California Court of Appeal Holds No Right to Jury Trial in PAGA Cases and Affirms Suitable Seating Win for Employer

On February 18, 2022, the California Court of Appeal, Second District, held there is no right to a jury trial in a Private Attorneys General Act (PAGA)  action for civil penalties.  In that same decision the Court of Appeal affirmed a trial court’s judgment in favor of Ralphs Grocery Company after a bench trial in which the trial court found the company’s decision not to provide seats to cashiers did not violate workplace suitable seating requirements under the applicable Industrial Wage Commission (IWC) wage order.

Background on PAGA

Under PAGA, the State of California deputizes “aggrieved employees” to sue employers to recover civil penalties as a mechanism to enforce provisions of the Labor Code.   An aggrieved employee is a person who was employed by the defendant employer and against whom one or more of the alleged Labor Code violations occurred.   Under PAGA, the plaintiff-employee pursues civil penalties for Labor Code violations the employer allegedly committed against all aggrieved employees (not just the plaintiff).   The employee who brings a PAGA action acts as an agent of the state enforcement agencies; therefore the action is considered a dispute between the employer and the state, as opposed to a suit for damages.   If the employee prevails in the litigation, 75 percent of the civil penalties go to the state, and the remaining 25 percent go to the aggrieved employees.   Prevailing PAGA plaintiffs are also entitled to recover reasonable attorneys’ fees and costs.

California’s “Suitable Seating” Requirements

For decades, California’s IWC wage orders have required most employers to provide “suitable seats” to their employees “when the nature of the work reasonably permits the use of seats.”   When the nature of employees’ work requires standing and the employees are not actively engaged in those duties, the wage orders require employers to provide their employees seats when using seats “does not interfere with the performance of their duties.” 

These “suitable seating” requirements were little noticed until after the enactment of PAGA in 2004.  Although the suitable seating requirement does not appear within the Labor Code itself, section 1198 of the Labor Code makes it unlawful to employ any employee under conditions prohibited by an IWC wage order. The result is that a violation of any IWC wage order is also a violation of Section 1198, which gives rise to a PAGA claim. Under PAGA, the civil penalty for a violation of Section 1198 is $100 for each aggrieved employee per pay period for the initial violation, and $200 for each aggrieved employee per pay period for each subsequent violation.  It doesn’t require a calculator to see how PAGA provided the financial incentive behind the explosive growth of suitable seating litigation.

LaFace v. Ralphs Grocery Co.

Ralphs Grocery Company employed Jill LaFace as a cashier.   She brought a PAGA action against Ralphs on behalf of herself and other current and former Ralphs cashiers, alleging Ralphs violated an IWC wage order requiring the company to provide suitable seating when the nature of the work reasonably permitted the use of seats, or, for a job where standing was required, to provide seating for employees to use when their use did not interfere with their duties.

The trial court set a jury trial but later granted Ralphs’s motion for a bench trial after finding PAGA actions are equitable in nature and are therefore not triable to a jury.   After a bench trial the trial court found Ralphs had not violated the wage order because the evidence showed even when cashiers were not functioning in their primary roles as cashiers, they were required to move about the store fulfilling other tasks.   LaFace appealed the judgment, contending she was entitled to a jury trial on her PAGA claim.

On appeal, LaFace and Ralphs agreed that PAGA itself does not confer a right to a jury trial, so the Court of Appeal limited its inquiry to whether the California Constitution’s guarantee of a right to a jury trial applies to PAGA actions.   Surveying the line of cases examining the reach of the state constitutional right to a jury trial, the Court of Appeal determined the issue turned on whether a PAGA action is of “like nature” or “of the same class as a pre-1850 common law right of action” that the constitutional provision was designed to protect.

Examining the nature of a PAGA action, the Court of Appeal concluded there is no right to a jury trial in PAGA actions for four reasons.  First, notwithstanding the fact that a PAGA action’s designated forum is the trial courts which technically makes it a civil action, PAGA plaintiffs act as mere proxies for the state, bringing on behalf of the state what would otherwise be an administrative regulatory enforcement action.   Second, PAGA’s penalty provisions are subject to a variety of equitable factors that call for a qualitative evaluation and the weighing of a variety of factors that is typically undertaken by a court, not a jury.   Third, the Labor Code proscribes a wide range of conduct that was unknown at common law, including suitable seating requirements among others.   Fourth, although the penalty assessment portion of a PAGA action could be severed from the liability portion, with a jury deciding liability and the court deciding penalties, as noted above many PAGA violations are based on newly created rights that did not exist at common law, with the result that a PAGA action typically does not have a pre-1850 analog that would call for the right to a jury trial under the California Constitution.

After addressing the constitutional issue, the Court of Appeal next turned to the merits of LaFace’s suitable seating claim.  On appeal, LaFace did not argue the nature of her cashier duties reasonably permitted the use of seats; her appeal was limited to her contention that she was entitled to a seat during the brief periods of time when she was on the clock but not checking out customers.  LaFace and Ralphs generally agreed the evidence, including the testimony of longtime cashiers and expert witnesses, showed that when cashiers were not checking out customers, Ralphs expected them to be performing other tasks that required standing, to include cleaning, restocking, and looking for customers ready to check out.  

