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.
California Supreme Court Rules PAGA Plaintiffs Are Presumptively Entitled to Contact Information of Defendant’s Employees Statewide
Last week in a unanimous decision, the California Supreme Court ruled that representative plaintiffs in Private Attorneys General Act (PAGA) cases are presumptively entitled to discover the names and contact information of other allegedly “aggrieved employees” statewide at the outset of litigation, without the need to show good cause.
Enacted in 2004, PAGA allows allegedly “aggrieved employees” to sue employers on behalf of the state of California to recover civil penalties on behalf of the state for violations of the state Labor Code, and to keep for themselves and other aggrieved employees 25 percent of any civil penalties recovered, with the remaining 75 percent going to the state. PAGA also provides for the recovery of attorneys’ fees.
Michael Williams was employed by Marshalls of CA, LLC, at the company’s store in Costa Mesa, California. He sued Marshalls under PAGA, asserting various wage and hour violations. Early in the case, Williams sought to discover the names and contact information of fellow Marshalls employees throughout California, and offered to use a so-called “Belaire-West notice,” a discovery mechanism whereby non-party employees are notified of a plaintiff’s request to discover their names and contact information, and are given an opportunity to opt out of having their information produced. Marshalls objected on several grounds, including burdensomeness and the privacy rights of its employees. The trial court granted Williams’ motion to compel Marshalls to produce employee contact information, but only as to employees who worked at the Costa Mesa store where Williams worked.
The Court of Appeal affirmed, holding discovery of contact information for employees statewide was premature, and that Williams had failed to show good cause for the production of contact information statewide, given that he had not shown knowledge of unlawful practices at any store other than the Costa Mesa location, or facts putting any uniform statewide practice at issue.
The California Supreme Court reversed, finding the trial court abused its discretion in denying Williams’ motion to discover statewide contact information because the California Code of Civil Procedure does not include a “good cause” standard for discovery, and discovery rules for PAGA actions are no different from the rules governing discovery in putative class actions. Although defendants may object to discovery requests on various grounds (as did Marshalls) and trial courts retain broad discretion to manage discovery, when it opposed the motion the company presented no evidence showing the production of statewide contact information would be unduly burdensome, and the well-established Belaire-West notice procedure provided sufficient privacy protections.
This decision confirms that in a class, collective or PAGA action litigated in a California state court, the names and contact information of non-party employees are presumptively discoverable simply upon the filing of a complaint. Instead of placing the burden on plaintiffs to show good cause for the discovery, the burden is on defendants to show why discovery should be limited. The court found Marshalls failed to do so, but the opinion leaves open the possibility that other employers may be able to limit discovery under the right circumstances.
Last week the California Court of Appeal issued a decision holding that employers must separately compensate commissioned (“inside sales”) employees for legally required rest breaks.
Under California law most employees are entitled to a paid 10-minute rest break for every work period of four hours, or major fraction thereof. California law also provides an overtime exemption for commissioned salespeople, but this “inside sales” exemption does not exempt those employees from minimum wage or meal and rest break requirements. (So-called “outside” salespeople are not subject to minimum wage, overtime, or meal/rest break requirements.)
Stoneledge Furniture compensated its retail sales associates according to a standard commission agreement. The agreement provided for sales associates to be compensated on a commission-only basis, but also guaranteed the associates a minimum income of $12.01 per hour. The minimum income was paid to sales associates as a “draw” against future commissions. If an associate earned commissions that met or exceeded the draw, the associate would be paid the commissions actually earned. But if an associate’s earned commissions were less than the draw, the associate would receive the minimum draw. The agreement did not provide separate compensation for any non-selling time, such as time spent for meetings, training, or rest breaks.
Two sales associates filed a class action against Stoneledge alleging the company failed to provide paid rest breaks. The trial court certified a class but later granted summary judgment to Stoneledge, finding that by guaranteeing sales associates a minimum income of $12.01 per hour, Stoneledge ensured they would be paid for all hours worked, including rest breaks.
The Court of Appeal reversed, holding that Stoneledge violated California law by not separately compensating sales associates for rest breaks. The court relied on the applicable wage order, which provides, “authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.” The court reasoned that since the minimum pay guarantee was a draw against commissions, it was simply an advance subject to clawback, or deduction, from future commissions. As a result, when a sales associate earned commissions that exceeded the draw, the only pay the associate received consisted of commissions, which did not account for rest breaks. The court held that to comply with California law, commission-based compensation plans must provide for separate pay for legally required rest breaks. In reaching its conclusion, the court relied on previous cases holding that piece-rate employees must be separately compensated for rest breaks, a requirement the state legislature later codified at California Labor Code section 226.2, which took effect in 2016.
