CALIFORNIA’S MINIMUM WAGE GOES UP – THE RAMIFICATIONS ARE BROADER THAN JUST THE HOURLY WAGE

As of January 1, 2023, California’s minimum wage increased to $15.50 per hour, regardless of the size of the workforce.
Here’s a checklist of some important workplace issues that the California minimum wage increase affects:

  1. Update Posters: California employers should make sure their workplace posters are up-to-date and reflect the correct minimum wage requirements.
  2. Exempt Position Salary Requirements: Under federal and state law, employees who meet certain exemptions (i.e., executive, administrative, or professional) are exempt from minimum wage and overtime requirements if they meet the applicable exemption tests. The threshold minimum salary requirement for exempt employees in California is at least two times the state minimum wage. This salary test is much higher than the FLSA. As such, with the new state minimum wage, effective January 1, 2023, the minimum salary for a California employee classified as exempt under the executive, administrative, or professional category, is $64,480.00. If you have exempt employees in California making a salary less than $64,480.00 annually, there is a good chance they are not properly classified as exempt.
  3. Local Minimum Wage Ordinances: There are a multitude of local ordinances in California that require employers to pay more than the state minimum wage to non-exempt employees, as well as industry-specific requirements in certain jurisdictions. Many of these ordinances update and become effective annually on January 1 or on July 1. Employers should check the current local minimum wages in California and set a reminder to check for mid-year updates to ensure compliance. This is particularly important given the increase in remote work environments where an employee’s work location may no longer be in-office and instead, located within a city or county that has a local ordinance that requires an hourly rate higher than California’s minimum wage.
  4. Location, Location, Location: California has one of the highest minimum wages in the country. Many cities in the bay area have local minimum wages that are currently over $16 an hour. Some are over $17 an hour. These minimum wages apply to all employees working the state/jurisdiction. With remote work becoming so popular, even for hourly workers, it is very important to know where your employees are performing their work. Often, employers of remote workers are completely unaware of where the work is being performed. If you have an exempt employee who was making a salary of $55,000 and moves to California to complete his work, or even works there temporarily, the employee is likely no longer properly classified as exempt. Hourly employees must be paid the higher of the California and the local minimum wage. If you have remote workers, it is very important to know exactly where they are working from or you could be stuck with a problematic wage and hour claim or lawsuit down the road.
  5. Do Not Rely on Your Payroll Company: California employers should remain vigilant about compliance without relying blindly on an outside payroll company to avoid wage and hour pitfalls that result in costly litigation, that employers typically bear alone. There are specific nuances of potentially overlapping regulations and realities of today’s remote or hybrid work environments and the payroll companies, even the larger ones, rarely keep up with everything, including local minimum wages and often fail to make the adjustments or notify the employer when the law changes/wage goes up. Most of the agreements that employers sign with payroll companies, place the burden squarely on the employer when a mistake is made. Do not rely on others to ensure minimum wage compliance.
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California Appellate Court Holds That Percentage Bonuses Can Be Calculated Using FLSA Method

In a pro-employer decision addressing the overlap of federal and California wage and hour law, the California Court of Appeal for the Second Appellate District upheld summary adjudication for the employer, finding that the employer’s calculation of overtime on a nondiscretionary bonus using the Fair Labor Standards Act’s (“FLSA”) calculation method set forth in 29 C.F.R. section 778.210 (“CFR 778.210”) was permissible, even though it resulted in less pay than the calculation method set forth in the California Division of Labor Standards Enforcement (“DLSE”) Manual.  

In Lemm v. Ecolab, Inc. [callaborlaw.com], the plaintiff sued his employer, Ecolab, under the California Private Attorneys General Act (“PAGA”), claiming that Ecolab improperly calculated the overtime due on a nondiscretionary bonus paid to him and all other similarly situated employees. The parties stipulated to have the trial court determine the overtime calculation issue based on cross-motions for summary adjudication.  

