedy under federal law.

Seemingly Neutral "Rounding" Rules May Systematically Shortchange Workers

Many companies use time keeping systems (such as the market-leading Kronos software) that "round" employee time entries to the nearest quarter-hour.  For example, if an employee clocks in at 8:53 a.m., the system will credit him as starting work at 9:00 a.m.  On the other hand, if he had started work at 8:52 a.m., the system will typically round the other direction giving him credit as having started work at 8:45 a.m.

Most employers assume that the rounding works in both directions and will just average out over time.  But when other workplace rules are in effect, the rounding can be systematically skewed.  

For example, employers who follow rigid scheduling regimes often set their timekeeping software so that employees are "locked out" and cannot clock in more than seven minutes before their scheduled start time.  This ensures that the rounding will inevitably operate in one direction only.  This effect may be further compounded by policies requiring employees to arrive at work at least ten minutes before their shift begins.      

These minutes can add up, especially as they will often be compensable at time-and-a-half overtime rates when added back into the total hours worked.  By losing just seven minutes per day to rounding a full time worker could be owed nearly 30 hours of overtime by the end of the year.  Over a four-year statute of limitations this is nearly a month of uncompensated work.

The bottom line is that workers and employers should pay close attention to these small timekeeping details, which are too often ignored on the theory that they involve only negligible amounts of time.        

Some Wage and Hour Claims May Be Insurance Covered -- California Daries, Inc. v. SRUI Indemnity Co.

One of the reasons employers purchase Directors and Officers (D&O) or Employment Practices Liability (EPL) coverage is to protect against employee lawsuits.  And the most important source of exposure for California employers is the seemingly ubiquitous class action lawsuits for Labor Code violations.  Once they have been sued, however, employers are sorely disappointed when their carrier contends that the policy contains a blanket exclusion for all wage and hour claims.

The standard verbiage excludes coverage for any alleged violation of the federal "Fair Labor Standards Act . . . or any similar provision of federal, state or local statutory law or common law." 

According to the Eastern District decisions in California Dairies, Inc. v.  RSUI Indemnity Co., however, this exclusion does not apply to all California wage and hour laws.  Rather, under the terms of the exclusion, the issue is whether a particular Labor Code provisions has a sufficiently "similar" analog within the FLSA to trigger the exclusion.  

Applying this analysis to the claims plead in the underlying lawsuit, the Court (unsurprisingly) held that claims for unpaid minimum wage and overtime under California law, which closely track federal law are within the scope of the exclusion.  In a much closer question, the Court further held that claims for meal period penalties under Labor Code section 226.7 were within the scope of the exclusion because federal implementing regulations require payment of minimum wages during rest breaks.  

But the Court found that federal law contained no analog to California Labor Code sections 226 (requiring accurate itemized wage statements), section 2802 (requiring reimbursement of employee expenses), and section 201-201 (requiring timely payment of wages at termination and imposing "waiting time" penalties.  The carrier was therefore required to cover defense and indemnity costs for these claims notwithstanding the so-called "wage and hour" exclusion.

The lesson for employers is (i) always tender employment related claims even if they involve wage and hour issues and (ii) you don't necessarily have to take "No" for an answer when the carrier denies coverage.      

California Courts Provide Yet More Guidance on Drafting Class Action Settlements -- Munoz v. BCI Coca-Cola Bottling Co.

In my prior post, I noted that the recent decision in Nordstrom Commission Cases by the Fourth Distrct Court of Appeal had given much needed guidance in drafting class action settlement agreements.  Well, there may be a trend afoot because the Second DCA has now weighed in with Munoz v. BCI Coca-Cola Bottling. 

Both cases are pro-settlement.  But while the Nordstrom case is mostly concerned with how the consideration is structured and allocated, Munoz v. Coca-Cola (which was decided the same day) provides more of a road map for the specific facts which the parties need to put in the record as part of the settlement review process.  The highpoints of the decision are:

  • Amount in Controversy.  To approve a settlement the reviewing court must be able to generally understand the "amount that is in controversy and the realistic range of outcomes."  But this does not require an "explicit statement of the maximum amount the plaintiff class could recover if it prevailed on all its claims." 
     
  • Source of Settlement Data.  It is immaterial whether the data used to determine the general amount in controversy has been obtained through formal discovery,other litigation or informal disclosures by the defendant.
     
  • Potential Certification Difficulties.  Class members must presumably share enough commonality to warrant the formation of a settlement class.  The court nevertheless cited the potential difficulty in obtaining a contested certification order as a factor favoring the adequacy of an agreed-upon settlement amount.
     
  • The Unsettled Status of Brinker Supports Settlement.   In a clear allusion to the California Supreme Court's ongoing (and seemingly never ending) review of Brinker v. Superior Court, the court found that "The uncertain state of the law with respect to meal and rest period claims was likewise a substantial concern" which favors settlement approval.
     
  •  No Opt-Out Form Need Be Provided.  Although potential class members must be informed of their right to opt-out of the settlement the parties are not required to provide a separate opt-out form with the class notice.
     
  • Incentive Payments for Named Plaintiffs.  "[N]amed plaintiffs are eligible for reasonable incentive payments to compensate them for the expense or risk they have incurred in conferring a benefit on other members of the class."  An additional incentive payment of $5,000 for the named plaintiff is reasonable where the average participating class member received $4,300.  

 As with Nordstrom Commissions Cases, the Munoz decision helps everyone involved by providing some fairly clear rules for approving class settlements.

 

Parties Have Flexibility in Allocating Settlement Amounts in Class Actions -- Nordstrom Commission Cases

In traditional litigation a plaintiff is obviously free to settle his differences with the defendant on whatever terms he chooses.  And if a settlement removes the case from an overcrowded docket the Court's normal reaction is to immediately grant a dismissal with a sigh of "good riddance."  

As class action practitioners are acutely aware, however, these cases are a whole different animal.  Because the Court has an obligation to safeguard the procedural rights of "absent class members," it must give approval to the class settlement after certifying that it is "fair and reasonable" to the class under the circumstances.  This places judges in the anomolous position of acting as a sort of quasi-advocate for the interests of one group of litigants.  As a result, there has been a great deal of uncertainty about exactly what the court must do in order to discharge its obligation to review and approve class settlements.

In Nordstrom Commission Cases the California Appellate Court has provided some useful guidance for the Courts that review class action settlements and the parties who negotiate and draft them.  The Appellate Court upheld the lower court's decision to approve a settlement involving the calculation and payment of commissions to Nordstrom sales clerks.  In doing so, it affirmed the following principles:

  • A lower court's determination that the relative "strength of the case" supports settlement approval will not be second-guessed so long as the parties have provided a "substantiated explanation of the strengths and weaknesses of the class's claims, as well as the potential total recovery by the class under various damage theories."
     
  • The parties need not allocate specific money to each claim and, in particular, may properly allocate "$0" to claims under PAGA.  This is significant because 75% of all PAGA penalties must be paid to the state of California.
     
  • Vouchers for products provided by the defendant are a proper form of settlement consideration and such so-called "coupon settlements" are not disfavored under California law.

By clarifying the standards and making settlements easier to negotiate and approve, the Nordstrom Commission case is actually beneficial to both plaintiffs and defendants.  

 

Promoting A Product Without The Ability to Close a Sale is not Exempt "Outside Sales" Activity -- In re Novartis Wage and Hour Litigation

Pharmaceutical representatives (aka "drug reps") are an unusual breed.  Their job duties are essentially the same as travelling salesmen -- i.e., visiting potential customers to sing the praises of their employer's products.  But it is only after these visits that the doctors will write prescriptions for their individual patients, which will be filled by independent pharmacists.  Unlike a true salesperson, drug reps therefore cannot actually close a sale.

In In re Novartis Wage and Hour Litigation, the Second Circuit determined that this was a crucial distinction which prevented Novartis from avoiding FLSA overtime payments under the "outside sales" exemption.  As the court explained, the essence of a salesperson is "obtaining commitments to buy" a product.  Merely proving information or promoting demand for a product is insufficient:

In sum, where the employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it, we conclude that it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.

The Novartis decision is a reminder of the important distinction between "sales" and "promotion" work.  Promotion work can be counted toward satisfying a sales-based exemption only when it is done in furtherance of a salesperson's efforts to generate her own commissioned sales.  It can also be counted toward the administrative exemption if an employee also exercises "independent judgment and discretion" in important matters. 

But Novartis's drug reps fell short of both exemptions because they had no authority to close sales and no authority to make any important administrative decisions.  

Who is A "Joint Employer" in California -- Martinez v. Combs

In Martinez v. Combs, the California Supreme Court has provided long overdue guidance on the question of who may be held liable for unpaid wages as a "joint employer."  

A large part of the decision is an historical treatise tracing the development of California wage regulation since the Progressive Era.  But the "take-away" rules are the following:

  • The Industrial Welfare Commission ("IWC") has the authority to define who is a covered "employer" through its Wage Orders.
  • The California definition of "employer" does not impose liability on "individual corporate agents acting within the course and scope of their agency." 
  • California law also does not incorporate the extremely broad "economic realities" definition of employer used under the federal FLSA.
  • Rather, the California definition of employer includes only entities which have the practical ability to prevent the alleged violations -- in other words, those parties with the power to "hire and fire," "set wages," or to tell workers "when and where to report to work." 
  • The true employer may not shield itself from liability by exercising this level of control through a "straw man" or by using some other "sham arrangement." 

 The main beneficiaries of the new standards are companies that purchase personal services or labor-intensive products from outside contractors.  So long as the purchasing company is not directly supervising the workers or making hiring and firing decisions it should not face liability for unpaid wages.

The Department of Labor Issues Its Very First "Administrator's Interpretation" -- Mortgage Loan Officers Are Entitled To Overtime

On March 24, the DOL issued Administrator's Interpretation No. 2010-1, which is a significant document for a number of reasons.

First, this is the very first in a new breed of interpretative guidance which is apparently intended to replace the DOL's prior practice of issuing "opinion letters" responding to the specific facts and questions submitted by interested parties.  The new "Administrator's Interpretation" is more like an advisory opinion based on hypothetical or generalized facts.

Furthermore, the substance of the letter reinforces a recent judicial trend we have blogged about last year -- i.e., that salaried financial service workers may be glorified production workers entitled to overtime pay.    

In particular, the Administrator's letter addresses overtime for positions in the mortgage industry which may carry titles such as "loan representative," "loan consultant," or "loan originator."  Whatever the title, the duties of these positions are generally defined as follows:

Mortgage loan officers enter the collected financial information into a computer program that identifies which loan products may be offered to customers based on the financial information provided.  They then assess the loan products identified and discuss with the customers the terms and conditions of particular loans, trying to match the customers' needs with one of the company's loan products.  Mortgage loan officers also compile customer documents for forwarding to an underwriter or loan processor, and may finalize documents for closings.

According to the Administrator, "a careful examination of the law as applied to the mortgage loan officers' duties demonstrate that their primary duty is making sales and, therefore, mortgage loan officers perform the production work of their employers."  As a result, mortgage loan officers fall squarely on the non-exempt side of the so-called production/administrative dichotomy and they are therefore entitled to overtime pay. 

This interpretation is entitled to "deference" by federal courts applying the FLSA and will no doubt also carry persuasive weight in interpreting the California Labor Code exemption as well.  Employers are thus well advised to review the exempt of status of any financial service workers who have duties comparable to those described in this first Administrator's Interpretation.    

 

Commuting in Company Vehicle May Be Compensable Under California Labor Code -- Rutti v. LoJack

The Ninth Circuit decision in Rutti v. LoJack highlights the sharp distinction between the federal definition of compensable "hours worked" and the more generous standard under the California Labor Code. 

Rutti was a technician who installed LoJack anti-theft units in customers' cars.   He was dispatched directly from his home to the homes of customers, where he installed the anti-theft units.  During these trips he was required to use a company vehicle and was prohibited from making any personal stops or detours.  His employer only paid hourly wages, however, from the time he arrived at the first customer's house until he finished the last installation job of the day. 

The Ninth Circuit found that time Rutti spent "commuting" is specifically excluded from compensable time under the federal Fair Labor Standards Act ("FLSA").  Rutti was therefore not entitled to FLSA pay for the time he spent traveling to and from his first and last jobs of the day.  

By contrast, California law requires compensation for all time "during which an employee is subject to the control of an employer."   Under this standard, the requirement to use a company van and to refrain from any personal business was sufficient "control" to trigger the employer's duty to pay compensation under the Labor Code.

California Court Finds Sales Employees Cannot Meet Administrative Exemption -- Pellegrino v. Robert Half Int'l

Previously we blogged about the Second Circuit decision in which a class of loan officers were found to be entitled to federal overtime pay under the Fair Labor Standards Act because their duties fell on the "production" side of the so-called "administrative/production dichotomy."   (See Financial Service Workers May Be Glorified "Production Workers" Who Are Entitled to Overtime -- Davis v. J.P. Morgan Chase & Co. )

In Pellegrino v. Robert Half International, Inc. the Fourth District Court of Appeal has clarified that this same "dichotomy" litmus test also applies to any employer attempt to avoid California overtime by claiming the administrative exemption under the California Wage Orders.

Robert Half is the world's largest staffing firm (a/k/a "headhunter" firm).  The Plaintiffs in Pellegrino were "account executives" who were responsible for recruiting and placing candidates with Robert Half's customers.  The plaintiffs received salary and commissions but were classified as exempt from overtime.  Based on its analysis the position's job duties, however, the Court upheld a verdict that the account executives were essentially glorified salesman rather than exempt administrators.  

The Court reached this conclusion by noting that the first element of the administrative exemption is that an exempt position must be "directly related to management policies or general business operations."  This element, in turn, triggers the so-called "dichotomy" test, which the Court described as follows:

The phrase ‘directly related to management policies or general business operations of his employer or his employer's customers' describes those types of activities relating to the administrative operations of a business as distinguished from ‘production’ or, in a retail or service establishment, ‘sales' work. In addition to describing the types of activities, the phrase limits the exemption to persons who perform work of substantial importance to the management or operation of the business of his employer or his employer's customers.

By contrast, the evidence showed that the account executives had little or nothing to do with setting the internal policies of their employer were instead trained and evaluated for the purpose of achieving quantitative success in "selling the services of RHI's temporary employees to clients."  

The Court thus concluded that the duties of an account executive "were not directly related to management policies because they instead constituted sales work."  As a result, it determined that the six plaintiffs were properly found to have been misclassified and were collectively entitled to unpaid overtime and penalties of $615,000.

Financial Service Workers May Be Glorified "Production Workers" Who Are Entitled to Overtime -- Davis v. J.P. Morgan Chase & Co.

Loan officers, analysts, and brokers of various financial products are generally considered to be well compensated and prestigious positions.   As a result, these positions are often reflexively classified as exempt from overtime.  The Second Circuit's recent decision in Davis v. J.P. Morgan Chase & Co. should cause employers to question this assumption.

The Davis decision holds that a given position cannot be considered exempt unless it falls on the correct side of the so-called "production/administrative dichotomy."  According to this "dichotomy" test, the administrative exemption cannot apply if a worker's services are not being performed for the purpose of internally running the company, but are instead being sold to customers to generate revenue. 

The court noted that classifying a position as "production" depends solely on the relationship between the work performed by the employee and the nature of the Company's business.  According to the Court, the key distinction is between, on the one hand, those employees "directly producing the good or service that is the primary output of a business" and, on the other hand, those "employees performing general administrative work applicable to the running of any business." 

Significantly, the Court also specifically found the following factors were irrelevant to this distinction: (i) whether the company is selling "an  intangible service rather than a material good;" (ii) "the level of responsibility, importance, or skill needed to perform a particular job;" (iii)  "the monetary value" of the transactions handled by the employee; and (iv) whether the employee's is highly paid.  

Applying this "dichotomy" may lead to counter-intuitive results where the employer is in the business of selling financial products and services to the public.  For example, an employee who creates these financial products or provides these services to the firm's clients may be found to be a non-exempt "production" worker just as surely as if he were welding car parts on a GM assembly line. 

The Davis Court thus determined that a group of loan underwriters for Chase who investigated customer finances and approved loans could not be classified as exempt administrative employees.  To the contrary, in the context of Chase's loan business, they had to be classified as mere "production" workers. 

Although decided under the FLSA, Davis is also relevant to California overtime law, which expressly incorporates most federal definitions of  exempt duties.

 

Employees Are Not Required to Exhaust Internal Expense Reimbursement Procedures Before Suing -- Stuart v. RadioShack

California employees have a right to be reimbursed for their work related expenses, such as business travel, equipment, materials, training, and even legal expenses.  On the other hand, companies typically have their own deadlines, rules, special forms, and  other procedural requirements which must be followed in order to request and receive reimbursement.

So what happens when an employee sues for reimbursement and the Company argues that his claim should fail because he did not make a proper request under its internal rules?

In Stuart v. RadioShack, the Northern District addressed this very question and held, in effect, that the requirements of the statute must override any internal reimbursement rules set by the employer. 

Indeed, California Labor Code section 2802 provides that "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties."  And Section 2804 further provides that "Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void." 

Thus, companies must reimburse employee expenses and the parties can't do anything to forfeit or limit these rights even if they wanted to.  According to the District Court, the employer's duty to reimburse expenses should be triggered by the same standard that applies in cases of "off-the-clock" work:

The Court concludes that a fair interpretation of [Labor Code] §§ 2802 and 2804 which produces “practical and workable results,” consistent with the public policy underlying those sections, focuses not on whether an employee makes a request for reimbursement but rather on whether the employer either knows or has reason to know that the employee has incurred a reimbursable expense. If it does, it must exercise due diligence to ensure that each employee is reimbursed.

The Bottom Line:  Employer's should continue to set internal deadlines and procedures for expense reimbursement.  However, they should also recognize that the failure to follow these procedures will ultimately not  be a defense to legal liability if they know or have reason to believe the expense was actually incurred.

Court holds independent contractor status of cab drivers not suitable for class action.

USA Cab owns a fleet of about 45 taxis that it leases to drivers, and it operates a taxi dispatch service. At issue in the case was whether USA Cab’s classification of the drivers as independent contractors was proper. The Plaintiffs’ brought a putative class action alleging that due to the misclassification, USA Cab failed to provide workers’ compensation insurance, failed to pay minimum wages, improperly required drivers to pay security deposits and other fees, and denied them meal and rest breaks.

Under the terms of the agreement with the drivers, USA Cab provided the lessee-drivers with a taxi "painted with [its] insignia and equipped with meter, radio, and any other equipment as required by state law and local ordinances relating to taxicabs.” The company also paid for all licenses, taxes and fees assessed on the taxi, and to furnish liability insurance, oil, tires, and maintenance, except that required by the lessee's misuse or abuse of the taxi. The company also allowed the lessee to select from specified daily, weekly or monthly lease rates depending on his or her driving record.

USA Cab argued the purported class would be unmanageable, and common questions do not predominate over individual issues, given differences among the driver-lessees' situations.

The court noted, that while the merits of the case are not determined at the class certification stage, the facts and defenses pertinent to the merits of the case are taken into consideration to determine whether class certification is appropriate. With regards to the test of which workers can be classified as independent contractors, the court noted:

While the right to control work details is the most important factor, there are also " 'secondary' indicia of the nature of a service arrangement." [citation] The secondary factors are principally derived from the Restatement Second of Agency, and include "(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee." [citation] "Generally, the individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations." [citation]

The court provides an excellent overview of California law regarding which workers can be classified as independent contractors.  The opinion is well worth the read for anyone dealing with this issue in California. 

In this case, USA Cab submitted a number of declarations from primarily current drivers to oppose Plaintiffs’ motion for class certification. The court noted that the declarations tended to show that the case was not proper for class certification because the they tended to show that individualized issues predominated the case:

  • The declarations tended to show a lack of class-wide damage. For instance, most declarants said they incurred no work-related injuries, customarily took meal and rest breaks, and earned wages equaling or exceeding minimum wage.
  • The declarations established that the drivers were not required to use USA Cab's dispatch service. Some drivers used it for between 20 and 60 percent of their business, many used it infrequently, and some chose not to use it at all.
  • The declarations also showed that drivers paid for their own tools, such as map books, flashlights, tool kits, jumper cables, cell phones, computers, GPS navigational systems, and credit card machines.
  • Some of the drivers also established that they conducted their own marketing and advertising to gain new customers.
  • The drivers also declared that “with varying frequency they chose to set their own rates, such as flat rates for trips, or rates below the standard metered rate.”

Based on these facts, the trial court ruled, and the appellate court agreed, that this case was not suitable for class treatment. The opinion, Ali v. USA Cab Ltd., can be downloaded here (Word).
 

HR professionals note to employment lawyers: stop working off of fear

The HR blog Fistfull of Talent raises a concern I think a lot of HR professionals feel. See article “Hey Employment Law ‘Experts’, You’re Killing My Profession.” Kris Dunn expresses the all too common sentiment that employment lawyers are not advising their clients – but are rather scaring them into inaction. Kris uses the example of advice some lawyers are providing about whether or not companies should use social networking sites and Google to conduct background checks on job applicants. Taking the conservative approach, many lawyers, as Kris notes, advise against using these new technologies out of concern that it could create potential discrimination claims. (On a side note – I warned awhile ago that companies should be using the Internet to conduct background checks.)

Kris’ analysis is right on for a number of reasons. First, lawyers are trained to point out the risks of any situation to properly advise their clients. Second, lawyers are notoriously behind the technology curve. Most do not know what “new” technologies are being used or how to use them, and this creates concern as anyone is scared about what they do not know about.

Employment lawyers need to take heed of this critique. HR professionals have jobs to perform and companies to run. They need legal advice that helps them perform their jobs better – not scare them into failing to change and keeping up with the times.

Employment lawyers need to recognize that change entails risk. However, companies always have to change, and lawyers need to help companies navigate this risk, not prevent them from doing anything new.

Note to HR professionals

As you know, the HR profession is changing a lot given today’s new technologies. New issues are creating a lot of uncertainty. Issues such as how to use social networking sites to conduct background checks, monitoring employee’s internet use, and determining "hours worked" when employees always have a smart device on them.

When looking for legal advice about these issues, you need to be certain that your lawyer is familiar and up-to-date with the technology available. Does the lawyer who you are seeking legal advice from have a Twitter, Facebook, or LinkedIn account? Do they use an iPhone or Blackberry? If the answer to these questions are ‘no’ – don't be surprised if their advice is to avoid these “new” technologies.

Ninth Circuit Clarifies When Travel and Commuting Time Must be Paid -- Rutti v. LoJack

In Rutti v. LoJack, the Ninth Circuit examined the issue of which employee activities must be counted as "hours worked" and which may be disregarded as non-compensable.  In doing so, it touched upon most of the important issues raised in so-called "off-the-clock" cases.  It also applied these rules under both the FLSA and California Labor Code (where there is currently a dearth of authority on the subject). 

As a result, Rutti it is an important case for both employers and plaintiffs that warrants several distinct posts.  This entry focuses on the Ninth Circuit's ruling on commuting time.

In that regard, Rutti reemphasized the familiar rule that commuting time (i.e., travel time from home to the first place of employment for the day) need not be paid under the FLSA or California Labor Code. 

Under federal law, the 1996 Employee Commuting Flexibility Act (“ECFA”), 29 U.S.C. Sec. 254(a)(a)(2), generally excludes "traveling to and from the actual place or performance of the principal activity or activities which such employee is employed to perform."

Under California law, Labor Code section 510(b), likewise provides that "[t]ime spent commuting to and from the first place at which an employee's presence is required by the employer shall not be considered part of the day's work." 

Rutti held that this commuting rule applies even where the employee is required to use a company vehicle and is restricted from making unauthorized stops or engaging in personal business. 

Rutti did allow that an employee's travel time could become compensable if he were  required to perform any "additional legally cognizable work" during his commute.  The Court gave no specific examples of such work.  However, making work related cell phone calls or entering data in an on-board  computer system would seem to be likely real-world examples of such activities that would have to be paid even if they are done during otherwise non-compensable commute time. 

Technology blurs work/life definition

On-call time<div xmlns:cc="http://creativecommons.org/ns#" about="http://www.flickr.com/photos/maxually/2484889055/"><a rel="cc:attributionURL" href="http://www.flickr.com/photos/maxually/">http://www.flickr.com/photos/maxually/</a> / <a rel="license" href="http://creativecommons.org/licenses/by-nc/2.0/">CC BY-NC 2.0</a></div>

The WSJ notes the increase of lawsuits pertaining to when employees need to be compensated for on-call time or for time checking electronic devises away from the workplace. As the article notes, there have been a fair share federal cases, but California employers have no doubt been at the tip of this arrow. 

California’s DLSE takes the position that on-call or standby time at the work site needs to be paid for even if the employee does nothing but wait for something to happen. “[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 activities often is a factor of instant readiness to serve, and idleness plays a part in all employment in a stand-by capacity”.

The DLSE opines that employees may be paid for on-time work such as when the employee is not relieved of duties during meal periods and sleep periods when the employees are subject to the employer’s control.

What constitutes “work-time” and therefore must be paid depends on the restrictions placed on the employee. A variety of factors are considered in determining whether the employer-imposed restrictions turn the on-call time into compensable “hours worked.” These factors, set out in a federal case, Berry v. County of Sonoma, include whether there are very restrictive geographic limits on the employee’s movements; whether the frequency of calls is unduly restrictive; whether a fixed time limit for response is unduly restrictive; whether the on-call employee can easily trade his or her on-call responsibilities with another employee; and whether and to what extent the employee engages in personal activities during on-call periods.

Travel time

The DLSE also considers travel time compensable work hours where the employer requires its employees to meet at a designated place and use the employer’s designated transportation to and from the worksite. The leading case on this topic in California is Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575.
 

Bank of America pays $33 million in SEC Fines for Excess Bonuses

Employee bonuses continue to be a hot political issue.  The most recent exhibit was the SEC's announcement on Monday that Bank of America would pay $33 million in fines for not telling its shareholders that Merill Lynch would be allowed to pay $5.8 billion in executive bonuses prior to its merger with BofA.

While BofA's shareholders have every right to be upset about the non-disclosure, they must surely be wondering what good was accomplished by the SEC's action.  The $33 million fine is infinitesimal next to the $50 billion merger deal or the $5.8 billion in undisclosed bonuses.  But even more conceptually problematic is that the SEC fine will be paid by the same shareholders who were the victims of the non-disclosure in the first place.  So instead of an even $5.8 billion, the BofA shareholders are now out of pocket for $5,833,000,000. 

At least the settlement made headlines and allowed the administration to underline its moral outrage against excessive bonus compensation.

Ninth Circuit appeals court holds Wal-Mart cannot be held liable for foreign suppliers' labor violations

Plaintiffs in this case, Jane Doe v. Wal-Mart, were employees of suppliers to Wal-Mart who work in foreign countries. Their lawsuit alleged that Wal-Mart should be liable for the suppliers’ labor code violations. The employees worked for companies who manufactured goods for Wal-Mart in countries such as China, Nicaragua, and Bangladesh.

Plaintiffs alleged a unique theory for establishing liability on Wal-Mart’s behalf. They argued that Wal-Mart’s code of conduct for its suppliers (called the “Standards for Suppliers”) established a duty for Wal-Mart to ensure that the suppliers were complying with the foreign countries’ labor laws. Plaintiffs also relied on the Standards’ provision that gave Wal-Mart a right to inspect the suppliers’ to ensure they were complying with the applicable laws.

Wal-Mart filed a motion to dismiss the case on the grounds that under the law Wal-Mart could not be found liable for these third-party suppliers’ foreign labor code violations. The Court agreed with Wal-Mart in holding that the Standard for Suppliers policies did not create an obligation for Wal-Mart to monitor the suppliers’ compliance with the law – it only gave Wal-Mart a right to inspect the suppliers and then cancel orders if violations existed.

