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.
Inflation to Cause California Minimum Wage to Rise Higher Than Anticipated in 2023
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.
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
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.”
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.
California Supreme Court: One Hour California Meal and Rest Period Penalty Must Include Commissions and Non-Discretionary Bonuses
by Corrie Klekowski and Fred Plevin
Paul, Plevin, Sullivan & Connaughton
On Thursday, the California Supreme Court issued its decision in Ferra v. Loews Hollywood Hotel, LLC, in which it ruled that the one hour of pay employers are required to provide employees for non-compliance with California’s meal and rest period requirements must be based on the same “regular rate of pay” (RROP) calculation used in calculating overtime pay. This means that employers must account for commissions and non-discretionary bonuses when calculating the amount of a meal or rest period penalty paid to employees.
The Court ruled that its decision applies retroactively, so employers may be liable for underpaying hourly employees who received a meal or rest period penalty in a workweek for which they received commissions or non-discretionary payments if the meal/rest period penalty was not based on the RROP calculation.
Jessica Ferra was a bartender at the Loews Hollywood Hotel. She received quarterly incentive payments. On occasion, Loews paid her a penalty of one hour of pay for a missed, late or short meal or rest period. Loews calculated the one-hour meal/rest period penalty at Ferra’s base hourly rate. Ferra filed a class action against Loews in 2015, alleging that Loews failed to comply with California law by omitting the incentive payments from the one hour premium pay she received for noncompliant meal or rest breaks.
The governing statute, Labor Code 227.6(c), specifies that “the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” Ferra argued that “regular rate of compensation” was the same as “regular rate of pay,” which is a well-known concept in wage and hour law used for calculating overtime pay. Specifically, under the RROP concept, employers must include commissions and other non-discretionary payments when calculating overtime pay for employees.
Both the trial court and the California Court of Appeal ruled in favor of Loews, holding that the because the Legislature did not use the term “regular rate of pay” in the statute, that concept did not apply to the meal/rest period pay. The Supreme Court, however, disagreed and held that “regular rate of compensation” (the term used in Section 226.7) and “regular rate of pay” were synonymous. In reaching this conclusion, the Court turned aside Loews’ reliance on accepted “canons” of statutory interpretation, characterizing them as “merely aids” and “guidelines subject to exceptions.” The Court also relied on the “remedial purpose” of California’s Labor Code and its guidance that California’s labor laws are to be “liberally construed in favor of worker protection.”
Finally, the Court rejected Loews’ argument that its decision should apply only prospectively. Loews argued that it, like many other employers, had reasonably interpreted Section 227.6 as allowing for the premium pay to be based on an employee’s straight hourly rate and applying the decision retroactively would be unfair. The Court disagreed, concluding that this was a case of statutory interpretation, and therefore, its ruling should be retroactive. It also rejected Loews’ pleas that retroactive application of the Court’s decision would expose employers to “millions” in liability, observing it was “not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.”
What This Means
Like Loews, many California employers have paid meal/rest period penalties based on employees’ straight time hourly rate. The Loews decision means that such employers may have liability to employees who received a non-discretionary payment in the same workweek as they received meal/rest period premium pay. The period of exposure could be up to four years under California’s unfair business practice statute. Because the incremental difference in the penalties is likely to be small, the total wages owed, even to a large number of employees, may be relatively minor. However, the liability could expose employers to class action and PAGA claims for attorneys’ fees and other statutory and civil penalties based on an underlying violation of Section 226.7. We expect to see a proliferation of these claims being filed or added to pending class actions and PAGA lawsuits.
Employers should immediately implement changes to ensure that any meal/rest period penalties paid in the future are calculated based on the employee’s RROP.
In addition, employers may want to analyze options for paying employees to address recalculations of past meal/rest period penalties based on the RROP. Whether this is a viable option for employers will depend on a number of factors, including the availability of the information needed to identify eligible employees and to calculate the amount owed. If you have questions about this decision or would like guidance on analyzing your options, please feel free to contact one of the authors or any PPSC attorney.