Although this decision focused on rest breaks, its reasoning applies equally to other compensable yet “non-productive” time that is not accounted for and compensated under commission or piece-rate compensation plans. Employers with California-based commissioned (inside) salespeople, or employees paid on a piece-rate basis, should review their compensation plans to ensure those employees are separately paid at least the minimum wage for rest breaks and other non-productive yet compensable time, and that this pay does not operate as a “draw” subject to deduction. In other words, pay for all non-productive compensable time must be guaranteed and independent from compensation tied to sales commissions or piece-rate production.
Last week the California Supreme Court issued a decision holding that employers cannot require employees to remain “on-call” during legally required rest breaks. The ruling reversed a January 2015 appellate court decision.
California law has long required employers to provide most employees with a paid, uninterrupted 10-minute rest break for every work period of four hours or major fraction thereof, during which employees may not be required to work. California also requires employers to provide most employees with unpaid, uninterrupted 30-minute meal periods for work periods exceeding five hours, during which employees must be relieved of all duty.
Three security guards filed putative class actions against their employer, ABM Security Services, Inc., claiming the rest breaks provided to them were rendered invalid by ABM’s requirement that they keep their radios and pagers on, remain vigilant, and respond to calls if necessary. ABM argued that the mere requirement to stay “on-call” did not render the rest breaks invalid. The trial court agreed with the security guards and awarded $89.7 million in damages to a class of more than 14,000 security guards. ABM appealed.
The Court of Appeal analyzed the issue by turning to Industrial Welfare Commission Wage Order 4, which governs the working conditions of ABM’s security guards. Although Wage Order 4 requires employees to be “relieved of all duty” during meal periods, it contains no similar language as to rest periods. The absence of any explicit language requiring employees to be relieved of all duty during rest periods led the Court of Appeal to conclude that no such requirement was intended.
A divided California Supreme Court disagreed, holding that a “rest period” means just that―a period of rest in which an employee must be relieved of all duties. The court noted its interpretation is consistent with Labor Code section 226.7, which prohibits employers from requiring “any employee to work during any meal or rest period . . . .” In other words, the court determined an employer’s responsibilities are the same for meal and rest periods: to relieve employees of all work. Therefore, the court held that state law requires employers to relieve employees of all work-related duties during a required rest break, including the duty to remain on-call.
The practical effect of the decision is that employees must be allowed to turn off radios and mobile phones during rest breaks because requiring an employee to leave them on would mean the employee is on-call and available for work.
Keep in mind the court did not hold that rest periods may never be interrupted; it simply said employees cannot be required to remain on-call or readily available for interruption. If a rest break is interrupted or not provided, the employer must either provide a new, uninterrupted rest period within the required time frame, or pay the employee a penalty equal to one hour of pay at the employee’s regular rate.
The court did not disturb the longstanding rule that employees may be required to remain onsite or nearby during rest breaks.
Employers should immediately review their policies and practices to ensure they are not requiring California employees to remain on-call or in contact during rest breaks. This means employees must be allowed to turn off radios, mobile phones and other communication devices.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Today Governor Jerry Brown signed Senate Bill 3, which will gradually increase the state’s minimum wage from its current level of $10 per hour to $15 per hour by 2022. Both houses of California’s legislature passed the bill on March 31 to great fanfare, but the Governor waited until today to give formal approval, presumably to avoid signing the bill into law on April Fool’s Day.
The new law will increase the state’s minimum wage from $10 per hour according to the following schedule:
For employers with 26 or more employees:
January 1, 2017: $10.50 per hour
January 1, 2018: $11.00 per hour
January 1, 2019: $12.00 per hour
January 1, 2020: $13.00 per hour
January 1, 2021: $14.00 per hour
January 1, 2022: $15.00 per hour
For employers with 25 or fewer employees, each increase will be delayed by one year as follows:
January 1, 2018: $10.50 per hour
January 1, 2019: $11.00 per hour
January 1, 2020: $12.00 per hour
January 1, 2021: $13.00 per hour
January 1, 2022: $14.00 per hour
January 1, 2023: $15.00 per hour
Beginning in 2024, the minimum wage will increase annually up to 3.5 percent based on the United States Consumer Price Index for Urban Wage Earners and Clerical Workers, rounded to the nearest ten cents. The new law does not preempt local minimum wage ordinances that have been adopted by several cities in California in recent years, so local governments remain free to enact minimum wages higher than the state minimum.
