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.

How an $80 Mistake Became an $88,410 Mistake

First District Court of Appeal

California's Labor Code is full of technical requirements that can trip up even those employers who are trying to comply with their obligations. And, because of the monetary penalties and attorney's fees that can be assessed for violations of those technical requirements, the consequences may be out of proportion to the seriousness of the wrongdoing. A recent decision from the Court of Appeal for the First Appellate District illustrates the problem.

Labor Code section 202 requires an employer to pay all wages due within 72 hours after the employee gives notice of his or her intention to quit. (If the employer discharges the employee, the wages are immediately, under section 201.) If the employer does not pay the final wages within the deadline imposed by the Labor Code, it is subject to waiting time penalties under section 203, which provides: "If an employer willfully fails to pay ... any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced; but the wages shall not continue for more than 30 days."

In Nichiki v. Danko Meredith, APC, Case No. A147733 (August 1, 2018), the employer mailed a handwritten check to its departing employee for her final wages, on November 18 (which was within 72 hours of reading an email from the employee announcing her resignation). In the dollar amount box, the amount was given as "2,880.31," the correct amount. But, the amount was spelled out as "Two thousand eight hundred and 31/100." Because of the discrepancy, the employee was unable to deposit the check. She emailed the employer about the problem on November 26. The employer issued a new check for the correct amount on December 5, 9 days later. After a hearing the Labor Commissioner ruled that the employee should recover waiting time penalties for 17 days, from November 18 to December 5, at a daily rate of $250 per day -- a total of $4,250. The employer appealed the ruling to Superior Court, which upheld the waiting time penalty of $4,250, and awarded $86,160 in attorney's fees under Labor Code section 98.2(c).

The Court of Appeal reduced the waiting time penalties to $2,250, for the nine days from November 26 to December 5. By statute, the words written on a check prevail over numbers, which made the original check $80 short. (See Cal. U. Com. Code, section 3114.) Although that mistake was inadvertent, the delay in paying the correct amount became willful once the employer received notice of the mistake on November 26.

The attorney's fees award under section 98.2 was appropriate. That section provides, that the reviewing court must award reasonable attorney's fees to the opponent of an unsuccessful appellant, whether that is the employer or the employee. However, an employee is deemed to be successful if the court awards an amount greater than zero. Because the result, even after the appeal, was an amount greater than zero, the employee is also entitled to the costs and attorney's fees incurred for the proceedings in the Court of Appeal.

The lesson for employers is that you should cut your losses. Once you determine that there has been a violation of the Labor Code, make the employee whole for the violation immediately.

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.

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.

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

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.

California Employers Must Pay Employees for Required Use of Personal Cell Phones

According to a recent Court of Appeal decision, Labor Code section 2802 requires employers to reimburse employees who must use their personal cell phones for work-related calls. Cochran v. Schwan's Home Service, Inc., Case No. B247160 (Aug. 12, 2014).

Section 2802 provides: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful." Labor Code section 2804 makes any agreement by which an employee purports to give up the right to indemnification null and void.

Prachasaisoradej v. Ralph's Grocery Co., 42 Cal.4th 217 (2007) illustrates the outer boundaries of the requirement. The plaintiff in that case challenged a profit sharing plan that provided employees with additional compensation based on a store's profits after deducting operating expenses. The Supreme Court upheld the plan against the argument that employee pay was being reduced by expenditures that were the employer's responsibility. "The Plan was not illegal, we conclude, simply because, pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers' compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store's profit, upon which the supplementary incentive compensation payments were calculated. By doing so, Ralphs did not illegally shift those costs to employees. After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages."

In the Cochran case, the Court of Appeal explained that the test for determining whether the employer must reimburse is not whether the employee incurred an added expense, but whether the employer, in the absence of reimbursement, "would receive a windfall because it would be passing its operating expenses onto the employee." Even though employees might have cell phone plans that did not require them to pay for the minutes of usage devoted to the employer's purpose, the employer was not entitled to the "windfall" of not paying for those minutes on its own.

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."

California court confirms employers may deduct from exempt employee leave banks

The San Diego division of the Court of Appeal has confirmed that California employers may deduct from exempt employee leave banks for partial-day absences, without destroying the employee's exemption.

General Atomics provided its employees with a set amount of paid annual leave determined by the employee's length of service. Employees could draw upon the paid leave for absences caused by illness, vacation, and personal and family obligations. The company deducted from the accumulated leave for any partial-day absences. Lori Rhea filed a lawsuit challenging the company's practice as a violation of the salary-basis requirement for several recognized exemptions from the wage and hour laws. The Court of Appeal rejected her argument. Rhea v. General Atomics, Case No. D064517 (Jul. 21, 2014).

It is a requirement of many of the exemptions under federal and state law that the employee earn a salary, which means the receipt of a pre-determined amount per pay period that "is not subject to reduction because of variations in the quality or quantity of the work performed." Kettenring v. Los Angeles Unified School District, 167 Cal.App.4th 207 (2008). Rhea argued that her employer's practice resulted in her not receiving a salary, because unauthorized deductions from her leave bank for partial-day absences constituted a forfeiture of wages that she had earned. The Court of Appeal rejected the argument, because the employer was not taking away something that Rhea had earned. It was just applying the rules it had established for how Rhea could enjoy the fruits of what she earned.

