California Court Provides Guidance on “Unlimited” Vacation Policies

In recent years, some employers have implemented so-called “unlimited” vacation policies, mostly applied to exempt employees, that leave it up to employees and their supervisors to decide how much paid time off to take.  On April 1, 2020, the California Court of Appeal addressed for the first time whether California law requires an employer with an “unlimited” vacation policy to pay an employee for “unused” vacation upon the employee’s separation from employment.  The court held that on the specific facts of the case before it, the employer was required to pay its former employees for unused vacation, but also offered guidance as to what kind of unlimited vacation policy might relieve an employer of the obligation to pay out accrued but unused vacation upon an employee’s separation.

Background on California Law Governing Vacation Policies

California law does not require employers to provide employees with paid vacation.  But when an employer does provide paid vacation, Labor Code section 227.3 requires employers to pay as wages any “vested” vacation time that separating  employees have not used.  Decades ago, in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 784 (1982), the California Supreme court addressed when the right to vacation “vests” under section 227.3, stating:

The right to a paid vacation, when offered in an employer’s policy or contract of employment, constitutes deferred wages for services rendered.  Case law from this state and others, as well as principles of equity and justice, compel the conclusion that a proportionate right to a paid vacation “vests” as the labor is rendered.  Once vested, the right is protected from forfeiture by section 227.3  On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay.

While Section 227.3 effectively prohibits so-called “use-it-or-lose-it” vacation policies, an employer may adopt a policy that creates a waiting period at the beginning of employment during which no vacation time is earned, and therefore none vests.  An employer may also adopt a policy that “caps” the amount of vacation an employee accrues, by precluding accrual of additional vacation time once an employee has reached a specified maximum.  Under such a policy, the employee does not forfeit vested vacation pay because no more vacation is earned once the maximum is reached, and therefore no more vests until such time as the employee uses accrued vacation, drops below the cap, and once again begins to accrue more vacation.

In order to pay a separating employee all “vested” vacation, an employer necessarily must keep track of how much vacation an employee earned and used during employment.  But what happens if an employer offers “unlimited” vacation to an employee, or allows an employee to take paid time off, but never notifies the employee of precisely how much paid time off the employee may take?  That is the question addressed by the California Court of Appeal in its recent opinion.

McPherson v. EF Intercultural Foundation, Inc.

EF Cultural Foundation, Inc. (EF) runs educational and cultural exchange programs between the United States and other countries.  While EF’s employee handbook included a policy providing most salaried employees with a fixed amount of paid vacation days per month based on their lengths of service, that policy did not apply to “area managers,” a handful of exempt employees tasked by EF to run the company’s programs within their regions.  While area managers could, with their supervisors’ permission, take paid time off, they did not accrue vacation days or track the number of vacation days they took, nor were they ever notified of any specific limit on the amount of paid days off they could take.

After their employment ended, three area managers sued EF, alleging the company failed to pay them accrued but unused vacation upon their separation from employment.  After a bench trial, the trial court found EF liable for failing to pay the plaintiffs unused vacation, finding the plaintiffs’ right to take vacation time was not truly “unlimited” but rather was “undefined.”  The trial court found that “vacation time vests under a policy where vacation time is provided, even if the precise amount is not expressly defined by the employer in statements to employees.”  The trial court explained that “offering vacation time in an undefined amount simply presents a problem of proof as to what the employer’s policy was.  That policy is implied through conduct and the circumstances, rather than through an articulated statement.”  The trial court concluded that based on the evidence presented at trial, the area managers were provided at least 20 days of vacation per year, therefore that amount vested annually for each plaintiff, and Section 227.3 required EF to pay them the unused portion when their employment ended.

The California Court of Appeal agreed with the trial court’s conclusion that Section 227.3 applied to the area managers “[o]n the particular, unusual facts of this case.”  The appellate court emphasized that the company did not provide the area managers “unlimited” vacation in practice, nor did the company publish a formal policy notifying the area managers they had “unlimited’ vacation, and therefore the trial court was correct in determining their right to vacation was undefined, not unlimited.  But the court was careful to note that although Section 227.3 applied to EF’s informal, unwritten vacation policy, that does not mean Section 227.3 “necessarily applies to truly unlimited time off policies.”  The court suggested that such a policy “may not trigger section 227.3” if the policy is in writing and it:

  1. Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule—including employees’ ability to decide when and how much time to take off;
  2. Spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
  3. In practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
  4. Is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.

Unfortunately, the court offered these criteria as only an “example” of an unlimited time off policy that might not require a payout of unused vacation upon the end of employment, and not as a bright-line rule.

The appellate court’s opinion makes it clear that not all unlimited vacation policies necessarily dispose of the requirement to pay some amount of “vested” vacation upon an employee’s separation.  Employers operating in California that wish to establish or continue unlimited vacation policies should review those policies, and modify them if necessary, to ensure they are consistent with the California court’s  guidance.

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

Unpaid Future Commissions Can Be Trebled under Massachusetts Wage Act, SJC Rules

In Massachusetts, a commission is a wage subject to the Wage Act when the amount of the commission “has been definitely determined and has become due and payable.”  Accordingly, an employer’s failure to pay a commission which had not yet become due and payable generally does not implicate the Wage Act, and employers cannot be held liable for treble damages stemming from the failure to pay such a future commission.  However, last week in Parker v. EnerNOC, Inc., the Supreme Judicial Court created an exception to this rule, holding that an employee is entitled to treble damages on an unpaid future commission as lost wages where the employer’s unlawful retaliation was the reason the commission did not became due and payable.

Parker concerned an employee’s Wage Act claims based upon her prior employer’s failure to pay her certain commissions.  The employee earned commissions on software sales contracts she secured for her employer.  As a result of a particular contract, the employee earned two different commissions – one payable when the sales contract first became guaranteed and another when the time period for the client to opt out of the contract had passed.  After the deal became guaranteed, the employee complained that she had not been paid the full amount of the first commission to which she was entitled.  After the employee complained, the employer terminated her employment.  After the termination, the opt-out period passed.  Had the employee remained employed with the employer, she would have been entitled to the second commission.  The employee sued, alleging that she had been terminated in retaliation for her complaints and that she had been denied her commissions in violation of the Wage Act.  She ultimately prevailed.  The trial court judge granted the employee treble damages on the first commission, but not on the second, on the basis that the second commission had not “become due and payable” as of the employee’s last day of employment.

The SJC reversed the trial court, ruling that the employee was entitled to treble damages on the unpaid portions of both commissions.  According to the SJC, nothing in the Wage Act required a commission to be due and payable as of the date of termination to be subject to the Wage Act.  Because the Wage Act prohibits retaliation against employees raising Wage Act claims, the SJC ruled, “commissions that are not yet due to be paid may nonetheless constitute lost wages if the employer’s violations of the act prevent payment of those commissions.”  As such, the employee was entitled to treble damages on those lost wages as a remedy for the employer’s retaliation prohibited by the Act, regardless of whether the commission was due and payable.

In light of the decision in Parker, employers should exercise caution when terminating employees who have earned commissions that have not yet been paid.  Parker makes clear that unpaid commissions – even if they are not due and payable at the time to termination – constitute lost wages under the antiretaliation provisions of the Act, and employees are entitled to treble damages on future commission where an employee can show that the commission did not become due and payable as a result of an employer’s retaliation prohibited by the Act.

Jonathan Keselenko, James Fullmer, & Chris Feudo
Foley Hoag LLP
Boston, MA

California Supreme Court Rules Employees Must Be Paid for Time Spent in Post-Shift Bag Checks

Last Thursday, in a unanimous opinion, the California Supreme Court held that the time employees spend on an employer’s premises waiting for and undergoing required exit searches of their bags and other personal items that they bring to work purely for their own personal convenience, constitutes “hours worked” for which the employees must be paid.

Apple Inc. requires its retail store employees to undergo mandatory searches of their bags, packages, purses, backpacks, briefcases, and personal Apple technology devices (e.g., iPhones), before leaving the store for any reason, including after completing their work shift and clocking out.  In 2013, several employees sued Apple in a California federal district court to recover wages for the time spent undergoing these security checks.  They brought their claims under both California law and the federal Fair Labor Standards Act (FLSA).  The employees estimated that the time spent waiting for and undergoing the exit searches typically ranged from five to 20 minutes, but could take up to 45 minutes on the busiest days.

The district court dismissed the FLSA claims after the United States Supreme Court’s 2014 decision in Integrity Staffing Solutions v. Busk, which held that time spent undergoing mandatory security screenings is not compensable “hours worked” under the FLSA.  The district court later dismissed the plaintiffs’ California law claims, holding that exit search time was not “hours worked” because the employees could avoid the searches by not bringing bags or other personal items to work.  The employees appealed.

The Ninth Circuit Court of Appeals then asked the California Supreme Court to weigh in on the issue.  In last Thursday’s opinion, California’s high court hinged its decision on the significant differences between the FLSA and California law in defining “hours worked.”  In 1947, the FLSA was amended to narrow the definition of “hours worked,” excluding activities that occur before or after employees perform the “principle activity” they are engaged to perform.  As a result, under the FLSA, some pre-shift and post-shift activities are not compensable, even when required by an employer.  In contrast, California’s wage orders generally define “hours worked” much more broadly, to include all the time an employee is “subject to the control” of an employer, and all the time an employee is “suffered or permitted to work, whether or not required to do so.”

Applying this definition, the California Supreme Court concluded the employees were “subject to [Apple’s] control” when they waited for and underwent security checks, because these checks were required for Apple’s benefit.  The court rejected the district court’s conclusion that the security checks were essentially voluntary because employees could avoid them by not bringing personal items to work, reasoning that the realities of 21st-century life mean employees have little choice but to bring mobile devices and other personal items to work.

This decision illustrates two realities for all California employers.  First, California employees must be compensated for time engaged in pre-shift and post-shift activities that might not be compensable elsewhere.

Second, California employers should ensure employees are compensated for required activities that involve even very small amounts of time.  In 2018, the California Supreme Court held that the federal de minimis rule, under which small amounts of time need not be compensated under certain circumstances, does not apply to wage claims brought under California law.  As a result, claims for unpaid wages brought under California law are more difficult to defend.  Employers should therefore be vigilant about capturing and compensating employees for all time spent under the employer’s control, including security checks and other activities that might begin and end very quickly.

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

Federal Court Issues Preliminary Injunction Prohibiting Enforcement of AB 51, California’s Anti-Arbitration Law

Today a federal court issued a preliminary injunction prohibiting the state of California from enforcing Assembly Bill 51, the state’s new anti-arbitration law.  Earlier, on December 30, 2019, the court issued a temporary restraining order prohibiting the law’s enforcement, just two days before it was scheduled to take effect.

The anti-arbitration law is being challenged in a federal lawsuit filed in December 2019 by a number of pro-business organizations seeking a permanent injunction against enforcement of AB 51.  The business groups argue that AB 51 is preempted by the Federal Arbitration Act (“FAA”).

In the court’s minute order issued today, Judge Kimberly J. Mueller of the U.S. District Court for the Eastern District of California indicated she will explain her reasoning in a detailed, written order to be issued “in the coming days.”

Today’s order means California employers may continue to require employees to sign mandatory arbitration agreements as a condition of employment.  It also means the court continues to find the plaintiffs’ argument that AB 51 is preempted by the FAA to be persuasive.

Federal Court Issues Temporary Restraining Order Prohibiting Enforcement of California’s Anti-Arbitration Law

Today a federal court issued a temporary restraining order prohibiting the state of California from enforcing Assembly Bill 51, the state’s new anti-arbitration law, at least until another hearing scheduled for January 10, 2020.  The new law was scheduled to take effect January 1, 2020.

The temporary restraining order was issued in the federal lawsuit filed earlier this month by the U.S. Chamber of Commerce and other pro-business organizations seeking a permanent injunction against enforcement of AB 51.  The business groups argue that AB 51 is preempted by the Federal Arbitration Act (“FAA”).

In the order, the U.S. District Court for the Eastern District of California found the “plaintiffs have raised serious questions regarding whether the challenged statute is preempted by the Federal Arbitration Act” and that allowing the new law to take effect even temporarily could “cause disruption in the making of employment contracts” in California.

Today’s order means California employers can continue, at least until January 10, 2020, to require employees to sign mandatory arbitration agreements as a condition of employment.  It also means the Court found the plaintiffs’ argument that AB 51 is preempted by the FAA to be persuasive.

