Author Archive: Aaron Buckley

California Employers Should Remember the Federal and California White Collar Exemptions Are Different

In Rob Boonin’s post below, he summarizes the U.S. Department of Labor’s proposal to change the regulations governing the so-called “white collar” overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA).

As Rob mentioned, the proposed changes are expected to have little impact in California and some other states, because some of the salary thresholds for white collar exemptions under state law are higher than the proposed new FLSA salary threshold, and to be exempt from overtime under both the FLSA and state law an employee must satisfy both the federal and state exemption requirements in full.

Employers with California employees should be aware that the California white collar exemptions differ in other important respects.  Below is a summary of the most important ways in which the FLSA and California white collar exemptions differ.

Salary Threshold

California’s salary threshold for white collar exempt employees is set at twice the state minimum wage for a 40-hour work week.  Under the current $12 state minimum wage for employers with 26 or more employees, California’s salary threshold is $960 per week ($49,920 per year).   California’s minimum wage for employers with 26 or more employees is set to increase according to the following schedule, and by doing so cause corresponding increases in the salary threshold for white collar exempt employees:

Effective Date            Minimum Wage         Salary Threshold                                                    

January 1, 2019        $12.00 per hour         $960 per week / $49,920 per year
January 1, 2020        $13.00 per hour         $1,040 per week / $54,080 per year
January 1, 2021        $14.00 per hour         $1,120 per week / $58,240 per year
January 1, 2022        $15.00 per hour         $1,200 per week / $62,400 per year

No Use of Incentive Pay

Unlike the proposed new FLSA exemption rules recently announced by the DOL, California does not allow employers to include bonuses or commissions to satisfy the salary threshold.

No Exemption for Highly Compensated Employees

California does not have a separate threshold for “highly compensated employees.”

More Stringent “Duties” Test

Unlike the FLSA, California’s “duties” test requires exempt employees to spend a majority of their working time performing exempt (as opposed to nonexempt) work consistent with the exemption under which they are classified.

To avoid liability for unpaid overtime arising from employee misclassification, employers should ensure their white collar exempt employees satisfy all the exemption requirements under both federal and state law.

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

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California Court Rules Employers That Require Employees to Call in Before Scheduled Shifts Must Pay Them

On February 4, 2019, the California Court of Appeal held employers that require employees to call in to work two hours before scheduled “on-call” shifts to find out whether they need to report to work trigger California’s “reporting time” pay requirements.

Clothing retailer Tilly’s, Inc. scheduled its retail store employees to work both regular and “on-call” shifts.  Employees were required to call their stores two hours before the start of their on-call shifts to determine whether they were needed to work those shifts.  Tilly’s told its employees to consider on-call shifts as “a definite thing” unless they were advised they did not need to come in to work.

A former Tilly’s employee filed a putative class action alleging Tilly’s owed her and other employees reporting time pay for on-call shifts.  The employee’s argument was based on Wage Order No. 7-2001, which applies to the retail industry.  That wage order requires employers to pay “reporting time pay” to employees for each workday “an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work.”  The reporting time pay requirement is “half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours.”

The trial court ruled in favor of Tilly’s, holding that calling in to ask whether to report for work did not constitute “reporting for work.”   But on Monday the Court of Appeal reversed, concluding that requiring employees to call in to work two hours before scheduled on-call shifts falls within the definition of “reporting to work” and therefore triggers the reporting time pay provisions.  Under this holding, the employer would be required to pay the employee for at least half of the on-call shift (up to four hours), even if the employee did not work that amount of time.

The Court reasoned that by scheduling employees for on-call shifts and not informing them whether they would be required to work until two hours before those shifts, Tilly’s effectively deprived the employees of the ability to schedule other work or make plans for personal activities, and this was “precisely the kind of abuse that reporting time pay was designed to discourage.”

Although this decision was limited to Wage Order No. 7-2001, which governs retail employees, similar reporting time pay provisions are found in other wage orders.  California employers who need employees to be on call should examine their practices.  The critical element in this case was Tilly’s practice of requiring all on-call employees to call in prior to their shifts, which the court held was effectively requiring the employees to report to work.  If Tilly’s did not require such an effort from its employees, but instead only called off the employees that it determined were not needed to work, the court’s result may well have been different.  Accordingly, if a California employer needs to have employees on call, but does not want to pay reporting time pay, it should not require any pre-shift action by employees, but instead should have supervisors contact only those employees who are not required to come to work.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP

California’s Piece-Rate Compensation Law Survives Court Challenge

On January 4, 2019, the California Court of Appeal rejected a request to declare the state’s piece-rate compensation law unconstitutionally vague.  The 2016 law, codified as Section 226.2 of the California Labor Code, requires employers to compensate piece-rate employees separately for so-called “nonproductive” work time that is not directly related to the activity being compensated on a piece-rate basis.

