ABC Standard for Determining Employment Relationship Does Not Apply to Labor Code Claims

The San Diego division of the Fourth District Court of Appeal has ruled that the ABC test for employment established by the Supreme Court's Dynamex decision is limited to claims under California's wage orders. In Garcia v. Border Transportation Group, LLC, Case No. D072521 (10/22/2018), the Court ruled that a plaintiff's claims for (1) failure to pay overtime under Labor Code section 510, (2) waiting time penalties under Labor Code section 203, (3) Unfair Competition Law claims based on those violations, and (4) wrongful termination in violation of public policy were governed by the factors established in the Borello decision.

Garcia was a driver for a cab company that owned 30 of the 45 permits issued by the City of Calexico for taxicab service. To drive a taxicab, a person had to obtain a City driver's permit, which could only be used while employed by an identified cab company. To work for a different cab company, the driver would have to obtain an updated permit. He sued the cab company for a number of wage and hour violations, some under California Wage Order No. 9, some under the Labor Code, some under the Unfair Competition Law, and one for wrongful termination in violation of public policy. The trial court granted summary judgment for the cab company, based on the Borello standard, in  a decision handed down before the Supreme Court issued its Dynamex decision on 4/30/2018.

In Borello, the Supreme Court had explained that the principal test for determining whether an employment relationship existed was whether the recipient of the worker's services "has the right to control the manner and means of accomplishing the result desired." It also identified the following "secondary indicia" of an employment relationship: "(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee."

In Dynamex, the Supreme Court ruled that a more expansive definition was more appropriate for wage claims brought under one of the wage orders. It adopted the "ABC test," used in many other jurisdictions to decide whether an employment relationship existed. That test presumes that a worker is an employee, unless the person who engaged the worker's services establishes all of the following: "(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity's business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity."

The Court of Appeal ruled that the ABC test should not be applied outside the wage order context. That is where the language on which the Supreme Court relied in adopting the test appears. Further, the wage orders warrant a broader definition, because they were intended to regulate very basic working conditions that should be extended to the widest class of workers. Application of the ABC test to the facts before the Court compelled reversal of summary adjudication of the wage orders claims. Although Borello applied to the other claims, the Court of Appeal did not decide whether there was a triable issue under that standard, because Garcia's brief did not adequately raise the issue.

Federal "De Minimis" Doctrine Does Not Apply to Wage Claims under California Law

In Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946), the U.S. Supreme Court ruled that insubstantial and insignificant amounts of time spent on preliminary work activities could be ignored in calculating whether an employee had worked more than 40 hours in a workweek. The U.S. Department of Labor adopted a regulation codifying this "de minimis" doctrine, which may be found at 29 C.F.R. § 785.47. It provides that "insubstantial or insignificant periods of time beyond the scheduled working hours, which cannot as a practical administrative matter be precisely recorded for payroll purposes, may be disregarded." When applying that rule, federal 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." Using that analysis, most federal courts have found "daily periods of approximately 10 minutes de minimis even though otherwise compensable." Lindow v. United States, 738 F.2d 1057 (9th Cir. 1984).

On an appeal from a federal district court's grant of summary judgment on a state law unpaid wages claim based on the de minimis doctrine, the Ninth Circuit asked the California Supreme Court to determine whether the doctrine should be applied to wage claims under California law. (Rule 8.548 of the California Rules of Court authorizes the Supreme Court to respond to such inquiries.) According to the Ninth Circuit, the evidence in the case established that a Starbucks shift supervisor was required to perform various closing tasks after clocking out. Those tasks consumed 4 to 10 minutes each workday.

In Troester v. Starbucks Corporation, Case No. S234969 (July 26, 2018), the California Supreme Court ruled that California law does not permit application of the de minimis doctrine in the circumstances described by the Ninth Circuit. First, the Court determined that the applicable wage order and the California Labor Code contemplated that employees would be paid for all work performed, and did not incorporate a de minimis exception. In doing so, the Supreme Court expressly rejected the contrary position asserted in opinion letters issued by the California Labor Commissioner's Division of Labor Standards Enforcement.

The Court went on to consider whether it should adopt a de minimis rule for wage claims, based on the legal maxim de minimis non curat lex (the law cares not for trifles), which is codified in California Civil Code section 3533. Although it did not rule out the application of that principle to some wage claims, it declined to apply it to the facts described by the Ninth Circuit.

An employer that requires its employees to work minutes off the clock on a regular basis or as a regular feature of the job may not evade the obligation to compensate the employee for that time by invoking the de minimis doctrine. As the facts here demonstrate, a few extra minutes of work each day can add up. According to the Ninth Circuit, Troester is seeking payment for 12 hours and 50 minutes of compensable work over a 17-month period, which amounts to $102.67 at a wage of $8 per hour. That is enough to pay a utility bill, buy a week of groceries, or cover a month of bus fares. What Starbucks calls “de minimis” is not de minimis at all to many ordinary people who work for hourly wages.