January 1, 2020, Means New Pay Rules – Are You Ready?

On January 1, 2020, a number of new pay rules will become effective. While these changes may not directly impact many employees, they could cause pay compression under many compensation plans. Pay compression issues trigger employee morale issues, and adapting to those issues may mean that more than just those at the bottom of pay scales will need to have their pay adjusted. This ripple effect, of course, could be costly. Further, if the employees are covered by union contracts, how these new rates are rolled in, and whether pay compression concerns may be addressed, are mandatory subjects of bargaining. While a union contract cannot violate the law, the effects triggered by compliance are subjects of bargaining.

The following will briefly summarize what employers should be aware of and address in some form:

Federal law changes –

  • The salary level for most exempt executive, administrative and professional employees under the Fair Labor Standards Act (“FLSA”) will increase from $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year). Thus, unless currently exempt employees paid below this new threshold are given salary increases, they will lose their FLSA exempt status.
  • Some employees meet the FLSA’s exemption test if they are “highly compensated” and meet at least one of the duties criteria for being considered an exempt executive, administrative or professional employee. The current pay rules for these employees require that they receive at least $455 per week on a salary or fee basis and receive at least $100,000 on a non-discretionary basis. The rule, though, allows a short window to catch-up the pay to meet the $100,000 threshold if the employee falls short of the expected $100,000+ annual pay.

    On January 1, 2020, the new pay amounts applicable to these employees will be:
     $684 per week to be paid on a salary or fee basis, and
    Total compensation for the year must be at least $107,432.

  • Employers should consider conducting an FLSA compliance audit to review their exempted classifications, as well as their time and attendance practices and pay practices, which could avoid or greatly reduce employer liability should they be found to have somehow—even inadvertently—violated the Act.

State law changes 

In addition to complying with Federal law, employers must also comply with the minimum wage and overtime requirements under state law.

  • Many states have more stringent requirements for employees to be exempt from overtime than the FLSA, and the rules of whichever law is more favorable to employees will apply. A number of states have higher salary level thresholds for exempt status than those under the FLSA. Employees in those states must be paid per those state thresholds in order for them to considered exempt under state law.
  • On January 1, 2020, the minimum wages in many states will increase, and many states have minimum wages greater than the $7.25 per hour Federal minimum wage. As with overtime rules, whichever law mandates the higher minimum rate, that higher rate will apply. Among the states increasing their regular minimum wage rates on January 1 are:
     California (from $12.00 to $13.00 per hour);
    – Illinois (from $8.25 to $9.25 per hour);
     Maryland (from $10.10 to $11.00 per hour);
     Michigan (from $9.45 to 9.65 per hour); and
    Minnesota (from $9.86 to $10.00 per hour).
  • Employers should also be aware some local units of government have their own minimum and living wage requirements. In these local jurisdictions, the higher minimum wage will apply.

Next Steps: What should employers do?

Employers should evaluate whether they are in compliance with these new legal requirements by conducting an internal audit and, if an audit finds any areas of non-compliance, employers should make any necessary changes to their pay policies and practices. As mentioned above, as employers adjust to these changes, any audit should be conducted so as to survive judicial scrutiny if the pay program is ever challenged, particularly under federal law. Under federal law, employers can assert a “good faith” defense to an FLSA claim, and if successful, they may be able to avoid assessments of liquidated damages, damages that are usually an amount equal to the amount of unpaid wages or overtime at issue. To successfully assert this defense, courts usually expect employers to have their audits conducted a reputable wage and hour attorneys or sophisticated consultants.

For more information about compliance, contact any WHDI member.

California Governor Gavin Newsom Signs Series of Noteworthy Employment Bills

Sunday, October 13, 2019, was the last day for Governor Gavin Newsom to approve or veto bills passed by the state Legislature. This year’s approved employment-related bills generated quite a buzz, and for good reason. This e-Update surveys some of the most significant changes that will impact California employers. Paul, Plevin will review these and other new laws at the firm’s annual Employment Law Update on Friday, November 1st at the Hilton San Diego Resort & Spa on Mission Bay.

All new laws take effect January 1, 2020, except as indicated below.