The statute requires separate compensation for rest and recovery periods mandated by state law, as well as “other nonproductive time.”  Nisei Farmers League brought suit seeking to have the statute declared unconstitutional, arguing the phrase “other nonproductive time” is unconstitutionally vague because it doesn’t say whether such activities as “traveling between work sites, attending meetings, doing warm-up calisthenics, putting on protective gear, sharpening tools, waiting for additional equipment, or waiting for weather to change” are “nonproductive” time within the meaning of the statute.  The Court of Appeal rejected the argument, finding the phrase in question was expressly defined by the statute as time under the employer’s control not directly related to the activity being compensated on a piece-rate basis, and there was no constitutional requirement to define precisely what activities fall within the definition.

The 2016 legislation is a codification of earlier appellate court decisions holding that piece-rate workers must be separately compensated for rest breaks.  A February 2017 appellate decision reached a similar conclusion as to the nonproductive work time of employees classified as exempt from overtime under the commissioned employee (a/k/a “inside sales”) exemption.  (Employees classified as exempt under the “outside sales” exemption are not subject to minimum wage, overtime, or meal/rest break requirements.)  All employers with piece-rate and/or inside commissioned sales employees in California should take immediate steps to ensure they separately compensate these employees for all rest breaks and other nonproductive time.

The case is Nisei Farmers League v. California Labor & Workforce Development Agency, No. F075102 (Cal. App. January 4, 2019.)

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

California Supreme Court Holds Federal De Minimis Rule Not a Defense to Wage Claims Brought Under California Law

Yesterday, the California Supreme Court ruled that the de minimis rule found in the federal Fair Labor Standards Act (FLSA) does not apply to wage claims brought under California state law.  The court thus rejected an attempt by Starbucks to invoke the rule as a defense to an employee’s claim that he was routinely required to work off-the-clock for a few minutes each day.

Background on the De Minimis Rule

Under the FLSA, employers are generally required to pay at least the federal minimum wage for all ‘‘hours worked.’’ California’s Industrial Welfare Commission (IWC) wage orders include similar requirements, which generally define ‘‘hours worked’’ more broadly as ‘‘the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.’’

But federal courts have long recognized an exception to the general rule requiring pay for all hours worked.  Under the de minimis rule, employees generally cannot recover for otherwise compensable time if it amounts to only a few seconds or minutes of work beyond scheduled working hours.  To determine whether work time is de minimis, courts consider: (1) the practical administrative difficulty of recording the additional time; (2) the aggregate amount of compensable time; and (3) the regularity of the additional work.  Applying these standards, numerous courts have held that daily periods of up to 10 minutes are de minimis under federal law and thus not compensable.

Troester v. Starbucks Corporation

As a shift supervisor for Starbucks, Douglas Troester was responsible for performing certain tasks at the end of the business day after clocking out, including transmitting sales data to Starbucks headquarters and setting the store alarm. These closing activities generally totaled fewer than four minutes, and they nearly always took fewer than 10 minutes.

After his termination, Troester sued Starbucks for unpaid wages under California law.  The federal district court granted Starbucks’s motion for summary judgment based on the de minimis rule.  Troester appealed.

The Ninth Circuit Court of Appeals, finding no opinion by the California Supreme Court applying the de minimis rule to California wage claims, asked the California Supreme Court whether the rule applied under California state law.  Yesterday the California Supreme Court found that it did not.

In its decision, the court noted that although the de minimis rule has been part of federal law for 70 years, neither the Labor Code nor the wage orders have been amended to recognize a de minimis exception.  Only one published California Court of Appeal decision has applied the de minimis rule, and it found that the rule did not apply to the case before it.  And although the California Division of Labor Standards Enforcement (DLSE) has for some time identified the de minimis rule as defense to claims for small amounts of unpaid time in its Enforcement Policies and Interpretations Manual and a handful of opinion letters, neither is binding, and the court found no intent to incorporate the rule into California law.

The court also noted practical considerations undermining the application of the de minimis rule in California wage actions.  The rule was first adopted by federal courts decades ago when it was more difficult to track small amounts of time.  With the technology available today, the court concluded that capturing all employee work time is considerably less difficult.

Although the court rejected the FLSA de minimis rule as a defense to state-law wage claims, the court did not decide whether a general de minimis principle may ever apply to wage and hour claims under state law.  The court made it clear that no such principle applied in the case before it, because Starbucks was aware that Troester and other supervisors worked a few minutes off the clock every time they closed a store.  But the court gave no examples of where a general de minimis principle might apply in future cases.

What This Means For Employers

Yesterday’s decision makes it clear that the FLSA de minimis rule is no defense to claims for small amounts of unpaid time under California law.  Employers with nonexempt employees in California should enact and enforce policies and practices designed record every minute of every employee’s working time, and to pay employees for every minute worked.

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

California Supreme Court Tightens Up Test to Determine Whether Workers are Independent Contractors

Summary

In a major decision with wide-ranging implications, the California Supreme Court handed down a decision on April 30, 2018, substantially restricting the ability of California businesses to lawfully use independent contractors in their core business operations. Dynamex Operations, Inc. v. Superior Court (Lee), Case No. S22732.

Under pressure from government tax and employment law enforcement agencies, as well as labor representatives, the Court announced a new independent contractor test. The decision is widely viewed as a potential blow to the gig economy, and a significant restriction on employer flexibility in determining the most cost-effective configurations between contractors and employees.

Facts and Analysis

Dynamex is a nationwide package and documents delivery service. In recent years it classified its drivers and delivery personnel as independent contractors. The Supreme Court, citing arguments that such classification denied workers various employment benefits and resulted in significant loss of tax revenue, held these contractors were improperly classified, and must be treated as employees. The determination of class-wide damages awaits.

Under prior law, the test for determining contractor status relied upon a number of factors, and thus allowed employers some flexibility in classifying certain workers as contractors, especially if they could demonstrate that one, but not all, of the definitions were met. No more. Now to establish an exemption the employer must prove that all factors point to independent contractor status under a new test. Here’s how it works:

First, the courts will presume that anyone whom the employer “suffers or permits” to work for them is presumed to be an employee. This definition presumes that “all workers who would ordinarily be viewed as working in the hiring business” are employees. (Emphasis is the Court’s.) The only examples of exclusions given by the Court would be workers – like plumbers or electricians – who the Court called “genuine independent contractors” – who do not perform services that are part of the employer’s scope of operations or line(s) of business.

Second, the Court adopted what in other states has been called the “ABC” test. Under this test, a worker is properly considered an independent contractor only if the employer establishes all of the following:

A. The worker is free from control and direction of the hirer in connection with the performance of the work, both under the contract and in fact; and

B. The worker performs tasks that are outside the usual course of the hiring party’s business; and

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring business. This normally means the worker will have established and promotes his or her own business; is licensed; does advertising; has other clients or potential customers; and the like.

What This Means

Although this test is new, the Court ruled that its decision was merely explaining existing law, which means it can and will be applied retroactively. In light of this, all California employers are well-advised to conduct a prompt audit of their use of contractors in light of the new standards. The expectation and intention of the decision is that large numbers of current contractors may not qualify for that status under the new test.

It remains to be seen how this ruling will affect joint employer or subcontractor relationships, in which a true contractor entity (such as a staffing company) is engaged but whose employees are subject to detailed direction by the retaining company. It is clear, however, that this ruling is intended to expand the populations of persons for whom tax deduction, statutory employee benefits, leave and discrimination benefits, and the like, are available, and that hiring companies could be exposed to statutory liability to the subcontractor’s employee, since it “suffered or permitted” them to work on its premises. It is not clear whether the rules on indemnification and reimbursement of expenses will be interpreted in the same fashion as the new rules on classification and taxation, but caution suggests these practices, and subcontractor indemnities, be examined as well.

Aaron Buckley

Paul, Plevin, Sullivan & Connaughton LLP

California Supreme Court Clarifies Required Method for Calculating Overtime On Flat-Rate Bonuses (and it isn’t the FLSA method)

Earlier this week, the California Supreme Court issued an opinion in Alvarado v. Dart Container Corporation of California, holding that when an employee has earned a flat sum bonus during a single pay period, the employer must calculate the employee’s overtime pay rate using only the regular non-overtime hours worked by the employee during the pay period, not the total hours worked.

