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.

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: 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: Executive

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

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

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

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

Exemptions from Wage and Hour Requirements: Salary Basis

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

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

Minimum Salary

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

Missed Days

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

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

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

Sick Leave


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

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

Extra Pay for Extra Work

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

Exemptions from Wage and Hour Requirements: Family Members

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

Federal

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

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

California

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

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

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

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

Exemptions from Wage and Hour Rules in California

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

White Collar Exemptions

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

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

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

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

Computer Professionals

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

Outside Sales Persons

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

Commissioned Employees

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

Highly Compensated Employees

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

What Is A Commission?

The California wage orders exempt from the overtime rules "any employee whose earnings exceed one and one-half times the minimum wage if more than half that employee's compensation represents commissions." (See, for example, Wage Order No. 4, section 3(D).) Labor Codesection 204.1 defines "commission wages" as "compensation paid to any person for services rendered in the sale of such employer's property or services and based proportionately upon the amount or value thereof." Although that provision is limited to employees of vehicle dealers, the California Supreme Court has ruled it generally applicable to Labor Code provisions concerned with commissioned employees. See Ramirez v. Yosemite Water Co., 20 Cal.4th 785 (1999).

In a recent case, the Second District Court of Appeal in Los Angeles applied that definition to a CarMax plan that provided its sales consultants with a uniform dollar payment for each sale of a vehicle, lease, appraisal purchase and extended service plan, no matter what the sale price of the car. A class action lawsuit contended that the plan was not a true commission arrangement because the consultants did not receive a percentage of the price.

Earlier cases, including Ramirez, had concluded that pay was not commission wages unless unless the pay was a percent of the price of the product or service. See, e.g., Keyes Motors, Inc. v. Division of Labor Standards Enforcement, 197 Cal.App.3d 557 (1987). However, this Court found that CarMax's plan did provide for commission wages. It determined that the earlier cases had focused on the part of the definition that required a relationship to "value." But, the definition also provided that a commission could be based proportionately on "amount." In the case of CarMax, the amount that it paid its consultants was proportionate to the number (or amount) of cars sold. Areso v. CarMax, Inc., Case No. B219981 (May 20, 2011).

The Areso case is also instructive on the value of Labor Commissioner interpretations of the wage and hour laws. The Court of Appeal gave "no deference" to the DLSE Enforcement Policies and Interpretation Manual, because it was not adopted in accordance with the Administrative Procedure Act. But, DLSE opinion letters are not underground regulations, and may properly be considered.

Employer New Year Resolutions

As the New Year begins, here are four suggestions for New Year resolutions to help reduce the risk of employment law liability during the coming year.

1. Prepare job descriptions for every position in your organization. The job description is the most important document in an employee's personnel file. It provides the basis for evaluation of performance. It is the foundation for determining disability and workers compensation issues. To get started, take a look at the MS Word templates for job descriptions on the Microsoft website.

2. Review the job duties of every exempt employee. In recent years, the greatest exposure to liability for employers has been in wage and hour class actions. The most important factor in the multi-million dollar verdicts and settlements is misclassification of nonexempt employees as exempt. You must decide whether or not to treat employees as exempt based on actual job duties not on whether they are paid a salary or by job title. If you need an incentive, the December 26, 2008 issue of "Daily Journal Verdicts and Settlements" reports the following recent settlements: $21 million by Edward D. Jones & Co., $11.2 million by SBC and AT&T, $8.5 million by Unisource, $5.4 million by Kaiser, $2.25 million by EMC and Legato Systems, $1.3 million by Valley Farm Transport, and $900,000 by E-Trade Securities. We discussed wage and hour compliance in a June 29, 2008 post to this blog.

3. Review changes to the FMLA. Congress and the Department of Labor made important changes to the Family and Medical Leave Act rules last year. There is a new form of leave for members of military families, and there are changes to the existing regulations. We discussed these changes in a December 9, 2008 post to this blog, with links to the new rules.

4. Make sure that you are complying with immigration laws. All indications are that the federal government will continue to insist on strict compliance with the laws that prohibit employment of workers who lack authorization to work in the United States. If you knowingly employ someone who lacks such authorization, you have committed a federal crime. To assure that your workplace is in compliance, follow the rules for the I-9 Form. We discussed immigration compliance in an August 3, 2009 post to this blog.