Assembly Bill 5 – Employee versus Independent Contractor Status

Assembly Bill 5 codifies the “ABC” test adopted in Dynamex Operations v. Superior Court to determine whether a worker is an employee or independent contractor. The Dynamex decision was limited to only certain parts of the Labor Code, but Assembly Bill 5 extends the “ABC” test to virtually all California workers, excluding certain specifically enumerated industries and occupations (e.g. doctors, investment advisors, and hairdressers). In addition to various complete exceptions, this bill allows contracts of certain employers and industries to be governed by the more forgiving Borello multi-factor “economic realities” test, provided they meet a set of listed requirements.

Assembly Bill 9 – More Time To Bring Discrimination and Harassment Claims

The Stop Harassment and Reporting Extension Act extends the period for an aggrieved employee to file a complaint alleging harassment, discrimination, or other unlawful practices with the Department of Fair Employment and Housing (DFEH) from one year to three years. The new limitations period does not apply to claims that have already lapsed if a complaint was not filed with the DFEH.

Assembly Bill 51 – Prohibition on Mandatory Arbitration Agreements

This new law makes it a criminal misdemeanor for an employer to require an applicant or employee to enter into an agreement to arbitrate any claims under the Fair Employment and Housing Act or the California Labor Code. Arbitration agreements in place before January 1, 2020 will still be enforceable, as long as they are not extended or modified after that date. While the drafters of the bill attempted to avoid preemption by the Federal Arbitration Act, that question will likely be tested in the federal courts.

Assembly Bill 673 – Recovery of Civil Penalties

Employees will be able to obtain penalties as part of a Labor Commissioner hearing to recover unpaid wages. Under the current law, penalties must be paid to the State, but this new law allows workers to personally collect the penalty instead. An employee, however, still cannot “double dip”; he or she has to choose between recovering statutory penalties under these provisions or enforcing civil penalties under the Private Attorney General Act.

Assembly Bill 749 – “No Rehire” Provisions Prohibited in Settlement Agreements

This new law prohibits an agreement to settle an employment dispute from containing a provision that prohibits, prevents, or otherwise restricts the claimant from working for the employer against which the claimant filed a claim, or any affiliated entity. An employer and employee are permitted, however, to agree to end a current employment relationship or restrict the employee from obtaining future employment with the employer, if the employer made a good faith determination that the employee engaged in sexual harassment or sexual assault. Further, an employer is not required to continue to employ or rehire an employee if there is a legitimate, non-discriminatory or non-retaliatory reason for terminating or refusing to rehire the employee.

Assembly Bill 1554 – Flexible Spending Accounts

This new law requires employers to notify, in a prescribed manner, an employee who participates in a flexible spending account of any deadline to withdraw funds before the end of the plan year. “Flexible spending accounts” include but are not limited to: (1) dependent care flexible spending accounts; (2) health flexible spending accounts; and (3) adoption assistance flexible spending accounts. The required notice shall be provided by two different forms, one of which may be electronic.

Senate Bill 142 – Lactation Accommodations

This new law, largely based on the San Francisco ordinance for lactation accommodations passed in 2017, further expands protections for lactating workers by requiring employers to provide a lactation room, other than a bathroom, that shall be “in close proximity to the employee’s work area, shielded from view, and free from intrusion.” The lactation room must also (1) be safe, clean, and free from toxic or hazardous materials; (2) contain a surface to place a breast pump and personal items; (3) contain a place to sit; and (4) have electricity. Employers must also provide access to a sink with running water and a refrigerator in close proximity to the employee’s workspace. This law also requires employers to develop and implement a lactation accommodation policy, include it in employee handbooks, and provide it to new employees or when an employee raises parental leave. Employers with fewer than 50 employees may seek an exemption to these new requirements if they can demonstrate undue hardship.

Senate Bill 778 – Sexual Harassment Training Deadline Extension

This bill is emergency legislation, and therefore took effect immediately upon signing on August 30, 2019. This new law delays the deadline to complete supervisor and non-supervisor sexual harassment training under the FEHA from January 1, 2020 to January 1, 2021. However, new non-supervisory employees must still be provided at least one hour of sex harassment training within six months of hire, and new supervisory employees must be provided training within six months of the assumption of a supervisory position.