In California, the Division of Labor Standards Enforcement’s Enforcement Policies and Interpretations Manual (the “DLSE Manual”) sets forth a formula for calculating overtime due on non-discretionary bonus payments.  (Whether a bonus is “non-discretionary” is the subject of detailed FLSA regulations, which California generally follows.)  The DLSE overtime formula requires dividing the bonus by only the regular non-overtime hours worked in the pay period (i.e., not both the non-overtime and overtime hours), and using a multiplier of 1.5 to calculate the overtime premium due on the bonus.  In Tidewater Marine Western, Inc. v. Bradshaw, however, the California Supreme Court held that certain portions of the DLSE Manual were void as “underground regulations.”  Tidewater (1996) 14 Cal.4th 557, 571.

Dart Container paid a $15 “attendance bonus” to employees who worked on a Saturday or Sunday.  For employees who worked overtime during a pay period in which they received an attendance bonus, the company calculated overtime on the bonus by dividing the bonus by the total number of hours worked in the pay period (both non-overtime and overtime hours).  The company then used a multiplier of 0.5 to determine the amount the bonus added to the employee’s hourly overtime pay.

Employee-plaintiff Hector Alvarado contended Dart Container’s method of calculating overtime pay was illegal because it did not comply with the DLSE Manual.  Alvarado argued the company should have divided the bonus only by the number of non-overtime hours worked during the pay period, and should have applied a multiplier of 1.5.

Dart Container argued that because the DLSE’s method was void as an underground regulation, its method of calculating the overtime rate was proper because it complied with the FLSA, which permits an employer to divide a bonus by total hours worked and apply a 0.5 multiplier.  The Court of Appeal agreed with Dart Container, and held its method of calculating overtime was permitted under California law.

The California Supreme Court reversed, holding that even though the DLSE’s method is void as an underground regulation, it nevertheless is the proper method for calculating overtime on flat-rate bonuses.  The court reasoned that because California’s state policy is to discourage overtime, the method used by an employer must not encourage the use of overtime.  The FLSA formula does just that, because every hour of overtime worked incrementally decreases the regular rate, thereby incentivizing employers to require their employees to work more overtime.

Based on this reasoning, the court further held that only the non-overtime hours the employee actually works in a pay period should be the divisor, rather than all the potential full-time non-overtime hours in a pay period, and that the proper multiplier for the bonus premium is 1.5, not 0.5:  “We conclude that the flat sum bonus at issue here should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”

This decision firmly establishes the method employers must use to calculate a California employee’s overtime pay rate when the employee has earned a non-discretionary flat sum bonus during a single pay period.  Additionally, because the same policy consideration of discouraging overtime applies to other types of bonuses, the California Supreme Court’s reasoning very likely applies to bonuses that cover multiple pay periods, such as annual non-discretionary bonuses.  Employers should immediately review their payroll policies and practices to ensure their California employees receive overtime pay calculated in a manner consistent with this opinion.  In particular, multi-state employers that use centralized payroll systems must now ensure overtime pay for California employees is calculated using a different method than overtime pay for employees who work outside California.

One final note: Dart Container argued that if the California Supreme Court adopted the DLSE calculation method, its decision should be applied only prospectively because, up to now, no California statute, regulation or wage order clearly required that method.  The court declined the request, which effectively means the court’s decision applies retroactively.  Look for overtime litigation in California to spike in the near future.

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

California Agency Issues New Guidance Stating Employers May Not Require Employees to Remain On-Site During Rest Breaks

California’s Division of Labor Standards Enforcement (DLSE) recently updated its guidance on paid 10-minute rest breaks.  In its new guidance the DLSE maintains, for the first time, that an employer may not require its employees to remain on the employer’s premises during rest breaks.

In November 2017 the DLSE posted on its website new Frequently Asked Questions (FAQs) addressing requirements for rest breaks and lactation accommodation.  That new guidance includes the following:

5. Q. Can my employer require that I stay on the work premises during my rest period?

A: No, your employer cannot impose any restraints not inherent in the rest period requirement itself.  In Augustus v. ABM Security Services, Inc., (2016) 5 [sic] Cal.5th 257, 269, the California Supreme Court held that the rest period requirement “obligates employers to permit—and authorizes employees to take—off-duty rest periods.  That is, during rest periods employers must relieve employees of all duties and relinquish control over how employees spend their time.” (citation omitted)  As a practical matter, however, if an employee is provided a ten minute rest period, the employee can only travel five minutes from a work post before heading back to return in time.

The new DLSE FAQs in their entirety can be found here.  In the Augustus v. ABM Security Services case cited by the DLSE, the California Supreme Court held that employees cannot be required to remain on-call during rest breaks, but did not expressly say employers must allow their employees to leave the employer’s premises during rest breaks.  For more information on the Augustus case see our December 27, 2016 blog post.

Prior to the DLSE’s new FAQs, it was widely understood that employers may require their employees to remain on-site during rest breaks.  While the DLSE has no authority to make law, it is empowered to enforce California wage orders and labor statutes, and courts often find the DLSE’s opinions on enforcement issues persuasive.  For this reason California employers should take the DLSE’s new guidance seriously.

As the DLSE pointed out in its new FAQs, the realities of time and distance are likely to discourage many employees from leaving their employer’s premises during 10-minute rest breaks, even when allowed to do so.  However, an employer’s policy that purports to prohibit employees from leaving the employer’s premises during rest breaks could, under the DLSE’s new interpretation, potentially support a conclusion that the employer failed to relieve its employees of all duty during rest breaks, and subject the employer to liability.  California employers should therefore review their policies and practices to ensure they are not requiring employees to remain on the employer’s premises during rest breaks.

New California Law Makes Contractors Liable for Subcontractors’ Unpaid Wages

On October 14, 2017, California Governor Jerry Brown signed into law Assembly Bill 1701, which will make general contractors on private construction projects liable for their subcontractors’ failure to pay wages due to the subcontractors’ employees.  The new law applies to contracts entered into on or after January 1, 2018.

Assembly Bill 1701 adds Section 218.7 to the California Labor Code.  Subdivision (a)(1) provides:

For contracts entered into on or after January 1, 2018, a direct contractor making or taking a contract in the state for the erection, construction, alteration, or repair of a building, structure, or other private work, shall assume, and is liable for, any debt owed to a wage claimant or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the direct contractor for the wage claimant’s performance of labor included in the subject of the contract between the direct contractor and the owner.

The direct contractor’s liability under Section 218.7 will extend only to any unpaid wages, fringe or other benefit payments or contributions, including interest, but will not extend to penalties or liquidated damages.

Employees will not have standing to enforce the new law.  Only the California Labor Commissioner, a third party owed fringe or other benefit payments or contributions on a wage claimant’s behalf (such as a union trust fund), or a joint labor-management cooperation committee may bring a civil action against a direct contractor for the unpaid wages.   A joint labor-management committee must provide the direct contractor with at least 30 days’ notice by first-class mail before filing the action.

A prevailing plaintiff in any such action is entitled to recover its reasonable attorneys’ fees and costs, including expert witness fees.  The property of a direct contractor that has a judgment entered against it may be attached to satisfy the judgment.

The new law authorizes a direct contractor to request from its subcontractors their employees’ wage statements and payroll records required to be maintained under Labor Code section 1174.  The payroll records must contain information “sufficient to apprise the requesting party of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.”   Direct contractors and subcontractors also have the right to request from any lower tier subcontractors “award information that includes the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project.”   A direct contractor may withhold as “disputed” all sums owed if a subcontractor does not timely provide the requested information, until such time as that information is provided.

Given this new law, general contractors operating in California should be even more careful than before about the subcontractors they hire, and pay particular attention to the subcontractors’ ability and willingness to comply with all applicable wage and hour laws.  This includes requirements to provide timely meal and rest periods, because meal and rest period premiums qualify as wages.  General contractors should also ensure their subcontractor agreements require the subcontractors to indemnify the general contractor for any liability arising from the new law.  Once a project is underway, general contractors should closely monitor their subcontractors’ compliance with wage and hour laws and fringe benefit payments, and where necessary exercise their right to request payroll records from subcontractors to ensure they are timely paying all required wages and fringe benefits.

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

California Supreme Court Rules PAGA Plaintiffs Are Presumptively Entitled to Contact Information of Defendant’s Employees Statewide

Last week in a unanimous decision, the California Supreme Court ruled that representative plaintiffs in Private Attorneys General Act (PAGA) cases are presumptively entitled to discover the names and contact information of other allegedly “aggrieved employees” statewide at the outset of litigation, without the need to show good cause.

Enacted in 2004, PAGA allows allegedly “aggrieved employees” to sue employers on behalf of the state of California to recover civil penalties on behalf of the state for violations of the state Labor Code, and to keep for themselves and other aggrieved employees 25 percent of any civil penalties recovered, with the remaining 75 percent going to the state.  PAGA also provides for the recovery of attorneys’ fees.