The parties disagreed, however, whether Ralphs’s expectation about these secondary tasks required Ralphs to provide seats.   LaFace contended that notwithstanding Ralphs’ expectation that cashiers would perform these secondary tasks when they were not checking out customers, the “reality” was that cashiers would often remain at their checkstands, talking to other employees or using their mobile phones.   Ralphs argued that because cashiers were expected to be active and busy at all times, no seating was required, and “rogue employees” should not be able to create an entitlement to seats by shirking their job duties. The Court of Appeal sided with Ralphs and affirmed the trial court’s judgment, holding an objective inquiry into whether using a seat would interfere with an employee’s performance of job duties properly takes into account an employer’s reasonable expectations regarding customer service and acknowledges an employer’s role in setting job duties.   “An expectation that employees work while on the clock, rather than look at their phones or do nothing, seems objectively reasonable.”

Conclusion

While the bulk of suitable seating litigation has been brought by cashiers and other customer service employees who deal directly with the public, any California employer can be the target of a suitable seating claim.  Employers are therefore well advised to periodically review job duties and provide suitable seats where warranted.  When an employer concludes a seat is not warranted by an employee’s job duties, those duties should be clearly defined to make it clear an employee should not be sitting while on the clock.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

New California Law Classifies Intentional Wage Theft as a Felony

On September 27, 2021, Governor Gavin Newsom signed Assembly Bill No. 1003 (“AB 1003”) into law, adding Section 487m to the California Penal Code, which creates a new type of felony for intentional “wage theft.”  The law takes effect on January 1, 2022.

While theft is commonly thought of as an intentional crime, the California Labor Commissioner defines “wage theft” much more broadly, to include not only egregious intentional conduct such as forcing employees to work off-the-clock, but also violations that might result from simple mistakes, such as failing to pay reporting time pay or failing to correctly calculate the overtime due on a commission. 

The California Labor Code attempts to discourage wage theft by imposing criminal penalties on employers that violate provisions regulating payment of wages.  Running afoul of dozens of the most commonly-violated wage provisions of the Labor Code may result in a misdemeanor offense, including provisions such as:

  • Labor Code section 204, which requires timely payment of wages twice a month;
  • Labor Code section 206.5, which prohibits releasing claims for unpaid wages unless payment of the wages has been made;  
  • Labor Code section 207, which requires employers place employees on notice of regular pay days and the time and place of payment;  
  • Labor Code section 216, which prohibits employers from failing to pay wages owed to an employee or falsely denying the amount due after the employee has made a demand for payment;  and
  • Labor Code section 226.6, which requires employers provide accurate itemized wage statements to employees.  

While Labor Code wage theft statutes classify violations as misdemeanors, the new law goes one step further by creating a new felony offense under the Penal Code.  Specifically, under the new law, the intentional theft of employee wages in an amount greater than $950 from a single employee or $2,350 from two or more employees within a consecutive twelve-month period is considered “grand theft” under California Penal Code section 487m.   Importantly, the theft must be intentional to be actionable.   Accordingly, inadvertent mistakes or errors are not contemplated by the new code section.  Of note, the law also classifies independent contractors as “employees” for purposes of the offense, and includes individuals or entities hiring independent contractors as “employers.”  

Employers (and entities that engage independent contractors) that violate the new law risk serious consequences.  Prosecutors have the authority to charge those responsible for intentional wage theft violations with a misdemeanor or felony, either of which may be punishable by imprisonment (up to one year for a misdemeanor, and 16 months, or 2 or 3 years for a felony), a specified fine, or both a fine and imprisonment.

AB 1003 is a notable escalation in efforts to classify disputes over wages as serious criminal conduct.  The author of the bill, Assemblywoman Lorena Gonzales, confirmed the intent of AB 1003 was to send a clear message to employers that intentionally stealing wages from employees is criminal and can result in imprisonment.    

It is not yet clear how “intentional wage theft” will be interpreted and applied under the new law once it goes into effect next year.  Employers should remain vigilant about compliance with wage and hour laws by regularly reviewing and updating their compensation policies and practices for employees and independent contractors, and making adjustments where needed.  Employers should also take steps to ensure that hourly employees and managers are appropriately trained on wage and hour compliance and appropriately disciplined for violations. 

DOL Rescinds Trump-Era Joint Employer Rule: Employers Beware!

On July 29, the Department of Labor (DOL) announced a final rule rescinding the Trump Administration’s Joint Employer rule. This move clearly reestablishes the DOL’s quest to broaden the scope of potential liability for businesses under the Fair Labor Standards Act (FLSA) for the wrongs of their subcontractors, franchisees and other entities. This move is consistent with the Biden Administration’s trend to reinstate the measures taken under the FLSA by the Obama Administration, including those taken to broaden the scope of who could be deemed joint employers under the FLSA. The rule promulgated by the Trump Administration had replaced an Administrator’s Guidance issued by the Wage and Hour Administrator of the Obama Administration, David Weil. Consistent with this trend, David Weil has been nominated to serve the current administration in the same role he held during the Obama Administration.

Many members of the business community saw the Trump-era rule as providing clarity on whether an entity constitutes a joint employer under the FLSA. The Biden DOL, on the other hand, characterized the rescinded rule as “contrary to statutory language and Congressional intent,” and contrary to the Guidance issued during the Obama Administration. That Guidance though was highly criticized by the business community and the courts as being too broad. The objective of that guidance was to make it easier to hold contracting employers and franchisors liable for the wrongs of employers “lower on the ladder,” thereby finding “deeper pockets” liable and facilitating larger class actions.  