 Calculating the RROP can be complicated. But, generally for hourly employees, the RROP for a workweek is calculated by determining the total regular pay—including regular wages and other forms of “remuneration”—divided by the total number of hours worked. For example, an employee with a pay rate of $15 per hour that worked 40 hours, and received a $20 production bonus, would have a $15.50 RROP:
|(40 hours x $15/hr) + $20||$620|
|————————————–||=||————-||=||$15.50/hr (correct regular rate)|
|40 hours||40 hours|
So, if this employee had a non-compliant meal period in this workweek, under the Loews decision, they should be paid a $15.50 penalty, not a $15.00 penalty. Where an employee works overtime in the same period that the meal premium is due, the formula would be even more complex.
 The term “non-discretionary” for purposes of the RROP rule is defined in state and federal regulations and administrative guidance. Simply stated, a payment is “discretionary” only if both the fact that the payment is to be made and the amount of the payment are determined at the sole discretion of the employer, and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.
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.
California Court Provides Guidance on “Unlimited” Vacation Policies
In recent years, some employers have implemented so-called “unlimited” vacation policies, mostly applied to exempt employees, that leave it up to employees and their supervisors to decide how much paid time off to take. On April 1, 2020, the California Court of Appeal addressed for the first time whether California law requires an employer with an “unlimited” vacation policy to pay an employee for “unused” vacation upon the employee’s separation from employment. The court held that on the specific facts of the case before it, the employer was required to pay its former employees for unused vacation, but also offered guidance as to what kind of unlimited vacation policy might relieve an employer of the obligation to pay out accrued but unused vacation upon an employee’s separation.
Background on California Law Governing Vacation Policies
California law does not require employers to provide employees with paid vacation. But when an employer does provide paid vacation, Labor Code section 227.3 requires employers to pay as wages any “vested” vacation time that separating employees have not used. Decades ago, in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 784 (1982), the California Supreme court addressed when the right to vacation “vests” under section 227.3, stating:
The right to a paid vacation, when offered in an employer’s policy or contract of employment, constitutes deferred wages for services rendered. Case law from this state and others, as well as principles of equity and justice, compel the conclusion that a proportionate right to a paid vacation “vests” as the labor is rendered. Once vested, the right is protected from forfeiture by section 227.3 On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay.
While Section 227.3 effectively prohibits so-called “use-it-or-lose-it” vacation policies, an employer may adopt a policy that creates a waiting period at the beginning of employment during which no vacation time is earned, and therefore none vests. An employer may also adopt a policy that “caps” the amount of vacation an employee accrues, by precluding accrual of additional vacation time once an employee has reached a specified maximum. Under such a policy, the employee does not forfeit vested vacation pay because no more vacation is earned once the maximum is reached, and therefore no more vests until such time as the employee uses accrued vacation, drops below the cap, and once again begins to accrue more vacation.
In order to pay a separating employee all “vested” vacation, an employer necessarily must keep track of how much vacation an employee earned and used during employment. But what happens if an employer offers “unlimited” vacation to an employee, or allows an employee to take paid time off, but never notifies the employee of precisely how much paid time off the employee may take? That is the question addressed by the California Court of Appeal in its recent opinion.
McPherson v. EF Intercultural Foundation, Inc.
EF Cultural Foundation, Inc. (EF) runs educational and cultural exchange programs between the United States and other countries. While EF’s employee handbook included a policy providing most salaried employees with a fixed amount of paid vacation days per month based on their lengths of service, that policy did not apply to “area managers,” a handful of exempt employees tasked by EF to run the company’s programs within their regions. While area managers could, with their supervisors’ permission, take paid time off, they did not accrue vacation days or track the number of vacation days they took, nor were they ever notified of any specific limit on the amount of paid days off they could take.
After their employment ended, three area managers sued EF, alleging the company failed to pay them accrued but unused vacation upon their separation from employment. After a bench trial, the trial court found EF liable for failing to pay the plaintiffs unused vacation, finding the plaintiffs’ right to take vacation time was not truly “unlimited” but rather was “undefined.” The trial court found that “vacation time vests under a policy where vacation time is provided, even if the precise amount is not expressly defined by the employer in statements to employees.” The trial court explained that “offering vacation time in an undefined amount simply presents a problem of proof as to what the employer’s policy was. That policy is implied through conduct and the circumstances, rather than through an articulated statement.” The trial court concluded that based on the evidence presented at trial, the area managers were provided at least 20 days of vacation per year, therefore that amount vested annually for each plaintiff, and Section 227.3 required EF to pay them the unused portion when their employment ended.
