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. 

 

   

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.     

 

 

 

     

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.)               

"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.               

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.  

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.   

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.

 

 

             

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.      

 

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.        

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.

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).
 

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.

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]. 

 

 

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. 

 

 

 

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. 

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).
 

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.
 

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.
 

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."

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.

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.

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.

"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. 

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.

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.

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.

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.

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.

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.

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.