On October 14, 2017, California Governor Jerry Brown signed into law Assembly Bill 1701, which will make general contractors on private construction projects liable for their subcontractors’ failure to pay wages due to the subcontractors’ employees. The new law applies to contracts entered into on or after January 1, 2018.
Assembly Bill 1701 adds Section 218.7 to the California Labor Code. Subdivision (a)(1) provides:
For contracts entered into on or after January 1, 2018, a direct contractor making or taking a contract in the state for the erection, construction, alteration, or repair of a building, structure, or other private work, shall assume, and is liable for, any debt owed to a wage claimant or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the direct contractor for the wage claimant’s performance of labor included in the subject of the contract between the direct contractor and the owner.
The direct contractor’s liability under Section 218.7 will extend only to any unpaid wages, fringe or other benefit payments or contributions, including interest, but will not extend to penalties or liquidated damages.
Employees will not have standing to enforce the new law. Only the California Labor Commissioner, a third party owed fringe or other benefit payments or contributions on a wage claimant’s behalf (such as a union trust fund), or a joint labor-management cooperation committee may bring a civil action against a direct contractor for the unpaid wages. A joint labor-management committee must provide the direct contractor with at least 30 days’ notice by first-class mail before filing the action.
A prevailing plaintiff in any such action is entitled to recover its reasonable attorneys’ fees and costs, including expert witness fees. The property of a direct contractor that has a judgment entered against it may be attached to satisfy the judgment.
The new law authorizes a direct contractor to request from its subcontractors their employees’ wage statements and payroll records required to be maintained under Labor Code section 1174. The payroll records must contain information “sufficient to apprise the requesting party of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.” Direct contractors and subcontractors also have the right to request from any lower tier subcontractors “award information that includes the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project.” A direct contractor may withhold as “disputed” all sums owed if a subcontractor does not timely provide the requested information, until such time as that information is provided.
Given this new law, general contractors operating in California should be even more careful than before about the subcontractors they hire, and pay particular attention to the subcontractors’ ability and willingness to comply with all applicable wage and hour laws. This includes requirements to provide timely meal and rest periods, because meal and rest period premiums qualify as wages. General contractors should also ensure their subcontractor agreements require the subcontractors to indemnify the general contractor for any liability arising from the new law. Once a project is underway, general contractors should closely monitor their subcontractors’ compliance with wage and hour laws and fringe benefit payments, and where necessary exercise their right to request payroll records from subcontractors to ensure they are timely paying all required wages and fringe benefits.
This past November, a federal court issued a preliminary injunction halting the implementation of the proposed changes to the FLSA’s overtime exemptions just before they were to take effect on December 1. On August 31, 2017, the same court issued another decision definitively holding that the Department of Labor exceeded its authority in issuing those regulations and thereby permanently enjoining them. In doing so, the court clarified its prior holding and gave the new Administration a clear license to go back to the drawing board and draft new regulations consistent with the underlying law.
The November preliminary injunction was in response to a case brought by 21 states. At that time, a companion case also challenging the legality of the new regulations was pending before the same court. That case was brought by a variety of business groups and chambers of commerce from across the nation, spearheaded by the U.S. Chamber of Commerce. The business groups had filed a motion for summary judgment in its case last year, but the court did not rule on that motion until last week. The states joined in that motion, and therefore the ruling applies to both cases before that court.
While granting the business groups’ motion for summary judgment, the court concluded that the Department of Labor had exceeded its authority. The primary basis for its holding is that the new salary level (i.e., $47,476)—which was more than double the salary level in the existing regulations (i.e., $23,660)—served to make the salary level the primary determiner of exempt status. This outcome violated the FLSA, the court held, because it supplanted the duties tests for executive, administrative and professional status, and Congress intended that those performing the duties of those classifications were to be exempt. The salary level in the new regulations would have converted more than 4.2 million employees from exempt to nonexempt, despite the Department’s admission that, but for the new salary level, they would otherwise be exempt. The court also held that a salary level could be legally used by the Department in defining who may be considered exempt, but not if it is so high that it essentially becomes the sole test for the exemption. Thus, the court concluded that, while a salary level could be incorporated in regulations defining the exemption, the salary level in the new regulations was excessively high.
