Monday, March 28, 2016

California Supreme Court Rejects Unconscionability Attack on Arbitration Agreement

In the latest of a series of decisions dealing with the enforceability of arbitration agreements, the California Supreme Court has rejected an attempt to invalidate an agreement based on its provision for applications to a court for preliminary injunctive relief while the arbitration is pending. The provision simply reiterated a right that is conferred by statute in the absence of such a provision.

Beginning with Armendariz v. Foundation Health Psychcare, 6 P. 3d 669 (Cal. 2000), the California Supreme Court has carefully policed the use of arbitration agreements imposed as a condition of employment. It has directed California courts to refuse enforcement of such agreements if they are procedurally and substantively unconscionable. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, substantive unconscionability on overly harsh or one-sided results. Since virtually all arbitration agreements in the employment context are procedurally unconscionable, the analysis usually focuses on substantive unconscionability. The Armendariz case held that arbitration agreements forced on employees as a condition of employment are not enforceable unless they assure neutrality of the arbitrator, the provision of adequate discovery, require a written decision that will permit a limited form of judicial review, limit costs to what an employee would face in a judicial forum, and make available all remedies that the employee could pursue in court. Since then the Court has:
  • Invalidated a provision that allowed appeals to a second arbitrator of awards that exceeded $50,000. Little v. Auto Stiegler, Inc., 63 P.3d 979 (2003).
  • Set aside an arbitrator's award that deprived an employee of a hearing on the merits of his unwaivable statutory employment claim based on a clear error of law. Pearson Dental Supplies, Inc. v. Superior Court, 229 P.3d 83 (2010).
  • Invalidated an arbitration agreement that would have barred an employee from seeking relief in an administrative hearing before the Labor Commissioner. Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, 121 Cal. Rptr. 3d 58, 247 P.3d 130 (2011). The Court later reversed itself after the U.S. Supreme Court directed it to reconsider. Sonic-Calabasas A, Inc. v. Moreno, 311 P.3d 184 (2013).
  • Refused to enforce an arbitration agreement to the extent it would have required employees to submit PAGA claims to arbitration. Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 173 Cal. Rptr. 3d 289, 327 P.3d 129 (2014).
Its latest decision is Baltazar v. Forever 21, Inc., Case No. S208345 (Mar. 28, 2016). There, the employee had signed a take it or leave it arbitration agreement, which contained three provisions that she claimed were substantively unconscionable:

  1. It allowed the parties to seek a temporary restraining order or preliminary injunctive relief in the superior court, which the employee argued the employer was more likely to take advantage of. That was not unconscionable, because it did no more than recite the procedural protections already available under Code of Civil Procedure section 1281.8(b).
  2. It listed only employee claims as examples of the types of claims that were subject to arbitration. That was not unconscionable, because the agreement otherwise made clear that all employment claims were subject to arbitration.
  3. It required that all necessary steps be taken to protect the employer's trade secrets and proprietary and confidential information from public disclosure. That was not unconscionable, because there was a legitimate commercial need for such protection, and the agreement did not preclude the employee from seeking similar protection for her own confidential information.

Wednesday, March 9, 2016

Tipping and the Wage and Hour Rules

Jar for tips at a restaurant in New Jersey
Tip Jar
Both federal law and California law impose rules on employers about how to treat tips that their employees receive. It is important for employers in California to understand both sets of rules.

Federal Fair Labor Standards Act

The FLSA addresses tips in 29 U.S.C. section 203(m), which provides that an employer may add "an additional amount on account of the tips received" to the cash wage, in determining whether it has satisfied the minimum wage law with respect to a tipped employee (defined as an employee who customarily and regularly receives more than $30 a month in tips). The cash wage must be at least $2.13 per hour. The additional amount may not exceed the value of the tips actually received by an employee. The employer must inform all its tipped employees if it will be taking a credit against minimum wage for tips. The employer must include the amount of any tip credit that it takes toward the minimum wage in the total compensation for the week from which the regular hourly rate is derived for computing overtime. 29 CFR section 531.60.

All tips belong to the employees who received them, but the statute is not intended "to prohibit the pooling of tips among employees who customarily and regularly receive tips." The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools, but the employer, however, must notify tipped employees of any required tip pool contribution amount, and may only take a tip credit for the amount of tips each tipped employee ultimately receives. Further information on regulation of tips under the FLSA  is available in the Department of Labor's Fact Sheet #15.