In this case, the plaintiff was employed as a nonexempt route sales manager who regularly worked more than 12 hours in a day and more than 40 hours in a week. He was paid hourly wages, including any applicable overtime and double-time wages, every two weeks. He was also eligible to receive a nondiscretionary, monthly bonus, which would be paid every four to six weeks. Eligibility for the bonus was governed by an Incentive Compensation Plan (the “Plan”). Under the Plan’s terms, eligibility for the bonus depended on meeting or exceeding certain targets. If eligible, the Plan provided for a bonus payment in the amount of 22.5 percent of the worker’s gross wages earned during the monthly bonus period. The percentage multiplier used to calculate the bonus amount could increase for workers who exceeded the eligibility targets (i.e., greater sales meant a percentage multiplier). 

As a result, the bonus payments, as a percentage of gross wages earned comprised of regular and overtime wages, necessarily included additional overtime compensation. That methodology is expressly provided for under federal law, specifically, CFR 778.210. (Sample calculations are provided in the Court of Appeal decision.)

In the summary adjudication motions, the plaintiff argued that under California law, nondiscretionary bonus payments must be incorporated into the regular rate of pay, which in turn would affect overtime calculations. The plaintiff argued that the formula set forth in section 49.2.4 of the DLSE Manual should be used instead of the calculation permitted in CFR 778.210 because the DLSE Manual’s method resulted in higher pay, and thus, as stated by the California Supreme Court in Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542, the court must use the formula more favorable to California employees.

Ecolab argued that CFR 778.210 was the proper method of calculating the overtime due on the monthly bonus because that section applied to bonuses that are known as percentage bonuses, which are paid as a percentage of gross earnings that have already incorporated straight time, overtime, and double time wages for each bonus period. Thus, Ecolab argued, if the plaintiff’s method of calculation were to be used, it would result in the double counting of overtime, or “overtime on overtime.”

The trial court granted Ecolab’s summary adjudication motion and denied the plaintiff’s motion, finding that Alvarado’s holding was limited to flat sum attendance bonuses, not percentage bonuses like the one at issue in this case. (The bonus at issue in Alvarado was a pre-determined, flat sum, attendance bonus, which is significantly different than the variable, percentage of wages production bonus at issue here.) Thus, using the calculation permitted by CFR 778.210, in this case, was not at odds with the rationale of Alvarado or the DLSE Manual’s guidance on calculating flat sum bonuses. The trial court stated, “Ultimately, [Ecolab’s] position makes logical sense. Simply put, a requirement for an employer to pay overtime on a percentage bonus that already includes overtime pay makes the employer pay ‘overtime on overtime.’ This is not a requirement under the law. By paying a bonus based on a percentage of gross earnings that includes overtime payments the employer automatically pays overtime simultaneously on the bonus amount.”

The Court of Appeal agreed. While recognizing that overtime compensation in California was governed by both federal and state law and that federal law did not preempt state law in this area, the Court stated that federal cases may provide persuasive guidance because California wage and hour laws were modeled to some extent on federal law. Similar to this case, courts in the Ninth Circuit and California District Courts had previously upheld using the percentage of bonus calculation set forth in CFR 778.210 under federal and California law.  

The Court of Appeal also recognized the principle stated in Alvarado that while the DLSE Manual could be considered as a compilation of the DLSE’s expertise and competence, a court could adopt the DLSE Manual’s interpretation only if the court, through its exercise of independent judgment, determined that the DLSE Manual’s interpretation was correct based on the facts at issue in the particular case. The Court then determined that the calculation used in Alvarado and the DLSE Manual dealt with how to calculate an employee’s overtime pay rate when the employee has earned a flat sum bonus during a single pay period, not the type of percentage bonus at issue in this case.

