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.
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.
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
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.
Paul, Plevin, Sullivan & Connaughton LLP
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.)
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Governor Brown Signs #MeToo Bill Package Favoring Employees in Harassment Litigation and Settlements, Expanding Anti-Harassment Training Requirements, and Protecting Employers From Defamation Claims
On September 30, 2018, Governor Brown acted on the last of over 1,200 bills that the Legislature passed this year, including a slate of #MeToo inspired laws. This e-Update surveys the most significant changes.
Although the Governor’s reaction to the #MeToo legislation was mixed, the laws taking effect on January 1, 2019 will significantly affect California employers.
Senate Bill 1300 is most impactful. It establishes that a single incident of harassment may satisfy the requirement that harassment be “severe or pervasive.” The law also directs trial courts that sex harassment cases should generally be resolved by a jury trial. Further, the law makes it harder for an employer that prevails in a discrimination or harassment suit to recover its attorneys’ fees. Finally, the law limits an employer’s use of confidentiality and non-disparagement agreements in harassment and discrimination settlements.
Governor Brown also signed Assembly Bill 2770, which aims to protect employees and employers from certain defamation claims. A.B. 2770 deems three specific communications privileged: (1) an employee’s credible report of sexual harassment to an employer; (2) communications between an employer and “interested persons” (like witnesses or victims) about sexual harassment claims; and (3) an employer’s statements to prospective employers that a decision to not rehire an individual is based on the employer’s finding that the individual engaged in sexual harassment. All communications must be made without malice to be privileged.
The Governor also signed Senate Bill 820, which prohibits any provision in a settlement agreement that would prevent the disclosure of facts related to sexual assault, harassment, or discrimination. The law excepts only provisions that shield the claimant’s identity or the settlement amount.
Another new bill is Senate Bill 1343, which expands employer training obligations. Currently, employers with 50 or more employees must provide anti-harassment training to supervisory employees within six months of hire and every two years. The new law extends the training requirement to employers with five or more employees. The law also requires that non-supervisory employees receive one hour of training, starting in January 2020.
Paul, Plevin will review these new laws at the firm’s annual Employment Law Update on November 2, 2018.
What This Means
These laws are certain to alter harassment litigation in California. The new ban on non-disclosure provisions in harassment cases is certain to make early settlement more precarious as it will no longer ensure a publicity-free resolution. The new laws will also impede the dismissal of sex harassment claims. Finally, employers must now expand their harassment prevention efforts by training both supervisory and nonsupervisory employees every two years.
Employers have until January 1, 2020 to provide the first mandated training, which must be repeated every two years thereafter. PPSC regularly offers customizable compliance trainings both on-site and at our offices. For more information, see our website.
We note that some of the bills vetoed by Governor Brown this year, such as the bill prohibiting mandatory arbitration of harassment claims, are likely to be presented again in 2019 before a new Governor and Legislature. Paul, Plevin will continue to track these legislative proposals and provide updates on developments that affect California employers.
This E-Update was co-authored by Desi Kalcheva and Mary Allain. For more information, please contact Ms. Kalcheva, Ms. Allain or any Paul, Plevin attorney by calling (619) 237-5200.
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.
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Last week, Governor Brown signed into law Assembly Bill 2282, which was introduced in February 2018. The bill is another amendment to California’s Equal Pay Act, which has now been amended three times since January 1, 2016, when the Fair Pay Act expanded the law to apply to employees performing “substantially similar work” and limit the factors employers can rely on to justify pay disparities. The changes to the law take effect on January 1, 2019.
The new amendments are primarily intended to clarify the obligations imposed on employers by Assembly Bill 168, which took effect on January 1, 2018. AB 168 prohibited employers from asking job applicants for salary history information, and it also required employers to provide “applicants” with the “pay scale” for a position based on a “reasonable request.” Since AB 168 took effect, employers have struggled to interpret these requirements, including whether “applicants” included current employees, what information had to be included when providing the “pay scale,” and what constituted a “reasonable request.” AB 2282 addresses these questions by providing more details about employers’ obligations. Specifically, the new amendment provides:
- An “applicant” is an individual seeking employment, not a current employee.
- “Pay scale” is a salary or hourly wage range, and does not include bonuses or equity compensation.
- A “reasonable request” is a request made after an applicant has completed an initial interview with the employer.
The amendment also states what was previously understood: The ban on inquiring about an applicant’s pay history does not prohibit inquiries about an applicant’s “salary expectations.”
Finally, the new amendment drives home that employers cannot rely on prior salary – ever – to justify a pay disparity between employees performing substantially similar work. Existing law said employers could not rely on salary history information of an applicant as a factor to determine what salary to offer the applicant. Existing law also said employers could not use prior salary “by itself” to justify any disparity in compensation. The amendment removes the “by itself” limitation, and also adds a new sentence that says: “Prior salary shall not justify any disparity in compensation.” However, the amendment provides a slight exception for current employees, by providing: “Nothing in this section shall be interpreted to mean that an employer may not make a compensation decision based on a current employee’s existing salary, so long as any wage differential resulting from that compensation decision is justified” by the statutory factors of a seniority or merit system, a system that measures earnings by quantity or quality of production, or a “bona fide factor” other than gender, race or ethnicity, such as education, training or experience.