The Court also held that the facts plead by Plaintiffs did not make Wal-Mart a joint employer with its suppliers. The Court explained that to be a joint employer, an employer must have “the right to control and direct the activities of the person rendering service, or the manner and method in which the work is performed.” The Court also explained that there needs to be a day-to-day level of control, which simply did not exist in this case.

While Wal-Mart prevailed in this case, it should be a clear warning to employers to be careful in how it enters into relationships with vendors and suppliers. Employers need to be careful about how much control it has over vendors’ employees. If the relationship if not documented properly, or there is day-to-day control over the outside companies’ employees, there may be a possibility that the contracting employer could be liable for the vendors’ labor code violations.

Oral argument of the case can be listened to here
 

Employer's Uniform Classification of Its Own Employees Does Not Justify Class Treatment -- Wells Fargo Home Mortgage Overtime Pay Litigation

In re Wells Fargo Home Mortgage Overtime Litigation clarifies the role played by an employer's use of uniform job classifications when deciding to certify an overtime class.       

The opinion arose from Wells Fargo's appeal of the District Court order certifying a class of Wells Fargo "home mortgage consultants" for the purpose of determining whether they had been internally misclassified as exempt from overtime. 

As usual, the Company had an internal policy of designating everyone within this job title as being exempt from overtime regardless of any individual variation in his or her job duties.  Once sued, however, the Company took the arguably inconsistent position that it was impossible to determine overtime eligibility on such a group-wide basis.

The Ninth Circuit first made clear that an employer's internal decision to treat all members of a given job title as exempt from overtime is clearly relevant to class treatment.

The first line of attack, that Wells Fargo's exemption policy was an impermissible factor, is a non-starter. An internal policy that treats all employees alike for exemption purposes suggests that the employer believes some degree of homogeneity exists among the employees. This undercuts later arguments that the employees are too diverse for uniform treatment. Therefore, an exemption policy is a permissible factor for consideration under Rule 23(b)(3).

The District Court had gone much further, however, by employing the logic that “it is manifestly disingenuous for a company to treat a class of employees as a homogeneous group for the purposes of internal policies and compensation, and then assert that the same group is too diverse for class treatment in overtime litigation.”

The Ninth Circuit felt that this went too far and placed too much weight on Wells Fargo's internal overtime classification policy.  In the view of the Appellate Court, this internal policy was relevant, but should have warranted only slight weight in determining whether individual or common issues could be said to "predominate."

Wells Fargo's uniform exemption policy says little about the main concern in the predominance inquiry: the balance between individual and common issues. As such, we hold that the district court abused its discretion in relying on that policy to the near exclusion of other factors relevant to the predominance inquiry

Significantly, the Ninth Circuit made no ruling as to whether a class should be certified in the case.  It merely remanded with directions to re-consider the matter with more weight on the job duties of the position and less weight on the internal "uniform exemption policy."    

   

Arias v. Superior Court - Class Action Requirements Clarified By California Supreme Court

In almost every employment law class action filed, the plaintiff alleges a cause of action under California’s unfair competition law, found in California’s Business & Professions Code section 17200. Likewise, plaintiffs’ routinely allege causes of action under California Labor Code Private Attorneys General Act of 2004, found in Labor Code section 2698. These claims can be filed by one plaintiff as a “representative action” in which the individual plaintiff is seeking remedies on behalf of all other employees.

The issue decided by the California Supreme Court in Arias v. Superior Court was whether the plaintiff bringing a "representative action" must have the class certified as a class action when pursing a unfair competition claim and a Private Attorneys General Act claim. The Supreme Court held that a plaintiff must have the class certified as a class action when pursuing a Business & Professions Code section 17200 claim, but the plaintiff does not have to certify a class action to maintain a “representative action” under the Private Attorneys General Act.

The Court explained, “[a] party seeking certification of a class action bears the burden of establishing that there is an ascertainable class and a well-defined community of interest among the class members.” If a class is certified by a trial court, then everyone who fits the class definition receives notice that they are automatically in the class (unless they affirmatively opt out), and are bound by the ultimate outcome of the case.

Claims Under The Unfair Competition Law Must Be Certified As a Class Action

The Supreme Court explained that the unfair competition law prohibits “any unlawful, unfair or fraudulent business act or practice . . . .” Furthermore, in 2004, California voters passed Proposition 64 that amended Business & Professions Code section 17200 to only allow a plaintiff to bring a representative action under if he or she “suffer injury in fact and has lost money or property as a result of such unfair competition” and that the action must comply with California Code of Civil Procedure section 382, which (generally) allows for class actions under California law. The Supreme Court explained the intent of the voters in passing Proposition 64:

A thorough review of the Voter Information Guide prepared by the Secretary of State for the November 2, 2004, election at which the voters enacted Proposition 64 leaves no doubt that, as discussed below, one purpose of Proposition 64 was to impose class action requirements on private plaintiffs’ representative actions brought under the Unfair Competition Law.

Therefore, the Court held that claims brought under Section 17200 must be certified as a class action.

Claims Under The Private Attorneys General Act of 2004 Do Not Need To Be Certified As A Class Action

The Private Attorneys General Act (sometimes referred to as the bounty hunter law) was designed by the California Legislature offer financial incentives to private individuals to enforce state labor laws. As the Court noted in its opinion, at the time the legislation passed, the state’s labor law enforcement agencies did not have enough resources or staffing necessary to keep up with the rapid growth of California’s workforce. Therefore, the Act allows aggrieved employees to act like a private attorney general in collecting civil penalties for Labor Code violations. The employee must give 75% of the collected penalties to the Labor and Workforce Development Agency, and the remaining 25% is to be distributed among the employees affected by the violations.

Employees seeking recovery under the Private Attorneys General Act must comply with requirements that place the Labor and Workforce Development Agency and the employer on notice that the employee will be seeking remedies under the Act and give the Agency a chance to investigate itself. If the Agency does not investigate, then the plaintiff can proceed with the claim.

The Supreme Court did not agree with defendants' arguments that Private Attorneys General Act claims must be certified as a class action. The defendants argued that by not requiring class certification for these claims deprives defendants of their due process rights. Defendants explained that there is a scenario where plaintiffs could continually bring Private Attorneys General Act claims against their employer over and over for the same issues until they eventually prevail if the class certification is not required. The Supreme Court explained that this is not a concern:

Because an aggrieved employee’s action under the Labor Code Private Attorneys General Act of 2004 functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. The act authorizes a representative action only for the purpose of seeking statutory penalties for Labor Code violations (Lab. Code, § 2699, subds. (a), (g)), and an action to recover civil penalties “is fundamentally a law enforcement action designed to protect the public and not to benefit private parties."

Therefore, because all employees on whose behalf the representative plaintiff seeks remedies are bound by the ultimate outcome of the case, defendants are not faced with this possibility.

Managers Who Provide Table Service May Share in Tip Pool -- Appellate Court Reverses Award Against Starbucks

As we previously blogged, Starbucks was hammered last year with a class restitution award of $105 million in a fight over the ownership of the change dropped in its tip jars.   The central issue was whether store managers who also served customers could share in the tips which were left for all servers.  The trial court took the technical line that Labor Code section 351 prohibits any "agent" of the employer from sharing in tips -- period.

The Appellate Court reversed and took a considerably more common sense approach, explaining

There is no decisional or statutory authority prohibiting an employer from allowing a service employee to keep a portion of the collective tip, in proportion to the amount of hours worked, merely because the employee also has limited supervisory duties. Accordingly, we reverse the judgment and order the trial court to enter judgment in Starbucks's favor.

 Employers should not jump to the conclusion, however, that managers now have free reign to sharing in employee tips.  Rather, the rule in  Chau v. Starbucks decision  applies only where (a) There is a "collective tip box" or analogous circumstances in which "a customer would necessarily understand the tip will be shared among the employees who provide the service;" and (b) the managerial employee is part of the "team" that provided the service.  

 

Watkins v. Wachovia Corporation - New Class Action Opinion On The Effects Of Releases In Severance Agreements And Individually Settling With Named Plaintiffs

Plaintiffs Brown and Watkins brought a wage and hour class action against Wachovia seeking damages for unpaid overtime on behalf of all California sales assistants on the basis that they were misclassified as exempt employees or that Wachovia simply did not pay the hourly employees for overtime worked. 

Brown’s Release of All Claims In Connection With A Severance Package Precludes Her From Participating In This Lawsuit

At the trial court level, Wachovia brought a motion for summary judgment against Brown’s claims on the basis that Brown signed a release of all claims in conjunction with a severance package. Wachovia won the summary judgment motion at the trial court level, but Brown appealed. The issue on this appeal is whether Brown’s release of all claims in her severance package precluded her from bringing her claim for unpaid overtime in this case. 

In exchange for additional severance benefits when leaving Wachovia, Brown signed a release of all claims against Wachovia. Brown argued that the release is unenforceable because it violates the law in that Labor Code section 206.5(a) prohibits the release of all claims for unpaid wages unless payment is made in full for all claimed wages. The section provides:

“An employer shall not require the execution of a release of a claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of those wages has been made. A release required or executed in violation of the provisions of this section shall be null and void as between the employer and the employee.”

The court rejected this argument on the basis that section 206.5 must be read with Labor Code section 206(a). Section 206(a) provides “In case of a dispute over wages, the employer shall pay, without condition . . . all wages, or parts thereof, conceded by him to be due, leaving to the employee all remedies he might otherwise be entitled to as to any balance claimed.” 

The court noted that this exact argument proffered by Brown was rejected recently in another case, Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796. The court explained:

[The Pick Up Stix court] concluded that Labor Code section 206.5 simply prohibits employers from coercing settlements by withholding wages concededly due. In other words, wages are not considered “due” and unreleasable under Labor Code section 206.5, unless they required to be paid under Labor Code section 206. When a bona fide dispute exists, the disputed amounts are not “due,” and the bona fide dispute can be voluntarily settled with a release and a payment – even if the payment is for an amount less than the total wages claimed by the employee.

The issue then is whether there was a dispute of wages due when Brown signed her release. If there was a dispute about the amount of wages owed, then the release bars Brown from ever suing Wachovia. If there was no dispute at the time Brown signed the release with Wachovia, then she could sue for unpaid wages – even though she signed the release. 

The court ruled in Wachovia’s favor in holding that there was a dispute over unpaid wages at the time Brown signed the release. The court said this was evidenced by the fact that she complained to management earlier that she was not being paid overtime. The court also noted the fact that Brown was maintaining two time sheets while she was working for Wachovia – one time sheet she submitted to Wachovia and was paid for all time on, and another time sheet that included all of her overtime that was not paid. 

The court concluded: 

In other words, when Brown’s employment was terminated, she: (1) received all wages Wachovia conceded were due to her (based on the time sheets she had submitted); (2) believed she possessed a claim for further overtime pay; and (3) voluntarily elected to receive enhanced severance benefits in exchange for releasing her claims against Wachovia. Under these circumstances, the release is enforceable. Summary judgment was therefore appropriately granted.

Watkins’s Individual Settlement Precludes Her From Proceeding With The Class Action

Watkins filed a motion for class certification, which was denied by the lower court. The parties entered into settlement discussions, and she agreed to settle her individual claims, but purported to retain her rights to continue her appeal of the class action claims. Wachovia argued that Watkins’s appeal must be dismissed as moot because of the settlement she no longer has standing to pursue the class action. 

The court explained:

Watkins assumes, however, that her “class claim” for unpaid overtime wages has independent vitality and can continue after she has settled her “individual claim” for the same wages. The argument reflects a misunderstanding of the nature of a class action. A class action is a procedural device used “when the parties are numerous, and it is impracticable to bring them all before the court.” (Code Civ. Proc., § 382.) In such a situation, “one or more may sue or defend for the benefit of all.” (Ibid.) When a plaintiff brings a class action, the plaintiff undertakes a fiduciary duty to the other members of the class, under which the plaintiff agrees not to settle the other class members’ claims for the plaintiff’s individual gain. (La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 871.) But this duty should not be confused with an additional claim for relief. A representative plaintiff still possesses only a single claim for relief – the plaintiff’s own. That the plaintiff has undertaken to also sue “for the benefit of all” does not mean that the plaintiff has somehow obtained a “class claim” for relief that can be asserted independent of the plaintiff’s own claim. “[T]he right of a litigant to employ [class action procedure] is a procedural right only, ancillary to the litigation of substantive claims. Should these substantive claims become moot . . . , by settlement of all personal claims for example, the court retains no jurisdiction over the controversy of the individual plaintiffs.” (Deposit Guaranty National Bank v. Roper (1980) 445 U.S. 326, 332. (“Roper”)).

The court concluded that Watkins’s appeal must be dismissed. She voluntarily released her wage claim against Wachovia for $51,000. As the court explained, her “class claim’ is simply a procedural device by which she pursued her substantive claim for overtime wages. Having settled her substantive claim, the class claim disappears, and her appeal of the denial of class certification must be dismissed.”

 

The opinion, Watkins v. Wachovia Corporation, is a must read for wage and hour litigators [especially the analysis regarding “pick off” cases – when defendants try to stop class actions from going forward by picking off the named plaintiff by entering into an individual settlement with them]. 

 

 

EEOC Found To Violate FLSA Overtime Law

An arbitrator held that the Equal Employment Opportunity Commission willfully violated the Fair Labor Standards Act on a nationwide basis with its own employees.  The issue arose from the EEOC's policy of providing "comp" time to employees instead of paying them overtime.  The Washington Post reports:

The ruling stems from a grievance filed by the [National Council of EEOC Locals] union in 2006 and involves overtime disputes dating to 2003. Wolf found that the EEOC's practice of paying compensatory time to any employee who worked extra hours did not satisfy the Fair Labor Standards Act.

"With rare exception in this record, the concept of 'requesting' compensatory time was a fiction," Wolf wrote. Employees were pressured to work extra hours but not offered extra pay, according to the arbitrator. "With rare exception in this record, the concept of 'requesting' compensatory time was a fiction," Wolf wrote. Employees were pressured to work extra hours but not offered extra pay, according to the arbitrator.

Apparently the EEOC case load has been steadily increasing the last few years.  But instead of hiring new employees to manage the increased work levels, the EEOC simply placed the burden on its existing employees.  The EEOC's press release on the arbitrator's ruling can be viewed at its website here

Federal Service Contractors are Not Exempt from California Labor Code -- Naranjo v. Spectrum Security Services, Inc.

Employers who provide services under contract to the federal government are required to pay minimum wages and benefits set by the Department of Labor pursuant to the McNamara-O'Hara Service Contract Act of 1965 (the "SCA") (41 U.S.C. § 351 et seq.).   In Naranjo v. Spectrum Security Services, Inc. the Second District Court of Appeal held that being subject to the SCA  confers no exemption from the California Labor Code -- in other words, employers must comply with whichever regulatory scheme is the most favorable to the worker on any given issue. 

The opinion includes a useful explanation of how general preemption principles apply to the California Labor Code, especially the requirement to pay compensation for missed meal breaks.      

As our Supreme Court has explained, the additional compensation identified in subdivision (b) of this provision is not a penalty, but a form of “premium wage” paid to employees to compensate them for an adverse condition they have encountered during their work hours, namely, the potential hazard to their health and welfare from the denial of rest and meal breaks. ( Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal .4th 1094, 1102-1111.) As such, the additional compensation is akin to overtime pay, which is another form of premium pay. (Id. at pp. 1109-1110.)

Thus, according to the Court, the purpose of California' s meal period legislation is in no way inconsistent with the goal of the SCA, which is  "to secure for employees minimum wages and benefits determined by the Secretary of Labor."

Another Arbitration Agreement Containing A Class Action Waiver Found To Be Unenforceable

[In the interest of full disclosure – my firm represents Western Pizza in this case. Because of this, we are expressing none of our own analyses about the Court’s opinion, but are simply reporting the court’s findings.]

Octavio Sanchez works as a delivery driver for defendant. He filed a class action lawsuit alleging that the drivers not only are not adequately reimbursed for their expenses incurred in the performance of their job duties, but also as a result are paid less than the legal minimum wage. Sanchez signed an arbitration agreement that contained a provision that he would not participate in any class action litigation. Western Pizza filed a motion to enforce the arbitration agreement, which the trial court denied. Western Pizza appealed the lower court’s decision.

Western Pizza argued on appeal that:

  1. The enforceability of the arbitration agreement is a question for the arbitrator to decide;
  2. The Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts California law to the extent that California law would prevent the enforcement of the agreement;
  3. The class arbitration waiver does not impermissibly interfere with the employees’ ability to vindicate their statutory rights, and therefore is enforceable;
  4. The terms of the arbitration agreement are neither procedurally nor substantively unconscionable.

The court, not the arbitrator decides the enforceability of the arbitration agreement

The court explained:

Accordingly, we conclude, consistent with the rule stated in Discover Bank, supra, 36 Cal.4th at page 171, that the question whether the arbitration agreement is enforceable based on general contract law principles, including the question whether it is unconscionable or contrary to public policy, is a question for the court to decide rather than an arbitrator, regardless of whether the FAA applies.

 

Federal Arbitration Act (FAA) does not preempt California law

The court held that under the FAA, the validity and enforceability of an arbitration agreement is governed by state contract law:

Under California law, the question whether an arbitration agreement is unenforceable, in whole or in part, based on general contract law principles is a question for the court to decide, rather than an arbitrator. (Discover Bank, supra, 36 Cal.4th at p. 171; Balandran v. Labor Ready, Inc. (2004) 124 Cal.App.4th 1522, 1530; see Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1365.) This includes the determination whether an arbitration agreement is unconscionable or contrary to public policy. (Discover Bank, supra, at p. 171.) Discover Bank concluded that the FAA, and particularly the opinion by the United States Supreme Court in Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444 [123 S.Ct. 2402], did not conflict with California law on this point and that the California rule therefore governs.

The Enforceability of the Class Arbitration Waiver

The court set out the factors established in Gentry v. Superior Court to determine whether the class action waiver is unenforceable:

Gentry stated that a trial court determining whether a class arbitration waiver impermissibly interferes with unwaivable statutory rights must consider: “[(1)] the modest size of the potential individual recovery, [(2)] the potential for retaliation against members of the class, [(3)] the fact that absent members of the class may be ill informed about their rights, and [(4]) other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.” Gentry continued: “If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘ vindicate [their] unwaivable rights in an arbitration forum.’

(citations omitted). The court found that these factors supports the lower court’s holding that the agreement was unenforceable: the amounts at issue for reimbursement are modest, retaliation against low wage earners is “significant,” and most of the drivers here are immigrants with limited English skills “who are likely to be unaware of their legal rights.”

Unconscionability Of The Agreement\

The court held that the arbitration agreement was distinguishable from the agreement used in Gentry:

The record here does not indicate a distorted presentation of the benefits of arbitration to the degree that was present in Gentry, supra, 42 Cal.4th 443. The arbitration agreement states that the purpose of the agreement is “to resolve any disputes that may arise between the Parties in a timely, fair and individualized manner,” but otherwise does not extol the benefits of arbitration. The arbitration agreement does not limit the limitations periods, the remedies available, or the amount of punitive damages. It states, “Except as otherwise required by law, each party shall bear its own attorney fees and costs,” and therefore incorporates any statutory right to recover fees rather than creating a presumption against a fee recovery. Thus, the arbitration agreement neither contains the same types of disadvantages for employees as were present in Gentry nor fails to mention such disadvantageous terms. Moreover, the arbitration agreement expressly states that that the agreement “is not a mandatory condition of employment.”

The court still found, however, that there were elements of unconscionability in the agreement:

We conclude, however, that the record indicates a degree of procedural unconscionability in two respects. First, as in Gentry, the inequality in bargaining power between the low-wage employees and their employer makes it likely that the employees felt at least some pressure to sign the arbitration agreement. Second, the arbitration agreement suggests that there are multiple arbitrators to chose from (“the then-current Employment Arbitration panel of the Dispute Eradication Services”) and fails to mention that the designated arbitration provider includes only one arbitrator. This renders the arbitrator selection process illusory and creates a significant risk that Western Pizza as a “repeat player” before the same arbitrator will reap a significant advantage. These circumstances indicate that the employees’ decision to enter into the arbitration agreement likely was not a free and informed decision but was marked by some degree of oppression and unfair surprise, i.e., procedural unconscionability. We therefore must scrutinize the terms of the arbitration agreement to determine whether it is so unfairly one-sided as to be substantively unconscionable.

(citations and footnote omitted).

The court also held that the agreement did not provide for a neutral arbitrator. This is despite the fact that the arbitration agreement contained a clause that both parties had to agree to the arbitrator before the arbitrator could bind the parties. The court explained that “it seems likely that an employee in Sanchez’s position would not feel free to reject the arbitration provider designated by his employer under the terms of the agreement even after a dispute had arisen.”

In conclusion, the Court stated:

The arbitration agreement here includes a class arbitration waiver that is contrary to public policy and an unconscionable arbitrator selection clause, as we have stated. These are important provisions that, if they were not challenged in litigation, could create substantial disadvantages for an employee seeking to arbitrate a modest claim. Although it may be true that neither of these provisions alone would justify the refusal to enforce the entire arbitration agreement (see Gentry, supra, 42 Cal.4th at p. 466; Scissor Tail, supra, 28 Cal.3d at p. 828), we believe that these provisions considered together indicate an effort to impose on an employee a forum with distinct advantages for the employer. As in Armendariz, supra, 24 Cal.4th at page 124, we conclude that the arbitration agreement is permeated by an unlawful purpose. Accordingly, the denial of the motion to compel arbitration was proper.

The opinion, Sanchez v. Western Pizza, can be viewed at the Court’s website for a short period of time in Word and PDF.

This opinion comes on the heels of others that have also rejected arbitration agreements with class action waivers. And while the California Supreme Court left open the possibility that waivers may be enforceable in Gentry v. Superior Court, the recent line of lower appellate decisions (see Franco v. Athens Disposal Co.), including the decision in Sanchez v. Western Pizza, seems to have all but closed the door on any such possibility.

 

Obama Administration Moves to Block Bonus Payments to AIG Employees

According to an article this morning in the Miami Herald the Obama administration will be attempting to block bonus payments to AIG executives and traders.  A number of other prominent politicians have also piled on with righteous indignation at the prospect of paying large bonuses to highly paid executives at a company that is, for all intents and purposes, nationalized.

''At a time when millions of Americans are losing their jobs and trying to make ends meet, it is outrageous that a company that has been bailed out by the taxpayers for its mistakes would turn around and pay its executives such a staggering sum of money,'' said Sen. Russ Feingold, D-Wis. Other lawmakers from both parties said much the same.

To the extent any of these executives worked in California, however, the administration's efforts to retract promised bonuses may run afoul of the Labor Code.  For example, case law has interpreted Labor Code section 221 to prohibit any retroactive deductions from wages that have already been earned.  In other words, an employee who is induced to work by an offer or promise of a bonus or other specified incentive has a vested right to receive the compensation.  It is irrelevant that the Company may experienced financial difficulties or changed circumstances in the meantime.

While we don't know the terms of the express or implied bonus agreements at issue, it is safe to say that the taxpayers may not save any money if AIG is pressured to incur the legal liability and ensuing litigation which will result from a retroactive cancellation of bonus wages.  

Bartenders May Participate in Mandatory Tip Pools Even If They Do Not Provide "Direct Table Service" -- Budrow v. Dave & Busters

California confers a special legal status on employee tips.  Under California Labor Code section 351, tips are not considered part of the wage paid by the employer, but are rather treated as a direct payment from the patron to the employee.  As a result, they are the property of the server from the very beginning and the employer is not permitted to take a "cut."   

Courts have recognized, however, that more than one employee often contributes to the service. And customers presumably expect that their tips will be fairly apportioned among these employees.  Thus, opinions such as the 1990 decision in Leighton v. Old Heidelberg, held that employers may require servers to "split tips" with busboys, hosts, and others.  As that court explained:

[T]he restaurant business has long accommodated this practice which, through custom and usage, has become an industry policy or standard, a ‘house rule and is with nearly all Restaurants,’ by which the restaurant employer, as part of the operation of his business and to ensure peace and harmony in employee relations, pools and distributes among those employees, who directly provide table service to a patron, the gratuity left by him, and enforces that policy as a condition of employment.

But Old Heidelberg's reference to employees "who directly provide table service to a patron," created uncertainty as to which employees may qualify.  What about cooks, bartenders and others whose work does not bring them into direct contact with the customer's table?

The Second District Court of Appeal decision in Budrow v. Dave & Busters has seemingly laid this particular issue to rest by declaring that the Labor Code cannot be read as creating a distinction between "direct" and "indirect" table service when it comes to eligibility for tip pooling.  Instead, the court held that the touchstone must be the intent of the customer under the totality of the specific circumstances.

It is in the nature of a tip pool that it is based on the general experience of each particular establishment, that it is only broadly predictive of the reasons for and the patterns of tipping in that particular restaurant and that, in the final analysis, this is the best that anyone can do. It is simply not possible to devise a system that works with mathematical precision and solomonic justice in each one of the millions of transactions that take place every day.

Section 351 provides that the tip must have been "paid, given to, or left for" the employee.  Given that restaurants differ, there must be flexibility in determining the employees that the tip was “paid, given to or left for.” A statute should be interpreted in a reasonable manner.  Ultimately, the decision about which employees are to participate in the tip pool must be based on a reasonable assessment of the patrons' intentions. It is, in the final analysis, the patron who decides to whom the tip is to be “paid, given to or left for.”  It is those intentions that must be anticipated in deciding which employees are to participate in the tip pool.

This "customer intent" standard is consistent with the purpose of the statute.  However, it also raises more thorny issues than it answers.  For example, if some customers intend to benefit only the waitress and not the cook, can their tips be thrown into the general pool?  Should surveys or opinion polls be used to determine how customers wish to apportion their tips between different categories of workers?   

Perhaps most importantly, who bears the burden of proving that a restaurant's tip splitting scheme reflects a "reasonable assessment of the patrons' intentions?"  The Budrow Court seems to have implicitly placed the burden on the non-bartender employees because it upheld the grant of summary judgment against them despite the apparent absence of any admissible evidence of customer intent. 

 

 

 

When Are Releases of Wage Claims Valid? -- Chindarah v. Pick Up Stix, Inc.

The California Labor Code contains a number of provisions that prohibit employees from waiving their rights to receive all wages due.  For example, Section 206.5 states that "an employer shall not require the execution of a release of  a claim or right on account of wages due . . . unless payment of those wages has been made."   Any release in violation of this requirement is declared "null and void."

It would plainly defeat the paternalistic objectives of the Labor Code if employees could simply contract away their entitlement to minimum wages, overtime, or other minimum protections.  For example, if an employer did not pay overtime but required its workers to sign a release in order to receive each bi-weekly paycheck, it is pretty clear the agreement would not be enforced. 

On the other hand, if a formal lawsuit or administrative claim has been filed, there would be no end to the dispute if the parties could not enter into a binding compromise.   Practitioners have always operated on the presumption that this type of settlement is enforceable.      

In between these two extremes, however, lies a vast gray area of factual scenarios in which a release of claims might, or might not be enforceable.   

The Fourth District Court of Appeal decision in Chindarah v. Pick Up Stix, Inc. casts some additional light on the analysis.   In Chindarah, the employer entered into individual settlement and release agreements with a number of employees who were also members of a putative class that was suing for unpaid overtime wages.    The lower court held that the releases were valid, and the Appellate Court affirmed.

In the process the Appellate Court seemingly created a new rule that Section 206.5 will not bar a release of wage claims so long as: (a) all wages that are "concededly"  due have already been paid; and (b) whether any additional wages are owed is the subject of a "bona fide dispute."  

As authority for this rule, the Court relied on a combination of dicta from cases that had rejected various release agreements as well as its conception of sound "public policy."   In practice, however, the holding may be problematic as an employer is essentially empowered to negate the protections of Section 206.5 by merely refusing to "concede" that anything is due.        

