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 The Biden DOL, on the other hand, characterized the rescinded rule as “contrary to statutory language and Congressional intent,” and contrary to the Guidance issued during the Obama Administration.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The Rescinded Rule Lived an Interesting Life
Under the rescinded rule, an employer would be deemed to be a joint employer with the “direct employer” if, with respect to the employees of the direct employer, it: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The rescinded rule provided further clarity by eliminating from the analysis such factors as whether the relationship was due to a franchise agreement, whether the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.
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.
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.
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. Specifically, under the RROP concept, employers must include commissions and other non-discretionary payments when calculating overtime pay for employees.
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.
 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 hours||40 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.
 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:
- 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?
- 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.
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:
- the employee is under a COVID-19 quarantine or isolation period based on a governmental order or guidelines;
- the employee is under self-quarantine for COVID-19 concerns based on advice from a health care provider;
- the employee is receiving a COVID-19 vaccine;
- the employee is experiencing COVID-19 vaccine side-effects;
- the employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
- 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);
- 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.
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.
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).
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.
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.
|On September 22, 2020, the U.S. Department of Labor (DOL) unveiled its long-awaited proposed independent contractor rule. The new rule sets forth a new standard for determining whether a worker can be classified as an independent contractor rather than an employee for purposes of the Fair Labor Standards Act (FLSA). However, employers will still need to be aware of and comply with state laws that apply stricter standards for independent contractor classification, such as the laws in many blue states, including California, New Jersey, and Massachusetts.|
Under the FLSA, “employees” are subject to certain protections, such as minimum wage and overtime requirements, while “independent contractors” are not. But neither the FLSA nor current DOL regulations define, as a general rule, what makes a worker an independent contractor, giving rise to a patchwork of tests and rules across states and in federal courts. As questions of classification have grown in salience over the past decade with the rise of the “gig economy,” the DOL has attempted to fill the gap. In 2015, the DOL under President Obama issued an “Administrative Interpretation” (AI) setting forth a six-factor “economic reality” test that was widely seen as setting a demanding standard for classifying workers as independent contractors. Then, in 2017, the Trump DOL withdrew the 2015 AI, signaling a shift to a more forgiving, employer-friendly classification standard. Pressure has been mounting for the DOL to issue the new rule this year in light of the upcoming presidential election, which could bring about another ideological shift within the DOL.
The proposed rule creates a five-factor test to determine whether a worker is an independent contractor for FLSA purposes. Those factors are:
· The Nature and Degree of the Worker’s Control Over the Work: This includes a worker’s ability to set his or her schedule, the extent or lack of supervision over the worker, and the worker’s ability to work for competitors of the employee.
· The Worker’s Opportunity for Profit and Loss: This factor looks to whether the worker’s opportunity to succeed in his or her work relates to personal initiative, managerial skill, and business acumen.
· The Amount of Skill Required: This includes whether the work requires specialized training or skills that the employer does not provide.
· The Permanence of the Working Relationship: Under this factor, a working relationship that is definite in duration or sporadic is indicative of independent contractor status.
· The “Integrated Unit”: This asks whether the worker is part of a “production line” (real or metaphorical) – i.e., something requiring the “coordinated function of interdependent subparts working towards a specific unified purpose” as opposed to providing “discrete, segregable services.”
No single factor controls, although the rule indicates that the most weight should be given to the first two factors, which are deemed as being most probative of a worker’s economic dependence on an employer.
Not only does the new rule provide a clear, unified federal standard on independent contractor classification, but it puts less emphasis on certain indicia that are relevant under current court-created tests, which the DOL view as less relevant under the modern economy. For example, the DOL notes that falling transaction costs of hiring have led to shorter job tenures and that a knowledge-based economy means that independent contractors may not need to make significant capital investments of their own. Accordingly, the proposed rule de-emphasizes the importance of job tenure and worker investments, which had been factors cited in tests created by courts on the issue.
The proposed rule has been submitted to Federal Register for publication. Once published, the public will have 30 days to comment on it. However, it is unclear whether the proposed rule will survive a potential change in control of the White House or Congress, or even be implemented in the first place. If it does become final, the new rule will provide little comfort to employers in states like Massachusetts and California, which impose stricter tests for determining whether a worker can be classified as an independent contractor under state law. In those states, employers will need to continue to apply the state-specific test, which may result in treating a worker as an employee even though the worker would qualify as an independent contractor under the federal test.
Jonathan Keselenko, Foley Hoag LLP, Boston, MA
With the pandemic continuing, many offices remain closed and many employees are performing their job duties remotely from home. In certain states, like California, employers are statutorily required to pay for remote work expenses.
This had led many employers with remote workers in the Golden State to reasonably to ask, “what types of expenses are we required to reimburse employees for out there?” Unfortunately, the law is very unclear on this issue and there are no bright-line answers for employers that have California employees working remotely.
Here is some background on this issue, along with some tips for compliance.
What Law Applies in California?