The Rescinded Rule Lived an Interesting Life

Under the rescinded rule, an employer would be deemed to be a joint employer with the “direct employer” if, with respect to the employees of the direct employer, it:

(i)     Hires or fires the workers;

(ii)    Supervises and controls the workers’ work schedules or conditions of employment to a substantial degree;

(iii)    Determines the employees’ rates and methods of pay; and

(iv)    Maintains the employees’ employment records.

The rescinded rule provided further clarity by eliminating from the analysis such factors as whether the relationship was due to a franchise agreement, whether the franchisor provided sample handbooks to franchisees, whether the contractor’s employees worked on the contracting entity’s premises, whether the employees participated in association health or retirement plans, or whether the business required contractors to conform to minimum wage, workplace safety, sexual harassment and other policies. The current DOL believes the prior administration’s focus on control was too narrow.

The prior rule went into effect in March 2020, but it was enjoined by a federal court in New York in September 2020 due to a belief that the rule was inconsistent with the statute. Under the prior administration, the DOL appealed that ruling to the Court of Appeals and filed its brief shortly before the current administration took office. Rather than being placed in the awkward position of arguing contrary to the position taken in January as the appeal progressed, the DOL asked the court to hold the case in abeyance as the new administration was contemplating a change or rescission to the rule before the court. The court declined to do so. Now that the DOL is formally rescinding the rule, though, it is likely that the DOL will seek to have the case dismissed. 

Employers Need to Evaluate their Potential Exposure as Joint Employers

Despite the DOL’s assertions that rescinding the rule will have minimal effect on businesses since it “was not adopted by most jurisdictions,” many employers will be affected by the rescission. 

The DOL’s return to an “economic realities” in lieu of a “control” analysis foreshadows an increased effort by the DOL and employees to bring actions for unpaid wages under the FLSA against entities not typically considered to be employers. Employers, especially those who operate under a franchise model or engage many contractors, should therefore review their contracts and employment structures to better position themselves for responding to the scrutiny likely to be undertaken by the DOL and plaintiffs’ attorneys in the coming years. Contracts and basic practices which have been in place for decades may need to be revisited and revised.

Finally, employers need to stay alert to further changes to joint employment. While the DOL has not announced any further rulemaking plans, it did leave that door open if it determines that “alternative regulatory or subregulatory guidance is appropriate.”  Will that be vis-à-vis new regulations or a restated Administrator’s Guidance? Time will tell, but for now, it appears that at best employers are required to hold their relationships up to the patch-work of standards varying by circuit court jurisdictions that are otherwise in place, but which the current administration arguably construes more broadly than the courts have typically done in the past. For these reasons, we should expect that the DOL will endeavor to tilt the scales more towards its current interpretations through some formal action.

Lessening Liability for Unpaid Overtime Pay Claims: The Best Defense is a Good Offense

The Problem

The Biden DOL is primed to aggressively pursue errors made with respect to the payment of overtime compensation as required by the Fair Labor Standards Act (FLSA). While doing so, it’s also primed to assert claims for liquidated damages whenever it finds errors, even for errors that were inadvertent, and even for those that may seem nominal. These liquidated damages are equal to the amount of unpaid overtime its investigators deem due.

Liquidated damages are also generally due if an employer is found liable for unpaid overtime in any FLSA lawsuit filed by employees on either an individual or a collective class basis. When such lawsuits are brought, the employer may also be liable for the plaintiffs’ attorneys’ fees. These fees are often much greater than the claim for unpaid overtime and serve to overshadow the merits of the case and interfere with the ability to settle.

The Means to Address This Exposure

Prudent employers can take action to either eliminate or greatly reduce their exposure to unpaid overtime and liquidated damages claims. How? The answer is one word: “audit.”

A skillfully done audit can identify areas that typically trigger these inadvertent errors. The audit can identify and even correct concerns with respect to errors in:

  • identifying hours that are compensable under the Act (such as pre- and post-shift activities, rest and meal breaks, travel, and medical testing and treatment);
  • determining the correct regular rate of pay for calculating overtime pay (such as properly accounting for bonuses, commissions, longevity premiums, shift premiums, call-in pay, etc.); and
  • classifying employees as exempt from overtime or as independent contractors.

Importantly, a mere audit may not suffice. The audit must be done and documented in a way to establish that the employer took its obligations under the Act seriously, conformed to the findings of the audit, and did so in good faith. This is key because if such an audit is relied upon, but the DOL or a court concludes that a violation on the areas audited still exists, the employer may be able to assert a “good faith” defense and reduce or eliminate its exposure to liquidated damages, and even reduce a potential look-back period for liability for unpaid time from three to two years. Such a position can also greatly benefit employers as they try to settle FLSA claims, as a well-done audit can serve to greatly lower the potential value of the claim.

As stated above, the audit must be skillfully done; not all audits are created equal. Often, we recommend that the audit be overseen, if not done, by an attorney who is well-versed in the FLSA. The auditor can help assure that the audit serves to support the good faith defense, if needed, and a lot of that may depend on the auditor’s expertise and reputation. Further, the auditor can counsel as to suggested adjustments. Last, but not least, if the auditor is an attorney, or the audit is being conducted through counsel, attorneys can provide assistance in maintaining the confidentiality of the audit’s findings, if desired, or advising the company regarding the waiver of any attorney-client privilege, as may be feasible.