Beginning July 1, 2018, the new law will also phase in paid sick leave for in-home supportive care workers, who were excluded from the state’s paid sick leave law that took effect in 2015.
The new law will also gradually increase California’s minimum salary for so-called “white collar” (executive, administrative, and professional) exempt employees, which is set at twice the state minimum wage for a 40-hour work week. Under the current $10 state minimum wage, California’s minimum salary is $800 per week or $41,600 per year. Unless the legislature acts to de-couple the minimum exempt salary from the minimum hourly wage, the minimum salary for white collar exempt employees in California will rise according to the following schedule:
January 1, 2017: $840 per week / $43,680 per year
January 1, 2018: $880 per week / $45,760 per year
January 1, 2019: $960 per week / $49,920 per year
January 1, 2020: $1,040 per week / $54,080 per year
January 1, 2021: $1,120 per week / $58,240 per year
January 1, 2022: $1,200 per week / $62,400 per year
The minimum salary for white collar exempt employees under the FLSA is currently just $455 per week ($23,660 per year). However, the Obama administration’s plan to change the FLSA regulations to raise that minimum to at least $970 per week ($50,440 per year), and then annually adjust the minimum to keep pace with inflation, is likely to take effect in the summer or fall of 2016. Any white collar employee in California must be paid a salary high enough to satisfy both the state and federal minimums to be exempt from overtime for hours worked in excess of eight per day or 40 per week.
Employers should immediately begin planning to adjust to the new law, which critics describe as a “job-killer.” The economic impact of a $15 minimum wage remains to be seen, and given the implementation schedule the new law’s effects will be gradual. But at a minimum we know this much is true: (1) Minimum wage workers who remain employed will see a wage increase; and (2) Those who are laid off or cannot find employment under the new law will have an effective minimum wage of zero.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Ninth Circuit Adopts California Supreme Court’s Iskanian Rule Prohibiting Enforcement of PAGA Waivers
Last week the Ninth Circuit Court of Appeals held that waivers of the right to bring representative actions under the California Labor Code Private Attorneys General Act of 2004 (PAGA) are unenforceable, essentially adopting the rule established in June 2014 by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC. Prior to the Ninth Circuit’s decision, district courts in California had been divided on the issue, but most district courts deciding the issue had rejected the Iskanian rule.
The Ninth Circuit’s decision was in Sakkab v. Luxottica Retail North America, Inc., No. 13-55184 (9th Cir. Sep. 28, 2015). In that case, Shukri Sakkab filed a putative class action for unpaid overtime and inaccurate wage statements against his former employer, Luxottica Retail North America, Inc. After Luxottica answered and removed the case to federal court, Sakkab filed an amended complaint adding a representative claim for civil penalties under the PAGA. Luxottica then filed a motion to compel arbitration under the dispute resolution agreement contained in its Retail Associate Guide. The agreement purported to prohibit Sakkab from filing or participating in any “class-based” lawsuit or arbitration, “including any collective action” or “collective arbitration.” The district court granted the motion, holding Sakkab had waived his right to bring a class action or representative PAGA action, and ordering him to arbitrate his individual claims.
After the district court granted Luxottica’s motion and entered judgment, the California Supreme Court issued its Iskanian decision, ruling that PAGA waivers are unenforceable under California law.
On appeal, Luxottica argued the Federal Arbitration Act (FAA) preempts the Iskanian rule. In a 2-1 decision, the Ninth Circuit panel rejected the preemption argument. In reaching its decision, the panel majority explained that the Iskanian rule is a generally applicable contract defense that is not limited to arbitration agreements, and therefore falls within the FAA’s savings clause, which preserves generally applicable contract defenses providing they do not conflict with the FAA’s purposes. Next, the majority determined the rule does not conflict with the FAA’s purposes of (1) overcoming judicial hostility to arbitration and (2) ensuring enforcement of the terms of arbitration agreements, because PAGA claims can be arbitrated, and the Iskanian rule merely prohibits waivers of the right to bring representative PAGA claims in any forum.