The ABC's of Employment

The California Supreme Court has handed down an important decision that explains how to distinguish between an employee and an independent contractor, for purposes of enforcing California's wage orders. In Dynamex Operations West, Inc. v. Superior Court, Case No. S222732 (Apr. 30, 2018), the Court adopted the "ABC" test. That test assumes an individual who does work for another person is an employee of that person, unless the person proves (A) that the worker is free from the other person's control and direction in connection with the performance of the work, and (B) that the worker is performing work that is outside the usual course of the other person's business and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The California wage orders adopted by the Industrial Welfare Commission are quasi-legislative regulations that have the force of law. Among other things, they establish the overtime rules, and define the exemptions from those overtime rules. All but one of the 17 contains the following definitions: "employ" means "to engage, suffer, or permit to work;" "employee" means "any person employed by an employer;" and "employer" means "any person as defined in Section 18 of the Labor Code, who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person." All the wage orders may be accessed from this page on the website of the Department of Industrial Relations.

The Dynamex opinion discusses three earlier Supreme Court opinions that dealt with the distinction between employees and independent contractors.

1. S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 241. The narrow ruling in this case was that farmworkers hired by a grower to harvest cucumbers under a "sharefarmer" agreement were employees for purposes of the Workers' Compensation Act. Many decisions since Borello have cited that case as applying the common law test for employee. The decision identified a number of factors to be considered in making that determination. Those have come to be known as the "Borello factors," and have routinely been applied in a number of contexts, including wage and hour litigation, to determine whether or not an individual is an employee. For a recent example, see Linton v. DeSoto Cab Co., Inc. (2017) 15 Cal.App.5th 1208. The Dynamex decision says that Borello should be understood as adopting a "statutory purpose standard," rather than a universally applicable multi-factor test.
2. Martinez v. Combs (2010) 49 Cal.4th 35. Seasonal agricultural workers sued a strawberry grower and produce merchants who bought strawberries from the grower for failure to pay minimum wage and overtime. The Supreme Court stated that the wage orders contain three alternative definitions of employment: (1) to exercise control over the wages, hours or working conditions, (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship. The produce merchants could not be considered employers under any of the definitions.
3. Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522. Newspaper carriers claimed that a newspaper company had misclassified them as independent contractors. Because both sides had agree that the Borello test was the applicable standard, the Supreme Court did not consider the scope of the definition of employment in the wage orders.

Joint Employer Responsibility for Meal Periods

A recent decision from the California Court of Appeal explains how a staffing agency may satisfy its obligation to its employees to provide meal periods in accordance with the California wage orders. See Serrano v. Aerotek, Inc., Case No. A149187 (1st Dist. Ct. App. 3/9/2018).

Aerotek was a staffing agency that placed temporary employees with its clients. Its contract with the client stated that the client was responsible for the work environment, and the the client would comply with applicable federal, state and local laws. The client set the work schedules for the temporary employees, and managed their breaks. Aerotek had a handbook for temporary employees assigned to clients, which contained a meal period policy that complied with California law -- that is, that employees were to be provided with an uninterrupted 30-minute off-duty meal break by the end of the fifth hour of work.

One of the temporary employees filed a class action complaint against Aerotek and the client, alleging that the client did not actually provide meal periods in accordance with the law. Aerotek had a manager at the client's workplace, who declared that no Aerotek employee had ever complained to him that he or she had been from taking a meal period, even though Aerotek's policy required them to notify Aerotek if they believed they were being prevented from taking meal breaks. In written discovery, the temporary employee conceded that she was unaware of any actions by Aerotek that prevented her from taking her meal periods.

Employers are not required to police meal breaks. They need only provide a reasonable opportunity for employees to take their breaks, and refrain from impeding or discouraging them from doing so. See Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004. Aerotek fulfilled that obligation by establishing a policy that followed California law, and by not interfering with the taking of meal breaks. Even if Aerotek was aware that its temporary employees were not actually taking meal periods by the end of their fifth hour of work, it would not violate the meal period requirement. It did not have to make sure that the employees actually took their meal periods. The Court of Appeal affirmed the trial court's grant of summary judgment to Aerotek.

On Call

Is an employee who is sitting around waiting to be called into work, "working"? A recent decision by a Los Angeles Superior Court judge prompts us to examine the applicable principles.

In a scenario that has been common in retail and food service establishments, an employer tells its employees that fluctuating demands make it necessary for some employees to be placed on call to await a summons to work, if they are needed. The employees are not paid unless they are actually called in to work. Although resistance from employees and state enforcement authorities has led some employers to back away from the practice, it is still fairly common and is the subject of several pending lawsuits. For example, see this article from the December 31, 2016 Forbes Magazine issue, which reports the announcement that several national retailers have abandoned the practice.

Under the federal Fair Labor Standards Act, employers must include all "hours worked" in their calculations to determine whether an employee is entitled to overtime. The Department of Labor's regulations on hours worked explain that "all hours are hours worked which the employee is required to give his employer." Those regulations describe the application of that definition to on call time as follows: "An employee who is required to remain on call on the employer's premises or so close thereto that he cannot use the time effectively for his own purposes is working while 'on call.' An employee who is not required to remain on the employer's premises but is merely required to leave word at his home or with company officials where he may be reached is not working while on call."

A 2008 opinion letter from the Wage and Hour Division provides additional guidance on the subject. In that letter, the Division opined that an employee would not be working while on call if the employer's policy provided only that the on-call employee must be reachable at all times, abstain from alcohol or other substances, and report to work within one hour of notification, and if call-backs are rare.