Senate Bill 83 – Expansion of Paid Family Leave

This new law extends the maximum duration of paid family leave (PFL) benefits from six weeks to eight weeks beginning July 1, 2020. Workers paying into the California State Disability Insurance (SDI) program may receive such PFL benefits to (1) care for a seriously ill child, spouse, parent, grandparent, grandchild, sibling, or domestic partner, or (2) to bond with a minor child within one year of the birth or placement of the child through foster care or adoption. Additionally, this new law allows state government employees that pay into the Nonindustrial Disability Insurance (NDI) program to receive six weeks of paid leave. Further, this law requires the governor to propose by November further benefit increases—in terms of duration and amount—and job protections for individuals receiving PFL benefits.

Senate Bill 188 – Hairstyle Discrimination

The Creating a Respectful and Open Workplace for Natural Hair (CROWN) Act, expands the definition of “race” under the FEHA and the Education Code to include both hair texture and protective hairstyles that are closely associated with race. The Act bans not only general employment discrimination, but also dress codes and grooming policies that prohibit “natural hair, including afros, braids, twists, and locks,” which would have a disparate impact on black applicants and black employees. FEHA exceptions for bona fide occupational qualifications and security regulations still may apply. California is the first state to codify this rule.

Fred Plevin
Paul, Plevin, Sullivan & Connaughton LLP

DOL Issues Final Overtime Rule, Increasing Required Salary Level for Exempt Employees

The Department of Labor issued, on September 24, 2019, its final rule revising the salary requirements for exemption from the Fair Labor Standards Act’s mandate to pay overtime for hours worked over 40 in a workweek. The new rule increases the salary required to meet the executive, professional and administrative exemptions to $684 per week (the equivalent of $35,568 per year). The required compensation for highly compensated employees is raised to $107,432.

Effective Date: The effective date of the new rule is January 1, 2020.

Bonus and Incentives: The new rule allows nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the required salary. This provision applies only to the standard exemption, not the highly compensated exemption. To bring an employee up to the required level, an employer may make a final catch-up payment (not more than 10 percent of the required salary) at the end of the year. The final payment must be made within one pay period or one month of the end of the year. An employer may elect to use any 52-week period as its measuring year.

No other changes: The new rule does not change the duties tests for the exemption. It does not commit the DOL to any timetable for increasing the salary level in the future, although the DOL states that it intends to update these levels, which had not been updated since 2004, “more regularly in the future through notice-and-comment rulemaking.”

Legal Challenges: The new salary test is much lower than the rule adopted by the Obama administration in 2016, which was enjoined by a federal court in Texas. The new test may be challenged by worker advocates, but such challenges are not likely to prevail.

Impact: The new rule was set to allow most salaried exempt employees to remain exempt, but will have some impact, especially on assistant managers in retail, restaurants, non-profit and service industries, especially in rural areas. Employees paid less than the salary requirement must either be paid overtime or have their salaries raised to the required level. Raising wages may, of course, have a ripple effect to avoid wage compression. On the other hand, in some areas (California, New York City, Washington D.C.) the new salary test is not much higher than the applicable minimum wage. The hourly equivalent of $684 per week is $17.10 per hour.

Don’t forget: Under the new test, the no-docking rule will continue to apply. Subject to a number of specific exceptions, the no-docking rule requires exempt employees to receive their full salary for every week in which they perform any work. Full day absences for personal reasons may be docked. Full day absences for sickness and disability may be docked in accordance with a sick or disability leave plan, and FMLA leave may be docked.

Also, under the new test, the existing duties tests for the administrative, executive and professional exemptions will continue to apply.  Each of these tests contain language, such as “primary duty” or “discretion and independent judgment” that generates disputes.  Plaintiffs’ lawyers are on the lookout for possible misclassification claims.

California Supreme Court Rules Unpaid Wages Not Recoverable Under PAGA Law

Today the California Supreme Court ruled that employees cannot recover unpaid wages in actions brought under the California Labor Code Private Attorneys General Act (PAGA).  As a result of today’s decision, unpaid wages can only be recovered in actions brought under other Labor Code provisions that, unlike PAGA, can be subjected to mandatory employment arbitration agreements, including agreements that require employees to waive the right to bring claims on a class or collective basis.