The Court of Appeal in San Francisco reached the same result in Conley v. Pacific Gas & Elec. Co., 131 Cal.App.4th 260 (2005). Rhea sought to distinguish that case because PG&E had only deducted for partial-day absences that exceeded four hours. The Rhea Court could see no basis in California law for distinguishing among partial-day absences based on the length of the absence.

The California rule stated in Conley and Rhea matches the interpretation of federal law that the Department of Labor stated in a January 19, 2009 opinion letter, and the interpretation of California law that the Labor Commissioner stated in a November 23, 2009 opinion letter.

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.

Are truckers independent contractors?

Trucking companies have become the targets of lawsuits alleging that they misclassified their drivers as independent contractors. Such cases include Robles v. Comtrak Logistics, Inc., Case No. 2:13-CV-00161 (putative class action currently pending in the federal court in Sacramento) and Seacon Logix Inc. v. Labor Commissioner (Seacon ordered to pay $105,000 for violations against four of its drivers).

Truck drivers often own or lease their own trucks, and sign independent contractor agreements with the trucking companies. Those two factors alone are not sufficient evidence of independence to make the drivers independent contractors. As the California Court of Appeal explained in a 2007 case involving FedEx drivers: "The parties' label is not dispositive and will be ignored if their actual conduct establishes a different relationship." Estrada v. FedEx Ground Package System, 64 Cal. Rptr. 3d 327 (Ct.App. 2007). FedEx wound up paying $27 million for that misclassification case.

The factors to be evaluated in determining whether a driver is an independent contractor are: (1) whether the worker is engaged in a distinct occupation or business, (2) whether, considering the kind of occupation and locality, the work is usually done under the principal's direction or by a specialist without supervision, (3) the skill required, (4) whether the principal or worker supplies the instrumentalities, tools, and place of work, (5) the length of time for which the services are to be performed, (6) the method of payment, whether by time or by job, (7) whether the work is part of the principal's regular business, and (8) whether the parties believe they are creating an employer-employee relationship.

Under a California statute that became effective in January 2012, companies that "willfully" misclassify employees as independent contractors face increased penalties of up to $15,000 per violation (increased to $25,000 if there was a "pattern or practice" of misclassification. See California Labor Code sections 226.8 and 2753.

Before classifying workers as independent contractors businesses should make sure that they have carefully analyzed the nature of their relationships with those workers so that they do not incur the substantial liability that would be imposed if the workers have been misclassified.

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.

Are Per Diem Payments Part of Payroll?

If a payment to an employee is reimbursement for expenses the employee incurred on behalf of the employer it is not wages, and not taxable. Because it can be burdensome to track and reimburse small expenses exactly, many employers pay employees a flat per diem amount to be used for expenses. If the per diem payment is not reasonably related to the expenses it will be considered wages. Because the characterization has ramifications for various taxing and regulatory agencies, employers who pay per diems must make sure that they are aware of the standards.

The California Court of Appeal recently consider the distinction in a case arising out of the State Compensation Insurance Fund's audit of an employer's payroll records to determine the premium on an employer's workers compensation insurance policy. ReadyLink was a staffing agency that supplied temporary nurses to medical facilities in California. For the 2005-06 policy year, it paid a minimum wage of $6.75 per hour plus a "much higher stipulated per diem amount." More than 50 percent of the nurses' payments from ReadyLink camd from the per diems. The Court of Appeal ruled that the insurer properly included the per diems in payroll for purposes of computing the premium. The $6.75 hourly wage was well below the market rate for nurses. ReadyLink had used the per diem payments as a scheme for making up the difference while avoiding the tax and other consequences of paying the market rate. ReadyLink Healthcare, Inc. v. Jones, Case No. B234509 (Nov. 6, 2012). The applicable Insurance Department regulation is found at 10 Cal. Code Regs. § 2318.6.

ReadyLink argued that its payments were legitimate expense payments because they were within the guidelines established by federal regulation for payments to federal employees and employees of federal contractors while traveling. See 41 CFR Chapter 300. The Court of Appeal rejected the argument because the federal regulation dealt with a different issue. The IRS allows employees to exclude from their income per diem payments that meet the standards found in 41 CFR Chapter 300. However, the payment must be [r]easonably calculated not to exceed the amount of the expenses or the anticipated expenses. See Internal Revenue Bulletin 2011-42.

For purposes of the Fair Labor Standards Act, the U.S. Department of Labor considers payments that are reasonably approximate to the actual amount expended by the employee to be excludable from the regular rate of pay used to calculate overtime. See 29 CFR 778.217. Per diem payments that are based on the number of hours worked, for example, are not reimbursement for expenses. See Gagnon v. United Technisource, Inc., 607 F.3d 1036 (5th Cir. 2010).

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.

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: 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).