The earlier preliminary injunction was appealed by the former Administration to the Fifth Circuit Court of Appeals. In that appeal, the new Administration asked the court to recognize that a salary level is a permissible component of the exemption tests, but still strike down the regulations because of the amount. Concurrently, the new Administration has announced its intent to revisit the use and magnitude of the salary level test, and has asked for comments with respect to how it can be better tailored going forward.
With this decision, the case before the Court of Appeals is likely moot and the future of the regulations will hinge on whether or not the new Administration will appeal that decision. In fact, the Department of Labor today asked the Court of Appeals for permission to withdraw its appeal. Further, given that the district’s court new decision aligns with the Administration’s position before the Court of Appeals, the conventional wisdom is that an appeal is unlikely. Instead, the Department will likely simply proceed with the process for revisiting the salary level question and eventually promulgate new regulations. Secretary Acosta has indicated a view that the new rate would be more reasonable and appropriate if it hovered near $33,000, but that given the request for comments recently issued by the Department, other factors may come into play for small business, non-profits, rural business, and other employers who would be hard hit by a greatly increased salary level. Another issue “on the table” is whether any new salary level should somehow be indexed to automatically increase without having to exhaust the regulatory process.
Much is still up in the air, but the decision should bring a sigh of relief to employers. It appears that the enjoined regulations are officially dead, but there are still a few procedural and regulatory issues technically in play.
Importantly, though, this case does not affect wage and hour laws at the state level. Employers in states with higher minimum wages or exemption thresholds, such as California (currently $10.50 per hour with an exempt salary threshold of $3,640 per month or $43,680 per year for employers with 26 or more employees, but scheduled to increase to $11.00 per hour with exempt thresholds of $3,813.33 per month or $45,760 per year effective January 1, 2018), must continue to follow the higher applicable rates, as well as observe the stricter “duties tests” imposed in their particular states.
For more information, contact Robert Boonin at Dykema Gossett, email@example.com or (313) 568-6707
California Supreme Court Rules PAGA Plaintiffs Are Presumptively Entitled to Contact Information of Defendant’s Employees Statewide
Last week in a unanimous decision, the California Supreme Court ruled that representative plaintiffs in Private Attorneys General Act (PAGA) cases are presumptively entitled to discover the names and contact information of other allegedly “aggrieved employees” statewide at the outset of litigation, without the need to show good cause.
Enacted in 2004, PAGA allows allegedly “aggrieved employees” to sue employers on behalf of the state of California to recover civil penalties on behalf of the state for violations of the state Labor Code, and to keep for themselves and other aggrieved employees 25 percent of any civil penalties recovered, with the remaining 75 percent going to the state. PAGA also provides for the recovery of attorneys’ fees.
Michael Williams was employed by Marshalls of CA, LLC, at the company’s store in Costa Mesa, California. He sued Marshalls under PAGA, asserting various wage and hour violations. Early in the case, Williams sought to discover the names and contact information of fellow Marshalls employees throughout California, and offered to use a so-called “Belaire-West notice,” a discovery mechanism whereby non-party employees are notified of a plaintiff’s request to discover their names and contact information, and are given an opportunity to opt out of having their information produced. Marshalls objected on several grounds, including burdensomeness and the privacy rights of its employees. The trial court granted Williams’ motion to compel Marshalls to produce employee contact information, but only as to employees who worked at the Costa Mesa store where Williams worked.
The Court of Appeal affirmed, holding discovery of contact information for employees statewide was premature, and that Williams had failed to show good cause for the production of contact information statewide, given that he had not shown knowledge of unlawful practices at any store other than the Costa Mesa location, or facts putting any uniform statewide practice at issue.
The California Supreme Court reversed, finding the trial court abused its discretion in denying Williams’ motion to discover statewide contact information because the California Code of Civil Procedure does not include a “good cause” standard for discovery, and discovery rules for PAGA actions are no different from the rules governing discovery in putative class actions. Although defendants may object to discovery requests on various grounds (as did Marshalls) and trial courts retain broad discretion to manage discovery, when it opposed the motion the company presented no evidence showing the production of statewide contact information would be unduly burdensome, and the well-established Belaire-West notice procedure provided sufficient privacy protections.
This decision confirms that in a class, collective or PAGA action litigated in a California state court, the names and contact information of non-party employees are presumptively discoverable simply upon the filing of a complaint. Instead of placing the burden on plaintiffs to show good cause for the discovery, the burden is on defendants to show why discovery should be limited. The court found Marshalls failed to do so, but the opinion leaves open the possibility that other employers may be able to limit discovery under the right circumstances.