Obama's First Law Sends A Clear Message To Employers

President Obama signed the Ledbetter bill into law today. The bill overturned the Supreme Court’s ruling in Ledbetter v. Goodyear Tire & Rubber, which held that employees must file a discrimination claim within six months after being discriminated against. Ledbetter argued that the Supreme Court should apply a type of continuing violations doctrine to her situation. Under such a theory, Ledbetter argued that the first discriminatory act (receiving a lower than deserved raise because of her gender) continued with each additional pay raise because pay raises are cumulative over time. Therefore, she alleged that even though she had no evidence that her pay raises during the applicable 180 day time period to file a suit were discriminatory, the original discrimination continued into this time period. The Supreme Court rejected this argument, but now the new law allows employees to file a lawsuit 180 days after receiving their final paycheck, even if the discrimination took place decades earlier.

The new law removes any time limits on pay discrimination claims. A discrimination case can now be brought long after evidence has gone stale or witnesses have died, which was the case with Ms. Ledbetter's former boss. There is no doubt that this will result in more litigation against employers. 

What is the effective date that this law applies?  May 28, 2007.  And yes, that is not a typo - the law is retroactive.  This is the date of the Supreme Court's decision in the case. 

What Does Obama Have Next For Employers?

The Paycheck Fairness Act. This bill, which Obama co-sponsored while in the Senate, provides for stronger remedies under the already existing Equal Pay Act. This Act was coupled with the Ledbetter bill, but Democrats were worried that the two bills together would raise too much of an opposition to their passage. Therefore, the PFA was severed from the Ledbetter bill, and will definitely be placed on the President’s desk in the next couple of months, if not sooner.

The PFA would create a new, more difficult legal standard for employers to meet in showing that their pay structures were not discriminatory. Under the new standard, employers would have to show that wage disparities are job-related, not sex-based, and could only use a defense if they prove that business necessity demands the unequal pay. Under the current Equal Pay Act, employers need only show that the difference in wages results from “any factor other than sex” and the employer does not have to show a business necessity for the difference in pay.

As James Sherk of the Heritage Foundation points out:

Under the PSA, the government will inject itself into areas of business over which it has no experience. For instance: Does experience constitute a "bona fide factor other than sex"? A woman earning less than a man with more experience could argue that her employer should be required to send her to training and then pay them identical wages. She would have a strong case to argue that experience was not a "bona fide" factor because an alternative employment practice would eliminate the disparity.

The paycheck fairness legislation would also require the use comparable worth in creating "voluntary" wage guidelines for industries, and makes class action lawsuits on these grounds easier to bring. The Wall Street Journal notes:

Voluntary or not, these guidelines would become the basis for more litigation against companies that didn't follow them. Meanwhile, the bill strips companies of certain defenses against claims of sex-based pay discrimination. It also makes it easier to bring class actions, and it allows plaintiffs to claim unlimited punitive damages even in cases of unintentional discrimination.

 

Court Holds Employees' Contact Information Must Be Disclosed Despite Employee Agreement Stating Otherwise

To close out 2008 wage and hour law, an appellate court issued a ruling in Crab Addison, Inc. v. Superior Court.  The case is a very significant holding on employees' privacy rights in the context of wage and hour class actions. 

Crab Addison, Inc. (CAI), which operates Joe’s Crab Shack, refused to disclose employee names and contact information when asked to do so by plaintiff’s counsel in a wage and hour class action. Plaintiff, Martinez, argued that this information was necessary to meeting his burden of proving class certification was appropriate, he was entitled to the information, and production of the information would not violate the witnesses’ right to privacy.

CAI argued that its employees had a heightened expectation of privacy as to their contact information based on forms they signed regarding release of their contact information. After the lawsuit was filed by plaintiff, CAI had its employees sign a form stating the following:

RELEASE OF CONTACT INFORMATION

            From time to time, Joe’s Crab Shack (the “Company”) may be asked to provide your contact information, including your home address and telephone number, to third parties. The Company may be asked to provide such information in the context of legal proceedings, including class action lawsuits.

            We understand that many employees may consider this information to be private and may not want it released. Accordingly, please indicate whether you consent to the disclosure of your contact information by marking the appropriate box.

  • No, I do not consent to the Company’s disclosure of my contact information to third parties.
  • Yes, I consent to the Company’s disclosure of my contact information to third parties.
  • I would like to be asked on a case-by-case basis whether I consent to the disclosure of my contact information to a particular third party, and my contact information should only be provided if I affirmatively consent in writing.

The bottom of the release forms contained the following:

            NOTE: Your response does not create a guarantee that the Company will not release your contact information as circumstances may require or warrant it. For instance, the Company may be required or compelled by law to disclose your contact information, regardless of whether you consent to such disclosure, or it may determine that it must do so should it determine that you are a witness in a lawsuit or should it be requested by law enforcement officers. In such an event, the Company cannot be held responsible for disclosing this information even if you have not consented to disclosure or asked for a case-by-case determination of disclosure.

Arguing that this release form created a heightened expectation of privacy, CAI said that if the employees’ contact information is disclosed, only contact information for employees who affirmatively “opt in” to have their information disclosed should be given to plaintiff's counsel. Defendant argued for an “opt in” process because it would result in a smaller number of employees’ contact information being disclosed. This is opposed to an “opt out” process by which the employees’ contact information is automatically disclosed to plaintiff’s counsel unless they object to the disclosure. 

The appellate court heavily relied on the recent case, Puerto v. Superior Court (2008) 158 Cal.App.4th 1242. In that case the court explained that “[t]he ‘expansive scope of discovery’ is a deliberate attempt to ‘take the “game” element out of trial preparation’ and to ‘do away “with the sporting theory of litigation—namely, surprise at the trial.”” [citations omitted] Therefore, discovery statutes are broadly construed in favor of discovery whenever possible in order to aid the parties in preparation for trial. The court also noted, however, that there needs to be a balancing of interests. In summarizing the Puerto case, the court stated:

The right of privacy in the California Constitution (art. I, § 1), ‘protects the individual’s reasonable expectation of privacy against a serious invasion.’” (Puerto v. Superior Court, supra, 158 Cal.App.4th at p. 1250, quoting Pioneer Electronics (USA), Inc. v. Superior Court (2007) 40 Cal.4th 360, 370.) 

While contact information generally is considered private, this “does not mean that the individuals would not want it disclosed under these circumstances.” (Puerto v. Superior Court, supra, 158 Cal.App.4th at pp. 1252-1253.) While employees would not likely want their contact information broadly disseminated, this does not mean they would want it withheld “from plaintiffs seeking relief for violations of employment laws in the workplace that they shared.” (Id. at p. 1253.) Rather, employees similarly situated to petitioners “may reasonably be supposed to want their information disclosed to counsel whose communications in the course of investigating the claims asserted in [petitioners’] lawsuit may alert them to similar claims they may be able to assert.” (Ibid.)

The court said there were two major differences between this case and the Puerto case. First, in Puerto, the employer voluntarily disclosed the identities of the witnesses but sought to protect addresses and telephone numbers. Here, CAI sought to protect the names of employees as well as addresses and telephone numbers. Second, in Puerto there was no release form like the one used here.

In quickly rejecting defendant’s argument on the first issue, the court found that employees’/witnesses’ names do not have any more heightened protection than their addresses and telephone numbers, and therefore should be disclosed. 

The court then turned its analysis to the effect that the release forms had in this case:

CAI argues that these forms gave their employees a heightened expectation of privacy in their contact information, requiring that the contact information be given greater protection and making an “opt in” notice procedure proper. We are unconvinced by this argument.

We first address the question whether, as a matter of public policy, we should enforce a release form that may have the effect of waiving an employee’s right to notice of a pending class action lawsuit concerning the employer’s alleged violations of overtime and wage statutes. While not determinative, the Supreme Court’s recent opinion in Gentry v. Superior Court (2007) 42 Cal.4th 443 is instructive. In Gentry the court addressed the question “whether class arbitration waivers in employment arbitration agreements may be enforced to preclude class arbitrations by employees whose statutory rights to overtime pay [under the Labor Code] allegedly have been violated.” (Id. at p. 450.) The court noted the Legislature through its enactment in the Labor Code established “‘“a clear public policy”’” that “minimum wage and overtime laws should be enforced in part by private action brought by aggrieved employees.” (Id. at p. 455.) So great is the public policy protecting employees’ right to overtime compensation that the right is “unwaivable.” (Ibid.)

The court looked to a recent case, Gentry v. Superior Court, for guidance on this issue. Gentry did not deal with disclosure of putative class members’ contact information, but with arbitration agreements in which the employee agreed not to participate in class actions for wage and hour violations. The Gentry court observed that class arbitration waivers in wage and overtime cases would frequently exculpate employers for violations and undermine the enforcement of wage and overtime laws; second, current employees suing their employers run a greater risk of retaliation; and, third, that employees may be unaware of the violation of their rights and their right to sue.

Based on this analysis, the court in this case concluded that the release form used by CAI did not create a higher expectation of privacy in the employees’ contact information. The court found that “public policy concerns weigh in favor of enforcing unwaivable statutory wage and overtime rights through class action litigation over a right to privacy in “relatively nonsensitive [contact] information.” (citing Puerto v. Superior Court, supra, 158 Cal.App.4th at p. 1259.) The court held:

[T]o the extent the right to privacy is based on the release forms, there are strong reasons for not giving effect to those forms. Employees indicating that they did not want their contact information disclosed, or wanted disclosure on a case-by-case basis, were unaware at the time they signed the forms of the pending litigation to enforce their statutory wage and overtime rights through a class action lawsuit. We may presume that, had they known about the litigation, their response on the form would have been different. Additionally, the forms apprised them that their contact information could be disclosed if required by law, so they were aware of the limitation on privacy offered by the forms.

Therefore, Defendant was required to provide the employees’ names, addresses, and telephone numbers even though the release form had been utilized by Defendant in this case. The case is a must read for every wage and hour class action litigator in California. 

 

Calculating "Bonus Overtime" -- Marin v. Costco

It is shocking how many employers don't realize that paying a bonus to hourly employees will trigger an additional overtime obligation.  The decision in Marin v. Costco is a reminder of this obligation and an illustration of just how convoluted the calculation can become, especially where the bonus is variable based on work effort or performance.

The Marin decision involves a lengthy, eye-glazing mathematical analysis of a particularl bonus scheme that was arguably a hybrid between a "flat rate" and "performance-based" payment.  The main take-away points, however, are that:

  • Additional overtime payments are triggered when a bonus is paid; and
  • The method for calculating the amount of this "bonus overtime" depends on whether the bonus is characterized as a "flat rate" bonus or a "production" bonus. 

These concepts are outlined below in a somewhat simplified form.    

The Concept of "Bonus Overtime" -- Bonuses Retroactively Increase Employees' "Regular Rate"

"Bonus overtime" stems from the fact that overtime premium pay is computed based on a multiple (usually 1.5x) of the employee's "regular rate" of hourly compensation.  The regular rate is calculated by dividing the hours worked in a week by all compensation earned for that week.  But if the employee is later given a bonus that is partly due to the work performed in that week this additional pay must be added into the total compensation for the week (i.e., the denominator of the regular rate calculation).  This retroactively increases the employee's regular rate of pay.  

For example, suppose an employee's straight time hourly pay is $10/hr and he works 40 regular hours and ten overtime hours in a given week.  His regular weekly paycheck would include $400 of straight time pay ($10 x 40 hours) plus an additional $150 of overtime pay (1.5x his base rate, or $15/hr,  times 10 hours). 

The Retroactive Effect of A "Flat Rate" Bonus on Overtime.

Now suppose the employer has a generous annual profit-sharing program that pays this employee $5,200 at the end of the year based on the company's overall performance.  Because the bonus is equally attributable to all weeks in the year, this payment retroactively increases his weekly compensation by $100 (i.e., $5,200 divided by 52 weeks). 

Under California law, this additional $100 per week payment also retroactively raises the employee's regular hourly rate for the week by a full $2.50 (i.e., $100 divided by 40 straight time hours).   

Since his recalculated regular rate for the week is now $12.50 per hour, his recalculated overtime rate increases proportionately from $15/hr. to $18.75/hr.  Our hypothetical employee is therefore entitled to an additional $3.75 for each overtime hour worked, totaling $37.50 for the week. 

The Retroactive Effect of a "Production Bonus" on Overtime.

Now this time suppose the employer paid the same $100 per week amount as a performance bonus based on the employee's individual volume of production during the year -- making sales, manufacturing widgets, etc.   In this case, California law  calculates bonus overtime differently.  Instead of dividing the $100 by 40 straight time hours to determine the "regular rate" for bonus overtime, the employer is allowed to divide the amount by all 50 hours worked (i.e., both straight time and overtime hours worked).  

As a result, the employee's regular rate for the week rises by just $2.00 (i.e., $100 divided by 50 total hours worked), and the hypothetical employee is entitled to only an additional $20 in bonus overtime for the week ($2.00 x 10 hours). 

The idea behind this different calculation is that  the extra production generated by working overtime hours helped contribute to achieving the "production" bonus in the first place.  Thus, not counting the overtime hours in the "regular rate" would amount to a partial double recovery.     

The Bottom Line: Calculating bonus overtime is a complex headache for employers.  However, they ignore it at their peril because the use of a mistaken formula is an ideal subject for a class action with the potential for huge liability.          

Court Rejects Punitive Damages for Labor Code Violations -- Brewer v. Premier Golf Properties

California Civil Code section 3294 provides that punitive damages are generally available in any "action for the breach of an obligation not arising from contract."  So if the Legislature creates a statutory obligation and does not specifically limit the remedies, shouldn't a plaintiff be able to recover punitive damages if he proves the defendants acted with the requisite "malice, fraud or oppression?"

This question has been the subject of many demurrers over the years but has never had a very clear answer.  In the context of state statutes prohibiting employment discrimination courts long ago held that punitive damages should be available even though they were not specifically authorized by the statutes themselves.  Courts have been more reluctant, however, in the context of Labor Code violations.

Brewer v. Premiere Golf Properties is the first published appellate opinion to directly address the issue.  The decision rejected the recovery of punitive damages for Labor Code violations -- or at least for an employer's violation of its obligation to pay minimum wage and provide meal periods.   

The Court's first rationale for rejecting punitive damages was to invoke the so-called "new right-exclusive remedy" doctrine.  Under this theory, the Legislature is presumed to deny punitive damages as a remedy for any new statutory right except where there is already a pre-existing "common law analog" for the new right.  

Next, the Court opined that punitive damages should also be unavailable because "claims for unpaid wages and unprovided meal/rest breaks arise from rights based on [the plaintiff's] employment contract."  

Neither rationale seems compelling.  In particular, the Court's attempt to distinguish the cases allowing punitive damages for employment discrimination is less than convincing.  After all, there was no common law cause of action for racial, gender, age or disability discrimination.  And a claim for unequal wages due to discrimination could just as easily be described as "arising from" the underlying employment relationship.  In either case, employees cannot contract out of their statutory rights.    

The opinion is a welcome development for employers, who face enough liability from class action wage and hour claims already.  But the Court reaches its result through some pretty suspect reasoning.  And for that reason (as well as the importance of the issue), the case seems like a prime candidate for Supreme Court review.  

 

Bad Economy Forces Politicians To Re-Think California's Meal Break and Overtime Laws

The bad economy is forcing politicians and business owners to re-examine California's laws on meal and rest breaks, and overtime.  The Governor has proposed legislation to reform these laws in order to keep jobs and businesses here in California.  As the Los Angeles Times reports today these issues are becoming "bargaining chips" in the state budget crisis.  The article notes:

Consider the state rules on work breaks. They are intended to make sure that employers don't force hourly workers to work for long periods without a break. Current law requires that mandatory, unpaid, half-hour lunch breaks be given before the end of the sixth consecutive hour on the job.

Employers say they want to modify the overly rigid law to give them and employees needed flexibility to set schedules. They say they want to make it possible for staff members to eat a sandwich at their desks voluntarily or to keep waiting tables -- and earning tips -- during a busy time at a restaurant. Additionally, working through a lunch break could give employees the option of going home early, employers contend.

The article continues:

As for overtime, California law calls for time-and-one-half pay for hourly workers after they clock eight hours in a single day. Additionally, in California and other states, extra pay accrues on a weekly basis after a worker puts in 40 hours.

Employers say the law makes it more expensive and difficult for managers to let an employee juggle his or her schedule to take care of personal or family needs, business lobbyists say.

My prediction is that these regulations are not likely to change anytime soon.  However, history has proven that these items are politically charged.  The eight-hour work day was done away with in 1997 when California’s Industrial Welfare Commission overturned state regulations for overtime pay after eight hours worked in one day.  This change did not last long, and the eight-hour work day was reinstated in 1999 by Governor Grey Davis. 

IRS Lowers Mileage Rate For 2009

The IRS announced that it will be lowering the IRS mileage rate in 2009.  Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be 55 cents per mile for business miles driven. This is a change from 50.5 cents in the first half of 2008 and 58.5 cents in the second half.

California employers need to reimburse employees for miles driven for business purposes under Labor Code section 2802.  The California Supreme Court clearified some of the rules pertaining to expense reimbursement last year in Gattuso v. Harte-Hanks (click here for more analysis of the case).  The Court also held that the mileage reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not necessarily have to be the IRS mileage rate, which is contrary to the DLSE’s opinion on the issue. 

Sullivan v. Oracle -- Residents of Other States are Entitled to Labor Code Remedies for Work in California

The recent case of Sullivan v. Oracle dealt with the thorny issue of what law should apply to employees whose work carries them across state lines.  The Ninth Circuit held that work performed  in California should generally be governed by California's strict wage and hour laws -- even if the employee is a resident of another state and is only temporarily working in California.

Due to a prior lawsuit Oracle treated its "technical instructors" in California as non-exempt  and entitled to overtime.  Outside of California, however, its instructors remained classified as salaried-exempt.  The "choice-of-law" problem arose when several instructors from Colorado and Arizona performed short term assignments in California.  These individuals filed a class action lawsuit seeking overtime wages under California law. 

In the end, the Ninth Circuit held that the "balance of interests" supported the application of California Law.  As the Court explained: "We fail to see any interest Colorado or Arizona have in ensuring that their residents are paid less when working in California than California residents who perform the same work."

The Ninth Circuit's decision  to apply California law was not particularly surprising.  The interesting part is how it got there -- by holding, in effect, that whichever law allows the employee to be paid more should apply.

New Ruling On Meal Breaks and Itemized Wage Statements: Brinkley v. Public Storage, Inc.

A recent case, Brinkley v. Public Storage, Inc. (October 28, 2008) is getting quite a bit of attention due to its ruling on employers’ duty to provide meal breaks. The court in Brinkley (out of the Second Appellate District), agreed with the holding of the appellate court in Brinker v. Superior Court that employer only had to provide meal breaks and not ensure that they were taken. Since the California Supreme Court granted review of Brinker, it is not controlling law, and this is why Brinkley is getting a lot of attention. (While Brinkley is good law for now, the issue will be ultimately decided by the Supreme Court in the Brinker case, and as many commentators have stated, it is likely that the Supreme Court will issue an order granting and holding Brinkley making it un-citable law until Brinker is decided.)

The Brinkley decision also addressed another hotly litigated wage and hour issue involving itemized wage statements, which is being overlooked given the meal break drama. Labor Code 226 requires employers to place certain information on the employee’s pay stub. In Brinkley, the Plaintiff alleged that defendant violated Labor Code section 226, subdivision (a), which requires employers to provide pay stubs that list (among other items): “(1) gross wages earned, (2) total hours worked by the employee . . . and (9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.” Plaintiff alleged that Public Storage violated this statute because certain pay stubs listed a mileage reimbursement rate that was different than the actual rate employees received.

In regards to section 226, the court noted that:

Section 226, subdivision (e) provides that an employee “suffering injury as a result of a knowing and intentional failure by an employer to comply with subdivision (a)” is entitled to recover the greater of actual damages or specified statutory penalties. The trial court found that defendant did not knowingly and intentionally violate section 226, subdivision (a). We agree.

Defendant met its burden of production by filing a declaration stating that the misstatement of the associated mileage rate was inadvertent and, when discovered, corrected. This evidence showed that plaintiff could not establish an essential element of his claim, namely that defendant intentionally and knowingly failed to provide required information on its paystubs. The burden of production thus shifted to plaintiff. Plaintiff, however, produced no evidence of knowing or intentional conduct by defendant.

The court also found that Plaintiff failed to show that he or any other proposed members of the class action suffered any injury. The court stated:

Plaintiff argues that the receipt of an inaccurate paystub ipso facto constitutes injury within the meaning of section 226, subdivision (e). This interpretation, however, renders the words “suffering injury” surplusage and meaningless. Such an interpretation is disfavored. We hold that section 226 means what it says: a plaintiff must actually suffer injury to recover damages or statutory penalties.

The present case is distinguishable from Wang v. Chinese Daily News, Inc. In Wang, the paystubs stated that the employees worked 86.66 hours regardless of the number of hours actually worked, the length of the pay period, or the number of work days in the pay period. This caused the employees to suffer injury because they might not be paid for overtime work to which they were entitled and they had no way of challenging the overtime rate paid by the employer. Here, by contrast, plaintiff was not underpaid or given insufficient information to challenge the payments he received. This inadvertent technical violation of section 226 caused no resulting damages.

(citations omitted).
 

Breaking News: CA Supreme Court Grants Review In Brinker v. Superior Court

The California Supreme Court announced today that it will be reviewing the much analyzed case Brinker v. Superior Court (Hohnbaum).  The lower court ruling in the case was favorable to California employers, in holding that employers did not have to "ensure" that meal breaks were taken, but only that employers had to provide meals breaks.  Click here for further analysis on the lower court's ruling. 

This much awaited decision by the Supreme Court makes the lower court's ruling in the case non-citable, which means that it is not binding on courts in California.  Therefore, California employers will have to wait for the Supreme Court decision to have some finality on this issue. 

Bad Job Design Is The Cause of Many Bad Sales Compensation Plans

We have previously blogged about some of the ways in which a bad sales compensation plan can result in legal liability.  However, as Ann Bares points out in her Compensation Force blog, many bad sales plans are caused by vague or ill-defined job responsibilities

Sales jobs that require constant shifting from prospecting to account management to order administration/tracking to installation/set-up and then back to prospecting may not be the best use of your available sales talent. Particularly if you've staffed the jobs with hunters. And, for a profession where variable pay can be a significant piece of the overall compensation package, jobs like this can present real challenges for sales incentive design.

Ann's analysis strikes me as generally correct.  Thus, at the risk of overstepping our area of legal expertise and venturing into management advice -- if an employer finds itself with a compensation structure that is convoluted, difficult to administer, and perceived as unfair, it should honestly consider whether the source of the problem lays with its management rather than its sales force.

New California Law Further Restricts Employee Release Agreements

Governor Schwarzenegger recently signed a bill amending Labor Code Section 206.5, which restricts the enforceability of agreements purporting to release wage claims. 

Labor Code section 206.5 currently provides that an employee cannot be required to sign an agreement releasing the employer from liability for wages "unless payment of such wages has been made."  The new bill, AB 2075, amends the statute to clarify that the prohibitions on the "execution of a release” also extend to any requirement that the employee "execute a statement of hours he or she worked during a pay period which the employer knows to be false.”
 

In response to wage and hour class actions a growing number of employers have implemented policies requiring employees to sign periodic statements certifying that their wage statements are accurate.  The new statute, which takes effect January 1, 2009, appears to be aimed at preventing employers from arguing that such certifications are binding on the employee.    

 

New Appellate Case Upholds Independent Contractor Status

Appellant Al Varisco sued Gateway Science and Engineering for wrongful termination of employment and similar causes of action. In order to sue under these legal theories, Varisco had to establish that he was an employee, not an independent contractor as Gateway contended.

The trial court agreed with Gateway that Varisco was an independent contractor, and the appellate court affirmed this ruling. In its ruling, the appellate court provided a great analysis for employers who face the issue of whether their independent contractors are properly classified. The court began its analysis with the following:

Control is the principal factor in determining whether an individual worker is an employee or an independent contractor. "An independent contractor is 'one who renders service in the course of an independent employment or occupation, following his employer's desires only in the results of the work, and not the means whereby it is to be accomplished.' [Citations.] On the other hand, the relationship of master and servant or employer and employee exists whenever the employer retains the right to direct how the work shall be done as well as the result to be accomplished. [Citations.] But this rule requires that the right to exercise complete or authoritative control, rather than mere suggestion as to detail, must be shown. [Citations.] Also, the right to control, rather than the amount of control which was exercised, is the determinative factor." (S. A. Gerrard Co. v. Industrial Acc. Com. (1941) 17 Cal.2d 411, 413.)

Thus, the most significant question in the independent contractor/employee determination is "'whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.' [Citation.]" (S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 350.)

The appellate court continued to explain that there are “secondary indicia” of whether someone is an independent contractor. These factors are:

  1. whether the one performing services is engaged in a distinct occupation or business;
  2. the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  3. the skill required in the particular occupation;
  4. whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
  5. the length of time for which the services are to be performed;
  6. (the method of payment, whether by the time or by the job;
  7. whether or not the work is a part of the regular business of the principal; and
  8. whether or not the parties believe they are creating the relationship of employer-employee. (citing Borello, 48 Cal.3d at p. 351.)

Base on these factors, the appellate court held that Varisco was an independent contractor. He received a 1099 for all his compensation from Gateway. Gateway did not provide any uniform, apparel, equipment, material, or tools to him. Varisco wore his own hardhat and work boots, mandatory apparel on the job site, and he testified that he provided his own equipment. He used his own car for transportation to and from the job site, and was not reimbursed for mileage or gas. Varisco was responsible for his own training, and did not receive any training from Gateway. His work hours were not set by Gateway, he only went to Gateway’s office twice a month to pick up his paychecks. Gateway did not have personnel at the LAUSD job sites. When issues or questions arose at the job site, he addressed them to the LAUSD architect, not Gateway. When asked "did Gateway give you any direction on how to perform your duties?" Varisco answered "no."

Varisco argued that because he was paid on an hourly basis, he should be considered an employee. Not persuaded by this argument, the court stated, “[a]n hourly rate traditionally indicated an employment relationship [citation] but independent contractors are now commonly paid on that basis. [citation].”

Finally, Varisco argued that he had an agreement with Gateway that provided the relationship was “at-will”, which supports his argument that he was an employee, not an independent contractor. The court, again, disagreed:

An independent contractor agreement can properly include an at-will clause giving the parties the right to terminate the agreement. Such a clause does not, in and of itself, change the independent contractor relationship into an employee-employer relationship. If it did, independent contractor arrangements could only be established through agreements which limited the right of a party, or perhaps both parties, to terminate the agreement. This would be absurd, and it is not the law.

Employers with independent contractors should take a look at the case for some guidance about whether their independent contractors are properly classified. The case, Varisco v. Gateway Science & Engin. can be downloaded as a PDF or in Word.
 

California Human Resources Networking Group - LinkedIn

I recently founded the California Human Resources Networking Group in LinkedIn. I’ve found that LinkedIn is becoming more and more popular with human resource professionals as well as legal professionals, so I created the group in order to promote HR related discussions specific to California.

To join, visit the California Human Resources Networking Group page in LinkedIn, or drop me an email and I will approve your request. There are no particular qualifications required to join - only a need for a better understanding of California's employment laws.

The group is devoted to discussing questions about human resource and other employment law issues that arise in California.

If you know of anyone else that would find the group beneficial, please send them to the group.

To get things started, I will be conducting a free webinar for the group in early October on how to use the Internet to conduct background checks on applicants and/or employees without creating liability for your company. More information to come.
 

Review of Overtime Obligations In California

Employers must review their payroll process from time-to-time to ensure that all overtime is being paid properly. Also, it is important for employers to conduct this analysis themselves – and not simply assume that their payroll company is doing it correctly.

When is overtime owed in California?