In a recent decision, the Ninth Circuit ruled that even employers who did not take tip credits against the minimum wage were subject to the requirement in the Department of Labor's regulations that mandatory tip pools must be composed only of employees who customarily and regularly receive tips. See Oregon Restaurant and Lodging Ass'n v. Perez, Case No. 13-35765 (9th Cir. Feb. 23, 2016).

California Law

The wage and hour laws in California do not permit employers to take a credit against the minimum wage for tips received by their employees. The Labor Code declares all "gratuities" to be the sole property of the employees who received them. Cal. Lab. Code section 351. When a gratuity is given to an employee by means of writing an amount on a credit card slip, that amount must be paid to the employee no later than the next regular pay day with no deduction for processing fees.

Because the employer has no interest in gratuities under California law, tips are not included in the calculation of the regular rate of pay used to determine overtime pay.

The courts have interpreted section 351 to allow mandatory tip pools, so long as the pool is limited to those in the chain of service and does not include owners, managers or supervisors. Etheridge v. Reins Internat. California, Inc., 172 Cal. App. 4th 908 (2009); Jameson v. Five Feet Restaurant, Inc., 107 Cal. App. 4th 138 (2003). Cal. Lab. Code section 350.


The California Labor Commissioner has an FAQ page on tips and gratuities at its website.

Sunday, January 24, 2016

DOL Gives Continued Attention To Joint Employment

In recent years, the U.S. Department of Labor has paid particular attention to misclassification of employees as independent contractors. It has worked with other federal and state agencies to help misclassified employees get the wages, benefits, and protections to which they are entitled. On January 20, 2016, the Administrator of the Department's Wage and Hour Division issued Interpretation No. 2016-1, entitled Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act. The interpretation emphasizes that joint employment should be defined expansively. It discusses two different types of joint employment:

  • Horizontal joint employment occurs when two or more employers each separately employ an employee and are sufficiently associated with or related to each other with respect to the employee. DOL regulations address this type of joint employment at 29 CFR section 791.2.
  • Vertical joint employment occurs when an employee of one employer (which the Administrator calls an “intermediary employer”) is also, with regard to the work performed for the intermediary employer, economically dependent on another employer.

To determine whether horizontal joint employment exists, the following questions should be asked: (1) who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have any common owners), (2) do the potential joint employers have any overlapping officers, directors, executives, or managers, (3) do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs), (4) are the potential joint employers’ operations inter-mingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for), (5) does one potential joint employer supervise the work of the other, (6) do the potential joint employers share supervisory authority for the employee, (7) do the potential joint employers treat the employees as a pool of employees available to both of them, (8) do the potential joint employers share clients or customers, and (9) are there any agreements between the potential joint employers.

The interpretation provides the following example of horizontal joint employment: An employee is employed at two locations of the same restaurant brand. The two locations are operated by separate legal entities (Employers A and B). The same individual is the majority owner of both Employer A and Employer B. The managers at each restaurant share the employee between the locations and jointly coordinate the scheduling of the employee’s hours. The two employers use the same payroll processor to pay the employee, and they share supervisory authority over the employee.

To determine whether vertical joint employment exists, the following factors should be considered: (1) Directing, Controlling, or Supervising the Work Performed, (2) Controlling Employment Conditions, (3) Permanency and Duration of Relationship, (4) Repetitive and Rote Nature of Work, (5) Integral to Business, (6) Work Performed on Premises, and (7) Performing Administrative Functions Commonly Performed by Employers.

The interpretation provides the following example of vertical joint employment: A laborer is employed by ABC Drywall Company, which is an independent subcontractor on a construction project. ABC Drywall was engaged by the General Contractor to provide drywall labor for the project. ABC Drywall hired and pays the laborer. The General Contractor provides all of the training for the project. The General Contractor also provides the necessary equipment and materials, provides workers’ compensation insurance, and is responsible for the health and safety of the laborer (and all of the workers on the project). The General Contractor reserves the right to remove the laborer from the project, controls the laborer’s schedule, and provides assignments on site, and both ABC Drywall and the General Contractor supervise the laborer. The laborer has been continuously working on the General Contractor’s construction projects, whether through ABC Drywall or another intermediary.