Next Steps

Undertaking the audit sooner versus later cannot be overemphasized. If the project is put off and a DOL audit or lawsuit is filed, the advantages discussed above will be lost. It will be too late, and, as a result, otherwise avoidable liability could be triggered, liquidated damages will likely be in the mix, and the cost of the other side’s attorneys will impair the ability to negotiate a reasonable resolution.

If you have any questions regarding these issues or want to discuss the possibility of conducting an audit, contact an attorney skilled in this area of the law, including any members of the WHDI.

California Supreme Court: One Hour California Meal and Rest Period Penalty Must Include Commissions and Non-Discretionary Bonuses

by Corrie Klekowski and Fred Plevin
Paul, Plevin, Sullivan & Connaughton

On Thursday, the California Supreme Court issued its decision in Ferra v. Loews Hollywood Hotel, LLC, in which it ruled that the one hour of pay employers are required to provide employees for non-compliance with California’s meal and rest period requirements must be based on the same “regular rate of pay” (RROP) calculation used in calculating overtime pay.  This means that employers must account for commissions and non-discretionary bonuses when calculating the amount of a meal or rest period penalty paid to employees. 

The Court ruled that its decision applies retroactively, so employers may be liable for underpaying hourly employees who received a meal or rest period penalty in a workweek for which they received commissions or non-discretionary payments if the meal/rest period penalty was not based on the RROP calculation.

Details

Jessica Ferra was a bartender at the Loews Hollywood Hotel.  She received quarterly incentive payments.  On occasion, Loews paid her a penalty of one hour of pay for a missed, late or short meal or rest period.  Loews calculated the one-hour meal/rest period penalty at Ferra’s base hourly rate.  Ferra filed a class action against Loews in 2015, alleging that Loews failed to comply with California law by omitting the incentive payments from the one hour premium pay she received for noncompliant meal or rest breaks.  

The governing statute, Labor Code 227.6(c), specifies that “the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.”  Ferra argued that “regular rate of compensation” was the same as “regular rate of pay,” which is a well-known concept in wage and hour law used for calculating overtime pay.[1]  Specifically, under the RROP concept, employers must include commissions and other non-discretionary payments when calculating overtime pay for employees.[2]

Both the trial court and the California Court of Appeal ruled in favor of Loews, holding that the because the Legislature did not use the term “regular rate of pay” in the statute, that concept did not apply to the meal/rest period pay.  The Supreme Court, however, disagreed and held that “regular rate of compensation” (the term used in Section 226.7) and “regular rate of pay” were synonymous.  In reaching this conclusion, the Court turned aside Loews’ reliance on accepted “canons” of statutory interpretation, characterizing them as “merely aids” and “guidelines subject to exceptions.”  The Court also relied on the “remedial purpose” of California’s Labor Code and its guidance that California’s labor laws are to be “liberally construed in favor of worker protection.”

Finally, the Court rejected Loews’ argument that its decision should apply only prospectively.  Loews argued that it, like many other employers, had reasonably interpreted Section 227.6 as allowing for the premium pay to be based on an employee’s straight hourly rate and applying the decision retroactively would be unfair.  The Court disagreed, concluding that this was a case of statutory interpretation, and therefore, its ruling should be retroactive.  It also rejected Loews’ pleas that retroactive application of the Court’s decision would expose employers to “millions” in liability, observing it was “not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.”

What This Means

Like Loews, many California employers have paid meal/rest period penalties based on employees’ straight time hourly rate.  The Loews decision means that such employers may have liability to employees who received a non-discretionary payment in the same workweek as they received meal/rest period premium pay.  The period of exposure could be up to four years under California’s unfair business practice statute.  Because the incremental difference in the penalties is likely to be small, the total wages owed, even to a large number of employees, may be relatively minor.  However, the liability could expose employers to class action and PAGA claims for attorneys’ fees and other statutory and civil penalties based on an underlying violation of Section 226.7.  We expect to see a proliferation of these claims being filed or added to pending class actions and PAGA lawsuits.

Employers should immediately implement changes to ensure that any meal/rest period penalties paid in the future are calculated based on the employee’s RROP.

In addition, employers may want to analyze options for paying employees to address recalculations of past meal/rest period penalties based on the RROP.  Whether this is a viable option for employers will depend on a number of factors, including the availability of the information needed to identify eligible employees and to calculate the amount owed.  If you have questions about this decision or would like guidance on analyzing your options, please feel free to contact one of the authors or any PPSC attorney.


[1] Calculating the RROP can be complicated.  But, generally for hourly employees, the RROP for a workweek is calculated by determining the total regular pay—including regular wages and other forms of “remuneration”—divided by the total number of hours worked.  For example, an employee with a pay rate of $15 per hour that worked 40 hours, and received a $20 production bonus, would have a $15.50 RROP:

(40 hours x $15/hr) + $20$620
————————————– = ————- = $15.50/hr (correct regular rate)
40 hours40 hours

So, if this employee had a non-compliant meal period in this workweek, under the Loews decision, they should be paid a $15.50 penalty, not a $15.00 penalty.  Where an employee works overtime in the same period that the meal premium is due, the formula would be even more complex.