The Court of Appeal recognized that Ecolab demonstrated that the plaintiff and alleged aggrieved persons would have been paid the same amount regardless of whether Ecolab used the DLSE Manual formula as applied to percentage bonuses or the CFR 778.210 formula, so long as the calculation first eliminated overtime on overtime. The Court determined that while as a general rule, courts must adopt the construction that favors the protection of employees, that general rule did not require courts to interpret state law to give an employee “overtime on overtime,” when such an interpretation would be inconsistent with the fundamental principles of overtime and would result in a windfall to employees.   This Court of Appeal decision emphasizes that California employers need not always follow the DLSE Manual’s guidance on calculating overtime on nondiscretionary bonuses if the guidance does not address the type of bonus at issue and does not make sense under the circumstances.

New California Case Calls Into Question the Viability of Any Time Rounding Practices in California 

Over the past decade, California employers have reasonably relied on consistent rulings from courts as well as state and federal administrative agencies upholding the validity of time rounding systems as long as they are neutral in application. However, in a sharp departure from these authorities, the Sixth District Court of Appeal recently ruled, in a decision certified for publication, that even a neutral rounding policy that, on average and in the aggregate, may slightly favor employees in terms of compensable time may present potential exposure for claims of unpaid wages, if a particular employee can demonstrate that the rounding policy disadvantaged him or her individually, and deprived the employee or some subset of employees of wages in any particular pay period.

In Camp v. Home Depot, 2022 WL 13874360 (Oct. 24, 2022), https://www.courts.ca.gov/opinions/documents/H049033.PDF Plaintiffs in a California putative class action challenged Home Depot’s time rounding policy that rounded employees’ time punches to the nearest quarter-hour and asserted that this policy deprived them of wages based on time actually worked. The trial court granted Home Depot’s summary judgment motion because the policy was both neutral on its face and as applied, based on See’s Candy Shops, Inc. v. Superior Court, 210 Cal.App.4th 889 (2012) and its progeny.  

In connection with Home Depot’s summary judgment motion, the parties stipulated to an analysis of a 10% sample of time and pay records of the putative class (for 13,387 hourly employees, 4,282,517 shifts, and 516,193 pay periods) that showed, among other things:

  1. 56.5% of shifts resulted in employees receiving pay that was equal to or greater than their actual work time based on the rounding policy; while
  2. 43.4% of shifts resulted in employees losing minutes of work time due to rounding;
  3. for pay periods where work time resulted in additional minutes in favor of employees, the average gain was 11.3 minutes; while
  4. for pay periods where work time resulted in lost minutes to employees, the average loss was 10.4 minutes. In fact, one of the two named plaintiffs, Adriana Correa, conceded on appeal that she was overpaid and could not state a claim for unpaid wages. Plaintiff Delmer Camp, however, demonstrated that Home Depot’s rounding policy resulted in him losing 470 minutes due to rounding, or approximately 7.83 hours over the course of 1,240 shifts (approximately 4.5 years).  

The Court of Appeal reversed the trial court’s grant of summary judgment and concluded instead that a genuine issue of material fact existed as to whether Home Depot’s rounding policy resulted in Camp not being paid for all of the time that he worked. The Court reasoned that nothing in the Labor Code or applicable Wage Order specifically permitted rounding, and instead, both statutory sources required employees to be paid for “all time worked.” Moreover, recent decisions from the California Supreme Court confirmed that the underlying public policy of protecting employees required compensation of even de minimus work time (Troester v. Starbucks, 5 Cal.5th 829 (2018)) and prohibited the rounding of time associated with meal breaks (Donohue v. AMN Services, LLC, 11 Cal.5th 58 (2021)).  

Where Home Depot’s timekeeping system could and did capture work time to the minute, the California Court of Appeal was unpersuaded by Home Depot’s arguments that its rounding practice produced verifiable and digestible wage statements (or at least was unpersuaded this arithmetic simplicity outweighed the benefit of paying employees for time actually worked).

The Camp Court limited its holding to the facts of this case, and did not purport to prohibit all employer time rounding practices, or address situations where neutral rounding policies may be permissible due to the demonstrated inability to capture the actual minutes worked by employees. It also expressly declined to rule whether an employer who has the actual ability to capture all employee work minutes is always required to do so.  Nonetheless, this decision has the potential to be used to challenge any rounding practice in California. It is a sobering reminder to California employers that they should re-evaluate any rounding policies/practices and determine whether this decision presents new compliance considerations in their respective workplaces.  

WHDI’s California representatives are ready to assist with any issues you may have in the Golden State.

Inflation to Cause California Minimum Wage to Rise Higher Than Anticipated in 2023

Introduction

On July 27, 2022, the Director of the California Department of Finance sent a letter to Governor Gavin Newsome and state legislative officials, notifying them that the high inflation rate over the last year will cause the state’s minimum hourly wage to rise higher than anticipated in January 2023.  The higher minimum wage will affect several categories of employees in addition to minimum-wage earners.

Background on California’s Minimum Wage Law  

Labor Code section 1182.12 established a series of annual increases to the state minimum wage, causing it to rise from the 2016 minimum wage of $10 per hour, to the 2022 minimum wage of $14 per hour for employers with 25 or fewer employees, and $15 per hour for employers with 26 or more employees.  Under subdivision (b) of that statute, in January 2023 the minimum wage for employers with 25 or fewer employees was scheduled to rise to $15 per hour, with no increase in the minimum wage for employers with 26 or more employees, meaning employers of all sizes would then be subject to a uniform minimum wage of $15 per hour.

Other provisions of the statute provide for further annual increases.  Specifically, subdivision (c)(1) of the statute requires the Director of Finance, beginning in 2023, to calculate an adjusted minimum wage on or before August 1 of each year based on the United States Bureau of Labor Statistics nonseasonally adjusted United States Consumer Price Index for Urban Wage Earners and Clerical Workers (U.S. CPI-W).  The Director is to calculate the increase in the minimum wage by the lesser of 3.5 percent or the rate of change for the U.S. CPI-W, and the result is then rounded to the nearest ten cents, with the adjusted minimum wage increase implemented on the following January 1, beginning in 2024.

However, subdivision (c)(3) provides that if the inflation rate exceeds seven percent in the first year in which the minimum wage for employers with 26 or more employees is $15 per hour (which is this year), the annual increases based on the U.S. CPI-W are to begin a year earlier—in January 2023.

The Department of Finance’s Determination of the 2023 California Minimum Wage

In her letter of July 27, 2022, California Department of Finance Director Keely Martin Bosler announced that the Department had determined the U.S. CPI-W for the 12-month period from July 1, 2021 through June 20, 2022 increased by 7.9 percent compared to the preceding 12-month period and, as a result, the inflation-adjusted annual increases required by the minimum wage statute would begin on January 1, 2023.  The Department calculated that the required 3.5 increase will result in a state minimum wage of $15.50 per hour for all employers beginning January 1, 2023, fifty cents higher than the previously anticipated minimum wage of $15.00 per hour.

Ripple Effect of a Higher Minimum Wage  

Any increase in the state minimum wage has a ripple effect on several categories of California employees in addition to minimum-wage earners.

California’s salary threshold for “white collar” (executive, administrative, and professional) exempt employees is set at twice the state minimum wage for a 40-hour work week.  A $15.00 minimum wage would have established a salary threshold of $62,400 per year ($15 x 2 x 40 hrs x 52 wks).  A $15.50 minimum wage will establish a salary threshold of $64,480 per year ($15.50 x 2 x 40 hrs x 52 wks).

California’s overtime exemption for commissioned employees (sometimes referred to as the “inside sales” exemption) applies to employees whose earnings exceed 1.5 times the state minimum wage if more than half the employee’s compensation represents commissions.  In order to maintain the exemption for those employees, beginning in January 2023 they must earn at least $23.25 per hour, in addition to earning more than half their compensation from commissions.

As a general rule, when tools or equipment are required for a job, the employer must provide and maintain them.  However, a California employee whose wages are at least twice the state minimum wage may be required to provide and maintain hand tools and equipment customarily required by the trade or craft.  Beginning in January 2023, those employees must be paid at least $31.00 per hour.

