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.

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.

Rounding Permissible Under California Wage and Hour Law

A January 2012 post described a case pending in the California Court of Appeal that involved the legality of rounding time worked to the nearest tenth of an hour for purposes of computing wages. In See's Candy Shops, Inc. v. Superior Court, Case No. D060710 (Oct. 29, 2012), the San Diego division of the Fourth District Court of Appeal has upheld the practice, provided that it does not result over a period of time into compensate the employees properly for all time actually worked.

The Kronos timekeeping system that See's Candy used recorded the actual time to the minute that employees punched into and out of the system, but the employer rounded the actual time up or down to the nearest tenth of an hour. The class action plaintiff claimed the practice violated California Labor Code section 204, which requires "all wages" to be paid twice each month on designated days. The court rejected the argument, stating that the reference "pertains to the timing of wage payments and not the manner in which an employer ascertains each employee's work time."

Because state law did not bar the practice, it was appropriate to follow the federal Department of Labor's regulation at 29 C.F.R. § 785.48(b), which states: "It has been found that in some industries, particularly where time clocks are used, there has been the practice for many years of recording the employees' starting time and stopping time to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour. Presumably, this arrangement averages out so that the employees are fully compensated for all the time they actually work. For enforcement purposes this practice of computing working time will be accepted, provided that it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked." The California Labor Commissioner’s enforcement policy follows the federal practice. See DLSE Enforcement Policies and Interpretations Manual, sections 47.1 and 47.2.

For an example of a rounding practice that did not comply with the regulation, see Eyles v. Uline, Inc., Case No. 4:08-CV-577-A (N.D. Tex. Sep. 4, 2009), which states that a policy of only rounding down would not compensate an employee for all time worked.

California Employers Must Pay California Overtime To Non-Resident Employees

Answering a question from the Ninth Circuit, the California Supreme Court has ruled that employers based in California must abide by California overtime rules for non-California employees while they are working in California. Sullivan v. Oracle Corp., Case No. S170577 (Jun. 30, 2011).

The plaintiffs worked for Oracle as instructors. Two were based in Colorado and one in Arizona. They sought overtime under California law for the full days and full workweeks that they spent in California. Unlike the plaintiffs' home states, California requires time and a half for all hours worked in excess of 8 in a day and on the seventh successive day of work in a workweek, and double time for all hours worked in excess of 12 in a day, and in excess of 8 on the seventh successive day of work in a workweek. They also sought enforcement of Oracle's overtime obligations under the federal Fair Labor Standards Act (FLSA) through California's Unfair Competition Law (UCL), which provides a longer statute of limitations.

On their face, California's overtime rules applied to the work in question, and California's governmental interest analysis approach to conflict of laws questions pointed to the application of the California rules. It was doubtful that there was a true conflict of governmental interest. To the extent there might have been, California's interest in assuring that work performed in California was compensated fairly outweighed any other state's interest. That also entitled the plaintiffs to enforce their California law overtime claims under the UCL. The court said that it might not reach the same result for other wage and hour rules, such as meal and rest periods and vacation pay accrual. It also explained that the case before it dealt with an employer based in California.

However, the plaintiffs were not entitled to enforce the FLSA overtime claims (which included work performed outside California) through the UCL. Unless the legislature expressly specifies otherwise, California statutes are not interpreted to reach conduct outside the state's borders. Here, there were no facts to support a conclusion that failure to pay overtime as required by the FLSA occurred in California.

UPDATE (December 13, 2011)

The Ninth Circuit acknowledged the California Supreme Court's answers to the questions it had posed, and reversed the District Court's grant of summary judgment. Application of California overtime rules to work performed in California for a California company by its out-of-state employees did not violate the United States Constitution because California had sufficient contacts with the controversy, and applied its law equally to all workers in California. Sullivan v. Oracle Corp., Case No. 06-56649 (9th Cir. Dec. 13, 2011).

Calculating Hours Worked During A 14-Day Hitch

Two Metson Marine employees worked 14-day hitches on Metson's ships providing emergency clean up of oils spills and other environmentally hazardous discharges off the California coast. During their hitches, the employees were required to sleep on the ships. Metson allotted 12 hours out of the day to work, and 12 hours to off-duty (three hours for meals, eight hours for sleep, and an hour for free time). During their off duty time, employees were required to carry a cell phone or pager and be able to return to the ship within 45 minutes of a call. While on the ship they were subject to call at any time.

In Seymore v. Metson Marine, Inc., Case No. A127489 (Cal. Ct. App. 2/28/20110), the California Court of Appeal in San Francisco ruled that the off-duty hours all constituted hours worked under California wage and hour rules. The employees' circumstances on the ships made them "subject to the control of an employer," the California standard for determining what constitutes hours worked. (See Wage Order No. 9, subdivision 2(G) and the explanation of the provision in Morillion v. Royal Packing Co., 22 Cal. 4th 575, 94 Cal.Rptr.2d 3 (2000).) However, by specifying the eight hours assigned for sleep in its employee handbook, the company created an implied agreement that it need not pay for those hours.

The Court of Appeal rejected the employer's attempt to reduce the number of overtime hours through its definition of the workweek. Although the 14-day hitch ran from 12 noon Tuesday to 12 noon two Tuesdays later, Metson designated a workweek that ran from 12:00 am Monday through 11:59 pm the following Sunday. It did so to avoid the premium pay for hours on the seventh consecutive day of work required by California law. The court ruled that the employer could not use an artificial workweek solely for the purpose of computing overtime. "[The employer] may designate any workweek it wishes, but the workweek it selects and requires its employees to observe is the workweek it must use for the purpose of calculating employee compensation."

Explicit Mutual Wage Agreements in California

A recent appellate decision explains how California employers may implement an explicit mutual wage agreement that provides for payment of a weekly salary to cover both regular hours and overtime hours. The decision in Arechiga v. Dolores Press, Inc., Case No. B218171 (Cal. Ct. App. 2/7/2011) is available here.

California law requires employers to pay overtime to all non exempt employees who work more than eight hours in a day, or more than 40 hours in a week. Usually, an employer complies with this requirement by establishing an hourly wage for its employees, and then paying the appropriate overtime rate for extra hours (time and a half for all hours over eight in a day or 40 in a week, and double time for all hours over 12 in a day).

If the employer intends a particular employee or group of employees to work a fixed schedule that will always involve the same number of overtime hours, the explicit mutual wage agreement can be used to establish a regular pay schedule without computing overtime pay each pay period. In the Arechiga case, for example, there was an agreement that the employee would work eleven hours a day, six days a week, and that he would earn 26 hours of overtime pay each week. The employer paid a fixed salary of $880 per week, to cover 40 hours at a regular hourly rate of $11.14, and 26 hours at the overtime rate of $16.71.

The employee argued that the enactment of Labor Code section 515(d) in 2000 invalidated such agreement by providing that, for a salaried non exempt employee, "the employee's regular hourly rate shall be 1/40th of the employee's weekly salary." The Court of Appeal disagreed, ruling that the salary referred to in section 515(d) was only that portion of the salary allocated to the regular hourly rate. The court explicitly disagreed with the contrary interpretation in the Enforcement Policies and Interpretation Manual published by the California Division of Labor Standards Enforcement.

An employer who wishes to implement an explicit mutual wage agreement should have each employee to whom it applies sign a document that (1) specifies the basic hourly rate of compensation on which the guaranteed salary is based before the work is performed, and (2) provides provides for payment of at least one and a half times the basic rate for all overtime hours. If the employee works more hours than those specified in the agreement, the employer will have to pay additional overtime at the appropriate rate.

One Worker, Two Related Employers

Allegations in a recent lawsuit against several McDonald's franchisees in Monterey County raise an issue about application of the wage and hour laws to employees who work for more than one employer. The complaint filed on behalf of several hundred employees alleges that the franchisees used a "dual-shift" practice whereby a worker would be paid by two employers for the same pay period in an attempt to avoid paying overtime. Garcia v. Forza Management LLC, Case No. GNM 98240 (Monterey County Superior Court Apr. 13, 2009). While we do not know what the evidence in the case will show, we can examine the legal principles used to decide such cases.

The applicable U.S. Department of Labor regulation is found at 29 CFR section 791.2. The California Labor Commissioner does not have a formal regulation, but the Division of Labor Standards Enforcement Enforcement Policies and Interpretations Manual appears to follow federal principles. Under those principles, there are three possible scenarios:

1. If two or more employers act entirely independently of each other, and are completely dissociated from each other, their wage and hour obligations to an individual whom they both employ are treated separately. Assume that Ginnie works an eight-hour shift at McDonald's, takes a nap for a couple of hours, and then works four hours selling hot dogs at Dodger Stadium. Although Ginnie worked 12 hours that day, she is not entitled to overtime pay from either employer.