[2] The term “non-discretionary” for purposes of the RROP rule is defined in state and federal regulations and administrative guidance.  Simply stated, a payment is “discretionary” only if both the fact that the payment is to be made and the amount of the payment are determined at the sole discretion of the employer, and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

Dismissing Non-Willful Claims Under the FLSA – the Second Circuit Rules on an Issue of First Impression

Everybody knows that the statute of limitations for claims under the Fair Labor Standards Act (FLSA) is two years, unless the claim is for a willful FLSA violation, in which case the statute of limitations is three years. Okay, maybe everybody doesn’t know that—but attorneys who regularly bring or defend wage-and-hour claims certainly do (and if you’re reading this blog, you probably do as well). So an FLSA claim filed in 2021 based on allegations from 2017 can be easily dismissed at the outset of litigation, because such a claim is clearly beyond the longest possible statute of limitations of three years. Now, consider this: what if a plaintiff files a claim in May 2021, alleging an FLSA violation from June 2018? In that case, the only way the plaintiff can bring a valid FLSA claim is if the claim is willful, because then the plaintiff could utilize the three-year statute of limitations. But this raises two questions for the court:

  1. Can the court even consider an employer’s motion to dismiss a plaintiff’s FLSA claim on the basis that the plaintiff has not sufficiently pled willfulness?
  2. If the court can consider such a motion to dismiss, what standard do the plaintiff’s allegations have to meet in order to survive?

Believe it or not, before April 27, 2021, the Second Circuit had not definitively considered either question, and indeed is only the second Court of Appeals to do so.

On a motion to dismiss in federal court, the judge generally cannot consider any information outside of the plaintiff’s complaint. There are some exceptions, such as if the plaintiff submits documents with the complaint, or if the complaint cites specific documents. Likewise, the judge also must generally consider allegations to be true when deciding a motion to dismiss, but there are limits to this rule as well. The judge is not required to accept conclusory allegations, such as those that merely parrot legal elements or conclusions without providing factual support (e.g. “the defendant violated the FLSA”). And of the remaining, non-conclusory allegations, the judge’s task is to determine whether those allegations state a plausible claim of relief—not just that the plaintiff prevailing is possible, no matter how remote the possibility, but that if the plaintiff’s allegations are true, it is reasonable to conclude that a legal violation occurred.

And now we introduce FLSA claims into this mix. A plaintiff alleging that an FLSA claim was willful has the burden to prove willfulness—and yet if an employer raises the issue of the statute of limitations, that is an affirmative defense, and therefore the employer’s burden to prove. So on a motion to dismiss a willful FLSA claim, does a plaintiff have to show that he or she plausibly alleged willfulness, or (1) should the court not even consider the issue because it’s an issue of a statute of limitations defense, and (2) even if it does consider the issue, does a plaintiff have to allege willfulness with plausibility?

In the case of Whiteside v. Hover-Davis, the plaintiff argued that the court could not consider the issue, because the employer was raising an affirmative statute of limitations defense; that if the court could consider the issue, a plaintiff could just merely allege willfulness without pleading it plausibly; and, even if the court required pleading willfulness plausibly, the plaintiff had done so. In contrast, the employer argued that both the legislative history and Supreme Court jurisprudence of the FLSA demonstrated that the statute of limitations for FLSA claims was two years, with the limited exception of three years for willfulness. As a result, if a claim on the face of the complaint was outside the two-year window, the court could consider the issue on a motion to dismiss because willfulness was the plaintiff’s pleading burden, and because it was plaintiff’s pleading burden, it must be plead with plausibility. And finally, that the plaintiff in Whiteside had not plead willfulness with plausibility.

In a 2-1 decision, the Second Circuit held for the employer, upholding the dismissal of the plaintiff’s claim. In her opinion, Chief Judge Livingston cited the Supreme Court’s decision in McLaughlin v. Richland Shoe, 486 U.S. 128 (1988), stating that Congress intended to create a “significant distinction between ordinary violations and willful violations” of the FLSA (emphasis in original). As a result, not only can a court consider such claims on a motion to dismiss, but such claims must be pled with plausibility, not generally. (The Second Circuit stated that the other Court of Appeals to consider the question, the Tenth Circuit, had incorrectly found that the mere allegation of willfulness is sufficient for the three-year statute of limitations to apply.) The court went on to find that the plaintiff—who alleged that he had done non-exempt tasks for a number of years, but had not alleged that he had ever complained to a supervisor, and had not alleged that the employer had ever changed his salary or said anything to him that suggested any awareness of wrongdoing—had not made a plausible allegation of willfulness, and thus could not utilize the three-year statute of limitations. While Judge Chin dissented, he did not opine on the court’s ruling that willful FLSA claims must be plausibly pled; he only argued that he found the plaintiff’s allegations of willfulness to be plausible.
In short, in the Second Circuit, it is now settled that claims of willful FLSA violations must plead willfulness plausibility to enjoy a three-year statute of limitations on a motion to dismiss.

Michael D. Billok authored this article, and represented Hover-Davis in Whiteside v. Hover-Davis. He is a member (partner) in the Labor & Employment practice at Bond, Schoeneck & King, PLLC, and a member of the Wage & Hour Defense Institute, an organization of attorneys who represent employers in wage and hour matters.

New California Supplemental Paid Sick Leave Law Takes Effect March 29

On Friday, Governor Newsom signed SB 95, which requires California employers with 25 or more employees to provide employees with a brand new bank of supplemental paid sick leave for COVID-related reasons (SPSL), including to employees seeking vaccination appointments or recovering from vaccination side-effects. The law requires employers to provide the SPSL to employees retroactively back to January 1, 2021.