Wage and hour obligations for California employers generally come from three sources—the federal Fair Labor Standards Act (“FLSA”), the California Labor Code, and the wage orders issued by the California Industrial Wage Commission applicable in the particular industry. The California employer must comply with all three of these.
The FLSA generally does not require an employer to reimburse employees for remote work expenses, unless the amount of those expenses is such that it effectively causes an employee to be paid less than the federal minimum wage (and/or applicable overtime compensation) for all hours worked. The federal Department of Labor’s COVID-related FLSA guidance explains this.
Because California employees generally work well above the federal minimum wage (because California’s minimum wage is much higher – currently 12 or 13 dollars an hour depending on the number of employees), this is rarely an issue. However, if you have employees who are paid close to minimum wage with significant business expenses, you need to look more closely at the types of business expenses they may be incurring in connection with remote work to assess whether the expenses are of such an amount that the employee effectively is netting less than minimum wage plus any applicable overtime for all hours worked. If so, expense reimbursement will be required under federal law.
California (along with a handful of other states) has a specific law that requires employers to reimburse employees for necessary business expenses that they incur. California’s law on expense reimbursement is contained section 2802 of the California Labor Code. This statute requires employers to reimburse employees for all expenditures necessarily incurred by the employee in direct discharge of duties for the employer, or in obedience to directions of the employer.
Unfortunately, this is not as easy to apply as it may seem. Making matters worse, in 2014, a California court issued a decision in a case called Cochran v. Schwan’s Home Service, Inc., muddying up the standard even more. In the Cochran case, the court addressed expense reimbursement requirements in circumstances where employees are required to use their personal cell phones for work purposes. The court held that if an employee is required to use a personal cell phone for business purposes, the employer must reimburse the employee. This is true even if the business use of the personal phone does not cause the employee to incur expense in excess of their usual, flat monthly rate. Unfortunately, the court did not specify how much an employer is required to pay in expense reimbursement, just that it should be a reasonable percentage of the employee’s bill.
Neither the wage orders, the California Labor Commissioner’s office, nor the California courts, have provided further clarification for employers on the scope and amount of expense reimbursement that is required under California law. Disappointingly, the California Labor Commissioner’s office has failed to issue COVID-specific expense reimbursement guidance for employers with remote workforces due to COVID.
This leaves employers uncertain about the extent of their expense reimbursement obligations related to employees working from home. Rest assured that California plaintiffs’ attorneys will file class action and Private Attorney General Act lawsuits against employers, alleging that they did not comply with their expense reimbursement obligations under Labor Code 2802. As such, all employers who are requiring California based employees to work remotely should think about the types of expenses their remote employees are incurring and issue them a reasonable amount of expense reimbursement to cover those expenses. These expenses may include use of personal phones and other devices, use of home internet/WiFi, use of office supplies, increased electricity costs, and the like. Of course, for most of these things, no employer will be able to determine the precise portion of an employee’s expense that is work-related.
As such, employers faced with reimbursing California employees should generally decide on a flat monthly amount that they believe reasonably covers the work-related expense associated with working from home. An employer also can limit employee expenses by providing employer-owned equipment (e.g. cell phones, laptops, printers, hotspots) for employees to use at home. Regardless of the monthly amount decided on by the employer, the employer should tell its California employees what the expense stipend is intended to cover (all home-related work expenses) and include a provision telling employees that if, in any month, they believe that the expense stipend is not sufficient to cover their specific remote work expenses, the employee should notify Human Resources, so that the employee’s expenses can be reviewed and a determination made as to whether additional reimbursement is owed.
Of course, if California employees are incurring driving-related expenses, or concrete expenses associated with purchasing items needed to perform their jobs, those expenses should be compensated at the IRS mileage reimbursement rate and/or actual cost, as applicable.
Finally, remember that California’s expense reimbursement law only applies to expenses that are “necessarily” incurred in direct consequence of the job duties or in complying with an employer’s directions. This means that if an employee is incurring expenses that are wholly unnecessary or unreasonably exorbitant, they need not be reimbursed. Employers may want to adopt a policy requiring employees to get advance approval for before purchasing any items to use for their remote work. This will help avoid unreasonable expenditures and a dispute over whether to cover it.
The “necessarily incurred” standard also raises the question of whether employers are required to reimburse remote work expenses where a California employee voluntarily chooses (but is not required) to work from home. If an employer has reopened its offices and employees are welcomed to return to the office to perform their jobs, but are permitted to voluntarily choose to continue working remotely, there is a very good argument that the employee’s remote work expenses are not “necessary” and need not be reimbursed, particularly if the employer has notified employees that home office expenses will not be reimbursed in this situation (because employees are free to report to work and not incur any such expenses).
Bottom line: If you have not already done so, evaluate your remote work arrangements in California and any need to adopt new or revised expense reimbursement policies. If you are late to the game, you can always issue retroactive expense reimbursement for prior months of required remote work by employees.