The wage orders that regulate wage and hour condition in California define "hours worked" 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, and in the case of an employee who is required to reside on the employment premises, that time spent carrying out assigned duties shall be counted as hours worked." In its Enforcement Manual, the California Division of Labor Standards Enforcement has explained that the application of that definition to on call situations depends upon consideration of the following factors:

"(1) whether there was an on-premises living requirement; (2) whether there were excessive geographical restrictions on employee’s movements; (3) whether the frequency of calls was unduly restrictive; (4) whether a fixed time limit for response was unduly restrictive; (5) whether the on-call employee could easily trade on-call responsibilities; (6) whether use of a pager could ease restrictions; and (7) whether the employee had actually engaged in personal activities during call-in time."

The wage orders contain another provision that requires payment of wages when an employee is called to work, but not actually put to work, as follows: "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 employee shall be paid for half the usual or scheduled day's work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee's regular rate of pay, which shall not be less than the minimum wage."

In the decision mentioned at the beginning of this post, Judge Elihu Berle denied an employer's motion to dismiss a claim by a potential class of employees of a Japanese-inspired fast food chain claimed that they were do reporting time pay under the California wage orders. That employer's policy required an employee who was scheduled to be on call to call a manager two hours before the his or her anticipated start time. If the manager directed the employee to go into work, he or she had to do so immediately. Failure to call in or to go into work if summoned subjected an employee to discipline. On the basis of those facts, Judge Berle concluded that it was possible for an employee to "report" to work by calling in.

California's Commissioned Employee Exemption

In response to an inquiry from the Ninth Circuit, the California Supreme Court has explained how earnings should be allocated when determining whether a commissioned employee's wages exceed one and a half times the minimum wage. That is one of the elements of California's commissioned employee exemption from overtime requirements. See Wage Order No. 4, section 3(D).

Susan Peabody earned commissions selling advertising for Time Warner. Three things had to occur for Peabody to earn a commission -- (1) procurement of the order; (2) broadcast of the advertising; and (3) collection of the revenue from the client. Every other week Time Warner paid her $769.23 in hourly wages, which was the equivalent of $9.61 per hour, based on a 40-hour workweek, but did not amount to one and a half times the minimum wage. Time Warner paid commissions every other pay period. Time Warner argued that it should be allowed to allocate the commissions after the fact to the pay periods in which they were earned.

The Supreme Court rejected the argument. "An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall." Peabody v. Time Warner Cable, Inc., Case No. S204804 (July 14, 2014). In rejecting the argument, the Supreme Court declined to follow federal authorities applying the similar exemption available under the Fair Labor Standards Act. (See 29 U.S.C. section 
207(i).) There are too many differences between federal law and California law in the wage and hour area to draw upon federal authorities when interpreting the commissioned employee exemption.

"Suitable Seats" Class Action by Cashiers

The California wage orders (available here) provide: "(A) All working employees shall be provided with suitable seats when the nature of the work reasonably permits the use of seats. (B)When employees are not engaged in the active duties of their employment and the nature of the work requires standing, an adequate number of suitable seats shall be placed in reasonable proximity to the work area and employees shall be permitted to use such seats when it does not interfere with the performance of their duties." Several large retailers have been targets of recent class actions alleging violations of these suitable seats requirements.

Most recently, Judge William Alsup of the United States District Court for the Northern District of California certified a one-store class of cashiers seeking damages for suitable seats violations against Kmart. He explained his reasoning in a June 11, 2013 decision, in a case entitled Delbridge v. Kmart Corp., Case No. C 11-02575 WHA.

Although there have not been a large number of cases, employers should assess the feasibility of providing seats for those employees who currently do not have seats at their place of work. The wage order provisions impose a mandatory duty. Employers may not wait for their employees to request seating. Should a class action result in a substantial recovery, there will likely be a number of copy cat lawsuits filed. The damages exposure could be large, because courts have ruled that suitable seats claims may be enforced through the Labor Code Private Attorneys General Act (PAGA), which provides for penalties of up to $100 per employee per pay period for an initial violation, and $200 per employee per pay period for each subsequent violation, as well as attorney’s fees. Bright v. 99c Only Stores, 189 Cal.App.4th 1472 (2010).

Can an employee do exempt and nonexempt work at the same time?

"Not in California" was the answer that Safeway recently received from the Second District Court of Appeal in Los Angeles. Heyen v. Safeway Inc., Case No. B237418 (May 23, 2013).

Linda Heyen was responsible for all store operations at Safeway's Oceanside store, but, she also had to do bookkeeping and other nonexempt work. She was able to manage the store while doing lower level work. For example, when she was stocking shelves, she was also observing general conditions in the store. Safeway classified her as an exempt employee, but she sued for overtime, claiming that she was really a nonexempt employee.

The California wage orders establish an "executive" exemption for those who manage a customarily recognized unit of the employer and are "primarily engaged" in executive duties. (Wage Order No. 7-2001 applied to Safeway.) "Primarily" means "more than one-half the employee’s work time."

Safeway argued that Heyen spent more than half her time on executive duties, because whenever she was performing nonexempt work she was also keeping an eye on general operations. The Court of Appeal disagreed. The test requires the fact finder to determine the employee's purpose for each task. If the purpose is to supervise employees or contribute to the smooth functioning of the unit, the task exempt work. Otherwise, it is nonexempt work.

The result might have been different under the federal Fair Labor Standards Act. The FLSA regulations use a "primary duty" rather than a "primarily engaged" test. Under that test, "assistant managers in a retail establishment who perform exempt executive work such as supervising and directing the work of other employees, ordering merchandise, managing the budget and authorizing payment of bills may have management as their primary duty even if the assistant managers spend more than 50 percent of the time performing nonexempt work such as running the cash register. However, if such assistant managers are closely supervised and earn little more than the nonexempt employees, the assistant managers generally would not satisfy the primary duty requirement." 29 CFR 541.700(c).

Rest periods must be separately compensated

Safeway paid its truck drivers on what it called a piece rate basis. Pay was based on (1) mileage rates that varied by number of miles driven, time of day, and location, (2) fixed rates for certain tasks, (3) an hourly rate for a predetermined amount of minutes for other tasks, and (4) an hourly rate for delays beyond the driver's control. Its collective bargaining agreement with the drivers' union provided for two rest periods for every eight or ten hour shift.

The California wage orders require employers to "authorize and permit" nonexempt employees to take a 10-minute rest period for every four hours worked. The rest periods "shall be counted as hours worked for which there shall be no deduction from wages." See section 12 of Wage Order No. 7-2001. Safeway authorized and permitted the drivers to take rest periods, and claimed that its compensation system included pay for the rest periods.

The Third District Court of Appeal in Sacramento ruled that Safeway's system violated the applicable wage order, and directed the trial court to certify a class action and determine the damages payable to the drivers. In a piece rate system, rest periods must be separately compensated. Bluford v. Safeway Stores, Inc., Case No. C066074 (May 8, 2013).

What is a salary?

Many of the exemptions from the wage and hour laws require that the employee earn a "salary," a term that is not defined in California law. The California Division of Labor Standards Enforcement construes the wage orders to incorporate the federal salary basis test, as explained in a March 1, 2002 opinion letter. The U.S. Department of Labor regulations state that an employee is paid on a salary basis if the employee "regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed." See 29 CFR section 541.602(a).

The Sixth District Court of Appeal recently addressed the concept in Negri v. Koning & Associates, Case No. H037804 (May 16, 2013). An insurance claims adjuster was paid $29 per hour with no minimum guarantee, but did not receive premium pay when he worked overtime. The employer claimed that he was salaried because he received an unvarying minimum amount of pay equivalent to $29 per hour for 40 hours. The court rejected the argument. Since the amount of pay was based on hours worked, it was not a predetermined amount.

Exemptions from Wage and Hour Requirements: Motor Carrier

The Fair Labor Standards Act  exempts from the overtime requirement "any employee with respect to whom the Secretary of Transportation has power to establish qualifications and maximum hours of service." 29 U.S.C. section 213(b)(1). This is known as the motor carrier exemption. The California wage orders contain a similar exemption. See, for example, Wage Order No. 9-2001, Section 3(L).

Most trucking companies fall within the exemption. But, to be exempt the employee in question must also be engaged in activities directly affecting the safety of operation of motor vehicles in interstate or foreign commerce. Interstate commerce is defined broadly to include intrastate delivery of goods if it is merely a continuation of an interstate journey. Walling v. Jacksonville Paper Co., 317 U.S. 564 (1943). Drivers who do not transport goods in interstate commerce are still exempt if they reasonably could be expected to be called on to make interstate runs. Morris v. McComb, 332 U.S. 422 (1947).

For a recent application of the exemption, see Bell v. H.F. Cox, Inc., Case No. B229982 (Cal. Ct. App. 9/5/2012).

After the passage of the Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999, a question arose about whether the California Legislature had repealed the California motor carrier exemption. The Court of Appeal concluded that it had not in Collins v. Overnite Transportation Co., 105 Cal.App.4th 171 (2003).

Exemptions from Wage and Hour Requirements: Commissioned Employees

Federal and state wage and hour laws both exempt certain employees who earn commissions from their overtime requirements. The Fair Labor Standards Act contains the following exemption: "No employer shall be deemed to have violated subsection (a) by employing any employee of a retail or service establishment for a workweek in excess of the applicable workweek specified therein, if (1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under section 6, and (2) more than half his compensation for a representative period (not less than 1 month) represents commissions on goods or services." 29 U.S.C. section 207(i).

To be "a retail or service establishment," it must engage in the making of sales of goods or services, 75 percent of its sales of goods or services, or of both, must be recognized as retail in the particular industry, not over 25 percent of its sales of goods or services, or of both, may be sales for resale. 29 CFR section 779.313. Congress meant to limit the exemption to employees of traditional local retail or service establishments. Service establishments refer to such local enterprises as restaurants, hotels, barber shops, and repair shops. The Department of Labor's regulations provide a list of establishments that qualify at 29 CFR section 779.320, and a list of those that do not at 29 CFR section 779.317.

Because of the limitation of the exemption to traditional local retail or service establishments, many well-paid commissioned employees do not qualify. This has led to several class action lawsuits by commissioned employees of financial services companies. Merrill Lynch agreed to pay $37 million to settle claims by its brokers. Citigroup agreed to pay $98 million to settle claims by its financial advisors.

The California wage orders exempt any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions. There is no limitation to local retail or service establishments as there is under the FLSA. However, the commissioned employee exemption only applies to employees who are involved principally in selling a product or service. See Areso v. CarMax, Inc., 195 Cal.App.4th 996 (2011).

Exemptions from Wage and Hour Requirements: Professional

Although both federal and state law exempt professional employees from the wage and hour laws, the application of the exemption to some employees differs. The exemption under the federal Fair Labor Standards Act is for an employee (1) who is compensated on a salary or fee basis at a rate of not less than $455 per week, and (2) whose primary duty is the performance of work (i) requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (ii) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. See 29 CFR section 541.300.

The California wage orders provide an exemption for an employee (1) who is licensed or certified by the State of California and is primarily engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting, or (2) who is primarily engaged in an occupation commonly recognized as a learned or artistic profession, and (3) who customarily and regularly exercises discretion and independent judgment in the performance of duties, and (4) who earns a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment (which equates to $640 per week).


Under both standards, "learned" means work requiring knowledge of an advanced type in a field or science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual, or physical processes. "Artistic" or "creative" means work that is original and creative in character in a recognized field of artistic endeavor (as opposed to work which can be produced by a person endowed with general manual or intellectual ability and training), and the result of which depends primarily on the invention, imagination, or talent of the employee.

Under this standard, a radiology technologist is not exempt, but a physician's assistant is. The difference is the level of knowledge and extent of learning required. A television news anchor was not exempt, because he spent most of his time on the mundane activity of collating material from various news sources for presentation on the newscast, and then read from a teleprompter. Nordquist v. McGraw-Hill Broadcasting Co., 32 Cal.App.4th 555, 38 Cal. Rptr.2d 221 (1995). A news commentator may be creative enough to qualify for the exemption.

Although the federal and state standards are similar, the result is not always the same. Pharmacists and registered nurses are exempt professionals under the FLSA, but not under the California wage orders. Nurse practitioners are exempt under the California wage orders.

Some professionals are exempt even if not paid on a salary basis:

• Under the FLSA, an attorney with a license to practice law is automatically exempt without regard to the method or level of compensation. That is not the rule under the California wage orders.
• The FLSA exempts licensed physicians and those with medical degrees enrolled in internship and resident programs, without regard to the method or level of compensation. Licensed physicians who earn at least $69.13 per hour (adjusted annually) are exempt under California law, but interns and residents are not.
• Computer professionals who meet the separate duty requirements set out in 29 CFR section 541.400, are exempt from FLSA provisions if they receive at least $27.63 per hour. The California wage orders contain a similar exemption if the employees receive at least $38.89 per hour (adjusted annually).

Exemptions from Wage and Hour Requirements: Administrative Employees

The federal and state exemptions for administrative employees are phrased similarly, but may differ in their application to particular jobs. The federal standard appears in 29 CFR section 541.200, which provides that an administrative employee is one (1) who is paid a salary of at least $455 per week, (2) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers, and (3) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Management and general business operations are defined in section 541.201, and discretion and independent judgment in section 541.202.

Under the definition in the California wage orders, an administrative employee is one (1) whose duties and responsibilities involve either (a) performance of office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer’s customer, or (b) the performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein, and (2) who customarily and regularly exercises discretion and independent judgment, and (3) who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge, or who executes under only general supervision special assignments and tasks, and (4) who is primarily engaged in duties that meet the test of the exemption, and (5) who earns a monthly salary equivalent to no less than two times the minimum wage, which equates to $640 per week. The wage orders point to the federal regulations for guidance on the definition.

Section 541.203 of the federal regulations contains examples of some jobs that do and do not meet the test for the exemption. In addition to the examples given there, the Administrator of the Department of Labor's Wage and Hour Division Administrator has opined in FLSA 2010-1 that the exemption generally does not apply to mortgage loan officers.

Illustrative of the difficulties of applying the federal and the state exemptions are cases involving insurance claims adjusters. Section 541.203 states that they generally meet the duty requirement of the exemption "if their duties include activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation."

In a case decided under an earlier version of the wage orders the California Court of Appeal refused to apply the exemption to claims adjusters, ruling that they were involved in production, rather than administrative work. See Bell v. Farmers Ins. Exchange, 115 Cal.App.4th 715 (2004);  But, last year, in Harris v. Superior Court, 53 Cal. 4th 170 (2011), the California Supreme Court directed California courts to refrain from using the production/administrative dichotomy as the sole determinative factor in applying the exemption, pointing to a more elaborate explanation of the exemption in the current version of the wage orders. The Supreme Court did not determine whether the employees in the case before it were exempt, just that the Court of Appeal had applied the wrong analysis.

UPDATE [7/23/2012]


On remand, the Court of Appeal in the Harris case applied the Supreme Court's analysis, and again determined that the claims adjusters did not fall within the administrative exemption. "The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the ―directly related‖ requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like." See  Harris v. Superior Court, Case No. B195121 (Cal. Ct. App. 7/23/2012).

Exemptions from Wage and Hour Requirements: Executive

Both California and federal law recognize an exemption for employees in executive positions. The elements of the exemption are substantially the same. Both standards require that the employee be paid on a salary basis, as discussed in an earlier post.

The federal definition appears in the Department of Labor's regulations at 29 CFR section 541.100. Under that definition, an executive employee is one (1) who is paid a salary of at least $455 per week, (2) whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof, (3) who customarily and regularly directs the work of two or more other employees, and (4) who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

Under the state definition (which appears in section 1(A)(1) of each wage order), an executive employee is one (1) whose duties and responsibilities involve the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof, (2) who customarily and regularly directs the work of two or more other employees, (3) who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight, (4) who customarily and regularly exercises discretion and independent judgment, (5) who is primarily engaged in duties which meet the test of the exemption, and (6) who earns a monthly salary equivalent to no less than two times the minimum wage which equates to $640 per week.

The principal difference (other than the minimum salary required) is the use of the "primary duty" standard under federal law, and the use of the "primarily engaged" standard under state law. The state wage orders define "primarily" in section 2(N) as "more than one-half the employee's work time." The "primary duty" standard is more flexible. Section 541.106(b) of the regulations gives the following example: "For example, an assistant manager in a retail establishment may perform work such as serving customers, cooking food, stocking shelves and cleaning the establishment, but performance of such nonexempt work does not preclude the exemption if the assistant manager's primary duty is management. An assistant manager can supervise employees and serve customers at the same time without losing the exemption." Under the state standard, the assistant manager would not be exempt unless he or she spent more than half his or her time on exempt duties.

Exemptions from Wage and Hour Requirements: Salary Basis

Three of the exemptions that we will discuss in upcoming posts (executive, administrative and professional) require that the employee be paid on a salary basis. This post will help you understand that critical concept.

Both federal and state law have the same general definition of what it means to be paid a salary. The employee must regularly receive each pay period a predetermined amount that is not subject to reduction because of variations in the quality or quantity of the work performed. An employee who earns $750 per week no matter how many hours she works has earned a salary within that definition. An employee who is paid at a rate of $750 per week, but earns only $600 if she works four days in a week, has not. A salaried employee is not paid for the amount of time spent on the job, but for the general value of services performed.

Minimum Salary

Under federal law, an employer must earn a salary of at least $455 per week to meet the salary basis test. 29 CFR section 541.600. Under California law, the minimum salary is twice the minimum wage for  a 40-hour work week. See 9 Cal. Code Reg. section 11040(1). At the current minimum wage of $8 per hour, the minimum salary is $640 per week.

Missed Days

One important exception to the general rule is that a salaried employee who misses a day of work for personal reasons other than disability or illness has not earned the portion of her salary attributable to that day. But, if the employee works part of a day, she has earned the portion of the salary attributable to that day, no matter why she misses work for the rest of the day. See 29 CFR section 541.602. The employer may deduct the salary attributable to a partial day's absence from a vacation leave bank, because the employee will still receive the designated salary, even though she loses a portion of her vacation benefit. See Conley v. Pacific Gas & Electric Co., 131 Cal. App. 4th 260, 31 Cal.Rptr.3d 719 (2005).

Employers may deduct the pay attributable to any days not worked before the commencement of employment and after its termination, even if the employee has performed some work during that work week.

Employers may not deduct from an exempt employee's salary for days missed because of jury duty, temporary military leave or attendance as a witness. Although the federal regulations permit deductions as penalties for infractions of safety rules of major significance and for suspensions for infractions of workplace conduct rules, California law does not permit such deductions.

Sick Leave


Although the salary basis test bars deductions for days missed because of illness or disability, there is an exception if the employer offers a bona fide plan that offers a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by sickness or disability. Employers may deduct from sick leave for full and partial day absences due to illness. If the employer offers such a plan, it may deduct from the weekly salary for full day absences that occur before the employee qualifies for paid leave, and after she has exhausted the paid leave available under the plan. Sumuel v. ADVO, Inc., 155 Cal. App. 4th 1099, 66 Cal.Rptr.3d 622 (2007). The California Labor Commissioner has provided a detailed explanation of how this exception works in conjunction with rules regarding deductions from vacation leave banks in a November 23, 2009 opinion letter.

Under California law, a sick leave plan is not bona fide unless it provides for paid leave that is restricted to illness. A paid time off program that combines sick leave with vacation pay does not qualify.

Extra Pay for Extra Work

An employer does not destroy the salary basis of an employee's compensation by paying more than the weekly salary if the employee works more hours beyond the normal workweek. The extra compensation for extra hours may be paid on any basis, time and a half, straight time, half time, or flat sum.

Exemptions from Wage and Hour Requirements: Outside Salespersons

The Supreme Court's recent decision provides a good jumping off point for the next in our series of posts about the exemptions from wage and hour rules--outside sales persons. The case before the Supreme Court dealt with representatives for pharmaceutical companies who visited physicians to promote sales of their employers' products. Their job was to obtain nonbinding commitments from the physicians to prescribe the medication that they were promoting. Since the physicians' patients' were the ones who would be doing the purchasing, the representatives were not directly responsible for sales. See Christopher v. Smithkline Beecham Corp., Docket No. 11-204 (Jun. 18, 2012).

The Fair Labor Standards Act exempts a worker who is employed "in the capacity of outside salesman" from its overtime and minimum wage requirements. 29 U.S. Code section 213(a)(1). The Department of Labor regulations define "outside salesman" to mean "any employee . . .
[w]hose primary duty is . . . making sales." 29 CFR 541.500. The FLSA states that "sale" includes "any sale, exchange, contract to sell, consignment for sale, shipment for  sale, or other disposition." 29 U.S. Code section 203(k).The Department of Labor regulations provide that promotion work that is "performed incidental to and in conjunction with an employee’s own outside sales or solicitations is exempt work," whereas promotion work that is "incidental to sales made, or to be made, by someone else is not." 29 CFR 541.503. The employee must be "customarily and regularly engaged away from the employer's place or places of business in performing" his or her duties." 29 CFR 541.500.

The Supreme Court rejected the Department of Labor's litigation position that the exemption requires a consummated transaction directly involving the employee for whom the exemption is sought, which would have left out the pharmaceutical representatives. Instead, it determined that "other disposition" was intended to include "those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity." In the pharmaceutical industry, the nonbinding commitments to prescribe medication were all that the representatives could do to ensure a sale.

The California exemption is similar. The wage orders define "outside salesperson to mean "any person, 18 years of age or over, who customarily and regularly works more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities." See, for example, Section 2(M) of Wage Order No. 4. See also California Labor Code section 1171. In Ramirez v. Yosemite Water Co., 20 Cal.4th 785, 85 Cal.Rptr.2d 844, 978 P.2d 2 (1998), the California Supreme Court explained that the California exemption is narrower because it is limited to those who spend at least half their working time selling away from the employer's premises, rather than all those who have sales as a primary duty.

Exemptions from Wage and Hour Requirements: Family Members

A few weeks ago, we took a cursory look at how California's exemptions from the wage and hour law differ from the federal ones. Today, we begin a multi-part series that will look at each of the exemptions available under state and federal law in depth. We start with the exemption for family members:

Federal

The federal Fair Labor Standards Act comes at the exemption by excluding from its coverage any "establishment" that has as its only "regular" employees the owner, and his or her parents, spouse, children, or other members of the immediate family. 29 U.S.C. section 203(s)(2). The Department of Labor's regulations provide the following additional guidance: "The term 'other member of the immediate family of such owner' is considered to include relationships such as brother, sister, grandchildren, grandparents, and in-laws but not distant relatives from separate households." 29 CFR section 779.234.

There is limited case law about the exclusion. Non-family members may be "regular" employees even if their hours and shifts vary. The question is whether the establishment depends upon non-family employees for its existence. Donovan v. I and J, Inc., 567 F.Supp. 93 (D.N.M. 1983). Where a family establishment is part of a larger enterprise, its revenues are not counted toward the $500,000 in annual sales that triggers application of the FLSA, but all employees may be covered if the remaining revenue is enough. Martin v. Bedell, 955 F.2d 1029 (5th Cir. 1992). A partnership whose partners are unrelated does not qualify for the exemption. Donovan v. S & L Development Co., 647 F.2d 14 (9th Cir. 1981).

California

The California wage orders exempt "any individual who is the parent, spouse, child, or legally adopted child of the employer." Cal. Admin. Code, tit. 8, section 11040(2)(D). Research has not uncovered any judicial decisions or opinion letters from the Division of Labor Standards Enforcement.

The different approaches may yield different results in some situations. Under the FLSA, a mom and pop deli would not have to pay overtime to the owner's grandchild if all the regular employees were members of the immediate family. By contrast, California law would require overtime, because grandchildren are not among those exempted by the wage orders.

Under the California wage orders, a family business with $10 million in sale, and 1,000 non-family employees spread across the state would not have to pay overtime to the employer's 35-year old son. By contrast, the FLSA would require overtime, because the businesses regular employees include non-family members.

As is the case with most employment laws, the employer must follow the provision that provides the greater protection for the employee in the particular situation.

Exemptions from Wage and Hour Rules in California

The California rules on exemptions differ in several respects from those under the federal Fair Labor Standards Act. In most respects the California rules take a narrower view of the exemptions. In one notable circumstance, the FLSA standard is more favorable to employees. Employers in  California must follow the rule that takes the narrowest view of the exemption.

White Collar Exemptions

There are exemptions for executive, administrative and professional employees under both state and federal law, but the specifics differ. Under both standards, the exempt employee generally must be salaried. The federal minimum is $455 per week. The state minimum is two times the state minimum wage (currently $8 per hour) for a 40-hour work week. That calculates to $2773 per month. Federal law requires that the exempt employee's primary duty fall within those by which the exemption is defined. State law requires that the exempt employee devote more than half his or her time to the defined duties.