In a lengthy dissent, Justice N. Randy Smith stated his view that the FAA does preempt the Iskanian rule, relying on a line of United States Supreme Court cases including AT&T Mobility LLC v. Concepcion, in which the nation’s high court held that class and representative action waivers in consumer contracts were enforceable, reversing a previous Ninth Circuit decision to the contrary.
For the time being, PAGA representative action waivers are not enforceable in either the state or federal district courts in California. But the issue isn’t entirely settled. Luxottica may seek en banc review in the Ninth Circuit, or seek review by the United States Supreme Court. In the meantime, employers should review their arbitration agreements with counsel and make adjustments if necessary.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
The Healthy Workplaces, Healthy Families Act of 2014 took full effect on July 1, 2015. The new law requires employers to provide paid sick leave to employees who work 30 or more days in California in a calendar year.
Yesterday Governor Jerry Brown signed a bill amending and clarifying several provisions of the new law. The bill was passed as an “urgency statute” and took effect immediately. Among the most noteworthy changes are the following:
Eligibility: The new bill clarifies that to be eligible for paid sick leave, an employee must work 30 days for the same employer in California, and not simply work 30 days in California.
Accrual: As originally enacted, the law allowed employers to provide paid sick leave either by providing 24 hours in bulk at the beginning of the year, or by accrual at a minimum rate of one hour of paid sick leave for every 30 hours of work. This threw a wrench into many existing paid sick leave and paid time off programs that tie accrual to pay periods, not time worked. The new bill provides greater flexibility by specifically allowing the following additional accrual methods:
24 Hours Within 120 Days: An employer may use an accrual method different than one hour of paid sick leave for every 30 hours of work, provided the accrual is on a regular basis and the employee will have 24 hours of accrued paid sick leave available by the 120th calendar day of employment.
Grandfathering of Pre-Existing Accrual Methods: If an employer provided paid sick leave before January 1, 2015 pursuant to an accrual method different than providing one hour per every 30 hours worked, that program will satisfy the law’s accrual requirements provided an employee (including any employee hired after January 1, 2015) will accrue eight hours of paid sick leave within three months, and the employee is eligible to earn at least 24 hours within nine months.
Unlimited Sick Leave: If an employer provides unlimited paid sick leave or unlimited paid time off, the law’s written notice requirement may be satisfied by indicating on the notice or the employee’s itemized wage statement that such leave is “unlimited.” [Note: Employers should carefully consider the implications of “unlimited” paid time off, and exercise caution when drafting such policies.]
Rate of Pay Clarified: Employers may pay out paid sick leave to nonexempt employees either at the regular rate of pay for the workweek in which the employee uses paid sick leave, or by dividing the employee’s total wages (not including overtime premium pay) by the employee’s total hours worked in the full pay periods of the prior 90 days of employment. Paid sick leave for exempt employees should be calculated the same way as other forms of paid leave time.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
On Tuesday the Los Angeles City Council voted to raise the city’s minimum wage to $15 an hour by 2020. Los Angeles will join San Francisco, San Jose and Oakland as California cities with minimum wages higher than both the federal and state minimum wages.
The federal minimum wage is $7.25 per hour. California’s state minimum wage is currently $9 per hour, and is scheduled to rise to $10 per hour on January 1, 2016. Employees must be paid the highest minimum wage in effect, which in California is the state minimum wage except in cities that have established their own higher minimum wages.
The City of Los Angeles does not currently have its own minimum wage, but on Tuesday the City Council voted to establish a city minimum wage of $10.50 per hour effective July 1, 2016. Thereafter the city’s minimum wage will increase to $12.00 on July 1, 2017; $13.25 on July 1, 2018; $14.25 on July 1, 2019; and $15.00 on July 1, 2020. Beginning in 2022 the city’s minimum wage will be adjusted for inflation on July 1 of each year.
California cities that already have minimum wages higher than the state minimum wage include San Francisco (currently $12.25 per hour and scheduled to rise to $13 on July 1, 2016; $14 on July 1, 2017; and $15 on July 1, 2018; followed thereafter by annual adjustments for inflation each July 1); San Jose (currently $10.30 per hour and adjusted each January 1 for inflation); and Oakland (currently $12.25 per hour and adjusted each January 1 for inflation).
