Discretion: The Better Part of Valor in Defending Against California PAGA Claims
Since the Supreme Court’s decision in Viking River Cruises v. Moriana, California employers have been implementing and enforcing arbitration agreements requiring employees to arbitrate their individual Private Attorneys’ General Act (“PAGA”) claims. But what happens to the representative PAGA claim once the employee’s individual PAGA claim has been severed and sent to arbitration? The U.S. Supreme Court held in Viking River that the representative PAGA claim had to be dismissed from court because of the mandatory arbitration agreement. But, Justice Sonia Sotomayor’s concurring opinion in that case left the last word on standing to California courts and the California legislature.
Since Viking River, California courts have issued mixed and inconsistent rulings regarding what to do with the representative PAGA claim once the employee’s individual claims are compelled to arbitration. Some courts have dismissed the representative claims. Others have stayed the representative claim while the arbitration of individual claims proceeds.
Last week, the California Supreme Court considered that question during oral argument in Adolph v. Uber (Supreme Court Case No. S274671). A decision is expected to be issued in Adolph within 90 days. In the meantime, let’s review the key elements from the oral argument.
The Justices peppered counsel for both sides with questions during oral argument. A number of Justices seems skeptical that staying the representative action made sense as they aggressively questioned whether a plaintiff has sufficient “skin in the game” to prosecute the representative PAGA claim after their individual PAGA claim is already resolved in arbitration. Another key issue discussed during oral argument was whether a representative PAGA claim should be stayed during the arbitration of individual claims. Adolph Counsel’s argument that a stay of a representative PAGA claim may not always be required – while conceding that Uber’s arbitration agreement expressly required a stay – was also met with skepticism by the Court. A plaintiff’s standing to bring a PAGA claim will be decided as part of the arbitration and the potential for inconsistent findings between the arbitrator and the court is precisely the type of situation in which a stay is typically granted.
Prior PAGA decisions allow a plaintiff with minimal standing (i.e., skin in the game) to proceed with representative PAGA claims. For example, in Kim v. Reins Int’l Cal., a PAGA plaintiff who settled his individual claims in arbitration in which the settlement agreement expressly carved out settlement of the PAGA claim on a representative basis) was held to have preserved standing to prosecute the representative PAGA claim in court. In Huff v. Securitas Sec. Servs., the court held that a PAGA plaintiff has standing to bring claims on behalf of others for alleged Labor Code violations that they themselves never suffered, as long as the plaintiff suffered at least one Labor Code violation. If these prior cases providing for a minimal standing requirement and the stated legislative goal of ensuring compliance with the Labor Code are given deference by the California Supreme Court, it is likely that the Court will allow and even encourage representative PAGA claims to remain stayed in court until the resolution of the arbitration of a plaintiff’s individual claims. However, if the Court looks to formulate a more politically based solution, then a different conclusion will be drawn in the final Adolph opnion.
In the meantime, what strategies should employers consider in defending against PAGA cases?
- Cure alleged violations, if possible. PAGA allows employers to cure certain violations. If the initial LWDA exhaustion letter alleges claims that can be cured, employers should act quickly since they only have 33 days from the postmark date of the LWDA exhaustion letter to cure the alleged violation. A plaintiff cannot pursue PAGA claims if they have been timely cured. So, early evaluation of initial LWDA exhaustion letters is key.
- Evaluate whether to compel arbitration. If there is an arbitration agreement with employees providing for individual arbitration of claims, including individual PAGA claims, consider whether it is best to proceed in arbitration or not.
If California employers that are faced with PAGA claims by employees who have signed mandatory arbitration agreements proceed in individual arbitration and the PAGA representative claim is stayed (or later refiled) and the plaintiff is successful in arbitration, then employers may face an uphill battle with respect to those claims on the representative PAGA claim, although the employer could raise factual and legal defenses as to how any alleged violation suffered by the PAGA representative was not suffered by all or most of the “aggrieved employees” s/he seeks to represent. However, California employers should consider and weigh the heightened exposure because the number of pay periods upon which PAGA penalties can be imposed will likely increase during the time the case was stayed pending the arbitration. So, in those cases where a plaintiff can demonstrate a clear violation and individual defenses may be challenging, it actually may be in the employer’s best and most economical interest to proceed to early resolution rather than delay the process by compelling individual arbitration.
If an evaluation of a plaintiff’s allegations, timecards, and pay records does not establish a clear violation, then compelling arbitration while the representative PAGA claim is stayed is likely the most cost effective way of resolving whether plaintiff has standing, while at the same time avoiding broad and expensive discovery as to other employees.
In short, just because an employer can compel arbitration doesn’t necessarily mean they should. PAGA litigation is complex. Although a thorough and early evaluation of claims can be costly, it often helps save significant litigation costs in the long run.