One and one-half times the employee's regular rate or pay is owed for all hours worked in excess of eight hours up to and including 12 hours in any workday, and for the first eight hours worked on the seventh consecutive day of work in a workweek. Double the employee's regular rate or pay is owed for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.

Employers must remember that the regular rate of pay includes a number of different kinds of payments made to employees, such as hourly earnings, salary, piecework earnings, and commissions. Bonuses can also be considered in calculating an employee’s regular rate of pay if the bonus is a nondiscretionary bonus, which means when the bonus it is based upon hours worked, production or proficiency and not subject to the employer’s subjective determination. The DLSE provides a great question and answer section on overtime discussing some of the issues that an employer must take into account when calculating the employee’s regular rate of pay.

Can an employee agree not to be paid overtime by way of working an alternative work week?

An employee cannot simply agree to work over eight hours a day or more than 40 hours in a week without being paid overtime.  The employer must follow a complex set of rules to establish an alternative work week, for example, permitting an employee to work 9 hours a day four days a week, and have either a half day or a full day off every other Friday, without having to pay overtime for the 1 hour of work over 8 hours worked in a day.  In order to establish a legal alternative workweek the employer, among other items, must define a “work unit”, propose the alternative work schedule to the work group, distribute a written disclosure, have a meeting on the issue, hold a secret election, and file the election results with the Division of Labor Statistics and Research.  Furthermore, employers who have established an alternative workweek have greater record keeping requirements.
 

What Are Employers To Do In The Wake of Brinker v. Superior Court?

It was a pleasure conducting the presentation on “Meal and Rest Breaks in California: Why the Brinker Ruling Is Good News for Employers, and Where Caution is Still Required” through Business & Legal Reports.  It was wonderful to have such a large audience, as well as great follow-up questions.

I’ve had a lot of request for the concluding points I made about what employers should do while we are waiting for the California Supreme Court to determine whether or not it will review the Brinker v. Superior Court (Hohnbaum) decision.   So here are my concluding remarks I made during the presentation:

  1. Employers should continue to have a strict written policy on providing meal and rest breaks and continue to monitor that employees are actually taking meal breaks.
  2. Make sure management knows about and enforces these rules.
  3. Record meal breaks! This is already an obligation of California employers, and the Brinker decision does not change this obligation.
  4. Policies should require employees to come forward to report if they have been forced to work through a meal break.
  5. Brinker’s policies, which were found to be valid by the appellate court, are a good example of policies California employers should have in place.  For example, Brinker had a written policy titled “Break and Meal Period Policy for Employees in the State of California.” Brinker also required its employees to sign a form stating “I am entitled to a 30-minute meal period when I work a shift that is over five hours” and that “If I work over 3.5 hours during my shift, I understand that I am eligible for one [10-]minute rest break for each four hours that I work.”  Brinker’s policy also stated that an employee’s failure to abide by the policy could result in termination. The court held that this ultimately was sufficient under California law to “provide” meal and rest breaks, only if the defendant has taken steps to establish and communicate the policy. Then if an employee fails to take a meal or rest break voluntarily, the employer is not liable for damages.

Until we know whether or not the California Supreme Court will grant review of the Brinker decision, employers should definitely be taking proactive steps to protect themselves.

 

Petition For Review Filed In Brinker v. Superior Court

Plaintiff has filed a petition to the California Supreme Court requesting that it review the appellate decision in Brinker v. Superior Court (Hohnbaum) [as previously written about here and here]. The Supreme Court has at least 60 days to decide whether or not to grant review of the case – so until then the appellate court’s decision is still citable case law.

[Hat tip Wage Law]

 

Podcast On Brinker v. Hohnbaum: What Are Employers' Obligations To Provide Meal and Rest Breaks?

Plaintiffs Stand To Gain More From Settling? New Study Suggests So

A recent New York Times article provides a prelude to a study being unveiled later that examines the psychological issues that clients and lawyers face when deciding whether to take a case to trial.

One of the main findings of the study is that plaintiffs, statistically speaking, stand to gain more in taking a settlement offer than litigating the case.

“The lesson for plaintiffs is, in the vast majority of cases, they are perceiving the defendant’s offer to be half a loaf when in fact it is an entire loaf or more,” said Randall L. Kiser, a co-author of the study and principal analyst at DecisionSet, a consulting firm that advises clients on litigation decisions.

The article also found that defendants made the wrong decision of going to trial (i.e., they plaintiff was willing to take less in a settlement than what the jury eventually found for the plaintiff) less often than plaintiffs. Defendants made the incorrect decision only in 24 percent of cases, according to the study, where plaintiffs were wrong 61 percent of the time. The article states that “[i]n just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.”

However, the study also concluded that a wrong decision by defendants cost them much more (costing $1.1 million), as opposed to if plaintiffs got it wrong (costing $43,000).

The article also discusses the psychological theory of loss aversion, which could definitely explain litigants’ choices.  The article explains:

The findings are consistent with research on human behavior and responses to risk, said Martin A. Asher, an economist at the University of Pennsylvania and a co-author. For example, psychologists have found that people are more averse to taking a risk when they are expecting to gain something, and more willing to take a risk when they have something to lose.
“If you approach a class of students and say, I’ll either write you a check for $200, or we can flip a coin and I will pay you nothing or $500,” most students will take the $200 rather than risk getting nothing, Mr. Asher said.
But reverse the situation, so that students have to write the check, and they will choose to flip the coin, risking a bigger loss because they hope to pay nothing at all, he continued. “They’ll take the gamble.”

Definitely some food for thought for litigators that have to assit clients in the difficult decision about whether to settle or try a case. 

CA Supreme Court Holds Non-Competes Are Generally Unenforceable and Release of "Any And All" Claims Not Unlawful

In Edwards v. Arthur Andersen LLP, the California Supreme Court ruled on the following issues: (1) To what extent does Business and Professions Code section 16600 prohibit employee noncompetition agreements; and (2) is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

Noncompetition Agreements
Noncompetition agreements are governed by Business & Professions Code section 16600, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The statute permits noncompetition agreements in the context of sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).

Under the common law, as still recognized by many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.  Andersen argued that California courts have held that section 16600 embrace the rule of reasonableness in evaluating competitive restraints.

The Court disagreed with Andersen, and noted:

We conclude that Andersen’s noncompetition agreement was invalid. As the Court of Appeal observed, “The first challenged clause prohibited Edwards, for an 18-month period, from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination. The second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession.

The Court found that this agreement was invalid because it restrained Edwards’ ability to practice his profession.

However, Andersen argued that section 16600 has a “narrow-restraint” exception and that its agreement with Edwards survives under this exception.  Andersen pointed out that a federal court in International Business Machines Corp. v. Bajorek (9th Cir. 1999) upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. Andersen also noted that another Ninth Circuit federal court in General Commercial Packaging v. TPS Package (9th Cir. 1997) held that a contractual provision barring one party from courting a specific customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude[]” the party from pursuing its trade or business.

In refusing to accept the “narrow-restraint” exception for noncompetition agreements in California, the Court stated:

Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” [citation] Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.

The Court’s ruling basically eliminates the validity of non-competition agreements under California that are not expressly provided for in Section 16600.

Contract Provision Releasing “Any and All” Claims
The second issues in the case was whether Andersen's condition of Edwards’s obtaining employment that Edwards execute an agreement releasing Andersen from, among other things, “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to [Edwards’s] employment by, association with or compensation from” Andersen.

Edwards argued that Labor Code section 2804 voids any agreement to waive the protections of Labor Code section 2802 (which provides that employers must reimburse employees for all business related expenses that the employee incurs) as against public policy.

The Court noted that Labor Code section 2804 has been interpreted to apply to Labor Code section 2802, making all contracts that waive an employee’s right to reimbursement null and void. Therefore an employee’s right to be reimbursed for business expenses provided under Labor Code section 2802 are nonwaivable, and any contract that does purport to waive an employee’s right would be contrary to the law.  Edwards maintained, therefore, the agreement was an independent wrongful act that would support another claim he was alleged for intentional interference with prospective advantage.

The Court disagreed with Edwards, and concluded that a contract provision releasing “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.  Therefore, such agreements are still valid and enforceable under the law.

East Bay Taxi Drivers Association v. Friendly Cab Co., -- Taxi Drivers Found to be Employees, Not Independent Contractors

The Ninth Circuit’s decision earlier this year in East Bay Taxi Driver’s Association v. Friendly Cab, Inc., 512 F3d 1090 (2008), illustrates how easily courts will pierce through the outward appearances of a “business” contract to find that, at bottom, it is just a glorified employer-employee relationship.

The case involved taxi drivers who were seeking to form a union to bargain with the company that leased their cabs. As employees they would be covered by the National Labor Relations Act (“NLRA”) and could force the company to recognize their union and bargain collectively. This required the Court to detrmine their true status.  As the Court explained:


‘Employees' work for wages or salaries under direct supervision. ‘Independent contractors' undertake to do a job for a price, decide how the work will be done, usually hire others to do the work, and depend for their income not upon wages, but upon the difference between what they pay for goods, materials, and labor and what they receive for the end result, that is, upon profits.

The drivers leased their vehicles and kept the fares that they generated. Nevertheless, the Ninth Circuit upheld the NLRB’s determination that they were mere “employees.” The main reason for this outcome was the company’s tight control over the drivers’ operations. For example, the drivers were required to only respond to the company’s radio dispatches and could not pick up fares on their own or advertise their own services apart from the company. The company's high degree of control thus negated the drivers’ opportunity to generate any real “entrepreneurial profit” through their own initiative.  


We have blogged repeatedly about the difficulty of maintaining a proper independent contractor status.  Unfortunately, the various multifactor tests promulgated by courts and administrative agencies are remarkably unhelpful for predicting which side of the line a worker falls. As the outcome of the East Bay Taxi case illustrates, however, it is probably more useful to view the standard as a simple determination of whether the company’s control prevents the individual from making significant profit from his own business decisions.

Disputes over Unpaid Sales Commissions and Bonus Payments: When Does a Mere Expectation Become an "Earned" Wage? Part I - Performance-Based Employment Compensation as a Unilateral Contract

Most employees are paid for their time. Thus, if they work eight hours at a rate of $25 per hour, or eight weeks at a salary of $2,500 per week, there is little dispute over the amount of wages owed. But disputes begin to multiply where the payment is deferred and is calculated based on meeting certain performance targets. Typical disputes include the following:

 
• What must the employee do to be considered the originator of a particular sale?
• What happens if the employee closes a sale but the customer never pays for the product?
• What if the salesman closed the sale but the company ships a defective product or otherwise causes the sale to be cancelled?
• What if the commission formula is based on meeting an annual target, but the Company decides to restructure the commission formula halfway through the year?
• What if the employee quits or is terminated after making a sale but before the customer has paid for product?


The first (but by no means the last) step to resolving these questions is to examine the terms of the parties’ contract. To do so, it is important to realize that under California law an enforceable commission contract is typically formed based on the company’s written policies or other communications to the employee concerning what commissions or bonuses he can expect if specified criteria are achieved. This is true regardless of disclaimers stating that the employment itself is terminable at-will or that there is supposedly no contract “of employment.”


In other words, it is not necessary for the parties to have a signed piece of paper for a valid compensation contract to exist. Rather, California generally follows a “unilateral contract” theory of employment compensation. A unilateral contract is one in which a “unilateral” offer to pay for performance is communicated by the employer (e.g., an employer policy stating that “an employee selling $100K in product will be paid a 10% commission”). The employee simultaneously accepts the offer and performs his side of the contract by doing the specified task (i.e., selling $100K in product).


A vested right to a commission payment thus usually arises immediately when the employee performs the requested services, closes the sale, stays employed throughout the year, or achieves any another specified goal. As a result, the employer may be legally barred from thereafter attempting to change the commission structure in a way that would prevent the employee from eventually collecting this entire “earned” commission.


Many employers mistakenly believe that if an employee can be terminated “at-will” his or her commissions may also be reduced at-will. Another common belief is that commissions are only “earned” when they are actually paid out by the employer. At least as to commissions on past sales, these assumptions are usually incorrect as a matter of law.


Understanding exactly when and how a commission or bonus becomes “earned” and vested according to common contract provisions will be addressed in greater detail in future posts. In the meantime, however, it is important to at least recognize the basic legal concept of the "unilateral contract."

DLSE Orders Staff To Follow Brinker

The DLSE has recently issued a memorandum to its deputy labor commissioners instructing them to follow the holding in Brinker v. Superior Court. The July 25, 2008 DLSE memorandum provides, in pertinent part, that the Brinker decision is “a published decision, and its rulings are therefore binding upon the [DLSE].” In addition, the memorandum makes clear that Brinker:
  • Held that Labor Code Section 512 and the meal period requirements set forth in the applicable wage order mean that employers “must provide meal periods by making them available, but need not ensure that they are taken. Employers, however, cannot impede, discourage or dissuade employees from taking meal periods.”
  • Rejected the so-called “rolling five hour” requirement as being inconsistent with the plain meaning of Labor Code Section 512 and the applicable wage order. The memorandum made clear that “[a]n employer must make a first 30-minute meal period available to an hourly employee who is permitted to work more than five hours per day, unless (1) the employee is permitted to work a ‘total work period per day’ that is six hours or less, or (2) both the employee and the employer agreed by “mutual consent” to waive the meal period.
  • Held that the rest period requirements set forth in the applicable wage order mean that “employers must provide rest periods, but need not ensure that they are taken. Employers, however, cannot impede, discourage or dissuade employees from taking rest periods.”
  • Held that employers need only authorize and permit rest periods every four hours or major fraction thereof and they need not, where impracticable, be in the middle of each work period.
To review the complete text of the DLSE memorandum click here.

Although this is a significant development as employers frequently find themselves before the labor commissioner, the DLSE memorandum is of little value if an employee chooses to pursue their claims in court. Moreover, the memorandum does not state if the DLSE will continue to follow Brinker in the event the California Supreme Court decides to review the decision. Nevertheless, the DLSE’s position will undoubtedly be welcomed by employers throughout California.

Perspectives on Brinker (Part II) -- When Must Employers Schedule Employee Meal Breaks

In a prior post on Brinker v. Superior Court (Hohnbaum), we examined what the decision means in terms of defining the duty of California employers to make meal and rest breaks "available" to employees.  In this post we look at what Brinker says about when during the day those breaks need to be provided.

Brinker analyzes this question based on the language of California Labor Code section 512(a), which provides that “An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes.”

The Meal Period Timing Issue
At first glance, the phrase “work period” in the above-quoted provision might seem self-explanatory.  In fact, hundreds of millions of dollars and the daily activities of millions of people hinge on the semantic ambiguity arising from these two words. The two competing interpretations are as follows:

Interpretation # 1: The Continuous “Work Period.” The five-hour “work period” must refer to any five-hour period of continuous work. Thus, employers must provide at least one meal period for each continuous five-hour period of work.  

Interpretation #2: The Cumulative “Work Period.” The five-hour “work period” must refer to the total number of hours worked by the employee during any day. In other words, the statute is merely saying that whenever an employee is required to work more than a total of five hours in a day he must receive a 30 minute meal break at some point in the day – but the statute is not intended to dictate when during the day that break must be taken.

In Brinker v. Superior Court-- the first published opinion to address the issue – the lower court agreed with interpretation # 1. The Appellate Court, however, reversed in favor of interpretation #2. So does this mean that employers now have carte blanche to schedule meal breaks at whatever time of day they wish so long as they give the correct number of meal breaks per day?

We wouldn’t recommend it.

To begin with, there is a good chance that the California Supreme Court will grant review of Brinker– thereby rendering it non-citable. Moreover, the Brinker opinion has some pretty sizable holes in its reasoning. Thus, we would not bet the farm on Brinker’s interpretation holding up in the long run. Any employer who relies on Brinker to aggressively schedule meal breaks very close to the start or end of the workday could therefore find itself exposed to massive penalties if, and when, Brinker is eventually overturned by the Supreme Court.

The Vulnerabilities of Brinker
Brinker is vulnerable to be being overruled on several grounds. For example, Brinker rejects Interpretation #1, above, on the ground that if the Legislature meant to trigger a meal period for each consecutive five hour work period it could have done so without using the words “per day” in the phrase “a work period of more than five hours per day.” Adopting an interpretation that gives significance to every word is one goal of statutory interpretation. But this “per day” reference is a fairly thin reed to grasp for purposes of making this argument.

For one thing, the monetary penalties imposed by the Labor Code do not even arise from Section 512. Rather, it is Labor Code Section 226.7 which imposes a penalty of “one additional hour of pay at the employee's regular rate” for any failure “to provide an employee a meal period . . . in accordance with an applicable order of the Industrial Welfare Commission.”  Each of the IWC’s Wage Orders, however, conspicuously omits the very “per day” language that Brinker used as the basis for its ruling.  

Brinker dismisses the significance of the Wage Orders themselves by holding that they must be interpreted as if they merely track the text of Section 512(a) verbatim.  But why would the Legislature have used a violation of the IWC Wage Orders as the triggering event for imposing a penalty if it believed that the Wage Orders could only duplicate the text of Section 512? Brinker’s dismissive treatment of the actual text of the Wage Orders thus arguably repeals the portion of Section 226.7 that incorporates the Wage Orders by reference.  In doing so, Brinker potentially violates its own standard that the words of a statute cannot be rendered meaningless.

Brinker also fails to address the significance of Labor Code Section 512(b), which authorizes the IWC to adopt Wage Orders allowing meal periods to begin "after six hours of work" if it determines that this is "consistent with the health and welfare of the affected employees."  This provision presupposes that, in the absence of any new Wage Order provision, an employee cannot agree to wait more than six hours for a meal break. 

Brinker also leads to some problematic practical results.  For example, the over-arching Legislative purpose was to afford relief from fatigue and hunger that could result from long stretches of constant work. But under Brinker, an employer could schedule an employee to begin work at 9:00 a.m., take a meal break from 9:05 to 9:35 a.m., and then work thirteen hours straight before taking another 30-minute meal break immediately before leaving at around 11:05 p.m. It is hard to envision the Supreme Court endorsing this result as the true intent of the Legislature.

Conclusion
Notwithstanding the undeniably pro-employer Brinker decision, prudent employers should still strive to establish a record of good faith, affirmative efforts to enforce internal meal and rest break policies.  Part of this record includes scheduling employee meal periods to begin before the start of any sixth consecutive hour of work.   These steps may not be easy at an operational level, but they are necessary to avoid exposure to large-scale class action liability in the long run. 

Outdated IRS Rules on Employee Cell Phone Usage Likely To Change

A recent LA Times Article reports that the current IRS rule for expensing employer-provided cell phones is likely to be changing soon. The current rule permits employers to treat employee cell phone reimbursement as a deductible business expense only if the employee has kept a detailed log of every call and the reason for the call.

A bi-partisan bill to dispense with this log-keeping requirement (which is almost universally ignored in practice anyway), is co-sponsored by Reps. Sam Johnson (R-Texas) and Earl Pomeroy (D-N.D.), and has already passed the House.

The cellphone tax law was set "in 1989 when cellphones were huge and when it cost a lot of money to make a phone call," Johnson said. "Nowadays they're a dime a dozen and the cost is way down. If you don't log all your telephone calls, you're going to have some IRS weenie after you. That's why we're trying to get the law changed -- because it just doesn't make any sense anymore."

A change appears likely. When pressed by Johnson at a hearing this year, Treasury Secretary Henry M. Paulson said that updating the rules sounded "like the right idea to me." And the IRS' Advisory Committee on Tax Exempt and Government Entities, calling the rules "burdensome for any employer," recommended last month that the agency loosen reporting requirements for employers and that Congress change the law.

According to the Times article, "Nationwide, about 5.5 million people have cellphone service paid for directly by their employers -- and they are a group that makes up 2.4% of all wireless subscribers." Given the wireless industry's interest in preserving and growing this market, we are willing to bet that the the new legislation is a lock in the coming year.

Perspectives on Brinker: What Must California Employers Do to Make Meal and Rest Breaks "Available" to Their Employees?

In Brinker Restaurant Co. v. Superior Court, ___ Cal.App 4th ___ (2008), the Fourth District Court of Appeal held that “meal periods need only be made available, not ensured.” Thus employers are not strictly liable for missed meal and rest breaks when an employee “merely show[s] that he did not take them regardless of the reason."

So what then, according to Brinker, must an employer do to make a meal or rest break “available”? Or, stated somewhat differently, what are the reasons for an employee missing a break that will trigger a penalty? The following answers seem to emerge from the Brinker decision, and especially from that court’s efforts to factually distinguish the Cicairos and Perez cases which had previously found employer liability for failure to provide breaks.
  • To begin with, employers cannot actively “impede, discourage or dissuade employees from taking meal periods.”
  • Moreover, "an employer must do something affirmative to provide a meal period." (Brinker, discussing Perez, 2007 WL 1848037 at *7)”
  • Thus, an employer’s “obligation to provide [employees] with an adequate meal period [is] not satisfied merely by assuming that the meal periods were taken." (Brinker, quoting Cicairos, 133 Cal.App.4th at p. 962.)
  • For example, an employer’s “lack of a policy for meal breaks" combined with an on-call policy that requires employers to be constantly available to report to work, is not sufficient to discharge its affirmative duty. (Brinker, discussing Perez, supra, at *7).
  • Also, failing to record meal periods, while “pressuring” employees to adhere to scheduling policies that make it “harder” to take meal breaks is not sufficient. (Brinker, discussing Cicairos, supra, 133 Cal.App.4th at p. 962.)
  • Likewise, knowingly permitting employees to work through meal breaks, while not “tak[ing] steps to address the situation,” and implementing “management policies” that make it “harder” to take a break , may “effectively deprive[]” employees of their breaks. (Brinker, discussing Cicairos).
The Brinker case is very likely headed for the California Supreme Court. However, it clearly points to the inevitable direction in which the meal period “policing” rule will evolve. The public policy implications of a strict liability enforcement regime (such as having to fire employees for not complying with employer break policies) will rule out any strict liability standard. Instead, “good employers” who make reasonable efforts to create and enforce internal break polices will not be subject to class-wide liability for failing to achieve an impossible 100% compliance rate. On the other hand, “bad employers” who either have no break policy or who merely go through the motions of compliance will not be allowed to escape liability by claiming their employees are “voluntarily” working through breaks.

Mapping the borderline between these two categories of employers will no doubt generate years of massive, hard fought litigation.

The Brinker Decision Generates A Lot Of Commentary

Here is a sampling of what the blogosphere is saying about yesterday's Brinker v. Hohnbaum decision:

UCL Practitioner:
I was co-counsel for the employees in the appellate-level proceedings, and my normal policy is not to blog about my own cases (with an occasional exception if they are already getting outside press or blogosphere coverage). I am putting up this post only because I must clarify a comment that was attributed to me in the Recorder article:
[Kralowec] also said the 4th District's decision creates an appellate split that likely will ensure Supreme Court review. In Cicairos v. Summit Logistics Inc., 133 Cal.App.4th 949, Sacramento's 3rd District ruled in 2005 that employers have an affirmative duty to ensure that employees receive meal periods.
I do believe that the new Brinker decision creates a split in authority with Cicairos, and I also believe that the Supreme Court often grants review to resolve issues that are the subject of a split among the lower courts, particularly when two Court of Appeal panels have handed down conflicting published opinions. However, I did not say that I thought that in this specific case, the split between Brinker and Cicairos "likely will ensure Supreme Court review." I would never say something so presumptuous. It would have been more accurate to say that Brinker creates an appellate split, that such splits often lead to Supreme Court review, that Brinker is a particularly appropriate case for review, and that I certainly hope that the Supreme Court decides to grant review.
What’s New In Employment Law:
Wow. So, this is a major decision that could bring meal and break period class actions to a screeching halt, even though the Legislature does not seem inclined to do so. The only thing is, if the Supreme Court grants review, the decision could disappear for as much as a couple of years and could get reversed by the High Court.
The Complex Litigator:
I will post more later on this opinion, after I have chance to evaluate it further. For now, courts with pending meal break, rest break and off-the-clock claims should expect for the inevitable onslaught of paper that this will generate.
Wage Law:
However, it was not the first, and Brinker disagrees with many prior opinions, most specifically, Cicairos v. Summit Logistics, Inc. (2005) 133 Cal.App.4th 949, 962-963, which it discussed at length, and Bufil v. Dollar Financial Group, Inc. (2008) 162 Cal.App.4th 1193, which it did not even mention, and more generally, a string of cases which promote class actions as an efficient way to resolve wage and hour disputes and a string of cases which discuss the remedial nature of wage and hour laws in California. With Brinker and Cicairos presenting such starkly contrasting views on California law, with Brinker presenting so many novel ideas regarding wage and hour claims and class actions, and with so many U.S. District Court cases disagreeing with Cicairos and each other, this case looks like an outstanding candidate for Supreme Court review.
Even the Connecticut Employment Law Blog had something to say about the decision:
Why do I bring this up in a Connecticut blog? For a few reasons. First, there are several Connecticut employers that have California employees, whether through sales or otherwise. Second, California tends to be on the cutting edge of some legal issues. With nearly 36 million people (or roughly 10 times the population of Connecticut), those issues just tend to pop up more than in a small state like Connecticut. Third, the case provides a good opportunity to highlight the Connecticut meal period law -- an underappreciated law that lays out what is necessary and is much different than California.
The consensus across the commentators (including our take on the issue) is that the California Supreme Court will likely grant review of this monumental ruling. 

Meal and Rest Break Requirements Clarified By Court in Brinker v. Hohnbaum

The Appellate Court, Fourth Appellate District, Division One, issued a much awaited opinion today in Brinker Restaurant Corporation, et al. v. Hohnbaum, et al. (July 22, 2008). The case is one of the first California state appellate court to rule on the parameters of employers’ duties under the  California Labor Code requiring rest and meal breaks for hourly employees.  As discussed below, the court’s opinion was across the board in favor for California employers.  The primarily holding by the appellate court was that an employer does not have to “ensure” that meal and rest breaks are taken, therefore making these types of cases very difficult to certify as a class action. 

Due to the monumental impact this case will have on the vast wage and hour litigation in California, this post is longer than we typically like to write. And this post will definitely not be the last time we discuss the case.

Case Background

In November 2005 Brinker filed its first petition for writ of mandate (D047509) in this matter. In the petition, Brinker challenged the court's July 2005 meal period order. Specifically, Brinker requested a writ directing the trial court to "vacate its earlier order holding that: (1) a non-exempt employee is entitled to a meal period for each five-hour block of time worked[; and] (2) the premium pay owed for a violation of [section 226.7] is a wage."

In support of its petition, Brinker argued the trial court erred by interpreting section 512 to mean that an hourly employee's entitlement to a meal period is "rolling," such that "a separate meal period must be provided for each five-hour block of time worked . . . regardless of the total hours worked in the day. In other words, the [court] interpreted the law to be that . . . [o]nce a meal period concludes, the proverbial clock starts ticking again, and if the employee works five hours more, a second meal period must be provided." 

Brinker also argued that although an employee working more than five hours and less than 10 hours is entitled under section 512 to a 30-minute meal period at some point during the workday, "nothing in [s]ection 512 . . . requires a second meal period be provided solely because [the] employee works five hours after the end of the first meal period, where the total time worked is less than [10] hours." Brinker further asserted that IWC Wage Order No. 5 also "does not dictate the anomalous result that meal periods must be provided every five hours" because, like section 512, it requires only that an employee working more than five hours "gets a meal period at some point during the workday." Brinker complained that the court's meal period ruling "requires servers to sit down, unpaid, during the most lucrative part of their working day."

Plaintiff’s Motion For Class Certification

Plaintiffs moved to certify a class of "[a]ll present and former employees of [Brinker] who worked at a Brinker[-]owned restaurant in California, holding a non-exempt position, from and after August 16, 2000 ('Class Members')." In their moving papers, plaintiffs alternatively defined the class as "all hourly employees of restaurants owned by [Brinker] in California who have not been provided with meal and rest breaks in accordance with California law and who have not been compensated for those missed meal and rest breaks." 