2. If two or more employers act jointly with respect to an individual employed by both, they are jointly responsible for the total number of hours worked by both. Any overtime hours that the employee works must be apportioned among the employers based on the number of hours worked for each. Assume that ABC Petroleum employed Hector as a security guard eight hours a day. After a one hour break, Hector continued working as a security guard for another four hours, but transferred his attention to the facilities of XYZ Pipeline, which transported ABC's product from the oil fields to a shipping terminal. ABC and XYZ are not related and each issues its own paycheck to Hector, but XYZ relies on ABC to hire all security guards. Hector is entitled to four hours of overtime pay, with two-thirds paid by ABC, and one-third by XYZ. See Mid-Continent Pipe Line Co. v. Hargrave, 129 F.2d 655 (10th Cir. 1942).

3. If two or more employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer, the controlling employer is responsible for all hours worked. Assume that Sammy works eight hours for Janice in her oil fields, and then four hours at other oil fields as an employee of Janice Corp., of which Janice is the sole shareholder, board member and officer. All Janice's employees are also employees of Janice Corp. Sammy is entitled to four hours of overtime pay from Sammy. See Durkin v. Waldron, 130 F.Supp. 501 (D. La. 1955).

FLSA Applies To Retail Business on Indian Reservation

The Ninth Circuit Court of Appeals has ruled that the overtime requirements of the Fair Labor Standards Act apply to employees of a retail store owned and operated on the Puyallup Indian Reservation by members of the tribe. The store owners had argued that their tribe's retained sovereignty barred overtime claims under the FLSA. Solis v. Matheson, Case No. 07-35633 (9th Cir. Apr. 20, 2009). The full text of the decision is available here.

The Ninth Circuit explained that Indians and their tribes are subject to federal statutes of general applicability, just like any other United States citizen. There are exceptions if (1) the law touches exclusive rights of self-governance in purely intramural matters, or (2) if the application of the law would abrogate rights guaranteed by Indian treaties. An example of the first is Snyder v. Navajo Nation, 382 F.3d 892 (9th Cir. 2004), where the Ninth Circuit refused to apply the FLSA to tribal law enforcement officers, because law enforcement was a traditional governmental function. An example of the second is United States v. Smiskin, 487 F.3d 1260 (9th Cir. 2007), where a treaty that granted "the right, in common with citizens of the United States, to travel upon all public highways" barred prosecution for violation of the Contraband Cigarette Trafficking Act (which barred transportation of unstamped cigarettes).

The exceptions did not apply to the store owners. There was nothing sufficiently intramural about the employment of Indians and non-Indians by a retail business engaged in interstate commerce to invoke the first exemption. The tribe's right to occupy and exclude others under the treaty did not exempt the store owners from the FLSA because the tribe did not purport to regulate employment and there was no evidence that non-Indians had agreed to subject themselves to tribal jurisdiction.

By contrast, state laws are generally not applicable to operations on reservations. State law has no effect on the reservation unless the tribe has waived its sovereignty, or Congress has authorized an exercise of jurisdiction. See, for example, Middletown Rancheria of Pomo Indians v. Workers Compensation Appeals Bd., 60 Cal.App.4th 1340, 71 Cal.Rptr.2d 105 (1998), in which the California Court of Appeal ruled that the WCAB had no jurisdiction over a tribal gaming casino.

Bonus Effect On Overtime Wages

A recent decision from the First District Court of Appeal in San Francisco explains how bonus payments affect overtime wages. Marin v. Costco Wholesale Corp., Case No. A116847 (Cal. Ct. App. Dec. 23, 2008).

General Principles

Under the federal Fair Labor Standards Act and the California wage orders, employers must calculate overtime based on the "regular rate of pay." Although that is easy to do if the employee only earns a set hourly wage, employee compensation often includes other components. Some nonexempt employees are paid a salary. A paycheck may also include commissions, gifts, profit-sharing, bonuses and other items.

The regular rate must be computed workweek by workweek. For each workweek, total all compensation paid, but omit overtime payments, premium pay for work during off-hours, such as nights and holidays, gifts, profit-sharing and other benefit plans, and discretionary bonuses. These concepts are described in the U.S. Department of Labor's regulations at 29 C.F.R. sections 778.200 through 778.225. Divide the total by the number of hours actually worked (federal method) or the number of hours worked up to 40 (California method) to get the regular rate of pay.

Non-discretionary bonuses (those earned by by meeting performance standards, or based on formulas) are included in the regular rate calculation. (The distinction between discretionary and non-discretionary is described in 29 C.F.R. section 778.208.) But, such bonuses often cover more than one workweek. That requires an allocation of the bonus across the entire period, as explained in 20 C.F.R. section 778.209, and in section 49.2.4 of the California DLSE Enforcement Policies and Interpretations Manual.

The Marin Decision

Costco offered a formulaic bonus to its long-term hourly employees, which the Court of Appeal explained as follows: "To be eligible for the bonus, paid in April and October, these employees must: (1) have been paid a specified number of hours for continuous service—8,000 hours (approximately four years) for those hired before March 15, 2004, and 9,200 hours (approximately 4.6 years) for those hired after that date; (2) generally be at the top of their pay scale; and (3) have been employed by defendant on April 1 for the April bonus and October 1 for the October bonus. The maximum semi-annual base bonus amount is $2,000 for those with less than 10 years of service, $2,500 for those with 10 to 14 years of service, $3,000 for those with 15 to 19 years of service, and $3,500 for those with 20 or more years of service. To qualify for the maximum base bonus, the employee must have been paid for at least 1,000 hours in the six-month period preceding April 1 and October 1. Bonuses are prorated for those paid for less than 1,000 hours; the formula for the base bonus is thus: hours paid up to 1,000 ÷ 1,000 × maximum bonus amount."

Costco calculated the overtime attributable to the bonus by dividing the employee’s maximum base bonus by the minimum number of paid hours required to achieve that maximum bonus (1,000), and then by multiplying the number of overtime hours worked during the bonus period by one-half of that regular bonus rate. Attorneys for a class of Costco employees contended that Costco should have divided the base bonus the employee earned by the number of straight time hours worked during the bonus period, and then multiplied the number of overtime hours by 1.5 times that regular bonus rate. For an employee who earned a $2,500 bonus, the two methods could yield a difference of $350. The trial court adopted the plaintiffs' method with a modification, and entered judgment against Costco for $5.3 million.

The Court of Appeal reversed the judgment, and ruled that Costco had properly calculated the overtime due. The Court ruled that the DLSE manual did not have the force of law with respect to including bonuses in the regular rate of pay, because it had not been adopted as a regulation and did not cite any authority. Nonetheless, the Court also explained that Costco's method of calculating the regular rate of pay satisfied the standards set out in the manual.

Starbucks To Pay Over $100 Million For Requiring Baristas To Share Tips With Supervisors

The Case

A San Diego Superior Court judge recently determined that Starbucks owes over $100 million for allowing its shift supervisors to participate in tip pools at its restaurants. The practice ran afoul of a California law that makes tips the sole property of the employees who receive them. Starbucks management had reasoned that shift supervisors deserved a share of the tips because they spent time doing the same tasks -- making drinks and serving customers -- as the baristas who were entitled to the tips. But, the court ruled that shift supervisors could not participate because they also directed the work of the baristas. Chou v. Starbucks Corp., Case No. GIC836925 (San Diego Superior Court 3/14/2008).

The judge computed the amount owing by estimating the average hourly tip rate earned by the shift supervisors at $1.71, and multiplying that times the 50,694,674 hours that shift supervisors had worked during the relevant time period. That amounted to $86.7 million. The balance of the award was for accrued interest. The judge also enjoined Starbucks from continuing its practice. Click here to read the judge's decision.

The Rules on Tips

The California statute (Labor Code section 351) declares all tips to be the sole property of the employee or employees to whom they were left.  It is illegal for an employer or its "agent" to collect, take, or receive a tip, or to deduct any amount attributable to tips from wages owed to the employee. "Agent" means every person other than the employer who has authority "to hire or discharge any employee or supervise, direct, or control the acts of employees."

Since tips belong to employees, the employer may not count tip money toward its obligation to pay minimum wage. (This differs from the rule under the federal Fair Labor Standards Act, which allows employers to credit some tip money toward the minimum wage, as explained here.) At the same time, the rule means that tip money is not counted toward the regular rate of pay for computing overtime pay.

Tips include any money left for an employee over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron. For dancers, the definition is broader, covering any amounts paid directly by a patron to the dancer. For an explanation of the legislative intent behind that provision, see Jameson v. Five Feet Restaurant, Inc., 107 Cal.App.4th 138 (2003) and the 2001.06.22 opinion letter listed under "Resources" below.

A 1990 Court of Appeal decision ruled that employers could require employees to pool their tips without violating the statute. But, requiring tipped employees to share with supervisors who meet the definition of "agent" is not permitted, as Starbucks has now learned, at a cost of $100 million plus. For further information about tip pooling, see Leighton v. Old Heidelberg, Ltd., 219 Cal.App.3d 1062 (1990); the Jameson decision referred to above, and the 2005.09.08 and 1998.12.28-1 opinion letters listed under "Resources" below.

Resources

Starbucks Decision

California DLSE Tips and Gratuities FAQ

California Labor Code Provisions on Tips

DLSE Opinion Letter 2005.09.08

DLSE Opinion Letter 2001.06.22

DLSE Opinion Letter 1998.12.28-1