What This Means
This amendment provides employers with some additional clarity by better defining their obligations to provide pay scale information to applicants. The amendment also makes it clear that employers cannot rely on prior pay in initial salary setting, and cannot include prior pay even as one consideration in justifying a pay disparity between employees performing substantially similar work. Even though employers may make compensation decisions based on an existing employee’s current salary, employers still must be able justify any resulting wage differential based on factors enumerated in the statute. This means that employers must rely solely on these statutory factors, and never on prior pay, when explaining starting salaries or any pay differential between employees performing substantially similar work. Considerable uncertainty remains, however, over how narrowly courts will construe the statutory factors, especially a “bona fide factor other than gender, race or ethnicity,” which requires employers to prove an “overriding legitimate business purpose” and that the factor has been “applied reasonably.” It will take time for these questions to be answered by the courts.
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.
The Ninth Circuit Rules That Employers Cannot Rely On Prior Pay To Justify A Pay Differential Between Men And Women
On Monday, the Ninth Circuit issued an en banc opinion in Rizo v. Yovino, holding that an employer may not rely on prior pay as a defense to a gender pay equity claim under the federal Equal Pay Act (“EPA”). This is a significant decision as it reverses Ninth Circuit law established over 35 years ago and creates a split between federal circuits on this issue, which opens the door to review by the United States Supreme Court. The practical impact of the decision is immediate: Employers defending gender pay equity claims cannot rely on prior pay as even part of the justification for a pay differential between men and women.
Aileen Rizo was hired by the Fresno County Office of Education in 2009. The County set Rizo’s starting salary based on its policy of placing new employees within the County’s salary schedule at a step corresponding to their prior salary plus 5%. Rizo filed an equal pay claim in 2012 after learning she was earning less than male colleagues performing the same work. The County sought summary judgment on the ground that prior salary fell under the EPA’s “any factor other than sex” defense and as such, was a permissible basis for setting compensation under the EPA. The County’s summary judgment motion was denied, and the County obtained permission to file an immediate appeal. On appeal, a three-judge panel of the Ninth Circuit reversed the trial court’s denial of summary judgment, concluding that under a 1982 Ninth Circuit decision, Kouba v. Allstate Insurance Co., prior salary constitutes a “factor other than sex” under the EPA, as long as the employer’s consideration of prior salary was reasonable and effectuated some business policy.
The Ninth Circuit then granted Rizo’s petition to rehear the appeal en banc. On rehearing, an 11 judge en banc panel of the Ninth Circuit reversed course, overturned Kouba v. Allstate, and held that prior salary is not a “factor other than sex,” and therefore cannot be used to justify a pay differential between the sexes, independently or as one of several factors.
The Court’s en banc opinion was authored by Stephen Reinhardt, known as “the liberal lion of the Ninth Circuit,” who passed away on March 29, 2018 at the age of 87. In the majority opinion, Judge Reinhardt concluded “unhesitatingly, that ‘any other factor other than sex’ is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.” He observed that since the 1963 EPA was intended to eliminate long-existing, endemic sex-based pay disparities, it was “inconceivable” that Congress would create an exception for basing new hires’ salaries on those very disparities. Accordingly, the Court held: “Prior salary, whether considered alone or with other factors, is not job related and thus does not fall within an exception to the [Equal Pay] Act that allows employers to pay disparate wages.”
In response to an argument made in a concurring opinion, the Court noted that its decision expressed a general rule, and did not resolve its application under all circumstances. The Court specifically stated that it was not deciding whether or under what circumstances past salary might play a role in the course of an individualized salary negotiation, and expressly reserved questions relating to individualized negotiations to future cases.
What This Means
This is a significant development for all California employers. First, the case was decided under the EPA, which applies to employers nationwide. However, California’s Fair Pay Act, which took effect on January 1, 2016, was designed to be substantially tougher than the EPA. To accomplish this, the California legislature expanded coverage to employees performing “substantially similar work” instead of “equal work,” and also narrowed the “catch-all defense.” In contrast to the “any factor other than sex” language under the EPA, the defense under California law is limited to “a bona fide factor other than sex.” Under California’s formulation of this defense, an employer must prove the “factor other than sex” is job-related, consistent with business necessity, and not based on or derived from a sex-based factor. Given these more stringent requirements, it is not hard to see how a California court would adopt the Ninth Circuit’s reasoning and conclude that prior pay cannot constitute a “bona fide factor other than sex.”
Second, the Ninth Circuit did not just prohibit the use of prior pay as the sole justification for a challenged pay disparity. (California law already prohibits an employer’s reliance solely on prior pay.) The Court went one step further and held that prior pay, “whether considered alone or with other factors” could not be used to justify a pay differential. This could mean that an employer who uses prior salary along with valid job-related factors such as education, past performance, experience and training, could lose an equal pay claim because it failed to justify the entire pay disparity based on legitimate factors. In this regard, the Ninth Circuit’s interpretation of the EPA is more restrictive than other circuit courts that have addressed this issue.
Use of prior pay as a factor in setting compensation is already under attack. California is one of several states that prohibit an employer from even inquiring about an applicant’s prior pay. With the Ninth Circuit’s decision in Rizo and California’s nascent Fair Pay Act, employers are well-advised to avoid using prior pay in setting compensation, and to review the pay of existing employees whose starting pay was set based on prior pay, preferably as part of a broader, privileged audit of pay practices.
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.
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.