The California Court of Appeal agreed with the trial court’s conclusion that Section 227.3 applied to the area managers “[o]n the particular, unusual facts of this case.” The appellate court emphasized that the company did not provide the area managers “unlimited” vacation in practice, nor did the company publish a formal policy notifying the area managers they had “unlimited’ vacation, and therefore the trial court was correct in determining their right to vacation was undefined, not unlimited. But the court was careful to note that although Section 227.3 applied to EF’s informal, unwritten vacation policy, that does not mean Section 227.3 “necessarily applies to truly unlimited time off policies.” The court suggested that such a policy “may not trigger section 227.3” if the policy is in writing and it:
- Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule—including employees’ ability to decide when and how much time to take off;
- Spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
- In practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
- Is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.
Unfortunately, the court offered these criteria as only an “example” of an unlimited time off policy that might not require a payout of unused vacation upon the end of employment, and not as a bright-line rule.
The appellate court’s opinion makes it clear that not all unlimited vacation policies necessarily dispose of the requirement to pay some amount of “vested” vacation upon an employee’s separation. Employers operating in California that wish to establish or continue unlimited vacation policies should review those policies, and modify them if necessary, to ensure they are consistent with the California court’s guidance.
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
California Supreme Court Rules Employees Must Be Paid for Time Spent in Post-Shift Bag Checks
Last Thursday, in a unanimous opinion, the California Supreme Court held that the time employees spend on an employer’s premises waiting for and undergoing required exit searches of their bags and other personal items that they bring to work purely for their own personal convenience, constitutes “hours worked” for which the employees must be paid.
Apple Inc. requires its retail store employees to undergo mandatory searches of their bags, packages, purses, backpacks, briefcases, and personal Apple technology devices (e.g., iPhones), before leaving the store for any reason, including after completing their work shift and clocking out. In 2013, several employees sued Apple in a California federal district court to recover wages for the time spent undergoing these security checks. They brought their claims under both California law and the federal Fair Labor Standards Act (FLSA). The employees estimated that the time spent waiting for and undergoing the exit searches typically ranged from five to 20 minutes, but could take up to 45 minutes on the busiest days.
The district court dismissed the FLSA claims after the United States Supreme Court’s 2014 decision in Integrity Staffing Solutions v. Busk, which held that time spent undergoing mandatory security screenings is not compensable “hours worked” under the FLSA. The district court later dismissed the plaintiffs’ California law claims, holding that exit search time was not “hours worked” because the employees could avoid the searches by not bringing bags or other personal items to work. The employees appealed.
The Ninth Circuit Court of Appeals then asked the California Supreme Court to weigh in on the issue. In last Thursday’s opinion, California’s high court hinged its decision on the significant differences between the FLSA and California law in defining “hours worked.” In 1947, the FLSA was amended to narrow the definition of “hours worked,” excluding activities that occur before or after employees perform the “principle activity” they are engaged to perform. As a result, under the FLSA, some pre-shift and post-shift activities are not compensable, even when required by an employer. In contrast, California’s wage orders generally define “hours worked” much more broadly, to include all the time an employee is “subject to the control” of an employer, and all the time an employee is “suffered or permitted to work, whether or not required to do so.”
Applying this definition, the California Supreme Court concluded the employees were “subject to [Apple’s] control” when they waited for and underwent security checks, because these checks were required for Apple’s benefit. The court rejected the district court’s conclusion that the security checks were essentially voluntary because employees could avoid them by not bringing personal items to work, reasoning that the realities of 21st-century life mean employees have little choice but to bring mobile devices and other personal items to work.
This decision illustrates two realities for all California employers. First, California employees must be compensated for time engaged in pre-shift and post-shift activities that might not be compensable elsewhere.
Second, California employers should ensure employees are compensated for required activities that involve even very small amounts of time. In 2018, the California Supreme Court held that the federal de minimis rule, under which small amounts of time need not be compensated under certain circumstances, does not apply to wage claims brought under California law. As a result, claims for unpaid wages brought under California law are more difficult to defend. Employers should therefore be vigilant about capturing and compensating employees for all time spent under the employer’s control, including security checks and other activities that might begin and end very quickly.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA