Tip Rules Under the FLSA

The Fair Labor Standards Act permits an employer to take a credit against its minimum wage obligation for tips that its employees receive. Recent statutory, regulatory and case law developments make it advisable to review the rules. (Caution: State rules may impose stricter limits than the FLSA does. See Tipping and the Wage and Hour Rules, which contains a discussion of California law.)

Section 3(m) of the FLSA (29 U.S.C. section 203) permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between $2.13 and the federal minimum wage (currently $7.25). That provision raises the following questions:

Who is a "tipped employee?" A tipped employee means any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips.

Do tips belong to the employer or the employee? Although the employer may take a credit, the tips belong by law to the employee. An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of an employee's tips.

May an employer require tipped employees to participate in a tip pool? Yes, if the employer does not take a tip credit, and pays its tipped employees a cash wage that equals or exceeds the minimum wage. Those who take a tip credit may not require tip pooling.

Who may the employer require to be included in a tip pool? Those employers who pay the full federal minimum wage without a tip credit may require tipped employees to share their tips with employees who are not customarily and regularly tipped, such as cooks and dishwashers. (This is a change from the prior rule under a DOL regulation that prohibited those who did not take a tip credit from requiring tips to be shared with untipped employees. The change resulted from Congressional action earlier this year.) However, as mentioned above, managers and supervisors may not participate in tip pools.

What about employees who perform some duties for which they regularly receive tips, and some for which they do not? The DOL's dual jobs regulation, and an interpretive guidance in Chapter 30 of the Wage and Hour Division's Field Operations Handbook (section 30d00(f)) require employers to pay their tipped employees a cash wage equal to at least the federal minimum wage for duties that they do not regularly receive tips for. The employer may apply a tip credit to time the tipped employee spends on incidental duties that are related to the tipped occupation, up to 20 percent of the total hours worked in the tipped occupation during the workweek. Related duties for a server could include such tasks as filling salt and pepper shakers while the restaurant is open, cleaning and setting tables, making coffee, and occasionally washing dishes. Cleaning bathrooms and washing windows do not constitute related duties.

The Ninth Circuit recently explored the applicable rules in March v. J. Alexander's LLC, Case No. 15-15791 (9th Cir. 9/18/2018).

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.

DOL Abandons 6-Factor Internship Test

The U.S. Department of Labor has updated its fact sheet on internship programs to adopt the
"primary beneficiary" test followed by the Second, Sixth, Ninth and Eleventh Circuit Courts of Appeals. It previously used a six-factor text that refused to allow unpaid internships under the Fair Labor Standards Act if the employer derived any immediate advantage from the relationship. The new seven-factor test adopts a flexible approach, with no single factor being determinative. The seven factors are:

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.

The Department relied on the following Court of Appeal decisions in formulating its test:

Solis v. Laurelbrook Sanitarium and School, Inc., 642 F.3d 518 (6th Cir. 2011).

Schumann v. Collier Anesthesia, PA, 803 F. 3d 1199 (11th Cir. 2015).

Glatt v. Fox Searchlight Pictures, Inc., 811 F. 3d 528 (2nd Cir. 2015).

Benjamin v. B & H Education, Inc., Case No. 15-17147 (9th Cir. Dec. 19, 2017).

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.

Tipping and the Wage and Hour Rules

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).

UPDATE: The omnibus budget reconciliation act signed by President Trump on March 23, 2018, altered the federal rule to allow employers to require tip sharing with cooks, dishwashers and other "back-of-the house" workers who do not customarily and regularly receive tips. The rule still prohibits owners, supervisors and managers from taking a cut of the tips.

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.

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.

Wal-Mart Pharmacist Class Action Survives Motion To Dismiss

Four Wal-Mart pharmacists have filed a putative class action asserting that they were not paid for all the time that they devoted to an immunization certification training course. According to their second amended complaint, Wal-Mart encouraged its pharmacists to take the certification course so that the company could make more money through the administration of immunizations at its stores. Although Wal-Mart paid the pharmacists for the time they spent in the course, it did not pay them for time spent studying at home or taking the certification test. United States District Judge Andrew Guilford denied Wal-Mart's motion to dismiss the complaint, because the course was directly related to the pharmacists' jobs and was not voluntary. The pharmacists' motion to certify the case as a class action is set to be heard on August 17, 2015.