Plaintiffs' motion also sought certification of six subclasses, three of which are pertinent to the appeal: (1) a "Rest Period Subclass," consisting of "Class Members who worked one or more work periods in excess of three and a half (3.5) hours without receiving a paid 10 minute break during which the Class Member was relieved of all duties, from and after October 1, 2000"; (2) a "Meal Period Subclass," consisting of "Class Members who worked one or more work periods in excess of five (5) consecutive hours, without receiving a thirty (30) minute meal period during which the Class Member was relieved of all duties, from and after October 1, 2000"; and (3) an "Off-The-Clock Subclass," consisting of "Class Members who worked 'off-the-clock' or without pay from and after August 16, 2000."

The class in question is estimated to consist of more than 59,000 Brinker employees.

Plaintiffs Rest Break Claims

Plaintiffs allege Brinker willfully violated section 226.7 and IWC Wage Orders Nos. 5-1998, 5-2000 and 5-2001 by "fail[ing] to provide rest periods for every four hours or major fraction thereof worked per day to non-exempt employees, and failing to provide compensation for such unprovided rest periods." Section 226.7, subdivision (a) provides: "No employer shall require any employee to work during any meal or rest period mandated by an applicable order of the [IWC]." (Italics added.) 

The pertinent provisions of IWC Wage Order No. 5-2001 are codified in California Code of Regulations, title 8, section 11050, subdivision 12(A), which provides:

Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof. However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3 1/2) hours. Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages. (Italics added.)

The court held that the phrase "per four (4) hours or major fraction thereof" does not mean that a rest period must be given every three and one-half hours:

Regulation 11050(12)(A) states that calculation of the appropriate number of rest breaks must "be based on the total hours worked daily." Thus, for example, if one has a work period of seven hours, the employee is entitled to a rest period after four hours of work because he or she has worked a full four hours, not a "major fraction thereof." It is only when an employee is scheduled for a shift that is more than three and one-half hours, but less than four hours, that he or she is entitled to a rest break before the four hour mark. 

Moreover, because the sentence following the "four (4) hours or major fraction thereof" limits required rest breaks to employees who work at least three and one-half hours in one work day, the term "major fraction thereof" can only be interpreted as meaning the time period between three and one-half hours and four hours. Apparently this portion of the wage order was intended to prevent employers from avoiding rest breaks by scheduling work periods slightly less that [sic] four hours, but at the same time made three and one-half hours the cut-off period for work periods below which no rest period need be provided. 

The court also held that the DLSE’s opinion that the term "major fraction thereof" means any time over 50 percent of a four-hour work period is wrong because it renders the current version of Regulation 11050(12)(A) internally inconsistent. As an employee cannot be entitled to a 10-minute break if she or she "works more than 2 . . . hours in a day," if the employee is not entitled to a 10-minute break if he or she works "less than three and one-half" hours in a day. The court also noted that it is not required to follow the DLSE opinion on the matter, citing Murphy v. Kenneth Cole, 40 Cal.4th at p. 1105, fn. 7.

The court also held that the law does not required employers to provide rest breaks before meal breaks:

Furthermore, contrary to plaintiffs' assertion, the provisions of Regulation 11050(12)(A)do not require employers to authorize and permit a first rest break before the first scheduled meal period. Rather, the applicable language of Regulation 11050(12)(A)states only that rest breaks "insofar as practicable shall be in the middle of each work period." (Italics added.) Regulation 11050(12)(A)is silent on the question of whether an employer must permit an hourly employee to take a 10-minute rest break before the first meal period is provided. As Brinker points out, an employee who takes a meal period one hour into an eight-hour shift could still take a post-meal period rest break "in the middle" of the first four-hour work period, in full compliance with the applicable provisions of IWC Wage Order No. 5-2001.

The court explained that Regulation 11050(12)(A) allows employers some “discretion to not have rest periods in the middle of a work period if, because of the nature of the work or the circumstances of a particular employee, it is not ‘practicable.’” In explaining what “practicable” means, the court specifically mentioned that:

…this discretion is of particular importance for jobs, such as in the restaurant industry, that require flexibility in scheduling breaks because the middle of a work period is often during a mealtime rush, when an employee might not want to take a rest break in order to maximize tips and provide optimum service to restaurant patrons. As long as employers make rest breaks available to employees, and strive, where practicable, to schedule them in the middle of the first four-hour work period, employers are in compliance with that portion of Regulation 11050(12)(A). 

Ultimately, the court held that a determination about whether it is practicable to permit rest breaks near the end of a four hour work period is not an issue that can be litigated on a class-wide basis. In overruling the trial court’s granting of class certification the Appellate Court stated:

Had the court properly determined that (1) employees need be afforded only one 10-minute rest break every four hours "or major fraction thereof" (Reg. 11050(12)(A)), (2) rest breaks need be afforded in the middle of that four-hour period only when "practicable," and (3) employers are not required to ensure that employees take the rest breaks properly provided to them in accordance with the provisions of IWC Wage Order No. 5, only individual questions would have remained, and the court in the proper exercise of its legal discretion would have denied class certification with respect to plaintiffs' rest break claims because the trier of fact cannot determine on a class-wide basis whether members of the proposed class of Brinker employees missed rest breaks as a result of a supervisor's coercion or the employee's uncoerced choice to waive such breaks and continue working. Individual questions would also predominate as to whether employees received a full 10-minute rest period, or whether the period was interrupted. The issue of whether rest periods are prohibited or voluntarily declined is by its nature an individual inquiry.

Plaintiffs argued that even if the trial court erred in failing to define the elements of plaintiffs' rest period claims prior to certifying the class the appellate court should remand the case to the trial court to permit the trial court to rule on if plaintiffs' "expert statistical and survey evidence" makes their rest break claims amenable to class treatment. The appellate court refused to remand the case, stating that while courts may use such evidence in determining if a claim is amenable to class treatment, here, that evidence does not change the individualized inquiry in determining if Brinker allowed or forbade rest periods. The court stated:

The question of whether employees were forced to forgo rest breaks or voluntarily chose not to take them is a highly individualized inquiry that would result in thousands of mini-trials to determine as to each employee if a particular manager prohibited a full, timely break or if the employee waived it or voluntarily cut it short. (Brown v. Federal Express Corp. (C.D.Cal. 2008) ___ F.R.D. ___ [2008 WL 906517 at *8] (Brown) [meal period violations claim not amenable to class treatment as court would be "mired in over 5000 mini-trials" to determine if such breaks were provided].)

For these reasons, the appellate court vacated the order granting class certification for the rest break subclass. 

Plaintiffs’ Meal Break Claims

In their second cause of action, plaintiffs allege Brinker violated sections 226.7 and 512, and IWC Wage Order No. 5, by failing to "provide meal periods for days on which non-exempt employees work(ed) in excess of five hours, or by failing to provide meal periods [altogether], or to provide second meal periods for days employees worked in excess of [10] hours, and failing to provide compensation for such unprovided or improperly provided meal periods." Plaintiffs claim that Brinker’s “early lunching” policy that required its employees to take their meal periods soon after they arrive for their shifts, usually within the first hour, and then requiring them to work in excess of five hours, and sometimes more than nine hours straight, without an additional meal period violated California law. 

Plaintiffs asserted that common issues predominate on their rest break claims because they "presented corporate policy evidence of a pattern and practice by Brinker of failing to provide a rest period prior to employees' meal period as a result of its practice of scheduling meals early." Specifically, plaintiffs argued that "Brinker maintains company-wide policies discouraging rest periods, including requiring servers to give up tables and tips if they want a break and failing to provide rest periods prior to scheduled early meals."

1. Rolling five-hour meal period claim

The lower trial court in this case, found that a meal period "must be given before [an] employee's work period exceeds five hours." The lower court also stated that "the DLSE wants employers to provide employees with break periods and meal periods toward the middle of an employee[']s work period in order to break up that employee's 'shift.'" The court further stated that Brinker "appears to be in violation of [section] 512 by not providing a 'meal period' per every five hours of work."

In overruling the lower court, the appellate court ruled that this interpretation of the law was incorrect and that the trial court’s class certification order rests on improper criteria with respect to the plaintiffs' rolling five-hour meal period claim.

The appellate court began its analysis with Labor Code Section 512, subdivision (a), which provides:

An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee. An employer may not employ an employee for a work period of more than 10 hours per day without providing the employee with a second meal period of not less than 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and the employee only if the first meal period was not waived.

The appellate court held that Section 512(a) thus provides that an employer in California has a statutory duty to make a first 30-minute meal period available to an hourly employee who is permitted to work more than five hours per day, unless (1) the employee is permitted to work a "total work period per day" that is six hours or less, and (2) both the employee and the employer agree by "mutual consent" to waive the meal period.

            The appellate court also held that this interpretation of section 512(a), regarding an employer's duty to provide a first meal period, is consistent with the plain language set forth in IWC Wage Order No. 5-2001, which provides in part: "No employer shall employ any person for a work period of more than five (5) hours without a meal period of not less than 30 minutes, except that when a work period of not more than six (6) hours will complete the day's work the meal period may be waived by mutual consent of the employer and the employee."

On the issue regarding when an meal break must be provided the court stated:

With respect to the issue of when an employer must make a first 30-minute meal period available to an hourly employee, Brinker's uniform meal period policy (titled "Break and Meal Period Policy for Employees in the State of California") comports with the foregoing interpretation of section 512(a) and IWC Wage Order No. 5-2001. It provides that employees are "entitled to a 30-minute meal period" when they "work a shift that is over five hours." 

The court continued in holding that Section 512(a) also provides that an employer has a duty to make a second 30-minute meal period available to an hourly employee who has a "work period of more than 10 hours per day" unless (1) the "total hours" the employee is permitted to work per day is 12 hours or less, (2) both the employee and the employer agree by "mutual consent" to waive the second meal period, and (3) the first meal period "was not waived."

Plaintiffs argue that Brinker's written meal policy violates section 512(a) and IWC Wage Order No. 5 (specifically, Cal. Code Regs., tit. 8, § 11050, subd. 11(A)) because it allows the practice of “early lunching” and fails to make a 30-minute meal period available to an hourly employee for every five consecutive hours of work. Plaintiffs maintained that every hourly employee should receive a second meal break five hours after they return from the first meal break. The court found this argument unpersuasive:

Under this interpretation, however, the term "per day" in the first sentence of section 512(a) would be rendered surplusage, as would the phrase "[a]n employer may not employ an employee for a work period of more than 10 hours per day without providing the employee with a second meal period of not less than 30 minutes" in the second sentence of that subdivision.

The appellate court held that without a proper interpretation of section 512(a), the lower court could not correctly ascertain the legal elements that members of the proposed class would have to prove in order to establish their meal period claims, and therefore could not properly determine whether common issues predominate over issues that affect individual members of the class.

2. Brinker's failure to ensure employees take meal periods

Plaintiffs also claim that Brinker's uniform meal period policy violates sections 512 and 226.7, as well as IWC Wage Order No. 5, by failing to ensure that its hourly employees take their meal periods. In the primary holding of the case, the appellate court stated:

We conclude that California law provides that Brinker need only provide meal periods, and, as a result, as with the rest period claims, plaintiffs' meal period claims are not amenable to class treatment.

The appellate court disagreed with Plaintiffs’ contention that an employer’s duty was to ensure a meal break. The court stated:

If this were the case, employers would be forced to police their employees and force them to take meal breaks. With thousands of employees working multiple shifts, this would be an impossible task. If they were unable to do so, employers would have to pay an extra hour of pay any time an employee voluntarily chose not to take a meal period, or to take a shortened one. 

3. Amenability of plaintiffs' meal break claims to class treatment

The appellate court held that because meal breaks need only be made available, not ensured, individual issues predominate in this case and the meal break claim is not amenable class treatment. The court explained:

The reason meal breaks were not taken can only be decided on a case-by-case basis. It would need to be determined as to each employee whether a missed or shortened meal period was the result of an employee's personal choice, a manager's coercion, or, as plaintiffs argue, because the restaurants were so inadequately staffed that employees could not actually take permitted meal breaks. As we discussed, ante, with regard to rest breaks, plaintiffs' computer and statistical evidence submitted in support of their class certification motion was not only based upon faulty legal assumptions, it also could only show the fact that meal breaks were not taken, or were shortened, not why. It will require an individual inquiry as to all Brinker employees to determine if this was because Brinker failed to make them available, or employees chose not to take them.

The appellate court also found that the evidence does not show that Brinker had a class-wide policy that prohibited meal breaks. Instead, the evidence in this case indicated that some employees took meal breaks and others did not, and it requires the court to perform an individualized inquiring into the reasons why an employee did not take the break. The court also held that the plaintiffs’ statistical and survey evidence does not render the meal break claims one in which common issues predominate because while the time cards might show when meal breaks were taken and when there were not, they cannot show why they were or were not taken.

Plaintiffs’ Off-the clock claim

Plaintiffs also allege Brinker unlawfully required its employees to work off the clock during meal periods. This claim was comprised of two theories: (1) time worked during a meal period when an individual was clocked out; and (2) time “shaving,” which is defined as an unlawful alteration of an employee's time record to reduce the time logged so as to not accurately reflect time worked.

The court held, and the Plaintiffs did not dispute, that employers can only be held liable for off-the-clock claims if the employer knows or should have known the employee was working off the clock. (citing Morillion v. Royal Packing Co., 22 Cal.4th at p. 585.) The evidence also established that Brinker has a written corporate policy prohibiting off-the-clock work. Because of these facts, the court found that plaintiffs' off-the-clock claims are not amenable to class treatment. As the court stated:

Thus, resolution of these claims would require individual inquiries in to whether any employee actually worked off the clock, whether managers had actual or constructive knowledge of such work and whether managers coerced or encouraged such work. Indeed, not all the employee declarations alleged they were forced to work off the clock, demonstrating there was no class-wide policy forcing employees to do so.

The opinion can be viewed at the court’s website [Word] [PDF]. This case will no doubt change many wage and hour litigator's case strategies, unless the California Supreme Court grants review of the decision.

UPDATE: If you rather listen to my podcast on Brinker v. Hohnbaum, click here.

Brinker v. Superior Court: Employers Need Not "Ensure" Meal Periods Are Taken

The California Court of Appeal today issued its eagerly-awaited Brinker decision, which handed a big victory to employers and helped to clarify the standards that apply to the provision of meal periods under Labor Code section 512. To cut right to the chase, the Appellate Court summarized its decision as follows:

Specifically, we conclude that (1) while employers cannot impede, discourage or dissuade employees from taking rest periods, they need only provide, not ensure, rest periods are taken; (2) employers need only authorize and permit rest periods every four hours or major fraction thereof and they need not, where impracticable, be in the middle of each work period; (3) employers are not required to provide a meal period for every five consecutive hours worked; (4) while employers cannot impede, discourage or dissuade employees from taking meal periods, they need only provide them and not ensure they are taken; and (5) while employers cannot coerce, require or compel employees to work off the clock, they can only be held liable for employees working off the clock if they knew or should have known they were doing so. We further conclude that because the rest and meal breaks need only be "made available" and not "ensured," individual issues predominate and, based upon the evidence presented to the trial court, they are not amenable to class treatment.

We’ll be blogging further about the Brinker decision, but the gist of the above-quoted holding is pretty self-explanatory. There is no longer any argument that employers are “strictly liable” for non-compliance with meal or rest period policies. And as a result, class certification will be far more difficult to obtain.

DLSE Public Hearings Air Concerns Regarding Meal Break Issues

Once upon a time, employee meal and rest periods were an obscure legal backwater, which was the exclusive province of hard-core human resources nerds and bureaucrats. But no longer. Class action meal period litigation has now become a multi-million dollar political football. 

This new reality was highlighted by response when the DLSE recently held two public hearings on the topic in Sacramento and Los Angeles. Over 200 and 400 concerned individuals showed up in person to the respective meetings, and another 200 written comments were submitted in writing 

As the Labor Commissioner explained in her formal written report on the hearings.  

It is apparent that emotions surrounding the issue of meal and rest periods have run high for a long time. Conflicts and confusion in the statute and in the IWC orders have proven problematic. The forums demonstrated an urgent need for common sense solutions by the Courts and by the Legislature which would greatly benefit workers and businesses throughout California.

The California Division of Labor Standards Enforcements (or “DLSE”) is the administrative enforcement arm of the Labor Commissioner. As such, it has some limited latitude to influence how courts will define the scope of the meal period requirements – i.e., Labor Code sections 512 and 226.7. At the behest of Governor Schwarzenegger, the DLSE initially sided with employers by issuing an administrative decision that would have cut the relevant statute of limitations from four years to just one year.   The Division also propounded a set of “proposed” pro-employer regulations. 

The DLSE was forced to beat a hasty retreat, however, when the California Supreme Court issued its decision in Murphy v. Kenneth Cole. This opinion, which constitutes controlling legal authority, took the exact opposite position.

At this point, it appears that the Labor Commissioner has abandoned her own attempts to formally weigh in on any matters of first impression. Instead, the main purpose of the recent hearings is apparently to flag various concerns and ambiguities and beseech the Courts and politicians for more definitive guidance.  

The Labor Commissioner’s report recites that “Preserving the right to take meal and rest breaks is critical.” Nevertheless, Ms. Bradstreet primarily calls for more “flexibility” and highlights the following testimony:

  • Many workers who operate on tips or commissions object to taking breaks at times that cut into their earnings;
  • To keep consistent staffing, some employers are complying with the letter of law by scheduling “staggered lunch breaks” that begin as early as 9:00 a.m.
  • Employers are policing compliance by imposing ever-greater disciplinary measures on employees – for example, “UPS reported that in the first eight months of 2007 it issued 7,200 disciplinary citations and fired 22 workers for meal break violations.”

The report and various summaries of the comments on which it is based can be viewed through the following links.

http://www.dir.ca.gov/dlse/mealandrest/MRForumReport.pdf;

http://www.dir.ca.gov/dlse/mealandrest/MRsummaryComments.pdf;

http://www.dir.ca.gov/dlse/mealandrest/MRForumTranscript.pdf.

Braun v. Wal-Mart, Inc.: Wal-Mart Hammered For Meal and Rest Break Violations in Minnesota

Companies doing business in California frequently lament the “unique” burdens imposed by California wage and hour laws. But with all the attention on California wage and hour class action litigation, it is worthwhile to remember that many other states actually have similar laws.
No one knows this better than Wal-Mart, which has just been handed another costly meal period class action defeat under Minnesota law in the case of Braun v. Wal-Mart. The International Labor Communications Association blog has a good summary of what the case means for Wal-Mart:
Dakota County District Judge Robert King ordered the company to pay $6.5 million in back pay. In addition, Wal-Mart faces fines as high as $2 billion for the wage-and-hour violations.

King's ruling culminated a seven-year legal battle by four former Wal-Mart workers who filed a class-action lawsuit on behalf of 56,000 current and former employees who worked at Minnesota Wal-Mart and Sam's Club stores between Sept. 11, 1998, and Jan. 31, 2004.

"I was treated like so many of my co-workers," said Nancy Braun of Rochester, Minn., one of the four plaintiffs. "There was just too much work to do and never enough time to do it. There just wasn't enough time in the day to take the breaks we were entitled to."

Judge King found that Wal-Mart repeatedly and willfully violated Minnesota labor laws or its contract with its employees on the issues of contractual rest breaks, statutory meal breaks, shaving time from paid rest breaks and failure to maintain accurate records.

In the decision, the judge found that Wal-Mart was aware that employees were not receiving breaks to which they were entitled. "In essence, they put their heads in the sand," King stated.

He found that Minnesota law requires every employer to provide its employees with a sufficient time to eat a meal. King stated, "No time to eat a meal is not a sufficient time to eat a meal." King found that Wal-Mart violated the meal break law 73,864 times.

Reporting Time or "Show Up" Pay

Reporting time pay is a form of “premium” pay that, like overtime or missed meal period compensation, is intended to discourage work scheduling practices that are deemed to create a special burden on employees. Reporting time pay, also called “Show-Up Pay,” is intended to discourage employers with variable work demands from deliberately over-staffing their operations and then sending home any “excess” workers without pay. 

Think of it as the workforce equivalent of the much-despised airline practice of over-booking their flights and then “bumping” passengers to another flight if there is no room on the plane. The difference is that instead of a coupon for his next flight to Cleveland, the “bumped” employee must be paid between two and four hours of pay at his regular hourly rate.

Reporting time pay is actually one of the most overlooked requirements of California wage and hour law. One reason is that it is has never been codified in a Labor Code section. Rather, it is solely a regulatory creation of the Industrial Welfare Commission (“IWC”), which is contained only in the IWC Wage Orders that govern various industries in California.

The Reporting Time requirement is set forth in Section 5 of every Wage Order, each of which provides:

(A) Each workday an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work, the employee shall be paid for half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee’s regular rate of pay, which shall not be less than the minimum wage.

(B) If an employee is required to report for work a second time on any one workday and is furnished less than two (2) hours of work on the second reporting, said employee shall be paid for two (2) hours at the employee’s regular rate of pay, which shall not be less than the minimum wage.

(C) The foregoing reporting time pay provisions are not applicable when: (1) Operations cannot commence or continue due to threats to employees or property; or when recommended by civil authorities; or (2) Public utilities fail to supply electricity, water, or gas, or there is a failure in the public utilities, or sewer system; or (3) The interruption of work is caused by an Act of God or other cause not within the employer’s control.

(D) This section shall not apply to an employee on paid standby who is called to perform assigned work at a time other than the employee’s scheduled reporting time.

Scenarios that could trigger an obligation to pay “reporting time” of up to four-hour’s wages include:

  • Requiring employees to come in to work solely to attend a short staff meetings;
  • Sending employees home when work is slow (this happens often to waiters and waitresses);
  • Requiring employees to come in to the office on their “day off” to check a posted schedule or to pick up or drop off equipment or merchandise.

IRS Mileage Rate To Increase 8 Cents July 1, 2008

The IRS announced yesterday that the IRS mileage rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008.  Click here to see the IRS press release.  This is an increase of eight cents from the 50.5 cent rate in effect for the first six months of 2008. Click here to read a Washington Post article on the topic.

What does this mean for California employers?

California's DLSE has maintained that employers are required to reimburse employees for business miles driven at the IRS mileage rate in order to comply with California Labor Code section 2802.  However, just last year, the California Supreme Court ruled in Gattuso v. Harte-Hanks (as discussed previously on our blog here) that the reimbursement rate does not have the be the IRS mileage rate but can be negotiated by parties as long as it fully reimburses the employee. The Court stated:

We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under section 2802.
So if employers wish to reimburse employees at an amount lower than the IRS mileage rate, it is recommended that the agreement be documented and that the employer take into account any facts that would either increase or decrease the amount needed to fully reimburse the employee. 

Schwarzenegger and Sacramento Republicans Look at Reforming Meal Period Rules

The California Legislature has once again missed its budget deadline. This is more of an annual tradition than news. But this year the deficit is particularly large and the resulting budget fight will therefore be especially brutal. For example, state Republicans want to put everything on the table, including non-budget items such as a reform of meal break rules. According to the LA Times, “GOP lawmakers hope to use their leverage over the state budget, which cannot pass without some of their votes, to roll back landmark policies implemented by Democrats,” such as “rules dictating when employers must provide lunch breaks for workers.”

But don’t bet the ranch on this particular reform. Democrats have a prohibitive lock on the Legislature and meal breaks have become a high-profile issue backed by unions, consumer attorneys and other key constituent groups.

Motion To Strike Class Certification Allegations Upheld By Appellate Court

Three Plaintiffs filed two separate class actions against AZ3, Inc., doing business as BCBG Maxazria (BCBG), on behalf of all managers and assistant managers in BCBG’s California stores. The complaints alleged causes of action for failure to pay overtime compensation (Lab. Code, §§ 1194, 1197) and disgorgement of unpaid wages (Bus. & Prof. Code, § 17200 et seq.). The three Plaintiffs filed a coordinated complaint against BCBG in March 2005.

The coordinated complaint sought to recover overtime for all managers and assistant managers on the basis that they were misclassified as “exempt” employees. The plaintiffs alleged that BCBG had a policy of operating stores to minimize employee overtime, which resulted in the managers and assistant managers working over forty hours per week and “spend over fifty percent of their working hours performing the duties delegated to non-exempt employees.”

In a “preemptive strike” against the Plaintiffs, BCBG filed a motion to strike the class action allegations from the complaint alleging that the purported class was not amendable to class treatment. This motion was filed in January 2007, before Plaintiffs filed their motion for class certification.

In support of the motion to strike the class action allegations, BCBG explained the nature of its business as:
an haute couture design house for French-American styled women’s clothing. . . . In California, BCBG has maintained approximately 32 business locations with a variety of differing operating scenarios – for instance, some boutiques are small, stand-alone shops, others are large destination locations; some other[s] are small outlet/discount locations, while others are large (even multi-level) locations in malls; still others are incorporated as part of outdoor shopping plazas.
BCBG also noted the differences between the 32 locations: the stores do not carry the same merchandise; stores each have different target markets, requiring different marketing efforts; and the staffing and hours of operation differ from store-to-store. BCBG submitted declarations of 25 current or former managers and assistant managers from various California stores supporting its contention that managers are not assigned uniform duties and spend more than 50 percent of their time on non-managerial work.

The Plaintiffs opposed the motion, contending it was an improper attempt to circumvent the class certification process. The trial court granted BCBG’s motion to strike the class action allegations from the complaint, which prevented Plaintiffs' from continuing with the case as a class action.  Plaintiff’s appealed the trial court’s ruling.

In holding that BCBG’s motion to strike the class allegations was proper, the appellate court noted that any party can file a motion for class certification, and that trial courts should determine whether the action should be maintained as a class action “[a]t an early practicable time after a person sues or is sued as a class representative….” (citing Federal Rules Civ. Proc. Rule 23 (c)(1).)

The Plaintiffs’ argued that the motion to strike was premature, and that they did not have enough time to conduct adequate discovery into whether the class issues. The appellate court disagreed:
BCBG’s motion was filed 22 months after the filing of Plaintiffs’ coordinated complaint, 33 months after Denkinger’s complaint, and four years after Williams and Thornhill’s complaint. During the time between the filing of the coordinated complaint and the motion, Plaintiffs had, as Deckinger puts it, been engaged in “an extensive law and motion battle regarding the identity of members of the putative class and the declarations filed in support of Respondent’s Motion . . . .”
BCBG evidently was contacting former and current putative class members to have them sign an optout agreement from the class action. The Plaintiffs’ argued that this was unfair, as they did not have the names and telephone numbers for the putative class members and, therefore, could not contact the same people. The appellate court did not give Plaintiffs' argument any merit:
Plaintiffs did not have contact information for the putative class members and had been unsuccessful in discovery attempts to obtain it from BCBG. Plaintiffs suspected that BCBG might be giving the putative class members misinformation to induce them to settle their potential claims. The [trial] court remarked, “[T]his is frankly when a class rep ought to be out there dialing for dollars, talk[ing] to their friends and former employees, . . . and saying what’s going on out there, what have you heard. And that’s the kind of investigative work that would really, to me, make a class rep worth their weight in gold.”
The opinion, In re BCBG Overtime Cases, can downloaded from the court's website in Word or PDF.

Amaral v. Cintas Corporation: The Wide World of Local Wage Laws

The recent decision in Amaral v. Cintas contains a full plate of legal issues involving a city’s authority to regulate conduct outside its borders, employer’s duties to keep records, and a court’s discretion to reduce an employer’s potential penalties under the Labor Code Private Attorney General Act of 2004 (“PAGA”).     Perhaps the main message lesson for employers, however, is that the effect of local “living wage” ordinances can spread far beyond the jurisdiction of the actual city itself. 

In this case, Cintas signed a seemingly straightforward contract to provide laundry services to the City of Hayward, a city of approximately 147,000 residents in the San Francisco Bay Area.  Hayward, however, had passed a local wage ordinance (LWO) that required city contractors to pay at least $9.25 to “any individual employed by a service contractor on or under the authority of any contract for services with the City.” Cintas apparently paid the specified rates to its employees who worked within the City of Hayward. But Cintas also took laundry from inside the city to a centralized plant in another city, where laundry from various clients was comingled for processing. 

A class action lawsuit was filed on behalf of all employees at the plant who claimed that they, too, were entitled to earn the higher wage rate. Cintas argued that the local Hayward ordinance only required higher wage rates for hours worked on the city contract itself. The Court, however, gave the ordinance an extremely broad reading – finding, in effect, that every employee who ever touched the city of Hayward’s laundry was entitled to be paid $9.25 an hour on every other project that he or she worked on. As the Court explained:

A contractor with many employees might choose to limit its obligations by segregating City contract work and assigning this work to a smaller subset of employees. That it did not occur to Cintas to do so does not require us to reach a different interpretation of the ordinance.

As a result of this simple failure to segregate the city contract work, Cintas received an adverse judgment for restitution, penalties, attorney fees, and interest that was probably greater than the entire gross receipts of its contract with the city. This should serve as a cautionary tale for any employer doing business with a governmental entity that has a so-called “living wage” or “prevailing wage” requirement. 

Warning to Employers: Following the Terms Of A Collective Bargaining Agreement Is No Defense To Employee Claims For Overtime, Meal and Rest Periods

Many employers believe that union and non-union labor law are two entirely different universes. In some respects this is understandable. After all, there is an extensive decades-old body of federal labor law regulating the relationship between management and organized labor. The purpose of this regime is to ensure that the terms and conditions of employment will be determined by a freely negotiated bargain struck between equal bargaining powers.   So once this bargain is finally struck and reduced to a written collective bargaining agreement (“CBA”), shouldn’t it be the final word in determining the wages that must be paid to union employees?

The answer is no. 

While a union and employer are permitted to bargaining over most workplace issues, federal labor law does not permit unions to bargain away “non-negotiable minimum labor standards” established by state law. For example, a union could not agree to allow its members to work for less than the California minimum wage. Nor, with one exception, may a CBA waive the right to collect all overtime pay authorized by the California Labor Code.

This exception is contained at Labor Code section 514, which provides:

[California overtime requirements] do not apply to an employee covered by a valid collective bargaining agreement if the agreement expressly provides for the wages, hours of work, and working conditions of the employees, and if the agreement provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not less than 30 percent more than the state minimum wage.

Many employers are generally aware of this exemption but mistakenly believe that it exempts all employees covered by a CBA from state overtime requirement. The exemption is actually very narrow.   For example, employees are exempted from state overtime only if their CBA provides a premium wage rate for “all overtime hours worked.” In California all hours worked in excess of eight per day are considered “overtime.” Thus, a CBA which only provides premium pay for hours in excess of 40 per week would not qualify for the exemption. Likewise, any employee whose regular straight time rate under the CBA is less than $9.75 would not qualify for the exemption and would be entitled to state law overtime payments.

In the 2005 case of Valles v. Ivy Hill Corp, the Ninth Circuit also held that federal labor law does not permit a CBA to waive California’s meal and rest break requirements. Thus, all employees must receive meal and rest breaks – and receive one hour of compensation for each missed meal or rest period – regardless of whether they are in a union or are covered by a CBA.    

"Holiday Pay" Is Not Considered An Employee's "Regular Rate Of Pay" For Calculating Overtime

In Advanced-Tech v. Superior Court, Ester Roman worked as a security guard for Advanced-Tech Security Services, Inc. (Advanced-Tech). Ms. Roman brought a class action lawsuit against Advance-Tech for violations of Labor Code sections 510, 1194, and 1198, as well as failure to provide accurate itemized statements to her in accordance with section 226 and unfair business practices in violation of Business and Professions Code 17200.

At issue in this case is the interpretation of Labor Code section 510, subdivision (a) that requires that an employer pay an employee time and one-half of the employee’s “regular rate of pay” for (1) more than 8 hours of work in one workday, (2) more than 40 hours of work in any workweek, and (3) for the first eight hours worked on the seventh consecutive workday. Any work over 12 hours in one day must be paid at twice the regular rate of pay, as well as work longer than eight hours on the seventh consecutive day of work.

Advance-Tech provided its employees with “holiday pay” at time and one-half for hours worked on designated holidays pursuant to the Employee’s Handbook. Ms. Roman worked 12 hours on Labor Day in 2006, and argued that the 4 hours of daily overtime should have been paid at time and one-half of her higher “holiday” rate of pay, instead of at her normal, non-holiday rate of pay. Therefore, Ms. Roman asserted that the time and one-half she was paid for working on Labor Day should be considered her “regular rate of pay” and that she was entitled to be paid one and one-half times the premium holiday rate for the hours she worked on Labor Day.

The court disagreed with Ms. Roman’s interpretation of Labor Code section 510. The court held that premium holiday pay is not considered as a “regular rate” of pay an employee receives for a normal workday. An employer is allowed to credit the time and one-half premium pay on holidays against the overtime owed to the employee.

Side Note:  Generally, there is no obligation for employers to provide a higher rate of pay for work completed on holidays.  As done by Advance-Tech in this case, an employer may voluntarily agree to pay a higher rate of pay to incentivize and/or reward employees to work on holidays.  However, employers' policies (as set forth in the employee handbook or elsewhere) could arguably create a contractual right for the employee to receive the higher pay rate promised, and employers should use caution when drafting such policies. 

When Are "On-Duty" Meal Periods Permitted?

My recent post about Bufil v. Dollar Financial Group, Inc. (filed April 14, 2008, ordered published May 13, 2008) made a lot of readers ask, “When can an employer have an employee enter into an ‘on-duty’ meal period agreement?” 

As any reader of our blog knows, pursuant to Labor Code section 226.7 and the Wage Orders (for example Wage Order 4-2001, section 11(b)), each failure to provide the specified meal period entitles the employee to receive an additional compensation premium equal to one hour of pay.

The Wage Order provides for an “on duty” meal period that is an exception to the required meal break if the following requirements are met:

An "on duty" meal period shall be permitted only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time.

Wage Order No. 4-2001(a)(emphasis added). Unfortunately, the definition of the “nature of the work” is not clear, and the only real guidance California employers have on this issue is a Department of Labor Standards Enforcement (“DLSE”) opinion letter. Click here to download the opinion letter.

In the opinion letter, the DLSE addressed the issue of whether a shift manager in a fast food restaurant working the night shift would be allowed to take a “on duty” meal period. The DLSE began its analysis in stating that the off duty meal period is the default requirement, and any exceptions to this requirement should be narrowly construed. 

The DLSE set forth factors it considered in determining whether the nature of the work prevents the employee from taking an off-duty meal period. The factors included:

  • the type of work
  • the availability of other employees to relieve the employee during a meal period
  • the potential consequences to the employer if the employee is relieved of all duty
  • the ability of the employer to anticipate and minimize these staffing issues such as by scheduling employees in a manner that would allow the employee to take an off-duty meal break and
  • whether the “work product or process” would be destroyed or damaged if the employee were given an off-duty meal period. 

The DLSE concluded that based on the facts presented in the situation of the fast food restaurant, it did not understand why the nature of the work in the restaurant prevented the shift manager from being relieved of all duties for 30 minutes. 

As this issue has yet to be addressed by the courts (maybe the court in Bufil will provide some guidance), employers should follow the limited analysis set forth in the DLSE opinion letter, even though the DLSE opinion letter is not  binding on the courts. 

Appellate Court Allows "On-Duty" Meal Period Class Action To Proceed

This case is a class action lawsuit filed by Caren Bufil for violations of California’s meal and rest break laws, and violation of California’s Unfair Competition Law against Dollar Financial Group, Inc. (Dollar). Bufil v. Dollar Financial Group, Inc. (filed April 14, 2008, ordered published May 13, 2008).  Dollar is a company with 130 retail stores in California that provides check cashing, Western Union services and loans.

The plaintiff’s suit defined the putative class as consisting of two subclasses of hourly employees working in California from September 2003 until the present. The two subclasses were employees for whom Dollar’s meal break records showed that they did not receive a meal break because (1) they were the only employee working in the store at the time of their meal break or (2) they were training another employee who could not be left alone to operate the store when their meal break should have been taken.

Dollar’s “On-Duty” Meal Period Agreement
In 2001 Dollar implemented an "on-duty" meal agreement with hourly employees. The agreement was given to all new employees and states that (1) Dollar and the employees acknowledge that the nature of the business may prevent employees from being relieved of all duties during meal periods; (2) Dollar and the employees agree that an employee may take an on-duty meal break, and be paid accordingly; and (3) the employees may revoke their right to have the meal break deemed “on duty” by giving 24-hour written notice to a supervisor.

Dollar introduced an updated meal break policy effective September 2003. The revised policy sets forth that on-duty meal breaks are only permitted when the hourly employee (1) is the only employee in the store working during the entire work shift; and (2) is working with only one other employee who has been employed less than 90 days and is not certified to transact business alone. An e-mail to store managers in June 2006 reiterated this policy.

Dollar’s rest break policy did not require consecutive 10-minute breaks, but permitted a “net” 10 minutes of time that the employee could use throughout the day. The appellate court, relying upon a DLSE opinion letter, stated that the rest breaks had to be consecutive, and held that Dollar did not permit employees working alone or who were supervising other employees had the ability to take a 10-minute rest break.

Dollar Defeats Class Certification In Its First Wage & Hour Class Action: Chin v. Dollar Financial Group
Bufil’s lawsuit was filed just four months after an appellate court upheld a denial of class certification in favor of Dollar in a case that alleged similar violations of California’s wage and hour laws. In Chin, the plaintiff in that case filed a lawsuit against Dollar for missed meal and rest breaks, and proposed to certify a class of employees who were (1) employed for a period of more than five hours without a meal period of not less than 30 minutes, and/or (2) not authorized or permitted to take a rest break for every four hours of work.

In the Chin case, the court held the trial court properly ruled that the action was not suitable for class treatment because common questions of fact and law did not predominate over individualized issues. Because each employee would have to testify as to the particular facts pertaining to his or her case, it therefore was not a case suitable for class wide treatment.

Bufil’s Procedural History
The Plaintiff Bufil moved for class certification, and Dollar moved for judgment on the pleadings. Dollar argued that Bufil’s case was collaterally stopped because the earlier Chin litigation resolved these issues, and it is unfair that it has to defend itself again for the same issues already litigated in the previous lawsuit. The trial court agreed with Dollar, dismissed Bufil’s class allegations and denied plaintiff’s motion for class certification.

The appellate court overruled the trial court with the following holdings.

1. Bufil Is Not Precluded From Brining Her Suit On the Basis of the Collateral Estoppel Doctrine.
The principle behind the collateral estoppel doctrine is to prevent re-litigation of issues previous argued and resolved in an earlier proceeding. As the court set out, in order for the doctrine to apply, the issues must be identical to an issue that was actually litigated and decided to be final on the merits.

The court examined Alvarez v. May Dept. Stores Co. (2006) 143 Cal.App.4th 1223, which held that two cases filed against May Department Stores prior to the Alvarez case precluded the Alvarez case from proceeding under collateral estoppel. In Alvarez, the court held collateral estoppel applied because the two prior cases sought to certify the same class of employees, concerned the same policies, concerned the same time period, and one of the prior cases had the same attorneys. In this case, however, the court held that Bufil’s legal issues were not the same as the issues litigated in the prior Chin lawsuit against Dollar. The court held:
Unlike Alvarez, the class that Bufil asserts is not identical to the class asserted by Chin. Rather, it is a distinct subclass restricted to hourly employees who tracked Dollar’s recordkeeping system from September 2003 to the present with the designation of not having taken a meal period because the employee was the only employee in the store or was supervising a trainee who could not be left alone.
The court held Bufil’s theory that the meal period waivers for employees who were the only employees working at the store or who were providing training to employees are invalid because the waivers do not meet the “nature of the work” exception in Wage Order No. 4-2001 is different than the issues litigated in the Chin case. Wage Order No. 4-2001 provides:
An "on duty" meal period shall be permitted only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time. (emphasis added)
The court ruled that this is a legal question that was not present in the Chin litigation, and therefore was not barred under the collateral estoppel doctrine.

2.  Bufil’s Case Is Appropriate For Class Certification.
The court also held that the lower court’s finding that “commonality”, an element that plaintiffs must prove in order to proceed as a class action, did not exist in this case was flawed.  Despite Dollar’s argument, the court held that the individual employee’s understanding of the meal period waiver was irrelevant in this case. The court also held that a class was ascertainable in this case through Dollar’s records, which allowed the employee to electronically record if they did not take the meal break due to (1) the fact they were the only person in the store or (2) they were the only person with a trainee. Finally, the court held that Bufil could show that the class action was a superior method to resolve the litigation as class actions permit individuals to resolve all of their claims at the same time, it is more efficient and avoids repetitive actions, and allows for recover of small amounts of damages that may be too insignificant for individual litigation.

Appellate Court Holds Network Director For Start-up Company Was Properly Classified As Exempt Employee

In a recently published opinion, Combs v. Skyriver Communications, Inc., the plaintiff Mark Combs appealed a judgment against him in an action to recover overtime pay and meal and rest breaks. He alleged that he was misclassified as an exempt employee while working for Skyriver Communications, Inc. (Skyriver). He sued Skyriver and its chief executive officer for the unpaid wages under three causes of action: . (1) violation of Labor Code sections 510 and 1194 and applicable Industrial Welfare Commission (IWC) wage orders; (2) violation of the Unfair Competition Law (the UCL) (Bus. & Prof. Code, § 17200 et seq.); and (3) penalties under the Private Attorneys General Act of 2004 (the PAGA) (§ 2698 et seq.). Combs sought to hold Skyriver’s CEO liable on an alter ego theory.

The employer, Skyriver is a high-speed, wireless, broadband internet service provider. When Combs worked for Skyriver, it was a “young start-up company” and Combs was the first manager for capacity planning, and then became the director of network operations. He voluntarily resigned in November 2004.

Combs alleged the trial court committed an error by failing to apply the administrative/production worker dichotomy pertaining to the administrative exemption from IWC overtime compensation requirements, which was set forth in Bell v. Farmers Insurance Exchange (2001) 87 Cal.App.4th 805, cert. denied 534 U.S. 1041 (Bell II). Combs also contends that application of the Bell II dichotomy would have resulted in a determination that Combs was a production worker, not an administrator, and thus that he was not administratively exempt.

Administrative/Production Dichotomy Defined
As the appellate court explained, the administrative/production dichotomy was defined in the Bell II case when the court drew "a distinction between administrative employees, who are usually described as employees performing work 'directly related to management policies or general business operations of his employer or his employer's customers,' and production employees, who have been described as 'those whose primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce.' [Citation.]" (citing Bell II, supra, 87 Cal.App.4th at p. 820, fns. omitted.) Therefore, under this framework, employees who produce the company’s goods or services cannot qualify as exempt administrative employees.

However, this test has become more and more difficult to apply given today’s new technology, more “flat” organizational structures within companies, and the fact that with the advent of computers and the internet, it is often times hard to exactly describe what a company’s product actually is. The appellate court recognized this difficulty, and explained that the Bell II court further explained that dichotomy's "somewhat gross distinction" between administrative employees and production employees "may not be dispositive in many cases," and warned that it should be applied with "great caution." (citing Bell II at pp. 826-827.)

Combs claimed that the administrative/production dichotomy was "binding [legal] precedent" and that the courts were required to apply this framework to his case. However, the appellate court disagreed and held that:
Combs's reliance on Bell II and Bell III is unavailing because those cases are factually and legally distinguishable. They are factually distinguishable in that the class plaintiffs in that litigation were former and current insurance claims adjusters who worked in California branch claims offices and, according to their employer's own characterization in its regional claims manual, their job responsibilities were restricted to the "handling of the routine and unimportant." (Bell II, supra, 87 Cal.App.4th at pp. 827-828, italics added.) In upholding the trial court's determination that the claims adjusters were production, not administrative, employees within the meaning of the administrative exemption set forth in former IWC Wage Order No. 4, the appellate court in Bell II concluded that the record as a whole confirmed that the claims adjusters were "ordinarily occupied in the routine of processing a large number of small claims," and "[o]n matters of relatively greater importance, they [were] engaged only in conveying information to their supervisors—again primarily a 'routine and unimportant' role." (Bell II, supra, 87 Cal.App.4th at p. 828, italics added.) Here, however, as we shall explain, post, there is no evidence to show that Combs's responsibilities at Skyriver were limited to "the routine and unimportant."
The appellate court explained that Combs's job responsibilities were high-level and important. The trial record showed that Combs performed "specialized functions" that, unlike the "routine and unimportant" functions performed by the claims adjusters in the Bell cases, could not be readily categorized in terms of the administrative/production worker dichotomy. Evidence showed that the wide variations in Combs's job responsibilities called for "finer distinctions than the [Bell II] administrative/production worker dichotomy provides." The evidence also showed that Skyriver's corporate administrators commonly worked side-by-side with employees who were not administrative employees, and there is no evidence in the record to show that Combs's job responsibilities were limited to "the routine and unimportant" as was the case in Bell II. Therefore, the appellate court upheld the trial court's decision to not apply the administrative/production worker dichotomy

Administrative Exemption Test
The court then turned to analyze Combs’s claim under the requirements of the administrative exemption test. Combs conceded that he earned a monthly salary equivalent to no less than twice the state minimum wage (he earned between $70,000 and $90,000 per year) for full-time employment, that his worked was “office or non-manual work,” and that he performed his work “under only general supervision [and] along specialized or technical lines requiring special training experience or knowledge.”

Combs, however, challenged that Skyriver failed to prove the remaining "critical" elements of the “duties test” that are required to meet the administrative exemption.

    a. Work "directly related to management policies or general business operations"
Combs contended that his work did not rise to the level of being related to management policies or general business operations. The court disagreed. Combs was responsible for maintaining, developing and improving Skyriver's network, and his duties involved high-level problem solving, preparing reports for Skyriver's board of directors, capacity and expansion planning, planning for the integration of acquired networks into Skyriver's network, lease negotiations, and equipment sourcing and purchasing.

The appellate court also emphasized that Combs's own resume and his trial testimony showed that his job functions as manager of capacity planning included "network planning"; design of network operations center (NOC) policies and procedures; "project management, budgeting, vendor management, purchasing, forecasting[, and] employee management"; management of "overseas deployment of wireless data network"; among other duties.

    b. Customary and regular exercise of discretion and independent judgment
Combs testified that he spent 60 to 70 percent of his time on his core responsibility of maintaining Skyriver's network. Witnesses from Skyriver testified that Combs, in carrying out his role of "troubleshooting an issue with [Skyriver's] network," had "the authority to determine the course of action to correct the problem." The court again turned to Combs’ resume and found that the job responsibilities he listed “also supported a finding that he customarily and regularly exercised discretion and independent judgment with respect to matters of significance.”

    c. Primary engagement in duties that meet the administrative exemption test
The term "primarily" is defined to mean "more than one-half the employee's work time." (Cal. Code Regs., tit. 8, § 11040, subd. 2(N).) Combs himself testified that he spent 60 to 70 percent of his time on his core responsibility of maintaining the well-being of Skyriver's network. As the court set forth above, this type of activity is both "work directly related to assisting with the running or servicing of the business," and work that includes "computer network, internet and database administration" within the meaning of 29 Code of Federal Regulations 541.201 (which is the federal regulation incorporated in IWC Wage Order No. 4-2001). Therefore, the court held that Combs did in fact spend more than 50 percent of his time performing duties that meet the administrative exemption.

Lessons From This Case
  1. The administrative exemption is alive and well.
  2. Start-up companies and technology companies should be able to use this holding in order to urge courts to not apply the administrative/production dichotomy – which should increase the likelihood that an employee meets the requirements for the administrative exemption.
  3. An employee’s resume explaining their duties while working at a former company in a misclassification case is valuable evidence. It lists their true duties while they worked at a former job – which is probably a much more accurate description than they will testify to during litigation.

Upon An Employee's Request, Which Documents Does An Employer Have To Show And/or Copy?

Employers are obligated only to provide copies of any documents signed by the employee or applicant relating to their job. Labor Code section 432.

Employees are allowed to inspect other categories of documents. For example, Labor Code Section 1198.5 requires employers allow employees and former employees access to their personnel files and records that relate to the employee’s performance or to any grievance concerning the employee. Inspections must be allowed at reasonable times and intervals. To facilitate the inspection, employers must do one of the following: (1) keep a copy of each employee’s personnel records at the place where the employee reports to work, (2) make the personnel records available at the place where the employee reports to work within a reasonable amount of time following the employee’s request, or (3) permit the employee to inspect the records at the location where they are stored with no loss of compensation to the employee.

Employers are required to permit current and former employees to inspect or copy payroll records pertaining to that current or former employee. Labor Code Section 226(b). Starting on January 1, 2003, an employer who receives a written or oral request from a current or former employee to inspect or copy his or her payroll records shall comply with the request as soon as practicable, but no later than 21 calendar days from the date of the request. Failure to comply with the request entitles the employee to a $750 civil fine. Labor Code Section 226, subdivisions (c) and (f)

There are limits to the documents that an applicant or employee can inspect from his or her file. The employee does not have the right to inspect records relating to the investigation of a possible criminal offense, letters of reference, or ratings, reports, or records that (a) were obtained prior to the employee’s employment, (b) were prepared by identifiable examination committee members, or (c) were obtained in connection with a promotional exam.

Court Rules Starbucks Owes $105 million In Tip Pooling Case

The award represents an estimated amount of cash from tip pools that shift supervisors received between October 2000 and February 2008. The plaintiffs maintained that the shift supervisors were considered managers under California law, and therefore improperly participated in sharing in the tips placed in the tip jar.  California law prohibits managers from participating in tip pooling arrangements. 

Plaintiff’s used experts to provide an estimated the hourly tip rate. Based on a sampling of 250 stores in California, the experts determined that amount due to the class members was $1.87, plus or minus 16 cents per hour worked by the shift supervisors. While this amount does not seem to be much, it adds up when dealing with 120,000 current and former baristas who worked for Starbucks during the eight years at issue.

While there was a rash of tip pooling class action filed in California about two years ago, it appeared that this type of case was losing the interest of the plaintiff’s attorneys. However, once this judgment becomes commonly known, business owners can be sure that tip pooling cases will continue, if not increase in the coming year or two. Now is a good time to ensure that that a company’s tip pooling policy complies with California law. Our prior posts on this case can be read here.

Chou v. Starbucks - Tip Pooling Case Continues In Trial

Yesterday, the second phase of trial started in Chou v. Starbucks.  The plaintiffs are asking the judge for restitution and interest to a class of about 120,000 Starbucks baristas who worked for the company since 2000.

Initially, plaintiffs in Chou v. Starbucks had alleged violations of Labor Code §351 and Business and Professions Code §17200, California's unfair competition law as a result of the managers taking portions of the tips left by patrons in the tips jars.  

Labor Code section 351 provides:

No employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.

(emphasis added). Section 351 prohibits managers from participating in tip pooling arrangements.

In January the plaintiffs in Chou v. Starbucks voluntarily dismissed their Labor Code claim and decided to proceed only under their Business and Professions Code cause of action. This move could be for a number of reasons, primarily that the statute of limitations is one year longer (4 years) as opposed to the statute of limitations under the labor code (3 years). Also, by dropping the labor code violation, the case can only be heard by the judge, a trend which a lot of plaintiffs’ counsel prefer when the case involves technical violations of the labor code that may not draw a lot of sympathy from a jury. 

In the seminal 1990 case on tip-pooling, Leighton v. Old Heidelberg, Ltd., the court held that an employer’s practice of tip pooling among employees was not prohibited by section 351 because the employer did not “collect, take, or receive” any part of a gratuity left by a patron, and did not credit tips or deduct tip income from employee wages. The court relied upon the “industry practice” that 15% of the gratuity is tipped out to the busboy and 5% to the bartender, which was “a house rule and is with nearly all Restaurants.”

UPDATE:  Starbucks was held liable for over $100 million in damages, click here for updated post.

Vick's Case Is A Good Reminder About Treatment of Bonuses Under CA Law

Jailed quarterback Michael Vick can keep nearly $20 million in bonus money he received from the Atlanta Falcons following a ruling today by a federal judge. While Vick’s case involved interpretation of the NFL collective bargaining agreement, how bonuses are treated is often a sticky area of the law for California employers. Vick's win today is a good reminder to California employers to review how they should be treating bonuses. Below is a general overview of California’s DLSE’s opinion regarding how California employers must treat bonuses (with some commentary added).

DLSE’s Definition of Bonus:

The DLSE opines that a bonus is money promised to an employee in addition to the salary, commission or hourly rate usually due as compensation. The word has been variously defined as “An addition to salary or wages normally paid for extraordinary work. An inducement to employees to procure efficient and faithful service.” Duffy Bros. v. Bing & Bing, 217 App.Div. 10, 215 N.Y.S. 755, 758 (1926). Bonuses may be in the form of a gratuity where there is no promise for their payment; or they may be required payment where a promise is made that a bonus will be paid in return for a specific result.

An employee forfeits bonus if the employee voluntarily terminates employment before bonus vests, and employer states that bonus is contingent on continued employment.

An employee who voluntarily leaves his employment before the bonus calculation date is not entitled to receive it if the employer has expressly qualified its promise of a bonus on a requirement of continued employment. Lucien v. All States Trucking (1981) 116 Cal.App.3d 972, 975. This has been the rule ever since Peterson v. California Shipbuilding Corp. (1947) 80 Cal.App.2d 827, 831, 183 P.2d 56. The California rule is in accord with the prevailing view that where a definite bonus or profit-sharing plan has been established and forms part of the employment contract, the employee is not entitled to share in the proceeds where he leaves the employment voluntarily prior to vesting. (See DLSE Opinion Letter 1993.01.19)

If employer has not conditioned bonus on employment at time of payment then the employee may be entitled to receive bonus.

Where the promise of a bonus is not expressly conditioned on continued employment an employee who voluntarily leaves employment may be entitled to the bonus if other applicable conditions have been satisfied. Thus, in Hill v. Kaiser Aetna (1982) 130 Cal.App.3d 188, an employee who resigned on January 3, 1978, was held to be vested in his right to a bonus for calendar year 1977 where: (1) the bonus plan did not expressly require continued employment, and (2) the bonus was an inducement for continued employment. Id., at 196.

Caution: implied contract for bonus could be created by employer’s actions.

The regular payment of the bonus in past years may ripen into an implied contract for compensation in the absence of a specific contract. (D.L.S.E. v. Transpacific Transportation Co.(1979) 88 Cal.App.3d 823; cf. Simon v. Riblet Tramway Co., 8 Wash.App. 289, 505 P.2d 1291, 66 A.L.R.3d 1069, cert. den. 414 U.S. 975, 94 S.Ct. 28 9, 38 L.E d.2d 218 ). However, in order to be actionable, there must be some objective criteria upon which the bonus is based.

There is an exception to this general rule if bonuses which are completely discretionary, based on no objective criteria and are not routine, would not give rise to an implied bonus contract.

Termination of the employment by the employer could create obligation to pay bonus to the employee.

Common law contract theories will not allow one party to the contract to prevent the other party from completing the contract. If the employee is discharged before completion of all of the terms of the bonus agreement, and there is not valid cause, based on conduct of the employee, for the discharge, the employee may be entitled to recover at least a pro-rata share of the promised bonus. (DLSE Opinion Letter 1987.06.03) Again, if a bonus is discretionary, this general rule would not apply.

CNN Money.com Reports On Overtime Liability

CNN Money.com reports that many companies across the U.S. are encountering wage and hour issues that California companies are all too familiar with.  The article reports:
Rod Cotner, owner of Jericho Mortgage in Lancaster, Ohio, was shocked when the U.S. Department of Labor showed up at his door to investigate a wage-and-hour lawsuit filed on behalf of his 54 loan officers and sales managers.

His company was growing - sales exceeded $4 million that year - and his employees were profiting: "Some of the staffers named in the lawsuit were making over $150,000," he says. "After working in the industry for years, I'd never heard of this happening. Everyone pays their officers on a commission basis. How can someone who makes six figures a year demand back wages for his time?"
In 2006 the U.S. Department of Labor collected $172 million in back wages from employers, which is reported to be 3.6 percent higher than 2005.

Also, the article illustrates that while these laws were intended to protect employees, the laws often times have the opposite effect.  This is especially true in California where the meal and rest break laws are so rigid that the employees cannot enter into agreements with their employer to skip meal breaks when needed for family issues.  The article quotes Don Turner, the owner of the Golden Bear Inn in Berkeley:
"I had an employee who wanted to watch his child's Little League game at four, but he was scheduled to get off at 4:30," he says. "He asked me if he could work through his lunch break instead, and I had to refuse him - the overtime law just wouldn't let me."
The article concludes with a very appropriate caution to employers:
For now, the best that a small-business owner can do to avoid overtime lawsuits is keep painstaking payroll records for nonexempt employees and consult an employment lawyer to verify workers' status. And make sure to keep a sharp eye out for the kind of dedicated worker who might be tempted to skip lunch.
As a final warning, California employers need the advice of an attorney well versed in California labor and employment law - California law is more restrictive than federal law in almost every aspect.  Courts apply the law that provides employees with the most protection, which means that California law applies in almost every case.

New Case Decision On Witness Contact Information Disclosure In Class Action Litigation

On January 15, 2008, the Court of Appeal in Puerto v. Superior Court (Wild Oats) [PDF] [Word], concluded that an opt-in notice established by the trial court as a process to obtain witnesses' residential contact information "unduly hampered" plaintiffs' in conducting discovery.

In October 2006, Plaintiffs filed suit against Wild Oats alleging they were misclassified as exempt employees, and are seeking recovery for overtime compensation, compensate for all hours worked, and unfair business practices.

Plaintiffs served written discovery on Wild Oats that included Form Interrogatory No. 12.1, which requested that Wild Oats: “State the name, ADDRESS, and telephone number of each individual: [¶] (a) who witnessed the INCIDENT or the events occurring immediately before or after the INCIDENT; [¶] (b) who made any statement at the scene of the INCIDENT; [¶] (c) who heard any statements made about the INCIDENT by any individual at the scene; and [¶] (d) who YOU OR ANYONE ACTING ON YOUR BEHALF claim has knowledge of the INCIDENT (except for expert witnesses covered by Code of Civil Procedure section 2034).”

Wild Oats disclosed between 2600 and 3000 names and positions in the responses to Interrogatory No. 12.1.  However, Wild Oats withheld the individuals’ residential telephone numbers and addresses, citing privacy rights on behalf of the individuals listed.

After plaintiffs brought a motion to compel disclosure of the individuals’ contact information, the trial court approved a process by which a third party administrator would send a letter to each of the individuals informing them of plaintiffs’ request for their contact information. The letter contained an opt-in provision that stated, “The court has ordered the parties to send this letter to you so that you may decide whether or not you wish to disclose this information to the Plaintiffs’ attorneys. If you consent to the disclosure of your contact information, please complete and return the enclosed postcard to the Third-Party-Administrator . . . .”

The Court of Appeal found that the trial court’s use of the opt-in procedure was an abuse of discretion that exceeded the protections necessary to safeguard the legitimate privacy interests in the addresses and telephone numbers of the witnesses. The Court of Appeal stated:
While the trial court here implicitly found that a serious invasion of privacy would result unless an opt-in notice was used, we believe that conclusion is unsupported by facts or law. Here, just as in Pioneer, the requested information, while personal, is not particularly sensitive, as it is merely contact information, not medical or financial details, political affiliations, sexual relationships, or personnel information. [citations] This is basic civil discovery. These individuals have been identified by Wild Oats as witnesses. Nothing could be more ordinary in discovery than finding out the location of identified witnesses so that they may be contacted and additional investigation performed. [citation] As the Supreme Court pointed out in Pioneer, the information sought by the petitioners here—the location of witnesses—is generally discoverable, and it is neither unduly personal nor overly intrusive. [citation] In some respects, the potential intrusion here is even less significant than that in Pioneer, because here the requested disclosure does not involve individuals’ identities, which had already been disclosed by Wild Oats prior to the filing of the motion to compel. There simply is no evidence that disclosure of the contact information for these already-identified witnesses is a transgression of the witnesses’ privacy that is “sufficiently serious in [its] nature, scope, and actual or potential impact to constitute an egregious breach of the social norms underlying the privacy right.” [citation]
It is important to note that the court also recognized that the employer has a duty to protect employee’s contact information and “[s]hould any individual identified as a witness later feel that there has been an unnecessary invasion of his or her privacy, this will become an issue between the employee and [the employer], not the employee and [plaintiffs].”

The Court of Appeal did, however, still leaves open alternative discovery avenues to limit public disclosure of employee contact information:
This is not to say that the trial court was without the ability to enter a protective order limiting the dissemination of the witnesses’ contact information: Certainly the trial court may require that the information be kept confidential by the petitioners and not be disclosed except to their agents as needed in the course of investigating and pursuing the litigation. Moreover, should the trial court find that the record evidences discovery abuse warranting a protective order as to the manner and means of contacting witnesses, the trial court always retains the discretion to impose such an order.

California Labor Commissioner Files Multi-Million Dollar Suit Against Janitorial Companies

In a press release issued by the California Department of Industrial Relations, the agency announced that it has filed a joint lawsuit against Excell Cleaning & Building Services, Inc., and MO Restaurant Cleaning of California, Inc. The lawsuit is seeking damages for unpaid wages and penalties going back to 2003 for janitors who worked for the company. The DIR claims that its investigation also revealed that employees were being misclassified as independent contractors to avoid paying nearly $250,000 in payroll taxes. This misclassification also resulted in workers being paid less then minimum wage and not being paid overtime. This type of lawsuit is not a novel one, as many companies in California have been sued under a joint employer theory in cases alleging almost the same facts.

The DIR’s press release reminds employers that under state labor law, all wages earned by any person are due and payable twice a month on days established in advance by the employer as regular paydays. All California employers are also required to pay minimum wage, overtime for all hours worked in excess of regular hours, double time rates for work in excess of 12 hours in one day, or any work in excess of eight hours in the seventh day of a work week, and pay final wages due to employees at the time of termination. Finally, the DIR notes that employers are required to provide itemized statements, permit 10 minute rest breaks for every four hours of work, and provide a meal period of not less than 30 minutes for the first five hours of work unless the work period is not more than six hours.

Companies that outsource work to contractors, such as janitorial services, should be extremely careful to ensure that they have taken the proper measures to avoid being a joint-employer under the law.  If found to be a joint-employer, the company could be liable for the contractor's wage and hour violations. 

After Kakani v. Oracle Are "Claims Made" Class Settlements Obsolete?

In Kakani v. Oracle, 2007 WL 1793774 (N.D.Cal. 2007), Judge Alsop of the Northern District of California denied approval of a proposed class settlement agreement. In doing so, he cast doubt on so-called “claims made” or “reversionary” settlement agreements that are commonly used to settle wage and hour class actions.

Class action settlement agreements must be reviewed and approved by the court to ensure that the settlement is “fair and reasonable” to the absent class members. In recent years class action settlements typically provide a release of all class claims and also set forth a maximum amount that may be recovered by the class. All class members are given notice by mail of the settlement terms. However, for any individual class member to claim his or her portion of the settlement he or she must complete and return a written claim form. Any portion of the settlement which is not claimed in this fashion will “revert” back to the employer. Significantly the fees awarded to class counsel under such agreements are generally calculated based on a percentage (usually about 25%) of the gross settlement amount, before any reversion to the employer.
In Oracle, Judge Alsop held that this settlement model was inherently unfair to the many class members that inevitably fail to file claim forms and thereby receive no consideration for the release of their legal claims. The Court further held that such agreements were likely to over-compensate class counsel by basing their fees on settlement amounts that may ultimately go unclaimed by the class.

While Oracle is merely a district court decision, and is not binding on other trial courts, Judge Alsop’s analysis has already had a tremendous influence on both federal and state courts throughout California. In the future, class settlements are much more likely to be “non-reversionary” – i.e., the entire settlement amount must be distributed to class members and may not revert to the employer.

By altering the economic incentives of the various participants, this change will have a profound and far reaching effect on class action litigation in California. This shift will likely create an unusual alignment of winners and losers:

The Losers: Class Counsel and Employers.
Employers are economic “losers” under the emerging Oracle settlement model because they will be unable to retain the unclaimed portion of the settlement amount, which often amounts to 30-50% of the total settlement. Moreover, in return for this higher price of settlement, employers are also likely to receive a less expansive release of liability.
Class counsel are also “losers” because they must base their court-approved contingency fee on the amount actually recovered, rather than the amount theoretically available to the class. To justify their fee class counsel will thus feel compelled to hold out for more money, work up the case more extensively, and settle later in the action.

The Winners: Defense Counsel and Absent Class Members.
Class action defense counsel will likely receive more work in the aftermath of Oracle, because class actions are likely to be litigated longer prior to settlement, thereby generating higher hourly fees.

Absent class members will likely receive more money on average in any particular class settlement, as post-Oracle settlements will allow them to receive compensation regardless whether they submit valid timely claim forms.

Reminder - California Minimum Wage Increases Jan. 1 and Impacts Exempt Employees

As a simple reminder, employers should begin to plan to adjust their payroll systems in order to ensure that all California employees are paid the new minimum wage of $8 per hour starting January 1, 2008.  With this increase, California will tie Massachusetts for the highest minimum wage rate in the country. 

Impact Upon Exempt Employees
Employers will also have to re-examine the pay rates for their exempt employees. One of the items California law requires for an employee to qualify as exempt (which means they are not entitled to overtime) the employee must earn at least two times minimum wage, base on a forty hour workweek. Therefore, the increase in the minimum wage means that the minimum salary for exempt employees will increase from to $31,200 in 2007 to $33,280 as of January 1, 2008.

In addition, employers should also review their pay rates for commissioned inside sales employees. For an employee to qualify as a commissioned inside sales employees who are exempt from overtime under Wage Order Nos. 4 and 7, the employee must earn at least 1.5 times the minimum wage for all hours of work to maintain the exemption. The employee must meet other requirements to qualify for this exemption, but the salary level is a bright-line rule that must be met in order for the exemption to apply.

CA Supreme Court Grants Review In Harris v. Superior Court

The California Supreme Court granted review of Harris v. Superior Court.  As previously posted about here, the only legal issue reviewed by the lower appellate court was the proper construction and application of the single phrase limiting exempt administrative duties to those that are “directly related to management policies or general business operations.”  The lower court dealt a serious blow to the viability of the administrative exemption for all employers in California and the Supreme Court may have granted review in order to give at least some life back to the administrative exemption.

IRS Mileage Rate Set For 2008

The IRS announced the standard business mileage rate for 2008 is 50.5 cents per mile.  The IRS posted the following on its website yesterday:
The Internal Revenue Service today issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

* 50.5 cents per mile for business miles driven;
* 19 cents per mile driven for medical or moving purposes; and
* 14 cents per mile driven in service of charitable organizations.

The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The new rate for medical and moving purposes compares to 20 cents in 2007. The rate for miles driven in service of charitable organizations has remained the same.
California's DLSE has maintained that employers are required to reimburse employees for business miles driven at the IRS mileage rate in order to comply with California Labor Code section 2802.  However, this year, the California Supreme Court ruled in Gattuso v. Harte-Hanks (as discussed here) that the reimbursement rate does not have the be the IRS mileage rate but can be negotiated by parties as long as it fully reimburses the employee. The Court stated:
We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under section 2802.
UPDATE:  On June 23, 2008, the IRS announced that the mileage rate would increase effective July 1, 2008 to 58.5 cents a mile for all business miles driven.  Click here to read updated post. 

Gattuso v. Harte-Hanks: Positive Ruling for Employers

In Gattuso v. Harte-Hanks, the California Supreme Court shed some light on the relatively unexamined issue by the courts of expense reimbursement. At issue in the case was whether Harte-Hanks could reimburse its outside sales force for mileage by paying a higher “lump sum” in the form of wages and/or commissions, as opposed to paying a specified sum for each mile driven. The Supreme Court ultimately held that employers may reimburse employees under the lump sum method, but also provided an excellent examination of:

  • Employer's obligations under alternative methods of reimbursing employees for expenses,
  • Who bears the burden of proof when challenging the reimbursement amount (short answer: the employee - as explained below),
  • Whether employers and employees can independently negotiate an expense reimbursement amount (short answer: yes, and this amount does not have to be the IRS mileage rate), and
  • What a court needs to consider in determining whether expenses incurred by the employee were “reasonable” and, therefore, reimbursable (short answer: this is a individualized analysis for each employee).

1.      Reimbursement Method One: Actual Expense Method

The Court first examined the actual expense method that employers can utilized in reimbursing employees for business costs. The Court held that the actual expense method is the most accurate, but it is also the most burdensome for both the employer and the employee. The actual expenses of using an employee’s personal automobile for business purposes include: fuel, maintenance, repairs, insurance, registration, and depreciation. 

To calculate the reimbursement amount using the actual expense method the employee must keep detailed and accurate records of amounts spent in each of these categories. Calculation of depreciation will require information about the automobile’s purchase price and resale value (or lease costs). In addition, the employee must keep records of the information needed to apportion those expenses between business and personal use. This is generally done by recording the miles driven for business and personal use.  Then the employee submits this information for the employer to calculate the reimbursement due. 

2.      Method Two: Mileage Reimbursement Method

The Court recognized that employers may simplify calculating the amount owed to an employee by paying an amount based on a “total mileage driven."  The Court recognized that the mileage rate agreed to between the employer and employee is “merely an approximation of actual expenses” and is less accurate than the actual expense method. Therefore, the employee may challenge the amount of reimbursement. However, if the employee challenges the amount reimbursed, the employee bears the burden to show how the “amount that the employer has paid is less than the actual expenses that the employee has necessarily incurred for work-required automobile use (as calculated using the actual expense method), the employer must make up the difference.” 

Therefore, the employee must prove his case by producing the records of: fuel, maintenance, repairs, and depreciation, among other items as discussed above under the actual expense method. This analysis involves what the employee actually spends, and whether the expenses were “reasonable." This is a very difficult hurdle to overcome as the records required to meet the burden of proof under Gattuso need to be very detailed. In addition, the Court all but said that in determining what is “reasonable” requires an individualized review by the judge, which supports the argument that these types of cases are not appropriate for class-wide treatment.

The Court also held that the reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not have to be set at the IRS mileage rate, which is contrary to the DLSE’s opinion (I guess depending on which opinion letter you read). The Court stated:

We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under section 2802. 

3.      Method Three: Lump Sum Payment

Under this method, the employee need not submit any information to the employer about work-required miles driven or automobile expenses incurred. The employer merely pays a fixed amount for automobile expense reimbursement. The Court stated that these type of lump sum payments are often labeled per diems, car allowances, and gas stipends. 

In permitting lump sum expense reimbursement payments, the Court held:

We agree with Harte-Hanks, and also with the trial court and the Court of Appeal, that section 2802 does not prohibit an employer’s use of a lump-sum method to reimburse employees for work-required automobile expenses, provided that the amount paid is sufficient to provide full reimbursement for actual expenses necessarily incurred. 

The Court made it clear that employers paying a lump sum amount, however, have the extra burden to separately identify the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses.


Gattuso v. Harte-Hanks Supreme Court Decision Forthcoming Next Week

The California Supreme Court announced today that it will be issuing a decision on November 5 at 10:00 a.m. in the closely watched mileage reimbursement case.  The Supreme Court issued the following notice:

GATTUSO (FRANK) v. HARTE-HANKS SHOPPERS, INC.
S139555 (B172647; Los Angeles County Superior Court – BC247419)
Argued in San Francisco 9-06-07

This case includes the following issue: May an employer comply with its duty under Labor Code section 2802 to indemnify its employees for expenses they necessarily incur in the discharge of their duties by paying the employees increased wages or commissions instead of reimbursing them for their actual expenses?

Opinion(s) in the above case(s) will be filed on:

Thursday, November 5, 2007 at 10:00 a.m.

Unpublished Brinker Opinion Ducks Meal Period "Policing" Issue

[UPDATE: On July 22, 2008 - the Fourth Appellate District court issued a published decision (which can be read about here) after the Supreme Court transferred the case back to the court for reconsideration.]

The Fourth Appellate District today issued its much-anticipated decision in Brinker Restaurant v. Superior Court (Hohnbaum). The case had come to the appellate court via a grant of writ review following the trial court’s certification of a class of approximately 60,000 employees who were seeking compensation for “missed” meal and rest breaks.

Meal Periods
The big issue in Brinker was how to interpret the word “provide” when construing Labor Code section 512’s directive to “provide” a 30-minute meal period to employees. Does an employer meet its obligation by simply allowing its employees to take the statutory meal period if they wish to? Or must the employer effectively “force” its workers to take the unpaid break and be strictly liable for penalties if they refuse? Or is there perhaps some middle ground between a completely optional meal period and one that is completely mandatory?

For those who wanted a definitive resolution, Brinker was definitely a disappointment. First, the decision is unpublished, and hence un-citable as precedent. Second, the appellate court ducked the main issue and sent the case back to the trial court with directions to make a determination of its own regarding the scope of the duty. (The trial court had also ducked the issue by certifying the class without deciding exactly what elements the plaintiffs would have to prove).

Rest Breaks
The Brinker opinion does, however, contain a useful discussion of the separate statutory duty to “authorize and permit” rest breaks, which all parties agreed are generally waivable by employees. The court first disposed of some rather strained statutory interpretations by the plaintiffs as to when rest breaks must be provided during a shift. The Court then determined that – given that rest periods are waivable – it was necessarily an abuse of discretion for the trial court to have certified a rest period class. As the Court explained:
[B]ecause (as the parties acknowledge) Brinker’s hourly employees may waive their rest breaks, and thus Brinker is not obligated to ensure that that its employees take those breaks, any showing on a class basis that plaintiffs or other members of the proposed class missed rest breaks or took shortened rest breaks would not necessarily establish, without further individualized proof, that Brinker violated the provisions of [Labor Code] section 226.7, subdivision (a) and IWC Wage Order No. 5 as plaintiffs allege in the complaint.
The interesting part of this holding is that it reversed certification despite recognizing that the trial court’s decision is entitled to “great deference on appeal.”

This aspect of the ruling also illustrates why the stakes are so high in construing the duty to “provide” meal periods. If the duty is only to provide an optional, waivable meal break it would follow that the same result should apply – and meal period claims would likewise be un-certifiable as a matter of law in most cases.

Petitions to publish the opinion will presumably be filed shortly and we’ll post again if there is any change in the opinion’s current status as non-citable authority.

Weekly Tip: "On-Call", "Stand By" and Travel Time

The California Labor & Defense Blog, is beginning a new series - the Weekly Tip -  to remind employers, HR professionals and in-house counsel about the intricacies of California labor and employment law.  This week we are posting about the DLSE's recommendation on how employers should treat "on-call" and "stand by" time. 

The DLSE takes the view that, on-call or standby time at the work site is considered hours worked for which the employee must be compensated even if the employee does nothing but wait for something to happen. “[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 activities often is a factor of instant readiness to serve, and idleness plays a part in all employment in a stand-by capacity”. (Armour & Co. v. Wantock (1944) 323 U.S. 126) Examples of compensable work time include, but are not limited to, meal periods and sleep periods during which times the employees are subject to the employer’s control. (See Bono Enterprises v. Labor Commissioner (1995) 32 Cal.App.4th 968 and Aguilar v. Association For Retarded Citizens (1991) 234 Cal.App.3d 21)

Whether on-call or standby time off the work site is considered compensable must be determined by looking at the restrictions placed on the employee. A variety of factors are considered in determining whether the employer-imposed restrictions turn the on-call time into compensable “hours worked.” These factors, set out in a federal case, Berry v. County of Sonoma (1994) 30 F.3d 1174, include whether there are excessive geographic restrictions on the employee’s movements; whether the frequency of calls is unduly restrictive; whether a fixed time limit for response is unduly restrictive; whether the on-call employee can easily trade his or her on-call responsibilities with another employee; and whether and to what extent the employee engages in personal activities during on-call periods.

The DLSE also considers travel time compensable work hours where the employer requires its employees to meet at a designated place and use the employer’s designated transportation to and from the work site. (Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575)

Business Week's Cover - Wage Wars

Daniel Schwartz over at the Connecticut Employment Law Blog, notes that Business Week's cover story on "Wage Wars" is not exactly breaking news (or at least should not be) for HR professionals and companies. 

He offers a few suggestions for readers in response to the article:
  • Audit your exempt employees.  Go over job descriptions and compare that with actual duties.  Sometimes "managers" are just glorified sales workers.
  • Take seriously any complaints by employees about their overtime.  If there is a problem, odds are the complaining employee isn't the only one with the problem.  And that means the potential for a class action case. 
California has been "leading" the wage and hour class action trend mentioned  in the Business Week article.  These cases have arguably been the leading types of lawsuits filed in California for over the last five years.  This is primarily due to California's unique wage and hour laws.  Employers not familiar with California law mistakenly believe that because their policies comply with the FLSA, they are in compliance with California law.  This is a costly mistake, as California's labor code is very unique, and out-of-state employers should always seek a California employment attorney's advice regarding whether the complies with California law.  For example, the following are issues that illustrate how unique California law is compared to the rest of the country:

Meal and Rest Period Penalties

This is the current favorite claim of plaintiff’s class action attorneys in California. A 2001 statute imposes substantial penalties on employers who do not comply with very technical regulations concerning the timing and duration of employee lunch and rest breaks. In general, employees must receive a 30-minute meal break (during which they must be relieved of all duty and be free to leave the premises) before they complete 5 hours of work if their shift will be longer than 6 hours for the day. Employees are entitled to a second meal break whenever their shift will be longer than twelve hours. And employees are also entitled to take paid rest periods of at least 10-minutes for every four hours of work, taken as close to the middle of each work period as possible. The aggregate liability that can result over time was apply demonstrated by a 2005 jury verdict in a meal and rest break class action against Wal-Mart that awarded over $192 million in penalties and punitive damages.

California Overtime Exemptions Are Based on “Counting Hours” Test

Like the FLSA, California law provides that various job categories are exempt from overtime, including outside salespeople, commissioned salespeople and “white collar” employees.  Employers have often defined positions on a nation-wide basis as salaried or hourly based on the definitions of exempt duties provided by the FLSA and its implementing regulations.  California law, however, frequently rejects these federal rules in favor of its own, narrower definition of exempt duties.  For example, under federal law, a position may be exempt from overtime where its “primary,” or most important job functions are exempt. In California, by contrast, the duties test is strictly quantitative — i.e., “does the employee spend more than 50% of his or her time performing exempt duties?”  If not, the position may be misclassified and substantial back overtime may be due.

Daily Overtime and Double-Time

Virtually all employers know that the FLSA requires payment of “time-and-one-half” premium pay for all hours worked beyond 40 hours in one workweek. But a surprisingly large number of employers who set up shop in California are ignorant of the fact that California also requires “time-and-a-half” overtime for all hours worked beyond eight in a single workday and for the first eight hours worked on the seventh consecutive day worked in a workweek. Unlike, the FLSA, California also requires overtime at a double-time rate for all hours worked beyond 12 hours in a single workday and for hours worked beyond eight on the seventh consecutive day worked in a single week.

Mandatory Sexual Harassment Training for Supervisors

California law requires employers with 50 or more employees to provide two hours of sexual harassment training to all supervisors once every two years. Regulations are currently being proposed to clarify the extent to which this obligation applies to supervisors who are located outside California, but supervise California employees and other issues raised by the requirement.

No “Use-It-Or-Lose-It” Vacation Policy

California treats earned, but unused vacation time, as a form of vested compensation, which cannot be forfeited and must be paid out in full at the termination of employment. So-called “use-it-or-lose-it” vacation plans, which are permissible in most other states, are therefore illegal in California.

Brinker - Court to Determine Employers' Obligation To "Provide" Meal Breaks

UPDATE: On July 22, 2008, the Appellate Court issued a published decision, which can be read about at our post "Meal and Rest Break Requirements Clarified By Court in Brinker v. Hohnbaum"

Appellate arguments were made recently in the case Brinker v. Superior Court (Hohnbaum). One issue that is being closely watched by all wage and hour attorneys raised in the appeal is whether the term “provide” in Labor Code § 512 requires employers to force employees to take meal breaks or whether employers only need to offer meal breaks to employees (similar to the "authorize and permit" requirement for rest breaks).

California Labor Code § 512(a) states:
An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee. An employer may not employ an employee for a work period of more than 10 hours per day without providing the employee with a second meal period of not less than 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and the employee only if the first meal period was not waived.
This distinction argued in Brinker is critical in meal and rest break class actions. If the appellate court holds that Labor Code § 512 imputes a requirement on employers to force employees to take their meal and rest breaks, plaintiffs will have an easier argument that meal and rest break cases are subject to class certification. On the other hand, if the court holds that employers only need to make meal breaks available for employees, then class certification would be much harder to achieve because the court would have to make an individual inquiry into whether each employee could have taken a meal break and voluntarily waived it, or if the employee was forced to forego the break.

Courts that have reviewed this issue have reached differing conclusions about the meaning of the term “provide” in § 512. One court, in Cicairos v. Summit Logistics, Inc. (2005) 133 Cal.App.4th 949, held that “employers have ‘an affirmative obligation to ensure that workers are actually relieved of all duty.’” Id. at 962 - 963 (citing Dept. of Industrial Relations, DLSE, Opinion Letter 2002.01.28, p. 1.). However, another California federal district court held employers are only required to offer meal breaks. White v. Starbucks, Corp., (N. D. Cal. July 2, 2007) 497 F.Supp.2d 1080, 2007 WL 1952975. The court refused to follow the DLSE opinion letter relied upon in Cicairos, and stated:
In the absence of controlling California Supreme Court precedent, the court is Erie-bound to apply the law as it believes that court would do under the circumstances. See Wyler Summit Partnership v. Turner Broadcasting System, Inc., 135 F.3d 658, 663 (9th Cir.1998). The interpretation that White advances-making employers ensurers of meal breaks-would be impossible to implement for significant sectors of the mercantile industry (and other industries) in which large employers may have hundreds or thousands of employees working multiple shifts. Accordingly, the court concludes that the California Supreme Court, if faced with this issue, would require only that an employer offer meal breaks, without forcing employers actively to ensure that workers are taking these breaks. In short, the employee must show that he was forced to forego his meal breaks as opposed to merely showing that he did not take them regardless of the reason.
The California Labor & Employment Defense Blog will post about the appellate court’s ruling in Brinker v. Superior Court once it is issued.

Harris v. Superior Court: The "Administrative/Production Worker Dichotomy" as litmus test for the administrative exemption

The recent Harris v. Superior Court opinion dealt with that most-litigated species of employee – the California claims adjuster. And the only legal issue on appeal was the proper construction and application of the single phrase limiting exempt administrative duties to those that are “directly related to management policies or general business operations.” Nevertheless, the case deals a serious blow to the viability of the administrative exemption for all employers in California. 

The Court began its analysis by surveying the exemption language of the California Wage Orders, federal regulations under the Fair Labor Standards Act and the substantial body of state and federal case law. I won’t retrace the tortuous semantic analysis that follows. Suffice it to say, however, that the majority concluded that the so-called “administrative/production” dichotomy is the correct test to apply. 