California’s new mandate is unfunded, placing all of the burden on employers. However, in a bit of good news, the recently enacted $1.9 trillion American Rescue Plan of 2021 (ARPA) extended the federal payroll tax credits originally put in place by the Families First Coronavirus Response Act (FFCRA) through September 30, 2021. This means that, in many cases, California-mandated SPSL provided by employers with fewer than 500 employees will qualify for federal payroll tax credits. However, the rules regarding tax credits are complex – employers should consult their tax professionals to see if the credits may apply.

The new SPSL law goes into March 29, 2021, so employers have little time to provide employees with notice of their rights under the law, ensure compliant policies and practices, and work with their payroll providers to ensure that their paystubs include the necessary new information.

What does SB 95 require?

SB 95, which adds section 248.2 and 248.3 to the California Labor Code, requires employers with 25 or more employees to provide SPSL for COVID-related reasons (listed below). This entitlement is over and above employees’ regular paid sick leave, PTO, or vacation leave banks.  SPSL must be available for immediate use by the employee, upon oral or written request. An employee may determine how many hours of SPSL to use, up to the total number of hours to which the employee is entitled.

How much leave are employees entitled to?

Full-time employees are entitled to 80 hours of SPSL. Part-time employees who have a normal weekly schedule are entitled to SPSL based on the total number of hours the employee is normally scheduled to work over two weeks. Variable hour employees are entitled to SPSL based on an average hours calculation defined in the new law.

Employers cannot require the employee to use any other paid or unpaid leave, paid time off, or vacation time provided before the employee uses SPSL or in lieu of SPSL. The law clarifies that SPSL and leave provided under the Cal/OSHA emergency standards may run concurrently.

How will employees know about SPSL and how much leave they have available?

Each employee’s SPSL balance must be listed on the employee’s wage statement or a separate writing provided with the employee’s pay. The law provides only a very short grace period on implementing the pay stub requirement: employers have until the next full pay period after March 29, 2021, which is the effective date of the new law.

For variable hour employees, the employer may prepare an initial calculation of SPSL available and indicate “(variable)” next to that calculation. However, the employer must provide an updated calculation when a variable hour employee seeks to use SPSL or requests the calculation.

The employer must also post a notice to employees of their SPSL rights. The California Labor Commissioner will provide a model notice sometime this week. Notices may be posted electronically for employees who do not frequent the workplace.

What can SPSL be used for?

Employees may use SPSL if they are unable to work or telework for any of the following reasons:

  1. the employee is under a COVID-19 quarantine or isolation period based on a governmental order or guidelines; 
  2. the employee is under self-quarantine for COVID-19 concerns based on advice from a health care provider;
  3. the employee is receiving a COVID-19 vaccine;
  4. the employee is experiencing COVID-19 vaccine side-effects;
  5. the employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  6. the employee is caring for a family member who is subject to an order or guidelines described in subparagraph (1) or who has been advised to self-quarantine, as described in subparagraph (2);
  7. the employee is caring for a child whose school or place of care is closed or otherwise unavailable for reasons related to COVID-19 on the premises.

How much are employees paid for SPSL?

As is the case with regular California paid sick leave, nonexempt employees must be paid SPSL at the employee’s “regular rate of pay” (a term of art that includes all forms of remuneration the employee receives such as shift differentials and non-discretionary bonuses) or via a calculation made by dividing the covered employee’s total wages, not including overtime premium pay, by the employee’s total hours worked in the full pay periods of the prior 90 days of employment. 

Exempt employees’ SPSL should be paid in the same manner as the employer calculates wages for other forms of paid leave time.

However, employers are not required to pay more than $511 per day or $5,110 in the aggregate to an employee for SPSL unless federal legislation is enacted that increases the caps included in the FFCRA, in which case the new federal dollar amount caps would apply.

What is the practical effect of the law applying retroactively to January 1, 2021?

As noted above, SB 95 applies retroactively to January 1, 2021. This presents a significant practical challenge (and cost) for employers. 

For any time an employee took off between January 1, 2021 and March 29, 2021 for a qualifying reason under the new law (see above):

  • unless the employee has already received compensation in an amount equal to or greater than the amount of compensation required by the SPSL law, then upon the oral or written request of the employee, the employer must provide the employee with a retroactive payment that provides for such compensation;
  • this retroactive payment must be paid on or before the payday for the next full pay period after the oral or written request of the employee; and
  • the retroactive payment must be reflected on the employee’s wage statement as retroactive SPSL pay.

The law does not directly address what happens if the employee used “regular” paid sick leave, PTO, vacation leave, or unpaid leave after January 1, 2021, but we expect employees will request that their leave banks be credited and replenished for any such time previously debited. Employers should have internal processes/forms ready to process such requests. 

When does the new SPSL leave expire?

This new law is in effect through September 30, 2021, except that an employee taking SPSL at the time of the expiration must be permitted to take the full amount of SPSL to which the employee otherwise would have been entitled to under the new law. For example, if an employee starts SPSL on September 30, 2021, she may continue it into October to complete her leave.

Anything else I should know about the new SPSL law?

The new SPSL incorporates many of the provisions of California’s regular paid sick leave laws. For example, the recordkeeping, wage statement, pay calculation, and anti-interference/discrimination/retaliation provisions all apply to SPSL.

In addition, because SPSL is codified in the Labor Code, violations of the SPSL law may be the basis for a Private Attorneys General Act of 2004 (PAGA) representative action.

How does the new federal American Rescue Plan affect implementation of the SPSL?

The federal mandate for employers with fewer than 500 employees (“small employers”) to provide FFCRA leave expired on December 31, 2020. However, shortly before its expiration, Congress extended the federal payroll tax credits for small employers who continued to provide leave based on FFCRA eligibility requirements and in accordance with FFCRA rules, through March 31, 2021. The ARPA has both extended the FFCRA payroll tax credits through September 30, 2021, and expanded the payroll tax credit eligibility to leaves taken for additional reasons covered by SB 95 (e.g., vaccination-related qualifying reasons). This means that small California employers may be entitled to claim federal payroll tax credits to cover most SPSL provided to their employees.

Navigating the tax credits issue is complicated because the federal ARPA and California’s SPSL are not exactly aligned, eligibility for federal payroll tax credits is limited by a number of factors including company size and leave plans offered, and the tax credits will not necessarily cover 100% of the cost of SPSL provided to employees.

Ninth Circuit Decision Requires California Employers to Re-Examine Expense Reimbursement Procedures

Earlier this month, on February 8, the Ninth Circuit Court of Appeals held that a California employer’s per diem expense reimbursement payments functioned as compensation for work rather than business expense reimbursements. As a result, the employer was required to factor those per diem payments into employees’ “regular rate of pay.” 

An employee’s “regular rate of pay” is used to calculate overtime under the FLSA and California Labor Code. It is also used to calculate double-time, sick leave, and reporting time pay in California. The decision, if adopted by other courts, could have devastating consequences for California employers with flat-sum and/or automatic expense reimbursement procedures.

The Details of the Case: Clarke v. AMN Services

AMN is a healthcare staffing company that places hourly-paid clinicians on short-term assignments. Each week AMN paid traveling clinicians a per diem amount to reimburse them for the cost of meals, incidentals, and housing while working over 50 miles away from their homes. AMN did not report these payments as wages and classified them as tax-exempt expense reimbursements. 

AMN used a number of factors to calculate the per diem payment, including the extent to which clinicians worked their scheduled shifts. Notably, under the per diem policy, the payments could decrease if clinicians worked less than their scheduled shifts, and work hours in excess of those scheduled could be “banked” and used to “offset” missed or incomplete shifts. Interestingly, AMN provided “local” clinicians per diem payments under the same policy, but such payments were reported as taxable wages.  It was not clear why AMN took a different position with the local clinicians

The Ninth Circuit determined that these characteristics indicate that the per diem payments to traveling clinicians functioned as compensation for hours worked, and not expense reimbursements. The court relied heavily on AMN’s decision to pay both local and traveling clinicians under the same per diem policy but treat payments to local clinicians as wages. The Court also noted that “AMN offers no explanation for why ‘banked hours’ should effect” per diem payments, and found “the only reason to consider ‘banked hours’ in calculating” per diems is to compensate clinicians for hours worked.

Potential Implications for California Employers

Many California employers implement a business expense reimbursement policy aiming to fully reimburse employees for all expenses they incur, while (1) minimizing administrative burdens and expenses, and/or (2) avoiding the creation of preferential work assignments and a perverse incentive for employees to “incur” expenses. 

The process of submitting, reviewing and processing expense reimbursements is cumbersome, especially for employees who work in the field and/or travel frequently.  For this reason, some employers adopt a flat-sum reimbursement policy in which the amounts paid are at least partially fixed, such as AMN’s per diem policy. They often issue these payments automatically, without obtaining documentation of the expenses from employees. This issue is especially important during the COVID-19 pandemic because California employers often use fixed expense reimbursement amounts for computer and other expenses for remote workers. 

The Clarke decision should concern any employer with a business expense policy that includes such flat-sum or automatic reimbursement payments. It is unclear whether or not the holding of the Clarke case will be extended in other cases or whether it will be distinguished based on the unique facts of the case and inconsistencies of AMN’s implementation (i.e., that AMN was paying local clinicians a per diem, but treating it as part of wages under the same policy). 

Significant liability can arise if reimbursement payments, in whole or in part, are deemed to function as wages that must be factored into the regular rate of pay. In addition, plaintiffs could also argue that if such payments were actually “wages” then they were not properly reimbursed for their business expenses under section 2802 of the California Labor Code. As a result of this decision, California employers should carefully review any flat-sum or automatic reimbursement policies and procedures to ensure that they do not present any of the dangers illustrated in the Clarke decision.  In addition, the scope of this decision remains unclear.  Therefore, employers in other states particularly those employers with employees in states covered by the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington), should also take a close look at their per diem policies in conjunction with the Ninth Circuit holding in Clarke

New 2021 California Pay Equity Reporting Requirements Explained

A few weeks ago, California’s Pay Data Reporting Act, went into place.  This new Act requires California private employers with 100 or more employees that are required to file an annual EEO-1 report with the EEOC to also submit a “pay data report” to the California Department of Fair Employment & Housing (“DFEH”).  Earlier this week, the DFEH released new reference materials that provide guidance on how to prepare the pay data report and submit it to DFEH, including a user guide, an excel template and a CSV example (plain text file).  California employers that are subject to the reporting act must submit the requisite pay data report to the DFEH (by way of an online portal) by March 31 this year and every subsequent year.  The portal will be operational by February 16.  In addition, the DFEH maintains and updates a Frequently Asked Questions resource page that explains the substantive requirements of the act and how to satisfy them.  Links to the FAQs, user guide, portal, and the samples are here.  