You can find a summary of the DOL's views on joint employment in Fact Sheet 35.

Saturday, January 9, 2016

California's New Equal Pay Act

Although there has been a California equal pay act since 1949, and a federal one since 1963, and although both California and federal law have barred discrimination in employment based on gender for over 50 years, recent attention to the continuing wage gap between men and women and the publicity brought to the subject by Patricia Arquette's acceptance speech at the 2015 Academy Awards has led to enactment of a new equal pay act in California. The text of Labor Code section 1197.5, as amended by the new act, is set out below.

The U.S. Census Bureau has reported that the female-to-male earnings ratio, based on median earnings of full-time, year-round workers 15 years and older is 79 percent. (See Income and Poverty in the United States: 2014.) Whether this disparity results from discrimination that can be remedied by equal pay legislation is a difficult question. For a discussion of what the data shows, Read or listen to "The True Story of the Gender Pay Gap: A New Freakonomics Radio Podcast" at Freakonomics.com.

Further insight comes from Jennifer Lawrence, whose salary for "American Hustle" was revealed to be lower than that of her male co-stars when Sony's emails were hacked at the end of 2014. She wrote an essay for Lenny, in which she said: "When the Sony hack happened and I found out how much less I was being paid than the lucky people with dicks, I didn't get mad at Sony. I got mad at myself. I failed as a negotiator because I gave up early. I didn't want to keep fighting over millions of dollars that, frankly, due to two franchises, I don't need."

The California act used to bar payment of lower wages to any employee than what was paid to employees of the opposite sex in the same establishment for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. California's new law bars payment of lower wages for "substantially similar work." It is much too early to tell whether the new California law will lead to changes in pay practices or to additional lawsuits. Professor Martha West explains how the advantages and the shortcomings of the new law in this article in the Los Angeles Times.

Here are some examples of decisions applying the less rigorous standards. Would they turn out differently under California's new law?

  • The female head coach of the women's basketball team at a major university was offered a new contract at a salary of $96,000, substantially less than what the university was paying the male coach of the men's basketball team. When the university refused to do so, she sued for violation of the federal Equal Pay Act. The Ninth Circuit affirmed summary judgment in her favor, because differences in experience and qualifications justified the disparity on a basis other then gender. Stanley v. University of Southern California, 178 F.3d 1069 (9th Cir. 1999).
  • A female construction superintendent was earning $500 per week when her employer hire a new male superintendent at $900 per week. Although they had the same job duties, the pay differential did not violate the California equal pay act, because the two had vastly different levels of experience. Green v. Par Pools, Inc., 111 Cal. App. 4th 620 (2003).
  • Eight of 20 physician assistants at a particular healthcare facility were female, while 55 of 69 nurse practitioners were female. The employer paid the nurse practitioners on a regionally based scale that resulted in substantially lower pay than what the physician assistants received under a nationally based scale. In other areas of the country the regionally based scale for the nurse practitioners turned out to be higher than the nationally based scale for the physician assistants. The wage disparity did not violate the Equal Pay Act because the plaintiffs had no evidence that the pay scales were adopted based on gender. Yant v. United States 588 F.3d 1369 (Fed.Cir. 2009).

For further explanation of the federal standards see the EEOC's Enforcement Guidance on compensation of sports coaches.