Michael Williams was employed by Marshalls of CA, LLC, at the company’s store in Costa Mesa, California.  He sued Marshalls under PAGA, asserting various wage and hour violations.  Early in the case, Williams sought to discover the names and contact information of fellow Marshalls employees throughout California, and offered to use a so-called “Belaire-West notice,” a discovery mechanism whereby non-party employees are notified of a plaintiff’s request to discover their names and contact information, and are given an opportunity to opt out of having their information produced.  Marshalls objected on several grounds, including burdensomeness and the privacy rights of its employees.  The trial court granted Williams’ motion to compel Marshalls to produce employee contact information, but only as to employees who worked at the Costa Mesa store where Williams worked.

The Court of Appeal affirmed, holding discovery of contact information for employees statewide was premature, and that Williams had failed to show good cause for the production of contact information statewide, given that he had not shown knowledge of unlawful practices at any store other than the Costa Mesa location, or facts putting any uniform statewide practice at issue.

The California Supreme Court reversed, finding the trial court abused its discretion in denying Williams’ motion to discover statewide contact information because the California Code of Civil Procedure does not include a “good cause” standard for discovery, and discovery rules for PAGA actions are no different from the rules governing discovery in putative class actions.  Although defendants may object to discovery requests on various grounds (as did Marshalls) and trial courts retain broad discretion to manage discovery, when it opposed the motion the company presented no evidence showing the production of statewide contact information would be unduly burdensome, and the well-established Belaire-West notice procedure provided sufficient privacy protections.

This decision confirms that in a class, collective or PAGA action litigated in a   California state court, the names and contact information of non-party employees are presumptively discoverable simply upon the filing of a complaint.  Instead of placing the burden on plaintiffs to show good cause for the discovery, the burden is on defendants to show why discovery should be limited.  The court found Marshalls failed to do so, but the opinion leaves open the possibility that other employers may be able to limit discovery under the right circumstances.

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

California Court Rules Commissioned Employees Must Be Paid Separately for Rest Breaks

Last week the California Court of Appeal issued a decision holding that employers must separately compensate commissioned (“inside sales”) employees for legally required rest breaks.

Under California law most employees are entitled to a paid 10-minute rest break for every work period of four hours, or major fraction thereof.  California law also provides an overtime exemption for commissioned salespeople, but this “inside sales” exemption does not exempt those employees from minimum wage or meal and rest break requirements.  (So-called “outside” salespeople are not subject to minimum wage, overtime, or meal/rest break requirements.)

Stoneledge Furniture compensated its retail sales associates according to a standard commission agreement.  The agreement provided for sales associates to be compensated on a commission-only basis, but also guaranteed the associates a minimum income of $12.01 per hour.  The minimum income was paid to sales associates as a “draw” against future commissions.  If an associate earned commissions that met or exceeded the draw, the associate would be paid the commissions actually earned.  But if an associate’s earned commissions were less than the draw, the associate would receive the minimum draw.  The agreement did not provide separate compensation for any non-selling time, such as time spent for meetings, training, or rest breaks.

Two sales associates filed a class action against Stoneledge alleging the company failed to provide paid rest breaks.  The trial court certified a class but later granted summary judgment to Stoneledge, finding that by guaranteeing sales associates a minimum income of $12.01 per hour, Stoneledge ensured they would be paid for all hours worked, including rest breaks.

The Court of Appeal reversed, holding that Stoneledge violated California law by not separately compensating sales associates for rest breaks.  The court relied on the applicable wage order, which provides, “authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.”  The court reasoned that since the minimum pay guarantee was a draw against commissions, it was simply an advance subject to clawback, or deduction, from future commissions.  As a result, when a sales associate earned commissions that exceeded the draw, the only pay the associate received consisted of commissions, which did not account for rest breaks.  The court held that to comply with California law, commission-based compensation plans must provide for separate pay for legally required rest breaks.  In reaching its conclusion, the court relied on previous cases holding that piece-rate employees must be separately compensated for rest breaks, a requirement the state legislature later codified at California Labor Code section 226.2, which took effect in 2016.

Although this decision focused on rest breaks, its reasoning applies equally to other compensable yet “non-productive” time that is not accounted for and compensated under commission or piece-rate compensation plans.  Employers with California-based commissioned (inside) salespeople, or employees paid on a piece-rate basis, should review their compensation plans to ensure those employees are separately paid at least the minimum wage for rest breaks and other non-productive yet compensable time, and that this pay does not operate as a “draw” subject to deduction.  In other words, pay for all non-productive compensable time must be guaranteed and independent from compensation tied to sales commissions or piece-rate production.

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