Since 2004, the PAGA law has allowed employees to act as “private attorneys general” by bringing claims in court to recover “civil penalties” for violations of California Labor Code provisions.  PAGA allows employees to bring claims on behalf of themselves and on behalf of other “aggrieved employees.”  Before PAGA took effect, these “civil penalties” were recoverable only by the state’s labor law enforcement agencies.

In the fifteen years since the PAGA law took effect, the United States Supreme Court has issued a series of decisions upholding the enforcement of arbitration agreements, including agreements between employers and employees.  The U.S. Supreme Court has also repeatedly held that employment arbitration agreements may include provisions prohibiting employees from arbitrating claims on a class or collective basis, effectively requiring employees to arbitrate only individual claims.  As a result of these court decisions, many employers now encourage or require their employees to enter into arbitration agreements that include class and collective action waivers.

However, in 2014 the California Supreme Court ruled that employment arbitration agreements cannot prohibit employees from bringing PAGA claims in court on behalf of themselves and other “aggrieved employees.”  As a result, even where an employee subject to an employment arbitration agreement is barred from bringing claims on a class or collective basis in court or in arbitration, the employee may still bring a “PAGA-only” claim in court, forcing the employer to litigate claims for alleged violations affecting not only the plaintiff-employee, but other “aggrieved employees” as well.

Most of the Labor Code provisions providing for civil penalties recoverable under the PAGA law assess penalty amounts (typically $50 or $100) for each aggrieved employee affected by the violation, for each pay period in which a violation occurs.  But Labor Code section 558, which provides for civil penalties when an employer violates provisions of the Labor Code requiring employers to provide meal periods and overtime pay, is different.  Section 558 provides for a civil penalty of $50 for each underpaid employee for each pay period in which the employee was underpaid for an initial violation, and $100 for each under paid employee for each pay period in which the employee was underpaid for a subsequent violation, “in addition to an amount sufficient to recover underpaid wages.”

In recent years different districts of the California Court of Appeal have reached different conclusions about how to interpret Section 558’s language, with one district concluding that claims for underpaid wages under Section 558 are subject to arbitration, and other districts concluding they are not.  Despite their disagreements, however, all districts agreed that under the language of Section 558, the “underpaid wages” sought under Section 558 are part of a “civil penalty” recoverable under the PAGA law.

But today the California Supreme Court reached a different conclusion, confirming that the $50/$100 for each underpaid employee for each pay period is a civil penalty recoverable under the PAGA law, but holding that an employee’s underpaid wages are not part of that civil penalty, and are therefore not recoverable under the PAGA law.

As a result of today’s decision, plaintiff-employees cannot recover unpaid wages in PAGA-only cases.  Although employees may bring claims for unpaid wages under other, non-PAGA Labor Code provisions, those non-PAGA claims are subject to employment arbitration agreements that may require employees to arbitrate claims on an individual basis only.

This means employment arbitration agreements that include class and collective action waivers now provide more protection to employers than they did before today’s decision.  Employers that already make use of arbitration agreements should consult with counsel about whether their existing agreements are sufficient, or should be revised.  Employers that do not have arbitration agreements with their employees should consult with counsel about whether to adopt an arbitration program.

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

 

Chicago Enacts Nation-Leading Predictive Scheduling Ordinance

On July 24, 2019, the Chicago City Council unanimously passed the most comprehensive “predictive scheduling” ordinance in the nation that includes significant notice, scheduling, and rest provisions for many employers in Chicago. Mayor Lori Lightfoot is expected to sign the measure that, beginning in July 2020, will add Chicago to the list of other major U.S. cities attempting to standardize work schedules and limit employers’ ability to make last-second changes.

WHO IS COVERED?

The Chicago Fair Workweek Ordinance is a culmination of two years of legislative wrangling about precisely which industries and employees should be governed by the ordinance. In its final form, the rules cover employers in eight major industries: day and temporary labor service agencies, hotels, restaurants, building services, health care, manufacturing, warehouse services, and retail.