Wage & Hour Trap for California Employers: The Regular Rate of Pay Calculation
In California, non-exempt employees who are not part of a proper alternative workweek schedule are entitled to premium overtime wages at one and one-half times the employee’s regular rate of pay for any time worked over (a) eight (8) hours in a single workday, (b) forty (40) hours in a single workweek, or (c) six (6) consecutive days in a single workweek. Further, in California, the overtime premium must be paid out at double an employee’s regular rate of pay for any time worked (a) in excess of twelve (12) hours in a single workday or (b) in excess of eight (8) hours on the seventh consecutive day of work in a workweek.
For many California employees, the calculation is simple enough using the employee’s base hourly rate multiplied by either 1.5 or 2.0 to determine the Overtime or Double time rate for the corresponding hours in accordance with the above requirements. However, the regular rate of pay calculation may become increasingly more complicated in California when other forms of remuneration, such as incentives, are paid out, or when an employee is paid at multiple rates.
Below is a list of some of the primary forms of other “remuneration” that employees may receive as well as a discussion of when such payments may or may not impact the regular rate of pay calculation in California:
- Discretionary v. Non-Discretionary Bonuses: If a bonus is discretionary, it can be excluded from the regular rate of pay calculation, whereas a non-discretionary bonus needs to be factored into the regular rate. Simple enough, right? However, for a bonus to truly be discretionary, and thus not factored into the regular rate calculation for payment of overtime hours, whether or not payment is made needs to be at the sole discretion of the employer and made at or near the time it is paid out and not based on any promise or prior agreement. Simply calling a bonus “discretionary” or even a bonus plan that may contain certain discretionary elements does not necessarily make it truly optional or at the sole discretion of the employer. Non-discretionary bonuses, on the other hand, are intended to incentivize employees in some way and may include bonuses for productivity, hitting certain metrics, or even attendance goals. Generally, a non-discretionary bonus is one that is paid out under a prior agreement, contract, or promise, as well as one that is based on a specific formula or metrics being triggered. However, the line between a discretionary and non-discretionary bonus may get blurred when it has elements of both, making the determination of whether it should be factored into the regular rate of pay calculation less clear-cut at times. In close cases, many judges in the California courts and California Labor Commissioner tend to side with the employees.
- Other Bonuses: Even within this above distinction, certain bonuses may not fall squarely within these parameters. For example, a hiring bonus paid out at the start of employment is generally not dependent or tied to any performance metrics or length of employment and therefore is not intended to incentivize any future behavior where it could likely be excluded from the regular rate of pay calculation. However, when such a bonus is also tied to a retention requirement or length of service scale it begins to incorporate certain formulaic elements and/or future incentives that likely shifts such a bonus into the realm of being non-discretionary and therefore a factor for the regular rate of pay calculation. To further complicate matters, flat sum bonuses (ones that do not operate to increase/decrease in proportion with hours worked) and percentage bonuses (paid on a percentage of gross wages when benchmarks are met) may appropriately be calculated in a variety of methods for determining regular rate of pay and thus overtime payment rates, as reported previously in blog posts by our Nor Cal representatives, CDF Labor Law LLP:
Certain statutory exclusions from the regular rate of pay calculation do exist however, and below is a list of some of the more common exclusions:
- Gifts: Sums paid out occasionally, like a holiday bonus, and that are truly independent of an employee’s hours worked or production are not included in the regular rate of pay calculation in California.
- Reimbursements: Sums paid to reimburse an employee for reasonable business expenses incurred, like a portion of a personal cellphone or home internet plan, are generally not included in the regular rate of pay calculation provided the reimbursement or stipend is separately allocated and for reimbursement purposes. Simply increasing an employee’s hourly rate to offset certain business expenses incurred, perhaps related to a work-from-home environment, may create issues if excluded.
- Benefit Contributions: Sums paid by an employer for benefit plans, such as health insurance or retirement plans, are generally not considered in the regular rate of pay calculation as these contributions are not considered wages, provided the plan meets certain requirements.
Ensuring that the regular rate of pay calculation is being done correctly is imperative to ensure that employees are being properly compensated. Getting this wrong potentially opens California employers to possible liability far greater than the underpayment itself, which may be very minimal on any given paycheck, especially when little overtime is accrued. The reason is that the regular rate of pay calculation does not only impact overtime rates, but is also the calculation used to determine the proper amount for payment of meal and rest break premiums, as reported in CDF Labor Law LLP’s prior blog post [callaborlaw.com], and possibly other forms of remuneration such as sick leave and PTO.