U.S. Department of Labor Reinstates Opinion Letters and Signals Coming Changes to Obama-Era Overtime Rule
On June 27, 2017, the U.S. Department of Labor (DOL) made two announcements that signal a change of direction for the new Administration. First, the DOL announced in a press release that it would return to its decades-long practice of issuing “opinion letters,” which provide employers formal, written guidance on specific labor law issues. Second, the DOL began the process for seeking public notice and comment on the Obama DOL’s rule increasing the salary threshold for overtime exemptions, indicating that the DOL is considering eliminating or changing the controversial rule.
For over 70 years, the DOL issued opinion letters, which were official administrative guidance that explained how the DOL would apply the FLSA, FMLA and a select few other laws in specific factual scenarios. Employers could rely on the opinions and use them to defend actions taken in line with those opinions. In 2010, however, the DOL stopped issuing opinion letters, opting instead for broader “Administrator Interpretations.” These Interpretations were far fewer in number and offered more general guidance, and they were criticized by employers for their perceived pro-employee slant. (The DOL under President Trump has since revoked two of these Interpretations.)
On June 27, the DOL announced that it would resume issuing opinion letters. Labor Secretary Acosta explained that the policy shift was intended to benefit employees and employers by providing “a means by which both can develop a clearer understanding of the Fair Labor Standards Act and other statutes” and allowing employers to focus on “growing their businesses and creating jobs.”
The DOL has set up a webpage where the public can view existing guidance or request an opinion letter. The website contains specific instructions about how to request an opinion letter, what to include in a request, and where to submit the request.
On the same day, the DOL also announced that it sent a Request for Information (RFI) to the Office of Management and Budget (OMB) related to the Obama DOL’s overtime rule, which, among other things, increased the minimum salary for the executive, administrative and professional worker exemptions. Once the RFI is published, the public has an opportunity to comment.
The new overtime rule had been scheduled to take effect on December 1, 2016, but a federal court in Texas granted a preliminary injunction delaying implementation of rule while a legal challenge to it was pending. The Department of Justice appealed the decision on December 1, and the case remains on appeal in the Fifth Circuit Court of Appeals.
While the RFI could be the first step towards the rule’s official demise, the DOL may be considering modifying the rule in some way. In statements to a Senate subcommittee on June 27, Secretary Acosta noted that the request “would ask the public to comment on a number of questions that would inform our thinking,” and, while the rule’s salary threshold would be “just too high for many parts of the country,” he urged the public to show the DOL “how to write a good overtime regulation.”
Together, these changes show that the new DOL is moving in a more employer-friendly direction than the agency had during the prior Administration.
Jonathan Keselenko, Foley Hoag LLP, Boston, MA
On June 7, 2017, the U.S. Department of Labor withdrew the controversial Administrator Interpretations (“AIs”) issued in 2015 and 2016 regarding its guidance on “independent contractors” and “joint employers.” The announcement reads:
The Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors were withdrawn effective June 7, 2017. Removal of the two administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act or Migrant and Seasonal Agricultural Worker Protection Act, as reflected in the Department’s long-standing regulations and case law. The Department will continue to fully and fairly enforce all laws within its jurisdiction including the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act.
While the post-election conventional wisdom has been that the new leaders of the DOL would review these Administrator Interpretations, no one was sure if the anticipated relief to the employer community would be via a rescission or modification, and it was also not expected for any change to occur until after a new Solicitor of Labor and Wage and Hour Administrator took office. (The President has yet to nominate anyone of either of these offices.) Thus, the timing of this announcement – while greatly welcomed by the business community – is also somewhat of a surprise. The two AIs limited the misclassification of workers through a stricter independent contractor test and also expanded the definition joint employer.
THE RESCINDED INTERPRETATIONS
Independent Contractors: The July 2015 AI regarded the issue of misclassifying employees as independent contractors. While claiming to merely summarize existing standards, many viewed the newly proclaimed standards as being based on case law that deviated from the legal mainstream and established an “economic reality” or “dependency” test which minimized the element of control held by the contracting party. The case law up until that point, while weighing economic realities, placed a premium on the extent to which a business controlled the contractor. In contrast, the AI gave the lowest weight to the control factor. The bottom line under this definition emphasizing “dependency”, according to the Wage and Hour Administrator at that time, was that few workers could be properly treated as contractors.