Private employers maintaining a business facility in Chicago are covered when they are primarily engaged in one of the covered industries, have 100 or more employees (250 or more employees for nonprofit corporations), and if 50 or more of those are covered employees. The ordinance covers employees earning $26.00 per hour or less, as well as salaried employees earning $50,000 or less. These wage thresholds will increase annually based on the Consumer Price Index.

The law is tailored to avoid most small Chicago restaurants, applying only to those with 30 or more total locations (globally) and 250 or more combined employees. Franchisees who operate three or fewer locations are also exempted from the ordinance. The ordinance does not apply to most employees working in Chicago sports stadiums.

The ordinance does not affect any collective bargaining agreement in effect as of the July 1, 2020 effective date. That said, however, the ordinance dictates that it will apply to any CBAs that become effective after July 1, 2020, thus compelling an employer to negotiate with a labor union representing covered employees if it seeks the permitted “clear and unambiguous waiver” of the ordinance requirements.

NOTICE REQUIREMENTS

Under the ordinance’s notice requirements, for newly hired employees, employers must provide a good-faith estimate of the employee’s work schedule during the first 90 days of employment. This notice includes the expected average number of hours per week and the days and times that the employee can expect to work, including on-call shifts. Later, employers must provide work schedules to their employees at least 10 days in advance, increasing to 14 days of minimum notice on July 1, 2022. Employers may post schedules at the workplace or electronically transmit the schedules to all employees. Should the employer fail to provide adequate notice, employees have the right to decline those hours.

Employers who change a worker’s schedule within the notice period (at first 10 days) must give the worker one hour of “predictability pay” at the employee’s regular rate for each changed shift. If the employer cancels or reduces and employee’s hours with less than a 24-hour notice, the employer would have to compensate the employee at half of their regular rate of pay per hour for any hours not worked as a result. Employers must post a notice of employees’ rights under the ordinance and to distribute a similar notice to each employee with his or her first paycheck.

The ordinance also includes a “right to rest” provision allowing employees to decline any hours within 10 hours of a previous shift. Unless the employee agrees in writing to work those hours, the employer must pay the employee 1.25 times their regular rate for any hours worked fewer than 10 following the end of their last shift.

Notice requirements do not apply under certain “exemptions,” such as if there is an act of nature that prevents operations from continuing, unforeseen circumstances, if an employer makes schedule changes for disciplinary reasons, or if employees mutually agree to trade shifts. Employers can also avoid predictability pay when an employee agrees to a proposed schedule change in writing.

FIRST REFUSAL FOR EXISTING EMPLOYEES

The ordinance attempts to move more employees to full-time schedules by creating a sort of right of first refusal for employees when an employer is looking to add more hours. Before hiring new employees or adding temporary workers, the ordinance first requires employers to offer additional hours to existing covered employees who are qualified to do the work. Only when a covered employee declines the shift may it be offered to a temporary or seasonal worker for the employer for at least two weeks. Importantly, the rule does not require employers to offer additional hours to employee when doing so would make the employees eligible for overtime pay. Employers may not otherwise change pay rates or schedules to avoid coverage by the ordinance.

RECORDKEEPING AND PENALTIES

Employers are expected to maintain comprehensive scheduling records under the new law including payment records, schedules, written offers to change schedules, consent to work forms, and employee written responses for three years. Employers must provide employees with a copy of their records upon reasonable request. All scheduling changes must be made in writing.

The city will have the authority to investigate workplaces for violations under the ordinance with resulting violations carrying a potentially steep penalty. Employers may be fined between $300 and $500 per day per employee for each violation. The ordinance also creates a process for employees to bring a private action within two years from the date of an alleged violation. If an employee pursues civil action and prevails, they will be entitled to damages sustained, withheld predictability pay, litigations costs, and attorney’s fees.

HOW DOES AN EMPLOYER PREPARE? With just under a year to prepare, Chicago employers should act now to determine whether the new law will cover them in whole or in part, then determine which employees are covered so that notices and communication plans can be put in place. Affected employers should revisit procedures and ensure scheduling software complies with the law. Employers with unionized workforces should plan to negotiate a waiver or otherwise address ordinance requirements in any upcoming contract negotiations that may conclude after July 1, 2020. Finally, employers should watch for additional guidance from Chicago Department of Business Affirms and Consumer Protection expected before the effective date.