Conclusion

California Employers should begin planning for the higher minimum wage, and budget for this unexpected expense.  Employers should also keep in mind that a host of local governments throughout California have their own minimum wage ordinances that often require minimum wages higher than the state minimum, and some local governments may take steps to increase their own minimum wages in response to the higher than anticipated increase in the state minimum wage.

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

US Supreme Court Expands Protections for Public Employees’ Religious Expression

On Monday, the United States Supreme Court issued its decision in Kennedy v. Bremerton School District.  In a 6-3 decision, the Supreme Court ruled that the Free Speech and Free Exercise clauses of the First Amendment to the United States Constitution protect a public school football coach’s right to lead a post-game, mid-field prayer.  According to the Supreme Court, the prayers offered by the coach were a form of private religious observance, which the employer had no authority to censor. 

Background of Kennedy v. Bremerton School District

Joseph Kennedy was a high school football coach employed by the Bremerton School District (the “District”).  After football games, Kennedy made it a practice to kneel and offer prayer at midfield with anyone who chose to participate.  The District directed Kennedy to cease this practice, on the theory that students might feel obligated to participate, and the District wished to avoid a perception of religious endorsement.  Kennedy continued the practice, and the District terminated his employment.  Kennedy filed suit under the Free Speech and Free Exercise clauses of the First Amendment.  Siding with the District, both the trial court and Ninth Circuit determined that the District maintained a compelling interest in prohibiting the prayers because allowing them to continue could violate the First Amendment’s Establishment Clause, which prohibits government endorsement or hostility towards any religion.  The lower courts concluded that allowing Kennedy’s prayers to continue could be seen as preference towards his religion.

The Supreme Court disagreed.  It concluded Kennedy’s post-game prayers were not “ordinarily within the scope of his duties as a coach,” and the “object” of the District’s decision was to prohibit a religious practice by a “private citizen.”  Prior to Kennedy, courts applied the three-prong test established in 1971 in Lemon v. Kurtzman, to determine whether a government activity or law violated the Establishment Clause. The Supreme Court, however, shifted away from over fifty years of jurisprudence by abandoning the Lemon test and adopting a new framework requiring courts to generally consider “reference to historical practices and understandings.”  The Supreme Court ultimately concluded that Kennedy satisfied his burden under the First Amendment by showing that the District “burdened his sincere religious practice pursuant to a policy that is not ‘neutral’ or ‘generally applicable.’”  Therefore, the Supreme Court determined, the District violated Kennedy’s First Amendment rights by impermissibly regulating his speech and restricting his religious practice.

What This Means

The Supreme Court’s Kennedy decision could have a broad impact on public entities.  It requires public employers to place a higher emphasis on employees’ right to religious expression when making employment decisions involving potentially protected religious activity and ultimately expands employees’ recognized First Amendment rights in the workplace.

It is too early to tell how lower courts will apply the Supreme Court’s new historical reference framework under the Establishment Clause.  With greater protections now afforded employees under the First Amendment, employment decisions in the future, particularly for public employers, will be difficult and complicated.  Employers are encouraged to consult with counsel before making employment decisions that involve religious practice implications.

AUTHORS

Anissa Elhaiesahar (USD School of Law, Class of 2023)
Matthew Mushamel
Fred Plevin

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

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

Background on PAGA

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

California’s “Suitable Seating” Requirements

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

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

LaFace v. Ralphs Grocery Co.

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

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

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

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

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

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

Conclusion

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

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

New California Law Classifies Intentional Wage Theft as a Felony

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

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

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

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

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

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

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

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

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

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

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

The Rescinded Rule Lived an Interesting Life

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

(i)     Hires or fires the workers;

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

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

(iv)    Maintains the employees’ employment records.

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

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

Employers Need to Evaluate their Potential Exposure as Joint Employers

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

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

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

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

The Problem

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

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

The Means to Address This Exposure

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

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

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

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

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

Next Steps

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

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

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

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

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

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

Details

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

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

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

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

What This Means

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

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

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


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

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

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

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