Meanwhile, San Diego’s minimum wage is on hold. In October 2014 the San Diego City Council voted to establish a city minimum wage that would rise to $11.50 per hour by January of 2017, and would also require employers to provide their employees with up to 40 hours of paid sick leave each year. But opponents of the ordinance gathered enough petition signatures to put the measure to a public vote. It will go into effect only if it survives a June 2016 referendum.
It is becoming increasingly clear that employers can no longer assume that compliance with federal and state laws is enough. The trend of cities establishing their own minimum wages appears to be picking up steam. Employers should take steps to stay abreast of, and comply with, all local minimum wages and other local mandates.
On April 17, 2015, Judge James Donato of the U.S. District Court for the Northern District of California held that Integrity Staffing Solutions, Inc. v. Busk, 136 S.Ct. 513 (2014), in which the U.S. Supreme Court held the FLSA does not require employees to be compensated for time undergoing post-shift security screenings, does not apply to wage claims brought under California law. The case is Miranda v. Coach, Inc., No. 14-cv-02031-JD, 2015 U.S. Dist. LEXIS 51768 (Apr. 17, 2015).
Eve Miranda and Mary Lou Ayala filed a class action complaint against Coach, Inc., alleging they and other Coach sales associates were required to submit to “bag checks” each time they left the store. They alleged that waiting for and undergoing the bag check process, for which they were not paid, lasted anywhere from 5 to 30 minutes, and sought damages and penalties under California law for “off-the-clock” time. Coach moved to dismiss, arguing the bag check time was non-compensable under Integrity Staffing Solutions.
Judge Donato denied the motion to dismiss, explaining that while the decision in Integrity Staffing Solutions was premised on how the federal Portal-to-Portal Act of 1947 exempts employers from FLSA liability for certain categories of work-related activities, Coach was being sued under California law, which contains no similar exemption and defines “hours worked” differently. The opinion cited Morillion v. Royal Packing Co., 22 Cal.4th 575, 582 (2000), in which the California Supreme Court explained that California defines “hours worked” as including not only “time the employee is suffered or permitted to work,” but also “time during which an employee is subject to the control of an employer.” Given all this, Judge Donato denied the motion to dismiss, holding the plaintiffs’ claims for uncompensated time under California law “are viable and will go forward.”
Judge Donato’s opinion is not binding on any other court, but there is no reason to believe other courts presented with the same issue will reach a different conclusion. This does not mean—and Judge Donato did not hold—that time spent by employees undergoing bag checks is compensable under California law; it merely means the time may be compensable. For example, in certain situations there may be a viable argument that the time is so minimal as to be de minimis and therefore non-compensable. In class actions, certification might be defeated by showing that even where an employer requires bag checks, the employer’s policy affects employees differently, with the result that individualized inquiries will be needed to establish liability.
This case is another reminder that California’s wage and hour laws differ from their federal counterparts in important respects. As a result, decisions construing the FLSA and other federal laws cannot be relied on as indicators of what may allowed under California law. This presents challenges to all California employers, and especially to employers that are based outside California, but have employees working in the state. Employers should consult counsel before relying on any judicial decisions.
Employers That Prevail in Discrimination Cases Are No Longer Automatically Entitled to Recover Costs
It has long been the rule in California that the prevailing party in a discrimination or harassment claim under the Fair Employment and Housing Act is entitled to recover costs. A prevailing plaintiff is also entitled to automatically receive an attorneys’ fee award, while a prevailing defendant needed to prove that the plaintiff’s claim was frivolous or otherwise unreasonably brought or pursued. Although fee awards are difficult to obtain for prevailing employers, the ability to recover costs has served as a useful deterrent against marginal claims.
However, in a disappointing ruling for California employers, on May 4, 2015, the California Supreme Court ruled in Williams v. Chino Valley Independent Fire District that an employer’s ability to recover its costs after prevailing in a discrimination or harassment case is subject to the same “objectively without foundation” standard that applies to attorneys’ fee awards. The Court concluded the legislature intended for the Fair Employment and Housing Act to provide an exception to the general rule that a prevailing defendant is automatically entitled to recover costs, and imposing the higher standard of proof on a prevailing defendant’s cost application was consistent with California’s policy not to chill the vindication of employees’ rights under the FEHA.
What This Means
An employer will no longer be able to automatically recover costs in a FEHA case, even if it proves a plaintiff’s case has no merit. This further reduces the downside risk for employees and their attorneys who file baseless claims, and removes an important tool for employers to resolve unmeritorious claims.