The Department of Labor regulations define the circumstances under which compensation must be paid for lectures, meetings and training programs. Under 29 CFR sections 785.27- 785.32, time spent on such activities must be counted as working time unless (a) Attendance is outside of the employee's regular working hours; (b) Attendance is in fact voluntary; (c) The course, lecture, or meeting is not directly related to the employee's job; and (d) The employee does not perform any productive work during such attendance. An example of an application of the regulations to training city employees appears in  from the Department's Wage and Hour Division.
Opinion Letter FLSA2009-15

Airlines Targeted For Unpaid Work Before Takeoff

Virgin America and Jet Blue are defendants in separate lawsuits alleging that they do not pay their flight attendants for all the hours that they work. According to the complaints, the airlines, require the flight attendants to put in time on the ground getting ready for their flights, but do not start paying them until they are on board ready to go. The Virgin America complaint is available here, and the Jet Blue complaint here.

The standards for what are sometime called preparatory activities (or donning and doffing, when referring to uniforms or protective gear) differ under federal and California law:

Under California law, time spent on preparatory activities is compensable if the activity is compelled by the necessities of the employer's business and is not de minimis. The standard is explained in the following opinion letters from the Division of Labor Standards Enforcement: 1994.02.03-3, 1998-12-23, 1988-05-16.

Section 203(o) of the Fair Labor Standards Act excludes from work time "any time spent in changing clothes or washing at the beginning or end of each workday which was excluded from measured working time during the week involved by the express terms of or by custom or practice under a bona fide collective-bargaining agreement applicable to the particular employee." In addition, the Portal-To-Portal Act provides in section 254 that employers are not liable under the FLSA for the following activities: "(1) walking, riding, or traveling to and from the actual place of performance of the principal activity or activities which such employee is employed to perform, and (2) activities which are preliminary to or postliminary to said principal activity or activities, which occur either prior to the time on any particular workday at which such employee commences, or subsequent to the time on any particular workday at which he ceases, such principal activity or activities," unless there is a contrary agreement or custom and practice. The effect of those provisions and of Supreme Court interpretations is discussed in Wage and Hour Advisory Memorandum 2006-2.

Are Ride Share Services Employers?

Recent news reports about class action lawsuits against Uber and Lyft provide an opportunity for revisiting the standards that courts and enforcement agencies use to determine whether an employment relationship exists between the provider of labor and the recipient of the benefits of the labor. Uber is the subject of a lawsuit entitled O'Conner v. Uber Technologies, Inc., currently pending in the United States District Court for the Northern District of California, where it is being heard by Judge Vince Chhabria, under Case No. 13-CV-03826-EMC. The Lyft case is in the same district, where it is being heard by Judge Edward Chen -- Cotter v. Lyft, Inc., under Case No. 13-CV-04065-VC.

In both cases, the judges denied summary judgment motions by the defendants, on the grounds that there were triable issues as to whether the companies were employers of their drivers, The question to be decided at trial in each case is whether the drivers are independent contractors or employees entitled to the protections of the wage and hour laws. The answer turns on the amount of control that each company exercises over the manner and means by which the drivers provide services.

Under the venerable case of S.G. Borello & Sons, Inc. v. Dep’t of Indus., 48 Cal. 3d 341 (1989), California law (which applies in both cases) presumes that anyone who provides services to another is an employee. The burden is on the presumptive employer to show otherwise by analyzing the following factors: (1) the right to control the work, (2) the alleged employee's opportunity for profit or loss depending on his managerial skill, (3) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers, (4) whether the service rendered requires a special skill, (5) the degree of permanence of the working relationship, and (6) whether the service rendered is an integral part of the alleged employer's business. For a practical, question and answer approach to applying the California standard, see the Employment Development Department's Employment Determination Guide.

The federal standard under the Fair Labor Standards Act is similar. For example, in Bonnette v. California Health & Welfare Agency, 704 F.2d 1465, 1470 (9th Cir. 1983), the Ninth Circuit stated that the determination must be based on the economic realities of the situation, including whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.

Cases involving taxi drivers may provide some guidance as to how the Uber and Lyft cases will ultimately turn out. In Yellow Cab Cooperative v. Workers' Compensation Appeals Bd., 226 Cal.App,3d 1288 (1991), the California Court of Appeal ruled that a cab driver was an employee of Yellow Cab for purposes of workers compensation. Although the driver provided services under a written lease with Yellow Cab and was responsible for his own expenses, Yellow Cab exercised substantial control over the manner and means by which the driver provided the services. It marketed the service and had dispatchers who directed the drivers to calls. It instructed drivers on matters of behavior toward the public, personal appearance, and keeping their cabs clean. The company could require drivers to return to the yard. It barred them from working for other companies.

By contrast, in Yellow Taxi Co. v. NLRB, 721 F.2d 366 (D.C. Cir. 1983), a federal court of appeals ruled that taxis drivers were not employees under the National Labor Relations Act. There the company's written lease provided that the driver paid a fixed rental, regardless of his or her earnings on a particular day, and retained all the fares collected without having to account to the company in any way. That created a "strong inference" that the company did not control the manner and means of providing services.

Note that the Fair Labor Standards Act exempts drivers for "an employer engaged in the business of operating taxicabs" from the overtime rules (although not from the minimum wage requirement). See 29 U.S.C. section 213(b)(17).

For news reports on the denial of summary judgment motions in the Uber and Lyft lawsuits, see Juries To Decide Landmark Cases Against Uber and Lyft in Forbes, Judges back drivers in lawsuits against Uber, others in The Boston Globe, Judges Rule Lawsuits Over Lyft, Uber Drivers Should Proceed in The Wall Street Journal, and Uber and Lyft drivers' class-action lawsuits will go to jury trials in The Los Angeles Times.

Are Franchisors Joint Employers With Their Franchisees

The recent announcement by the NLRB's Office of the General Counsel that it has authorized complaints against McDonald's USA for NLRA violations allegedly committed at franchised restaurants raises the general issue of potential franchisor liability for labor and employment violations by their franchisees. Reported decisions on the subject are scarce. In two cases decided over 45 years ago, the NLRB refused to find that a franchisor was a joint employer. Speedee 7-Eleven, 170 N.L.R.B. 1332 (1968) and S.G. Tilden, Inc., 172 N.L.R.B. 752 (1968). If any of the current complaints proceed to adjudication, the NLRB, and then the federal courts, will determine whether the NLRA's definition of employer includes franchisors.

The issue has arisen under other laws. For example, the California Supreme Court has under review a Court of Appeal decision holding that Domino's could be held liable for sexual harassment by one of its franchisee's employees. The case was argued in June 2014. For a discussion of the decision rejecting liability, see this blogpost.

Employees have also sought to hold franchisors liable for wage and hour violations by franchisees. For example, earlier this year, class action lawyers in California, New York and Michigan filed lawsuits claiming that McDonald's was responsible for wage and hour violations by its franchisees.

For a newspaper columnist's view on the issue, see the LA Times Michael Hiltzik's column "The NLRB-McDonald's ruling could be the beginning of a franchise war."

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).

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).

Joint Employment

As we have pointed out in previous posts (One Worker, Two Related Employers, Who Is The (An) Employer), there may be more than one person involved on the employer side of an employment relationship. If each of those persons has enough control, a joint employment relationship may be created. Here, we examine the concept in the context of three statutory schemes: Title VII, the Fair Labor Standards Act, and the Family and Medical Leave Act.

Title VII

The federal employment discrimination statute defines employer as "a person engaged in an industry affecting commerce who has fifteen or more employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year," and employee as "an individual employed by an employer." 42 U.S.C. section 2000e. It does not define employ. However, the federal courts have made clear that there is no liability under Title VII unless there is an employment relationship between the "employee" plaintiff and the "employer" defendant. To determine whether there is a sufficient relationship, the courts evaluate a number of factors.

The EEOC lists the following factors in its Compliance Manual: (1) The employer has the right to control when, where, and how the worker performs the job; (2) The work does not require a high level of skill or expertise; (3) The employer furnishes the tools, materials, and equipment; (4) The work is performed on the employer's premises; (5) There is a continuing relationship between the worker and the employer; (6) The employer has the right to assign additional projects to the worker; (7) The employer sets the hours of work and the duration of the job; (8) The worker is paid by the hour, week, or month rather than the agreed cost of performing a particular job; (9) The worker does not hire and pay assistants; (10) The work performed by the worker is part of the regular business of the employer; (11) The employer is in business; (12) The worker is not engaged in his/her own distinct occupation or business; (13) The employer provides the worker with benefits such as insurance, leave, or workers' compensation; (14) The worker is considered an employee of the employer for tax purposes; (15) The employer can discharge the worker; (16) The worker and the employer believe that they are creating an employer-employee relationship. See, EEOC Compliance Manual, section 2-III-A-1. The U.S. Supreme Court endorsed the manual's approach in Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440 (2003).

For a case that applied the concept to a disability discrimination claim, see Bristol v. Bd. of County Comm'rs, 312 F.3d 1213 (10th Cir. 2002). There, the 10th Circuit held that, under Colorado law, the County Board of Commissioners did not have sufficient control over sheriff's department employees to be considered a joint employer with the sheriff.

Fair Labor Standards Act

The FLSA defines employer to include "any person acting directly or indirectly in the interest of an employer in relation to an employee." Employee means "any individual employed by an employer." Employ includes "to suffer or permit to work." 29 U.S.C. section 203. The Department of Labor's regulations add that these definitions look to "economic reality" rather than "technical concepts." 29 CFR 784.8. The analysis is similar to that used to decide who is protected under Title VII. See Lambert v. Ackerley, 180 F.3d 997 (9th Cir. 1999). The Department of Labor also has regulations that speak specifically to joint employment under the Fair Labor Standards Act. 29 CFR 791.1 and 791.2.

The Third Circuit recently discussed the test for joint employer status under the Fair Labor Standards Act in the context of a holding company providing shared services to its subsidiaries in In re Enterprise Rent-a-Car Wage and Hour Employment Practices Litigation, 2012 U.S. App. LEXIS 13229 (3d Cir. June 28, 2012). For a discussion of joint employment in the context of an attempt by prisoners to hold state officials responsible for FLSA violations, see Gilbreath v. Cutter Biological, Inc., 931 F.2d 1320 (9th Cir. 1991).

Family and Medical Leave Act

The FMLA expressly adopts the definitions of the FMLA. See 29 U.S.C. section 2611. The Department of Labor has a regulation that addresses the joint employment relationship, and its effect on FMLA requirements. See 29 CFR section 825.106.

For a case that applied the concept to an FMLA claim, see Moreau v. Air France, 356 F.3d 942 (9th Cir. 2004), where the Ninth Circuit affirmed a federal district court's ruling that Air France was not a joint employer with the entity that supplied ground handling services.

UPDATE [8/22/2012]

A recent decision from the United States District Court in Oregon illustrates the high stakes involved in a decision about who the employer is. A plaintiff who alleged that his priest molested him sued the Holy See itself, claiming that the Vatican was the priest's employer. On August 20, 2012, United States District Judge Michael Mosman ruled that the evidence did not establish enough control by the Vatican to render it the priest's employer. Doe v. Holy See, Case No. 02-CV-00430 (U.S. Dist. Ct. Ore. 8/20/212). In March 2009, the Ninth Circuit had ruled that the plaintiff's claim of respondeat superior liability for the priest's actions was not barred by the Foreign Sovereign Immunities Act. Doe v. Holy See, 557 F.3d 1066 (9th Cir. 2009).

Exemptions from Wage and Hour Requirements: Highly Compensated

The U.S. Department of Labor's regulations include an exemption for highly compensated employees. Because California law does not contain a similar exemption, the exemption is only relevant for California employers in the rare circumstance where an employee is exempt under California law, but not under the federal Fair Labor Standards Act.

The exemption is found in 29 CFR section 541.601, which provides that an employee with total annual compensation of at least $100,000 is exempt if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee. The compensation must include at least $455 per week paid on a salary basis. The employer may choose any 52-week period for calculating the total compensation. Further, if the employee has not earned $100,000 during the 52-week period, the employer has a month after the close of the period to make up the difference.  An employee who has worked only a portion of a year is exempt if he or she earns a pro rata portion of the $100,000.

Employers that are not considered local retail or service establishments (and hence cannot qualify for the commissioned employee exemption under the FLSA) should consider whether their commissioned employees can be considered exempt under the highly compensated employee exemption. For an example of a court applying the exemption to employees of a broker-dealer that provided investment banking and investment services to high-net-worth individuals, see In re RBC Dain Rauscher Overtime Litigation, 703 F.Supp.2d 910 (D. Minn. 2010).

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: 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.