Joint Employers: Under the January 2016 AI, joint employment relationships under the Fair Labor Standards Act could arise under two scenarios: 1) horizontal joint employer relationships; and 2) vertical joint employer relationships. The concept regarding horizontal joint employment (i.e., essentially when related businesses share employees) did not significantly deviate from prior doctrine. Regarding vertical joint employers, however, the DOL again selectively picked among judicial precedent to cobble a newly articulated standard, dramatically altering the doctrine from most courts’ application, , this time favoring emphasis on the “control” factor, e.g., the control a prime contractor may assert over subcontractors, a franchisor may assert over franchisees, and a business may assert over employees supplied by staffing companies. In essence, the AI made it easier for DOL to deem employers doing business together to be joint employers, and thereby make it easier to hold one of the “joint employers” liable for the alleged wrongs solely made by the other “joint employer.”
THE SIGNIFICANCE OF THE RESCISSIONS
After these AIs were published, only a handful of courts had adopted them as being the proper construction of the law. That has not stopped the plaintiffs’ bar from trying to leverage the AIs as support for their cases, nor has it stopped the DOL from applying them in the course of its audits and investigations.
With the rescission of these AIs, the common law as existed prior to 2015 on these issues is again clearly the law of the land. These AIs will no longer serve as a basis for finding liability, and critically, they will not drive the DOL in its investigations going forward. Thus, their rescission signifies is a return to the fairly stable and well established doctrines of the past, which should be welcomed by the business community, although it is likely that the plaintiffs’ bar will still use the arguments contained in the AIs. .
The remaining question is whether this also serves as “writing on the wall” with respect to how the EEOC and the NLRB will address these issues, because under their current composition, they have been heading in the direction now rejected by the DOL. This may also be a sign that other initiatives of the former administration may be rolled-back by the new DOL leadership, but some of those actions will likely await until the other leadership positions within the DOL are filled. For instance, it is anticipated that the new administration will reverse course by no longer issuing formal “Wage and Hour Administrator Opinion Letters,” as well as cease from engaging in the relatively new practice of routinely assessing liquidated damages when resolving pre-suit investigations..
In sum, this withdrawal is a good sign that some of the initiatives of the prior administration which appear hostile to employers may be rolled-back, in part or in whole. However, many of those initiatives, depending on the agency, are still – at least according to those agencies – alive and well. Even if the administration softens the government’s views on these issues, the arguments underlying the AIs and related positions of other agencies will continue to be made by plaintiffs’ counsel in the courts, and these issues will – in the end – be resolved in the courts. Consequently, there is nothing in today’s development which should dramatically alter any employer’s operations in the immediate future.
Earlier this week, the California Supreme Court issued its opinion in Mendoza v. Nordstrom, clarifying California’s day of rest requirements. These requirements are set forth in California Labor Code sections 551 and 552. Section 551 provides that “every person employed in any occupation of labor is entitled to one day’s rest therefrom in seven,” and Section 552 prohibits employers from “causing their employees to work more than six days in seven.” However, Section 556 exempts employers from the duty to provide a day of rest “when the total hours of employment do not exceed 30 hours in any week or six hours in any one day thereof.” While these provisions do not appear too complicated or hard to follow at first blush, compliance has been challenged in wage and hour litigation, raising several questions of what these provisions technically mean. Questions that have arisen include the following:
What does it mean to “cause” an employee to work more than six days in seven? Is it enough to “allow” the employee to work seven days in a row, or must the employer require the employee to work more than six days in a row to be found in violation of the statute?
Is the day of rest required for any consecutive seven-day work period on a rolling basis, or is it measured based on the employer’s workweek (the definition of which varies from employer to employer and may not match a calendar week)?
Does the exemption from the day of rest requirement apply where the employee works 6 or less hours on at least one day during the workweek, or must the employee’s hours be 6 or less every day of the workweek (and no more than 30 for the entire week)?
The California Supreme Court agreed to answer these questions at the request of the Ninth Circuit in Mendoza v. Nordstrom. Here’s how the Court ruled on these issues:
A day of rest is guaranteed for each workweek. Periods of more than six consecutive days of work that stretch across more than one workweek are not per se prohibited.