There have been many changes in California wage and hour law and leave laws over the last year.  If you have employees in California, we encourage you to reach out to one of our California based members at Paul Plevin (So Cal) or CDF Labor Law (Nor Cal). 

Ninth Circuit Finds That Federal Law Preempts California Break Rules For Interstate Truckers

The Ninth Circuit Court of Appeals recently upheld the Federal Motor Carrier Safety Administration’s (FMCSA) determination that federal law preempts California’s meal and rest break requirements as to drivers of property-carrying commercial motor vehicles (CMVs), who are subject to the FMCSA’s hours of service (HOS) regulations. The Ninth Circuit’s decision provides much needed clarity for companies employing such drivers, allowing them to operate in compliance with the FMCSA HOS drive-time, break, and time recording rules, without the additional costs burdens imposed by California’s break rules. 

However, the decision may still be overruled through en banc review by the Ninth Circuit or on petition to the Supreme Court.  Additionally, it is possible that the FMCSA reverses course after President Biden’s nominated Secretary of Transportation, Pete Buttigieg is in the driver’s seat.  A copy of the opinion is available here.

BACKGROUND & SUMMARY

On December 21, 2018, the FMCSA issued a Determination of Preemption, finding that California’s break rules are subject to the Secretary of Transportation’s authority to review and preempt state laws and regulations on CMV safety. (Federal regulations delegate the Secretary’s authority to the FMCSA Administrator.)  This finding was a departure from a 2008 decision, in which the FMCSA concluded that California’s break rules could not be regulations on CMV safety because they “cover far more than the trucking industry.”  The FMCSA supported the departure by pointing to its 2011 revisions to the HOS rules.  Among other changes, the 2011 revisions created a mandatory rest period requirement, which the FMCSA found are “unquestionably” rules on CMV safety. Because California’s break rules govern the same subject as the mandatory rest break requirement under the FMCSA’s HOS rules, the FMCSA concluded that California’s break requirements are also rules on CMV safety and thus subject to preemption review.

Because California’s rules are additional to or more stringent than the HOS regulations, they were subject to preemption upon a finding that they either (1) have no safety benefit, (2) are incompatible with the HOS regulations, or (3) would cause an unreasonable burden on interstate commerce.  The FMCSA determined that California’s break rules check each box. It then concluded that California may no longer enforce its break rules with respect to property-carrying CMV drivers subject to the FMCSA’s HOS rules.  

On December 28, 2020, the International Brotherhood of Teamsters petitioned the Ninth Circuit to review and reverse FMCSA’s determination.  California’s Labor Commissioner and others also filed petitions for review.  The Ninth Circuit rejected petitioners’ arguments and upheld the FMCSA’s decision, holding the FMCSA acted within its authority under federal law.  The court distinguished its prior decision in Dilts v. Penske Logistics, LLC, 769 F.3d 637 (9th Cir. 2014) because it was decided based on a different federal preemption law concerning state laws that are “related to” CMV prices, routes, or services. 

PRACTICAL POINTERS

Many California truckers and drivers remain subject to the state’s break rules.  Although the FMCSA’s HOS regulations, and thus the preemption decision, will apply to any person who operates a CMV (49 C.F.R. §§ 390.5 and 395.1), the roads are not all clear.  Companies must confirm that drivers are operating a vehicle that meets the detailed definition of a CMV, which is not always a simple task.

A CMV is defined as “a self-propelled or towed vehicle used on the highways in interstate commerce to transport passengers or property” depending on the vehicle’s weight or weight rating, number of potential passengers, or the type of property it is used to transport.  A critical factor is whether the vehicle is used “in interstate commerce,” which includes “trade, traffic, or transportation … [b]etween two places in a State as part of trade, traffic, or transportation originating or terminating outside the State or the United States.” (49 C.F.R. § 390.5.)  This definition includes the intrastate transport of goods in “the flow of interstate commerce,” which may be interpreted broadly. 

For example, in 2019, a California Court of Appeal concluded that a driver who transported beer and liquor from his employer’s California warehouse to California retail stores was engaged in interstate commerce because the “deliveries, although interstate, were essentially the last phase of a continuous journey of the interstate commerce.”  Nieto v. Fresno Beverage Co., 33 Cal.App.5th 274 (2019), reh’g denied (Mar. 27, 2019), review denied (July 10, 2019). In that case, the court found the beverages were held in the employer’s warehouse for a “short period,” which was not sufficient to disrupt the “continuous stream of interstate travel.” 

Before leaving California’s break rules in the dust, companies should evaluate its drivers’ routes and shipments to confirm that they are transporting property in interstate commerce, which would likely require the advice of legal counsel.  Additionally, those companies and their drivers still must comply with the FMCSA’s HOS drive-time, break, and time recording rules.  It would be the employer’s burden to establish the FMCSA preemption defense in any related litigation, which would be a difficult task if the employer does not treat them as being subject to the FMCSA’s HOS rules. Moreover, employers should be aware that this area of the law may continue to evolve in the near-term.