Many of the federal courts that originally developed and applied the “dichotomy” terminology considered it to be as a mere guidepost or analytical tool. But Harris elevates the distinction to the status of a legal litmus test for determining who may be exempt. At the same time it elevated the status of the “dichotomy” test, it also made the test far more restrictive. Indeed, according to the majority’s vision of the workplace, the vast majority of white collar employees will always qualify only as mere “production” workers because they inevitably spend their time on “day-to-day” business rather than determining how the business should operate “at the level of management policy or general operations.” 

As applied to the adjusters at issue in the case, the Court held that they could not be exempt because the work they did, although clearly sophisticated and important, was deemed to be a frequent part of the employer’s core business.

The undisputed facts show that plaintiffs are primarily engaged in work that falls on the production side of the dichotomy, namely, the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and so forth. None of that work is carried on at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of defendants' business.

Moreover, the Court also took pains to emphasize that the test should not depend on the nature of the employer’s business but rather on the level at which the employee operates.

[T]he phrase “ administrative/production worker dichotomy” is misleading. Properly understood, the dichotomy is not between workers engaged in “ production” (e.g., factory workers) and workers engaged in “ administration”  (e.g., office workers). Rather, it is between office or nonmanual work that is at the level of policy or general operations and office or nonmanual work that is not. Thus, any office or nonmanual work that is not at the level of policy or general operations constitutes production work for purposes of the dichotomy, regardless of how loosely or intimately the work is connected with producing the employer's product.

The Harris decision thus represents a severe restriction on the use of the administrative exemption in California. Moreover, employers must remember that the “administrative/production worker dichotomy” discussed in Harris is merely one of the elements that must be satisfied. For example, it is also the employer’s burden to establish that the employee “customarily and regularly exercises discretion and independent judgment” and performs under only “general supervision.” 

Prachasaisoradej v. Ralphs Grocery: California Supreme Court Upholds Legality of Employer Profit-Incentive Plans

The California Supreme Court decision today in Prachasaisoradej v. Ralphs Grocery, finally clarified once-and-for-all that employer profit-based incentive plans are permissible in California. For the uninitiated, this might seem like a “no brainer.” After all, what could possibly be wrong with sharing profits with one’s employees, isn’t that the type of responsible corporate citizenship that should be encouraged in a 21st Century “ownership society.”  

In fact, prior to today’s decision, Plaintiff’s lawyers had successfully prosecuted a number of class actions that that claimed these plans were illegal. The operative legal theory of these lawsuits (some of which resulted in multi-million dollar settlements) was that the employer’s plans illegally required workers to foot part of the bill for the company’s business expenses because any increase in expense items could result in lower wages. 

The Ralph’s Groceries decisions seems to have put a stake in the heart of this specious line of reasoning. In the process of upholding the legality of an incentive plan for grocery store managers, the Court explained:

The Plan was not illegal, we conclude, simply because, pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers’ compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store’s profit, upon which the supplementary incentive compensation payments were calculated. By doing so, Ralphs did not illegally shift those costs to employees. After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages.

Employers should keep in mind, however, that the Ralph’s Groceries decision was not dealing with earned wages. In terms of legal consequences, there is a world of difference between making a determination of what an employee must do in order to earn a bonus in the future (such as meeting the store profitability target at issue in Ralph’s Groceries) and making an after-the-fact reduction in a bonus that has already been earned. The latter scenario will almost always be illegal.

Once we are able to dissect the decision more, we will post more of our thoughts about the case.  The case can be read in its entirety here

Independent Contractors - Approach With Caution

FedEx is still litigating its classification of its drivers as independent contractors. FedEx lost a case recently in California in Los Angeles and the court ruled the company owes 200 drivers $5.3 million in expenses.  In addition, the California Employment Development Department (EDD), which is responsible for collecting payroll taxes, assessed FedEx Ground owed more than $7.88 million in back payroll taxes because it also held the drivers were misclassified as independent contractors. The audit covered the period July 2001 to June 2004 and concluded that some of the drivers were properly classified as independent contractors, but found the “single-route” drivers were employees. 

As these cases illustrate, California employers need to approach the independent contractor classification very carefully.  If a worker is properly classified as an independent contractor it can save the company money and give the workers great flexibility.  However, misclassifying employees as independent contractors exposes the company large damages for unreimbursed expenses, unpaid overtime, back payroll taxes, and many other items.

For guidance on whether employers have properly classified its workers as independent contractors, the California Division of Labor Standards Enforcement (“DLSE”) provides an explanation of the “economic realities” test. The DLSE maintains that the most indicative fact determinative of whether a worker is an employee or an independent contractor depends on whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. The DLSE also sets forth the other factors that are considered when determining an employee’s status:

  1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  2. Whether or not the work is a part of the regular business of the principal or alleged employer;
  3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
  4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  5. Whether the service rendered requires a special skill;
  6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  8. The length of time for which the services are to be performed;
  9. The degree of permanence of the working relationship;
  10. The method of payment, whether by time or by the job; and
  11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

Further details about the DLSE’s position on who classifies as an independent contractor can be found here. The DLSE’s information provides a great starting point for employers to audit their classifications of employees, but each case may present different facts, and the economic realities test may change depending on the jurisdiction (i.e., civil court or an EDD assessment) and whether state or federal law is at issue.

Do you want to reduce your payroll and add to the bottom line?

(Note to readers: Today we have the first guest post (of hopefully many more) from Ody Milton, who is a Hospitality Consultant and Culinary Management Instructor.  We thought that many of our readers would be interested in Ody's real world experience in managing restaurants.)

Guest Post by Ody Milton

Banquet and catered events offer this opportunity. When special group events are booked or sold most catering sales operations require that a “Service Charge” be paid for the event. Often these service charges range from 17% - 22% of all food beverage and other charges to the guest. These service charges are classified and handled differently than gratuities or tips. Gratuities and tips are required to be distributed to employees while “Service Charges” distribution can be done fairly according to management policy. For example many hotels retain the entire service charge and pay set –up and servers for these banquet/events an hourly “Flat Rate”. This flat rate hourly payment includes at least a minimum wage plus some flat distribution of Service Charges.

The job classification of banquet server may offer a $17.50 dollar per hour rate of pay. In essence this flat rate of $17.50 per hour is comprised of a base pay such as minimum wage at $7.50 per hour and a service charge distribution of $10.00. If the hotel collects greater than a $10.00 share per hour in Service Charges, then it can retain the difference as a credit to payroll on the P & L. This retention can be considerable! In some cases profitably for catered events has more than doubled by adopting this flat rate distribution method.  Don’t forget to check with your favorite employment attorney, laws in some states may vary.


We would like to thank Ody for this first guest post.  He is correct in noting that under California law, mandatory service charges do not have to be paid to employees.  Alternatively, tips left by patrons for the employee are the employee's property and cannot be collected from the employee unless the employer has implemented a valid tip pooling arrangement.   For more information about Ody's post, he can be reached via email or at 818-292-2506.

Avoiding Employment Lawsuits

Rush Nigut is a general business and corporate attorney in Iowa and writes a great blog, Rush on Business.  Recently he wrote about his top seven items to prevent employment lawsuits.  Here is a summary of his top seven tips (his entire post "Seven Ways To Avoid Employee Lawsuits" can be read here):
Employment lawsuits are continually on the rise. Here are seven things that may help you avoid employee lawsuits:
  1. Treat Employees with Respect
  2. Communicate with Your Employees
  3. Implement an Effective Unlawful Discrimination and Harassment Policy
  4. Document, Document, Document
  5. Conduct Honest Employee Evaluations on a Regular Basis
  6. Do Not Retaliate
  7. Take Action and Investigate Promptly
These simple steps will go a long ways to reducing employee lawsuits. To ensure that your company has done everything it can to avoid employee lawsuits, you should have your employment policies, training and practices reviewed by your employment lawyer.
Rush's top seven tips are great reminders about what employers need to continually remind themselves to do.  I also thought that it is interesting that Rush's top tip - treat your employees with respect - cannot be found in any of the 50 U.S. state laws, federal law, or any case law.  Even though there is no "legal" requirement to treat employees with respect, I wholeheartedly agree that this is the single best step employers can take to prevent litigation (in addition to having a satisfied and productive workforce). 

I also wanted to add three more tips to round out a "top ten" list for California employers:
8.  Develop and strictly enforce a meal and rest break policy
9.  Ensure your exempt employees (i.e., salaried employees) are properly classified as exempt under California law; and
10.  Review and update your employee handbook and/or policies once a year to incorporate any changes in the law.

Meal and Rest Breaks - Revisited

With July beginning, now is a perfect time for employers to review their meal and rest break policies. While readers may feel like they understand these regulations better than most non-employment attorneys, given the high penalties associated with violations, and the California Supreme Court’s ruling in April that the payments for violations are “wages,” increasing the statute of limitations periods up to four years, it is well worth it for employers to revisit these issues periodically to ensure compliance.

Below are excerpts from the DLSE’s website providing answers to frequently asked questions about employer’s obligations to provide meal and rest breaks.

Meal Breaks:

Q. What are the basic requirements for meal periods under California law?

A. Under California law (IWC Orders and Labor Code Section 512), employees must be provided with no less than a thirty-minute meal period when the work period is more than five hours (more than six hours for employees in the motion picture industry covered by IWC Order 12-2001).
Unless the employee is relieved of all duty during the entire thirty-minute meal period and is free to leave the employer's premises, the meal period shall be considered "on duty," counted as hours worked, and paid for at the employee's regular rate of pay. An "on duty" meal period will be permitted only when the nature of the work prevents the employee from being relieved of all duty and when by written agreement between the employer and employee an on-the-job meal period is agreed to. The test of whether the nature of the work prevents an employee from being relieved of all duty is an objective one. An employer and employee may not agree to an on-duty meal period unless, based on objective criteria, any employee would be prevented from being relieved of all duty based on the necessary job duties. Some examples of jobs that fit this category are a sole worker in a coffee kiosk, a sole worker in an all-night convenience store, and a security guard stationed alone at a remote site.

Q. Is it permissible if I choose to work through my meal period so that I can leave my job 30 minutes early?

A. No, working through your meal period does not entitle you to leave work early prior to your scheduled quitting time. In order for an "on duty" meal period to be permitted under the Industrial Welfare Commission Wage Orders, the nature of the work must actually prevent the employee from being relieved of all duty, and there must be a written agreement that an on-the-job paid meal period is agreed to. Additionally, the written agreement must also state that the employee may, in writing, revoke the agreement at any time.

Q. Can my employer require that I stay on its premises during my meal period?

A. Yes, your employer can require that you remain on its premises during your meal period, even if you are relieved of all work duties. However if that occurs, you are being denied your time for your own purposes and in effect remain under the employer's control and thus, the meal period must be paid. Minor exceptions to this general rule exist under IWC Order 5-2001 regarding healthcare workers. Pursuant to the Industrial Welfare Commission Wage Orders, if you are required to eat on the premises, a suitable place for that purpose must be designated. "Suitable" means a sheltered place with facilities available for securing hot food and drink or for heating food or drink, and for consuming such food and drink.

Rest Breaks:

Q. What are the basic requirements for rest periods under California law?

A. California employees covered by the rest period provisions of the Industrial Welfare Commission Wage Orders must be provided with a net 10-minute paid rest period for every four hours worked or major fraction thereof. Insofar as is practicable, the rest period should be in the middle of the work period. If an employer fails to provide an employee a rest period, the employer shall pay the employee one hour of pay at the employee’s regular rate of pay for each workday that the rest period is not provided.

Q. Must the rest periods always be in the middle of each four-hour work period?

A. Rest breaks must be given as close to the middle of the four-hour work period as is practicable. If the nature or circumstances of the work prevent the employer from giving the break at the preferred time, the employee must still receive the required break, but may take it at another point in the work period.

Q. Is it permissible if I choose to work through both of my rest periods so that I can leave my job 20 minutes early?

A. No, working through your rest period does not entitle you to leave work early or arrive late.

Q. Can my employer require that I stay on the work premises during my rest period?

A. Yes, your employer can require that you stay on the premises during your rest break. Since you are being compensated for the time during your rest period, your employer can require that you remain on its premises. And under most situations, the employer is required to provide suitable resting facilities that shall be available for employees during working hours in an area separate from the toilet rooms.

Q. Can I have additional rest breaks if I am a smoker?

A. No, under California law rest period time is based on the total hours worked daily, and only one ten-minute rest period need be authorized for every four hours of work or major fraction thereof.

Q. When I need to use the toilet facilities during my work period does that count as my ten minute rest break?

No, the 10-minute rest period is not designed to be exclusively for use of toilet facilities as evidenced by the fact that the Industrial Welfare Commission requires suitable resting facilities be in an area "separate from toilet rooms." The intent of the Industrial Welfare Commission regarding rest periods is clear: the rest period is not to be confused with or limited to breaks taken by employees to use toilet facilities. This conclusion is required by a reading of the provisions of IWC Orders, Section 12, Rest Periods, in conjunction with the provisions of Section 13(B), Change Rooms And Resting Facilities, which requires that "Suitable resting facilities shall be provided in an area separate from the toilet rooms and shall be available to employees during work hours."

Allowing employees to use toilet facilities during working hours does not meet the employer’s obligation to provide rest periods as required by the IWC Orders. This is not to say, of course, that employers do not have the right to reasonably limit the amount of time an employee may be absent from his or her work station; and, it does not indicate that an employee who chooses to use the toilet facilities while on an authorized break may extend the break time by doing so. DLSE policy simply prohibits an employer from requiring that employees count any separate use of toilet facilities as a rest period.

Tips On Litigation

Mike Dillon, a General Counsel and Corporate Secretary for Sun Microsystems, Inc. has some great thoughts about litigation posted on his blog, The Legal Thing.  He notes:

No. 1 - You only litigate when you have an important interest to protect. Litigation is costly. Incredibly costly. But it is not the expense that is the real issue, it's the diversion of resources. Time employees spend reviewing e-mails and documents, educating lawyers and preparing for depositions is time away from the business. That's the real cost of litigation.

No. 2 - A non-judicial resolution is almost always preferable. When you file a complaint, you are turning over resolution of an issue to a third party - be it a judge, arbitrator or jury. To a great degree you lose control of the outcome.

No. 3 - You litigate when you have a high degree of confidence that you will prevail. Bluffing is for weekend games of Texas Hold'em . When you file suit, you need to have fully evaluated all aspects of the case to ensure that the outcome will be favorable.

No. 4 - You litigate to win. This means that your employees, board and management team fully understand and support the commitment (both financial and time) required to prevail. It also means having seasoned litigation counsel who understand your business and objectives.
While his perspective is towards enforcing a company's intellectual property rights, his analysis can easily be applied to defending employment litigation.  Most notably different is that employers do not chose when to be sued for wrongful termination or wage and hour claims.  However, the company should be completely prepared to defend itself in litigation - in California it is only a matter of when.  In order to develop a strong defense, the company should work with experienced employment attorneys to establish policies that (1) comply with the law and (2) assist the company when a lawsuit is filed.  I mention the second point because while companies have policies that comply with the law, when litigation starts the fact that you have complied with the law is good, but the company needs PROOF that it complied with the law.  An experienced employment litigator can help companies set up policies to document the areas that will most likely be areas of contention during litigation.  For example, California companies should have a clear "at-will" policy signed by the employee, should have a system (preferably computer based) for recording when employees take their meal breaks, and have a clear policy on rest breaks that is in some way acknowledged by employees.

Also, this process of working with an attorney in establishing solid policies is a great period to see if the company likes working with the attorney and (hopefully) develops a good relationship that is critical in any attorney-client relationship.  This also allows the attorney to become familiar with the company and its business and objectives as Mike mentions in No. 4 above.

Finally, companies need to understand Mike's point No. 4 - You litigate to win.  Once a case is filed against a company, the message communicated throughout the company should be that it is extremely important to spend the time necessary to assist the outside counsel in defending the case.  Owners, executives and employees must give their undivided attention to the litigation.  To do otherwise is a costly mistake.

Employees' Wages: A Private Matter?

An article in Fast Company discusses whether companies should allow employees to see what other employees earn. The author cites an op-ed piece from the New York Times calling for federal regulations making employers disclose this information (no doubt because of the Supreme Court’s recent ruling in Ledbetter v. Goodyear Tire & Rubber). The article mentions that Whole Foods allows all current employees to look this information up on a computer in every store.

This raises a great point for California employers: what are California employers’ obligations to disclose payroll information?

California Labor Code section 232 provides that employers cannot require employees to refrain from “disclosing the amount of his or her wages.”  Employers are not required to disclose this information, but the labor code does prohibit an employer from discharging, disciplining, or discriminating against an employee who discloses his or her wages.  This is one of the few occasions I believe the current law in California reaches a good balance in giving the employees some control over this "private" information (they do not have to share their wage information with co-workers if they don't want to), but still allows employees who believe they are not being paid fairly, whatever the reason, to do some research of their own.

Analysis on Gentry v. Superior Court (Circuit City)

We attended the oral arguments yesterday in Gentry v. Superior Court.  Kimberly Kralowec, the author of the UCL Practitioner was kind enough to post our initial analysis on the oral arguments in Gentry v. Superior Court

Technology Creating Overtime Concerns

Adjunct Law Prof Blog discusses an interesting article about the "novel issue of whether employee time spent away from the office using technology such as Black Berry devices, cell phones and lap tops could lead to claims that such employees are entitled to overtime pay under the Fair Labor Standards Act of 1938."

It has been our experience that these types of claims in California are not so "novel" and that employers definitely need to have a policy addressing the issue of non-exempt employees utilizing such technology while they are off the clock or away from company premises.  Given the recent increase in the Federal minimum wage, it is likely that employment litigators outside of California will soon become all too familiar with these issues.

Federal Minimum Wage Increases to $7.25 Per Hour Over Next Two Years

Congress passed a bill and presented it to the President today that would increase the Federal minimum wage.  The President is expected to sign the bill into law. 

Workers subject to the Federal minimum wage now make $5.15 an hour.  This amount will increase 70 cents per hour before the end of the summer and another 70 cents will be added next year.   By summer 2009, all minimum-wage jobs will pay no less than $7.25 an hour.

This does not affect California employers as the state minimum wage is currently $7.50 per hour and set to increase to $8.00 per hour on January 1, 2008.

Vacation Time, Sick Pay, Severance Pay, and Other Benefits

Some of the most frequently asked questions by clients are about benefits for employees under California law: Do employer's have to provide vacation to employees?  Can employers have a use-it-or-lose-it vacation policy?  Do employers have to give employees severance pay?  Below is the Division of Labor Standards Enforcement's (DLSE) explanation of employer's obligations regarding these issues.


        VACATION: Paid vacations are not required under California law. If an employer has an oral or written vacation policy, such vacation benefits are considered wages and are earned by the employee on a pro rata basis for each day of work. Because vacation is a form of deferred wages and vests as it is earned, vacation wages cannot be forfeited (or in other words, an employer cannot have a use-it-or-lose-it vacation policy) (Suastez v. Plastic Dress Up (1982) 31 Cal.3d 774) An employer can place a reasonable cap on vacation benefits that prevents an employee from earning vacation over a certain amount of hours. (Boothby v. Atlas Mechanical (1992) 6 Cal.App.4th 1595). When an employment relationship ends all vacation earned but not yet taken by the employee must be paid at the time of termination. (Labor Code §227.3). If employees are subject to a collective bargaining agreement, the provisions pertaining to vacation benefits in the collective bargaining agreement will apply. (Labor Code §227.3)


        SICK PAY:There is no state legal requirement under California law for employers to provide paid sick leave. Employers with a presence in San Francisco should note that the city does require employers to provide sick pay accrued at a rate of one hour of sick time for every thirty hours worked.  For these workers in San Francisco, the sick pay is capped at 72 hours for large businesses that have10 or more employees and at 40 hours for small businesses that have less than 10 employees.

Employees should refer to their employer’s policy with respect to paid sick leave. However, most employers participate in the State Disability Insurance Plan (SDI), which they pay for through payroll deductions. (Unemployment Insurance Code §2601, et seq.) Employers are required to give newly hired employees and employees leaving work due to pregnancy or non-occupational sickness or injury a copy of a notice of their disability insurance rights and benefits due to sickness, injury or pregnancy. (Unemployment Insurance Code §2613) Additional information concerning disability insurance can be obtained from your local office of the Employment Development Department (EDD).

If an employer has a sick leave policy, the employer must permit an employee to use in any calendar year, the employee’s accrued and available sick leave, in an amount not less than the sick leave that would be accrued during 6 months at the employee’s current rate of sick leave, to attend to an illness of a child, parent, domestic partner, or spouse of the employee. (Labor Code §233)


        SEVERANCE PAY:There is no legal requirement under California law that employers provide severance pay to an employee upon termination of employment. Employees should refer to their employer’s policy with respect to severance pay. Severance pay plans provided by an employer pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. §1001 et seq. (ERISA), are subject to federal law. More information about ERISA can be found at the U.S. Department of Labor's website. In certain limited situations, California laws may apply. However, a thorough review of the facts is necessary before a determination can be made.

California Supreme Court To Hear Arguments In Landmark Arbitration Case and Bonus Plan Case

The California Supreme Court is scheduled to hear oral arguments in two cases that will have large ramifications for California employers. 

On Tuesday, June 5, 2007 the Supreme Court will hear oral arguments in GENTRY v. SUPERIOR COURT (CIRCUIT CITY STORES).

The issue being heard by the Court in Gentry is:

This case presents issues regarding the enforceability of an arbitration provision that prohibits employee class actions in litigation concerning alleged violations of California's wage and hour laws.

On Wednesday, June 6, 2007, the Supreme Court will hear oral arguments in PRACHASAISORADEJ v. RALPHS GROCERYThe issue being heard by the Court in Ralph’s is:

Does an employee bonus plan based on a profit figure that is reduced by a store's expenses, including the cost of workers compensation insurance and cash and inventory losses, violate (a) Business and Professions Code section 17200, (b) Labor Code sections 221, 400 through 410, or 3751, or (c) California Code of Regulations, title 8, section 11070?

The Supreme Court will have a written opinion within 90 days after the oral arguments. I plan on attending the oral arguments for Gentry, and will provide more analysis about the cases within the next few weeks leading up to and immediately after the oral arguments. 

Overtime Calculator Unveiled by Department of Labor

The Department of Labor rolled out an Overtime Calculator on its website this week. The calculator is designed to help employers and workers understand and calculate overtime pay under the Fair Labor Standards Act (FLSA). Warning for all California employers: the calculator does not explain an employer’s obligations under California’s more strict employment laws, such as calculate the overtime due for all work beyond eight hours a day. This basically makes the calculator useless for anyone employing workers or working in California.

While I have not had much time to dig into the calculator yet, my initial impression is that unless you have some background in wage and hour issues, and are very careful about the information you input in the calculator, it could be easy to miscalculate what is actually due in wages. However, if you are looking to educate yourself on FLSA wage issues, it is interesting to run different scenarios through.

DOL On-Line Self Assessment For Restaurateurs Employing Minors

The U. S. Department of Labor’s Wage and Hour Division website provides a self assessment tool for restaurants that employ minors. The assessment covers common violations of the Fair Labor Standards Act (FLSA ). Restaurant owners should note that this assessment does not cover California state law items. The assessment covers items that the DOL found in the past to be some of the most common problems encountered in restaurants, and therefore, are likely issues a DOL investigator will look for in a restaurant.

Here is a list of a few of the items covered in the assessment:

Do any workers under 18 years of age do the following:
1. Operate or clean power-driven meat slicers or other meat processing machines?

2. Operate or clean any power-driven dough mixer or other bakery machines?

3. Operate, load, or unload scrap papers baler or paper box compactors?

4. Drive a motor-vehicle on the job?


Do any workers under 16 years of age do the following:
5. Cook?

6. Bake?

7. Clean cooking equipment or handle hot oil or grease?

8. Load or unload goods from a truck or conveyor?

9. Work inside a freezer or meat cooler?

10. Operate power-driven bread slicers or bagel slicers?

11. Operate any power-driven equipment?

12. Work from ladders?

13. Work during school hours?

14. Work before 7:00 a.m. on any day?

15. Work past 7:00 p.m. between Labor Day and June 1?

16. Work past 9:00 p.m. between June 1 and Labor Day?

17. Work more than 3 hours on a school day, including Fridays?

18. Work more than 8 hours on any day?

19. Work more than 18 hours in any week when school was in session?

20. Work more than 40 hours in any week when school was not in session?

21. Do you employ any workers who are less than 14 years of age?

22. Do you fail to maintain in your records a date of birth for every employee under 19 years of age?

Click here to take the entire assessment. At the end of the assessment, there is a rules summary that explains an employer’s responsibility under the FLSA for the issues on the assessment.


How to Avoid a California EDD Tax Assesment For Misclassifying Independent Contractors

Independent contractors are the most common category of workers that are audited for back payroll taxes by the EDD.  We have also noticed that the EDD will target certain industries that it believes commonly misclassifies employees as independent contractors (delivery drivers for Federal Express and other delivery companies have recently been targeted).

In making a determination whether a worker is properly classified as an independent contractor, the EDD will examine the employer's right to control the worker, whether or not exercised, as one of the most important factors in determining the relationship. The right to discharge a worker at will and without cause is strong evidence of the right of direction and control. The following factors are also taken into consideration:
  • Whether or not the one performing the services is engaged in a separately established occupation or business.
  • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal without supervision.
  • The skill required in performing the services and accomplishing the desired result.
  • Whether the principal or the person providing the services supplies the tools, equipment, and place of work for the person doing the work.
  • The length of time for which the services are performed to determine whether the performance is an isolated event or continuous in nature.
  • The method of payment, whether by time, a piece rate, or by the job.
  • Whether or not the work is part of the regular business of the principal.
  • Whether or not the parties believe they are creating the relationship of employer and employee.
  • The extent of actual control exercised by the principal over the manner and means of performing the services.
  • Whether the principal is or is not engaged in a business enterprise or whether the services being performed are for the benefit or convenience of the principal as an individual.
  • Whether the worker can make business decisions that would enable him or her to earn a profit or incur a financial loss. Investment of the worker's time is not sufficient to show a risk of loss.
A written contract which claims to create the relationship of principal and independent contractor is not controlling if the practice of the parties shows that the principal retains the right of control under the common law test.

AB 510 Proposed Bill to Relax Complicated Restrictions For Employers to Implement Alternative Work-Week Schedules

Assemblyman John J. Benoit proposed new legislation (AB 510) on March 15, 2007 to give more flexibility to California hourly employees to alter their workweek schedules. Under current California law, employers must pay non-exempt employees time-and-one-half for work beyond eight hours in one day and the first eight hours worked on the seventh consecutive day worked in a single workweek. Double-time is owed for all time worked over 12 hours in a single day, and all hours beyond eight hours worked on the seventh consecutive day in a single workweek. Currently, the law is very inflexible to allow employees and employers to agree to a different working arrangement.

Alternative workweek schedules are permitted under California law, but the process is so cumbersome, and the potential liability is large if done improperly, many employers do not offer their employees this option. For example, in order to establish an alternative workweek under the current law employers need to propose the alternative workweek schedule to employees, hold at least one meeting about the new schedule, hold a secret ballot election, file the election results with the Division of Labor Statistics and Research, and retain documentation of the entire process. Also, once the alternative workweek is established for a "work unit" every employee, with every few exceptions, in the "work unit" must work the alternative workweek schedule. If this detailed process is done improperly, it could invalidate the alternative workweek, exposing the employer to liability of three to four years of back overtime for the employees working the alternative workweek.

AB 510 is a proposed solution to allow more flexibility for employers and employees to develop an alternative workweek schedule to accommodate each individual's work and personal scheduling needs. The bill would allow an individual employee to adopt a schedule that provides for 10-hour workdays in a four-day workweek. If the employer agrees to the proposed four-day workweek schedule, the employee will be paid at straight time rates. Any work performed beyond the 10 hours per day or beyond the four days would remain subject to current California overtime requirements.