The exemption for employees working shifts of six hours or less applies only to those who never exceed six hours of work on any day of the workweek. If on any one day an employee works more than six hours, a day of rest must be provided during that workweek, subject to whatever other exceptions might apply.
An employer causes its employee to go without a day of rest when it induces the employee to forgo rest to which he or she is entitled. An employer is not, however, forbidden from permitting or allowing an employee, fully apprised of the entitlement to rest, independently to choose not to take a day of rest.
With respect to question (1), the Court held that the seven-day period is based on the workweek as defined by the employer. Thus, if the employer uses a calendar week, then the seven-day period (during which there should be one day of rest) is based on each calendar week. If the employer defines its workweek differently, then the seven-day period designated by the employer controls. However, the one-day-of-rest-in-seven provision does not apply on a rolling basis to every consecutive seven-day period.
With respect to question (2), the Court held that if an employee works more than 6 hours on any day of the workweek, the day of rest provision applies. The Court rejected an interpretation that would exempt employers from providing a day of rest to an employee who works 6 hours or less on just one day of the workweek. Thus, if an employee’s hours exceed 6 on any day of the workweek, the day of rest requirement will apply. You now ask, “What if the employee does not work more than 30 hours per week?” Unfortunately, the Court chose not to clarify whether the day of rest exception for employees working no more than 30 hours per week or 6 hours per day should be read in the conjunctive or disjunctive (because the Ninth Circuit did not expressly ask the Court to answer this particular question). Thus, left for another day (and more litigation) is the issue of whether the day of rest requirement applies to an employee who works more than 6 hours one or two days of the workweek, but whose total hours for the workweek do not exceed 30. The conservative approach of course, it to provide the opportunity for a day of rest to any employee who works more than 30 hours per week and/or more than 6 hours in any one workday.
Finally, with respect to question (3), the Court held that an employer “causes” an employee to work more than six days in seven if it motivates or induces the employee to do so. This does not mean that the employer is liable if it simply permits an employee to work more than six days in seven. “[A]n employer‘s obligation is to apprise employees of their entitlement to a day of rest and thereafter to maintain absolute neutrality as to the exercise of that right. An employer may not encourage its employees to forgo rest or conceal the entitlement to rest, but is not liable simply because an employee chooses to work a seventh day.” Based on this interpretation, an employer generally should not affirmatively schedule or require employees to work more than six days in seven, but it is okay to offer employees the opportunity to work more than six days in seven, so long as they are apprised of their entitlement to one day’s rest each workweek and notified that they will not be penalized for choosing to take a day of rest (nor rewarded, apart from being paid their earned wages, for not taking a day of rest).
While this opinion clarified some issues relating to California’s day of rest requirements, it also left an important one unanswered. Specifically, California Labor Code section 554 provides an exception from the day of rest requirement where the “nature of the employment reasonably requires that the employee work seven or more consecutive days, if in each calendar month the employee receives days of rest equivalent to one day’s rest in seven.” There is a lack of guidance on when the “nature of the employment reasonably requires” seven or more consecutive days of work so as to allow accumulated rest days to be taken at a different time during the month, and today’s opinion does not shed light on that subject.
California employers are advised to review their scheduling and pay practices to ensure compliance with California’s day of rest requirements, as clarified by the California Supreme Court today. Employers are further reminded that California has special overtime compensation rules that apply to work performed on the seventh consecutive day of a workweek (time and one half for the first 8 hours of work performed on the seventh consecutive day of the workweek, and double time for hours in excess of 8).
On May 4, 2017, the Circuit Court for the City of St. Louis, Missouri lifted an injunction that had blocked a St. Louis City ordinance increasing the minimum wage for St. Louis City businesses. This action came after the Missouri Supreme Court ruled that state law did not prohibit the higher local minimum wage.
Now that the injunction has been lifted, the minimum wage for approximately 10,000 businesses in the City of St. Louis will increase to $10 per hour, effective tomorrow, May 5, 2017. The minimum wage will again increase to $11 per hour on January 1, 2018.
Employers that gross less than $500,000 per year, or have fewer than 15 employees, are exempt from the ordinance. Likewise, the ordinance does not apply to employees who work less than 20 hours per calendar year.
While there are legislative efforts underway in Jefferson City to reverse the outcome and avoid the issues raised by the Missouri Supreme Court, these efforts remain in preliminary stages and it is unknown whether they will be successful.
Additionally, the City’s informational website on the new minimum wage is located at www.stlouis-mo.gov/minimum-wage/.
by Frank Neuner
Spencer Fane LLP
The minimum salary to qualify for the traditional “white collar” overtime exemptions (administrative, executive, professional) in California has been higher than that required under federal law for many years. Because California’s exempt salary threshold is tied to the state minimum wage (an exempt employee generally must earn a salary of at least two times the state minimum wage), the salary floor goes up as California’s minimum wage goes up. The current minimum salary for exempt executive, administrative, or professional status in California is $43,680 per year (under the current minimum wage of $10.50).
As most employers know, last year the federal Department of Labor enacted regulations increasing the minimum salary to qualify for exempt status under the federal Fair Labor Standards Act (“FLSA”) to $47,476 per year. California employers would have had to comply with the higher salary threshold under the FLSA, except that the regulations were blocked by a Texas court late last year. The Texas court’s ruling is now on appeal, but at this point most WHDI members believe that the overtime regulations will not be reinstated — at least in current form — under the Trump administration.
California is now seeking to accomplish what the Obama administration could not accomplish at the federal level, by proposing to raise the minimum annual salary to qualify for exempt status in California to $47,472. AB 1565 (Thurmond) recently passed through the California Assembly’s Labor and Employment Committee. Under the bill, the minimum salary for exempt executive, administrative, or professional workers would be $47,472 or twice the state minimum wage, whichever is greater. As California’s minimum wage continues to rise, a salary of twice the state minimum wage eventually will be a number greater than $47,472. Until that time, $47,472 would be the minimum salary for exempt status in California if this bill is enacted. Our California WHDI members certainly believe that this bill has a reasonable chance of being passed and signed by Governor Brown, so employers with California employees should keep an eye on AB 1565.
Earlier this week, the U.S. House of Representatives passed, by a 229-197 margin, passed the Working Families Flexibility Act (HR 1180). The Act, if passed by the Senate and signed by the President, will introduce the concept of “compensatory time” (a/k/a “comp-time”) to the private sector workplace. Under the Fair Labor Standards Act, comp-time has existed in the public sector for many decades, but absent the passage of this Act, it is not permissible in the private sector.
The Comp-Time Concept
The concept of “comp-time” is essentially a way for employees to earn time off with pay in lieu of being paid time and one-half their regular hourly rates for hours worked over 40 during a workweek. This time off is earned at the rate of one and one-half hours for each hour of overtime worked. In the public sector, the FLSA allows employees to accrue 240 hours of comp-time (or 480 hours for public safety employees), to be used or paid per specific federal regulations. The system envisioned by this Act for the private sector is similar to its public sector counterpart, but different in some significant ways. These differences if they survive the passage of the bill may lessen the attractiveness of comp-time programs for private sector employers.
The Comp-Time Structure under the Working Families Flexibility Act
Under the Act as passed by the House, private sector employees could accrue up to 160 hours of comp-time.
- Only employees who have worked at least 1,000 hours during the 12-months preceding the beginning of the comp-time arrangement will be eligible to participate in a comp-time arrangement.
- Participation in a comp-time arrangement must be voluntary (i.e., the employer may not directly or indirectly intimidate, threaten or coerce employees to work under the comp-time arrangement) and initiated only pursuant a collective bargaining agreement, written agreement with the employee or other verifiable record maintained by the employer.
- Any accrued comp-time not used within a designated year must be cashed-out to the employee within 31 days after the year-end at the rate the employee is earning at the time of the payment or when the hours were earned, whichever is higher.
- During the year, the employee also may cash-out any accrued time, at the employee’s discretion.
- During the year, the employee must be allowed to use the comp-time accrued as requested, unless the time-off would unduly disrupt the employer’s operations.
- The employee may also opt-out of the comp-time arrangement at any time by giving the employer written notice. The employer may terminate the comp-time arrangement only by giving the employee 30 days’ prior written notice.
Good News or Bad News?
So is the good for business? It depends. Over the years – beginning in the Clinton era – similar bills have been introduced by both parties in Congress. The premise of the bills has been that allowing employees to earn and use comp-time may be more desirable than earning overtime pay, since the quid pro quo for losing some time with one’s family would be earning the ability to take off even more time at a later date, with pay, to be with one’s family.