Getting the regular rate calculation slightly wrong can create havoc. It might result in an underpayment for employees across the company, which can often trigger other penalties such as wage statement violations or multiple waiting time penalties. These penalties are mandatory and generally far exceed any actual underpayments. Moreover, because these mistakes are often not isolated to individual employees, a failure to include a requisite sum in the regular rate of pay calculation generally applies to a number of employees, making such claims subject to costly and time consuming representative class or California PAGA actions. In the last few years, WHDI has seen many California PAGA actions based on failure to properly calculate the regular rate of pay. California employers should review their current pay practices to ensure this calculation is being computed properly.
California Civil Rights Department Permits Deferrals For Reporting Labor Contractor Employee Pay Data
Recently enacted California law requires private employers of 100 or more employees and/or 100 or more workers hired through labor contractors to annually report pay, demographic, and other workforce data to the Civil Rights Department (CRD) next month, on May 10.
On April 14, 2023, the CRD updated its FAQs [calcivilrights.ca.gov] to permit employers to request a deferral on reporting the pay data for Labor Contractor Employee Reports. The key takeaways for employers required to file Labor Contractor Employee Reports are:
- Labor Contractor Employee Reports must be submitted through the portal by May 10, 2023.
- Employers that are not able to timely submit their Labor Contractor Employee Reports can file “enforcement deferral requests.”
- Once the deferral request is granted, the CRD will defer seeking an order of compliance for the employer to file its Labor Contractor Employee Report through July 10, 2023.
- The deferral request can be filed at any time from April 18, 2023 to May 10, 2023.
- The deferral request must be filed through the pay data reporting portal and can only be filed by the employer registered in the portal.
- Deferrals are only for the Labor Contractor Employee Reports, reports for regular employees are still due on May 10, 2023.
Because the CRD can seek an enforcement order and penalties of up to $100 per employee for initial violations for failure to file the report, an employer should seek a deferral if it will be unable to timely file its California Labor Contractor Report by May 10.
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:
- Update Posters: California employers should make sure their workplace posters are up-to-date and reflect the correct minimum wage requirements.
- 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.
- 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.
- 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.
- 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.
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:
- 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
- 43.4% of shifts resulted in employees losing minutes of work time due to rounding;
- for pay periods where work time resulted in additional minutes in favor of employees, the average gain was 11.3 minutes; while
- 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.
Ninth Circuit Decision Requires California Employers to Re-Examine Expense Reimbursement Procedures
Earlier this month, on February 8, the Ninth Circuit Court of Appeals held that a California employer’s per diem expense reimbursement payments functioned as compensation for work rather than business expense reimbursements. As a result, the employer was required to factor those per diem payments into employees’ “regular rate of pay.”
An employee’s “regular rate of pay” is used to calculate overtime under the FLSA and California Labor Code. It is also used to calculate double-time, sick leave, and reporting time pay in California. The decision, if adopted by other courts, could have devastating consequences for California employers with flat-sum and/or automatic expense reimbursement procedures.
The Details of the Case: Clarke v. AMN Services
AMN is a healthcare staffing company that places hourly-paid clinicians on short-term assignments. Each week AMN paid traveling clinicians a per diem amount to reimburse them for the cost of meals, incidentals, and housing while working over 50 miles away from their homes. AMN did not report these payments as wages and classified them as tax-exempt expense reimbursements.
AMN used a number of factors to calculate the per diem payment, including the extent to which clinicians worked their scheduled shifts. Notably, under the per diem policy, the payments could decrease if clinicians worked less than their scheduled shifts, and work hours in excess of those scheduled could be “banked” and used to “offset” missed or incomplete shifts. Interestingly, AMN provided “local” clinicians per diem payments under the same policy, but such payments were reported as taxable wages. It was not clear why AMN took a different position with the local clinicians
The Ninth Circuit determined that these characteristics indicate that the per diem payments to traveling clinicians functioned as compensation for hours worked, and not expense reimbursements. The court relied heavily on AMN’s decision to pay both local and traveling clinicians under the same per diem policy but treat payments to local clinicians as wages. The Court also noted that “AMN offers no explanation for why ‘banked hours’ should effect” per diem payments, and found “the only reason to consider ‘banked hours’ in calculating” per diems is to compensate clinicians for hours worked.
Potential Implications for California Employers
Many California employers implement a business expense reimbursement policy aiming to fully reimburse employees for all expenses they incur, while (1) minimizing administrative burdens and expenses, and/or (2) avoiding the creation of preferential work assignments and a perverse incentive for employees to “incur” expenses.
The process of submitting, reviewing and processing expense reimbursements is cumbersome, especially for employees who work in the field and/or travel frequently. For this reason, some employers adopt a flat-sum reimbursement policy in which the amounts paid are at least partially fixed, such as AMN’s per diem policy. They often issue these payments automatically, without obtaining documentation of the expenses from employees. This issue is especially important during the COVID-19 pandemic because California employers often use fixed expense reimbursement amounts for computer and other expenses for remote workers.
The Clarke decision should concern any employer with a business expense policy that includes such flat-sum or automatic reimbursement payments. It is unclear whether or not the holding of the Clarke case will be extended in other cases or whether it will be distinguished based on the unique facts of the case and inconsistencies of AMN’s implementation (i.e., that AMN was paying local clinicians a per diem, but treating it as part of wages under the same policy).
Significant liability can arise if reimbursement payments, in whole or in part, are deemed to function as wages that must be factored into the regular rate of pay. In addition, plaintiffs could also argue that if such payments were actually “wages” then they were not properly reimbursed for their business expenses under section 2802 of the California Labor Code. As a result of this decision, California employers should carefully review any flat-sum or automatic reimbursement policies and procedures to ensure that they do not present any of the dangers illustrated in the Clarke decision. In addition, the scope of this decision remains unclear. Therefore, employers in other states particularly those employers with employees in states covered by the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington), should also take a close look at their per diem policies in conjunction with the Ninth Circuit holding in Clarke.
New 2021 California Pay Equity Reporting Requirements Explained
A few weeks ago, California’s Pay Data Reporting Act, went into place. This new Act requires California private employers with 100 or more employees that are required to file an annual EEO-1 report with the EEOC to also submit a “pay data report” to the California Department of Fair Employment & Housing (“DFEH”). Earlier this week, the DFEH released new reference materials that provide guidance on how to prepare the pay data report and submit it to DFEH, including a user guide, an excel template and a CSV example (plain text file). California employers that are subject to the reporting act must submit the requisite pay data report to the DFEH (by way of an online portal) by March 31 this year and every subsequent year. The portal will be operational by February 16. In addition, the DFEH maintains and updates a Frequently Asked Questions resource page that explains the substantive requirements of the act and how to satisfy them. Links to the FAQs, user guide, portal, and the samples are here.
There have been many changes in California wage and hour law and leave laws over the last year. If you have employees in California, we encourage you to reach out to one of our California based members at Paul Plevin (So Cal) or CDF Labor Law (Nor Cal).
Ninth Circuit Finds That Federal Law Preempts California Break Rules For Interstate Truckers
The Ninth Circuit Court of Appeals recently upheld the Federal Motor Carrier Safety Administration’s (FMCSA) determination that federal law preempts California’s meal and rest break requirements as to drivers of property-carrying commercial motor vehicles (CMVs), who are subject to the FMCSA’s hours of service (HOS) regulations. The Ninth Circuit’s decision provides much needed clarity for companies employing such drivers, allowing them to operate in compliance with the FMCSA HOS drive-time, break, and time recording rules, without the additional costs burdens imposed by California’s break rules.
However, the decision may still be overruled through en banc review by the Ninth Circuit or on petition to the Supreme Court. Additionally, it is possible that the FMCSA reverses course after President Biden’s nominated Secretary of Transportation, Pete Buttigieg is in the driver’s seat. A copy of the opinion is available here.
BACKGROUND & SUMMARY
On December 21, 2018, the FMCSA issued a Determination of Preemption, finding that California’s break rules are subject to the Secretary of Transportation’s authority to review and preempt state laws and regulations on CMV safety. (Federal regulations delegate the Secretary’s authority to the FMCSA Administrator.) This finding was a departure from a 2008 decision, in which the FMCSA concluded that California’s break rules could not be regulations on CMV safety because they “cover far more than the trucking industry.” The FMCSA supported the departure by pointing to its 2011 revisions to the HOS rules. Among other changes, the 2011 revisions created a mandatory rest period requirement, which the FMCSA found are “unquestionably” rules on CMV safety. Because California’s break rules govern the same subject as the mandatory rest break requirement under the FMCSA’s HOS rules, the FMCSA concluded that California’s break requirements are also rules on CMV safety and thus subject to preemption review.
Because California’s rules are additional to or more stringent than the HOS regulations, they were subject to preemption upon a finding that they either (1) have no safety benefit, (2) are incompatible with the HOS regulations, or (3) would cause an unreasonable burden on interstate commerce. The FMCSA determined that California’s break rules check each box. It then concluded that California may no longer enforce its break rules with respect to property-carrying CMV drivers subject to the FMCSA’s HOS rules.
On December 28, 2020, the International Brotherhood of Teamsters petitioned the Ninth Circuit to review and reverse FMCSA’s determination. California’s Labor Commissioner and others also filed petitions for review. The Ninth Circuit rejected petitioners’ arguments and upheld the FMCSA’s decision, holding the FMCSA acted within its authority under federal law. The court distinguished its prior decision in Dilts v. Penske Logistics, LLC, 769 F.3d 637 (9th Cir. 2014) because it was decided based on a different federal preemption law concerning state laws that are “related to” CMV prices, routes, or services.
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.
The Muddled Rules for Reimbursing California Employees For Remote Work
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.