Executive Exemption. The defined duties are essentially the same. The exempt employee (1) must manage the enterprise, or a customarily recognized department or subdivision of the enterprise, (2) must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent, and (3) must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative Exemption. The defined duties are essentially the same, but the application to specific jobs differs. The exempt employee must (1) perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and  (2) must exercise of discretion and independent judgment with respect to matters of significance. Although insurance claims representatives are exempt under the federal standards, they are not under the state standard. See Bell v. Farmers Ins. Exchange, 87 Cal.App.4th 805, 105 Cal.Rptr.2d 59 (2001).

Professional Exemption. Again, the defined duties are essentially the same, but the application to specific jobs differs. The exempt employee (1) must perform work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment, (2) the advanced knowledge must be in a field of science or learning, and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual
instruction. Licensed professionals in the fields of law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting are exempt under both standards. Pharmacists are exempt professionals under federal law, but not under state law. Registered nurses are exempt professionals under federal law, but, under state law, only licensed nurse practitioners are.

Computer Professionals

Both federal and state law exempt highly skilled computer specialists who perform high-level duties. Under federal law they must earn at least $455 per week, or $27.63 per hour. Under state law, they must earn $38.89 per hour or annual salary of not less than $81,026.25 for full-time employment, and paid not less than $6,752.19 per month.

Outside Sales Persons

Under the FLSA, a salesperson is exempt if his or her primary duty is making sales, or obtaining orders or
contracts for services or for the use of facilities for which a consideration will be paid by the client or
customer, and he or she is customarily and regularly engaged away from the employer’s place of
business. State law has a similar exemption, but expressly requires that the employee spend more than half his or her time away from the employer's place of business.

Commissioned Employees

Under state law, an employee is exempt if more than half his or her compensation is commissions, and he or she earns at least one and a half times minimum wage. Under the FLSA, the commissioned employee exemption is limited to employees of retail or service establishments; auto, truck, trailer, farm implement, boat, or aircraft sales-workers; or parts-clerks and mechanics servicing autos, trucks, or farm implements, who are employed by non-manufacturing establishments primarily engaged in selling these items to ultimate purchasers. As a result, under federal law, employees of brokerage and financial services firms cannot qualify for the commissioned employee exemption.

Highly Compensated Employees

Department of Labor regulations promulgated under the FLSA provide an exemption for highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000, if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption. There is no such exemption under state law.

The Brinker Meal Period Decision

California Supreme Court

The California Supreme Court has handed down its long anticipated ruling in Brinker Restaurant Corp. v. Superior Court, Case No. S166350. Applying rules of construction and common sense, the Court ruled that employers need not force their employees to take a meal break:

"An employer's duty with respect to meal breaks under both [Labor Code] section 512, subdivision (a) and Wage Order No. 5 is an obligation to provide a meal period to its employees. The employer satisfies this obligation if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so.  What will suffice may vary from industry to industry ... On the other hand, the employer is not obligated to police meal breaks and ensure no work thereafter is performed.  Bona fide relief from duty and the relinquishing of control satisfies the employer's obligations, and work by a relieved employee during a meal break does not thereby place the employer in violation of its obligations and create liability for premium pay." The law requires a first meal period no later than the end of an employee's fifth hour of work, and a second meal period no later than the end of an employee's 10th hour of work.

The Court also put to rest any question there may have been about the separate rest period entitlement: "Employees are entitled to 10 minutes' rest for shifts from three and one-half to six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on."

What does the decision mean for employers?

Because the Supreme Court has foreclosed the argument that the lack of a record of a meal period within the first five hours of employment automatically makes the employer liable for a meal period violation, the decision should limit the circumstances in which class action certification is appropriate for such claims. In the absence of an employer policy that violates the meal period, each individual employee would have to prove that he or she was prevented from taking a meal break. But, in the case before it, the Court did not rule out a class action, leaving it to the Superior Court to determine, in light of the conclusions reached in the decision, whether common issues predominated over individual ones.

Further, the Supreme Court's decision does not read the meal period requirement out of California law. Employers must still ensure that all their non-exempt employees are completely relieved of duty for 30 minutes by the end of the first five hours of work.

What should employers do?

Now that the Supreme Court has conclusively determined the extent of the employer's obligation with respect to meal periods, employers should review their policies and practices to make sure that they are in compliance.

1. Employers should make sure that all supervisors and managers are informed of the legal requirement recited in the Supreme Court's opinion, and that any violations will result in discipline.

2. Employers should review their employee handbooks to make sure that it informs employees of their right to 30 duty free minutes by the end of their fifth hour of work. The acknowledgment of receipt of the handbook should contain a separate initialed acknowledgment of the employer's policy to provide meal periods.

3. Employers should make sure that their timekeeping systems accurately record meal periods. Section 7 of the California wage orders requires employers to maintain accurate records of meal periods.

4. Employers should consider encouraging employees to take their meals away from the work location. This will avoid claims that an employee was not relieved of all duty because someone asked a work-related question, or requested performance of a work duty.

5. Employers should self-assess the one-hour of premium pay imposed by California Labor Code section 226.7, if they need an employee or group of employees to work without a meal period. Although the Labor Code and wage orders permit employees to give written waivers "when the nature of the work prevents an employee from being relieved of all duty," such waivers are revocable at the employee's option and may be subject to challenge for having been coerced.