To those against the bill, there’s a fear that employees will be coerced to accept comp-time as a condition for working overtime, or that the payment of earned overtime pay will be unfairly deferred. These fears do not appear to be very realistic given the structure of the Act.
Due to the employee’s right to cash-out accrued time at any time and rescind the comp-time arrangement, the advantages of employees working overtime for comp-time in lieu of being paid overtime pay are less clear for employers. Employers like comp-time because they can avoid the out-of-pocket cost of overtime while allowing employees to take off more time during slower times of the year. Under the Act, while these advantages still exist, they can readily lost based on the employee’s whim to cash-out their time and terminated the relationship. Also, by forcing employers to cash-out accrued time not used by the year-end, much of financial savings will be lost to employers while the employees will also lose their ability to bank time for use at later time.
These disadvantages do not exist in the public sector, and it’s unclear as to why the model for the private sector needs to differ than that used in the public sector. Nonetheless, this is the course currently being taken by Congress.
Prospects for Passage?
While the President has endorsed the bill as passed by the House, its future in the Senate is unclear. If the bill moves through committee and to the floor, it is likely that some changes will be made to gather the 60 vote margin needed to avoid a filibuster. If this happens, then what will be shaped in Conference Committee is even more unclear. Time will tell.
Impact on Other Comp-Time Plans
Employers should realize, though, that the concept only applies to overtime worked by non-exempt employees. Under the FLSA, the Act would not apply to permissible comp-time arrangements which may be in place with respect to hours worked beyond a normal workweek of 35 or 37.5 hours, but less than 40, for example, nor does it impact comp-time arrangements in place with respect to exempt employees. Further, as currently drafted, the Act would not apply to public sector employers in any respect.
Last week the California Court of Appeal issued a decision holding that employers must separately compensate commissioned (“inside sales”) employees for legally required rest breaks.
Under California law most employees are entitled to a paid 10-minute rest break for every work period of four hours, or major fraction thereof. California law also provides an overtime exemption for commissioned salespeople, but this “inside sales” exemption does not exempt those employees from minimum wage or meal and rest break requirements. (So-called “outside” salespeople are not subject to minimum wage, overtime, or meal/rest break requirements.)
Stoneledge Furniture compensated its retail sales associates according to a standard commission agreement. The agreement provided for sales associates to be compensated on a commission-only basis, but also guaranteed the associates a minimum income of $12.01 per hour. The minimum income was paid to sales associates as a “draw” against future commissions. If an associate earned commissions that met or exceeded the draw, the associate would be paid the commissions actually earned. But if an associate’s earned commissions were less than the draw, the associate would receive the minimum draw. The agreement did not provide separate compensation for any non-selling time, such as time spent for meetings, training, or rest breaks.
Two sales associates filed a class action against Stoneledge alleging the company failed to provide paid rest breaks. The trial court certified a class but later granted summary judgment to Stoneledge, finding that by guaranteeing sales associates a minimum income of $12.01 per hour, Stoneledge ensured they would be paid for all hours worked, including rest breaks.
The Court of Appeal reversed, holding that Stoneledge violated California law by not separately compensating sales associates for rest breaks. The court relied on the applicable wage order, which provides, “authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.” The court reasoned that since the minimum pay guarantee was a draw against commissions, it was simply an advance subject to clawback, or deduction, from future commissions. As a result, when a sales associate earned commissions that exceeded the draw, the only pay the associate received consisted of commissions, which did not account for rest breaks. The court held that to comply with California law, commission-based compensation plans must provide for separate pay for legally required rest breaks. In reaching its conclusion, the court relied on previous cases holding that piece-rate employees must be separately compensated for rest breaks, a requirement the state legislature later codified at California Labor Code section 226.2, which took effect in 2016.
Although this decision focused on rest breaks, its reasoning applies equally to other compensable yet “non-productive” time that is not accounted for and compensated under commission or piece-rate compensation plans. Employers with California-based commissioned (inside) salespeople, or employees paid on a piece-rate basis, should review their compensation plans to ensure those employees are separately paid at least the minimum wage for rest breaks and other non-productive yet compensable time, and that this pay does not operate as a “draw” subject to deduction. In other words, pay for all non-productive compensable time must be guaranteed and independent from compensation tied to sales commissions or piece-rate production.