(a) An employer shall not pay any of its employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions, except where the employer demonstrates:
(1) The wage differential is based upon one or more of the following factors:
(A) A seniority system.
(B) A merit system.
(C) A system that measures earnings by quantity or quality of production.
(D) A bona fide factor other than sex, such as education, training, or experience. This factor shall apply only if the employer demonstrates that the factor is not based on or derived from a sex-based differential in compensation, is job related with respect to the position in question, and is consistent with a business necessity. For purposes of this subparagraph, “business necessity” means an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve. This defense shall not apply if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.
(2) Each factor relied upon is applied reasonably.
(3) The one or more factors relied upon account for the entire wage differential.
(b) Any employer who violates subdivision (a) is liable to the employee affected in the amount of the wages, and interest thereon, of which the employee is deprived by reason of the violation, and an additional equal amount as liquidated damages.
(c) The Division of Labor Standards Enforcement shall administer and enforce this section. If the division finds that an employer has violated this section, it may supervise the payment of wages and interest found to be due and unpaid to employees under subdivision (a). Acceptance of payment in full made by an employer and approved by the division shall constitute a waiver on the part of the employee of the employee’s cause of action under subdivision (g).
(d) Every employer shall maintain records of the wages and wage rates, job classifications, and other terms and conditions of employment of the persons employed by the employer. All of the records shall be kept on file for a period of three years.
(e) Any employee may file a complaint with the division that the wages paid are less than the wages to which the employee is entitled under subdivision (a) or that the employer is in violation of subdivision (j). The complaint shall be investigated as provided in subdivision (b) of Section 98.7. The division shall keep confidential the name of any employee who submits to the division a complaint regarding an alleged violation of subdivision (a) or (j) until the division establishes the validity of the complaint, unless the division must abridge confidentiality to investigate the complaint. The name of the complaining employee shall remain confidential if the complaint is withdrawn before the confidentiality is abridged by the division. The division shall take all proceedings necessary to enforce the payment of any sums found to be due and unpaid to these employees.
(f) The department or division may commence and prosecute, unless otherwise requested by the employee or affected group of employees, a civil action on behalf of the employee and on behalf of a similarly affected group of employees to recover unpaid wages and liquidated damages under subdivision (a), and in addition shall be entitled to recover costs of suit. The consent of any employee to the bringing of any action shall constitute a waiver on the part of the employee of the employee’s cause of action under subdivision (g) unless the action is dismissed without prejudice by the department or the division, except that the employee may intervene in the suit or may initiate independent action if the suit has not been determined within 180 days from the date of the filing of the complaint.
(g) Any employee receiving less than the wage to which the employee is entitled under this section may recover in a civil action the balance of the wages, including interest thereon, and an equal amount as liquidated damages, together with the costs of the suit and reasonable attorney’s fees, notwithstanding any agreement to work for a lesser wage.
(h) A civil action to recover wages under subdivision (a) may be commenced no later than two years after the cause of action occurs, except that a cause of action arising out of a willful violation may be commenced no later than three years after the cause of action occurs.
(i) If an employee recovers amounts due the employee under subdivision (b), and also files a complaint or brings an action under subdivision (d) of Section 206 of Title 29 of the United States Code which results in an additional recovery under federal law for the same violation, the employee shall return to the employer the amounts recovered under subdivision (b), or the amounts recovered under federal law, whichever is less.
(j) (1) An employer shall not discharge, or in any manner discriminate or retaliate against, any employee by reason of any action taken by the employee to invoke or assist in any manner the enforcement of this section. An employer shall not prohibit an employee from disclosing the employee’s own wages, discussing the wages of others, inquiring about another employee’s wages, or aiding or encouraging any other employee to exercise his or her rights under this section. Nothing in this section creates an obligation to disclose wages.
(2) Any employee who has been discharged, discriminated or retaliated against, in the terms and conditions of his or her employment because the employee engaged in any conduct delineated in this section may recover in a civil action reinstatement and reimbursement for lost wages and work benefits caused by the acts of the employer, including interest thereon, as well as appropriate equitable relief.
(3) A civil action brought under this subdivision may be commenced no later than one year after the cause of action occurs.

Friday, July 3, 2015

Federal Appellate Court Rejects DOL Six-Factor Intern Test

In September 2013, two interns who had worked without pay on Fox Seachlight's Black Swan movie convinced a United States District Judge that they were actually employees and should have been paid. That judge based his ruling on a six-factor test that the U.S. Department of Labor derived from the Supreme Court's decision in Walling v. Portland Terminal Co., 330 U.S. 148 (1947):
  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;The intern is not necessarily entitled to a job at the conclusion of the internship;
  5. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
On July 2, 2015, the Second Circuit Court of Appeals reversed the ruling in Glatt v. Fox Searchlight Pictures, Inc., Case No. 13‐4478‐cv (2nd Cir. July 2, 2015). It rejected the Department of Labor text, and stated that decisions about whether interns are employees under the Fair Labor Standards Act rest on whether the intern or the employer is the primary beneficiary of the relationship. For guidance in cases to come, the court offered the following seven non‐exhaustive set of considerations:
  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands‐on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.