In a recent decision, Ramirez v. ISB Mehta Corp., a restaurant successfully defended a lawsuit filed by a former manager claiming that he was misclassified as an exempt employee.  While the case is not officially published, it provides a few good lessons for restaurant operators’ classification of their employees.  This Friday’s Five focuses on the lessons illustrated by this case:

1. Employers must approach classifying employees as exempt carefully

In Ramirez v. ISB Mehta, the plaintiff worked for Erik’s DeliCafe, a franchised restaurant in the Bay Area.  The plaintiff filed a class action alleging that he was misclassified as an exempt employee and was entitled to overtime compensation because his duties as a manager primarily involved nonexempt work.

The plaintiff testified that his daily duties including counting cash, entering daily sales information, making daily bank deposits, writing checks, placing food orders, buying produce, marketing, preparing and delivering catering orders, and working the register (taking walk-in customer orders). Defendant provided plaintiff with a cell phone, but paid plaintiff $100 a month for the service.

The trial court rejected plaintiff’s overtime compensation and minimum wage claims, finding that he was an exempt employee under both the executive and administrative exemptions defined in Industrial Welfare Commission Wage Order No. 5-2001.  The court found that plaintiff was primarily engaged in activities falling within those exemptions, such as:

  • directing the work of others;
  • authorized to hire and fire;
  • customarily and regularly exercising independent judgment; and
  • regularly and directly assisting the owner of the business

The evidence established that the employee’s duties and responsibilities also involved performance of non-manual work directly related to management policies or general business operations, and Employee was paid a salary more than twice the minimum wage.

Click here for common exempt classifications.

2. To meet the executive exemption, the employer must meet six requirements

The court explained to meet the executive exemption, the following must be met:

The executive exemption has six components: (1) the employee’s “duties and responsibilities involve the management of the enterprise in which he/she is employed,” (2) the employee “customarily and regularly directs the work of two or more other employees,” (3) the employee “has the authority to hire or fire other employees …,” (4) the employee “customarily and regularly exercises discretion and independent judgment,” and (5) the employee earns a monthly salary “no less than two (2) times the state minimum wage for full time [40 hour per week] employment.” (Cal. Code Regs, tit. 8, § 11050, subd. 1(B)(1)(a)-(d), (f).)

The remaining component, at issue here, requires the employee to be “primarily engaged in duties which meet the test of the exemption.” (Cal. Code Regs, tit. 8, § 11050, subd. 1(B)(1)(e).)

3. Factors to review when employee is performing both exempt and nonexempt duties to determine if the employee spends more than 50% of their time on exempt duties

The court set out the factors used in determining if the employee spends more than 50% of their time on managerial duties when the employee performs both managerial and non-managerial work:

Work performed by a nonexempt employee is generally nonexempt work when performed by the supervisor; (2) the regulations do not recognize hybrid activities (activities having both exempt and nonexempt aspects); (3) identical tasks may be exempt or nonexempt depending on the manager’s purpose in engaging in the task or the task’s role in the work of the organization; and (4) in large retail establishments when certain tasks are customarily assigned to nonexempt employees, the performance of that work by a manager is nonexempt. (Heyen, supra, 216 Cal.App.4th at pp. 822-823.)

The court found that in this case bookkeeping tasks, maintaining inventory and ordering supplies and marketing the restaurant were exempt duties.

Click here for my prior article for examples of duties that usually are exempt duties.

4. Employers bear the burden to prove that an employee is exempt

California courts have made clear that the employer bears the burden of proof when asserting that an employee is an exempt employee.  “[T]he assertion of an exemption from the overtime laws is considered to be an affirmative defense, and therefore the employer bears the burden of proving the employee’s exemption.”  Ramirez v. Yosemite Water Co. (1999).

5. Even though the employer prevailed in this lawsuit, it can be risky to classify restaurant managers classified as exempt

While the employer prevailed in this case, the case illustrates the close factual analysis required in determining whether an employee meets an exempt classification.  Especially in the restaurant context, it is likely that managers will be performing both nonexempt and exempt duties.  It is very easy for disgruntled employees to contend after the fact that their duties primarily consisted of nonexempt, non-managerial tasks.

The DOL’s Final Rule was issued this week (see my previous article for the details), and we have had a few days to digest the new rules.  Now employers need to start putting together a plan to ensure compliance with the federal rules, and take time to ensure they are also complying with applicable California law.  This Friday’s Five is five suggestions to start the process:

1. Understand that the DOL’s changes apply to the FLSA, not California law.

At risk of sounding like a lawyer, the analysis to determine if an employee is properly classified as an exempt employee is very detailed and complex.  California’s requirements differ from the Federal requirements in many ways.  Therefore, it is imperative that California employers understand which laws apply to their employees, and that they are following the correct laws.  The set of rules that provides the employee with more rights and protections is usually the law that governs.  For example, to qualify as an exempt employee under California law, the employee must be paid the equivalent of two times the state minimum wage for full-time employment.  As of January 1, 2016, with the state minimum wage at $10 per hour, the annual salary must be at least $41,600 to qualify for the California white collar exemptions.  This is less than the annual salary of $47,476 or $913 per week as set by the DOL in the Final Rule.  Therefore, in order to avoid paying overtime for work over 40 hours in a week, California employers will need to pay at the higher salary required by federal law by the December 1, 2016 deadline.

2. Understand which law – federal or California – applies to your workforce.

Again, this analysis is complex and needs to be done carefully with competent legal counsel.  Generally, the law that gives employees the most protections or benefits must be followed.  The FLSA had a much lower salary basis test in the past, so California employers generally had to comply with California law regarding exempt status because it set a higher salary basis (the equivalent of two times the state minimum wage for full-time employment, which equals $41,600 annually, or $3,466.67 per month based on $10 per hour) and a stricter duties test than federal law.  Now, California employers will likely need to focus on compliance with the higher salary required under Final Rule, which becomes effective December 1, 2016, but still must also likely comply with California’s stricter duties test.  This is territory where advice from an employment lawyer particular to the client’s situation is critical.

3. Take time to evaluate workforce and reclassify employees if needed.

Employers should use the DOL’s Final Rule changes as an opportunity to audit their workforce to determine if employee classifications need to be reclassified prior to the December 1, 2016 implementation date of the Final Rule.  While the DOL changed the salary level required to qualify as exempt, employers cannot forget to ensure that exempt employee must also meet the requirements of the duties test, which generally requires employees to perform high level managerial duties for a substantial portion of their worktime.  As mentioned above, California applies a different, stricter duties test on employers, and because this provides more protection to the employee, California employers usually have to meet the California duties test.

It would also be an ideal time when the DOL’s regulations take effect to reclassify employees as nonexempt without raising the question of why the reclassification is taking place.

4. Update timekeeping systems and policies.

The increase in the salary basis test will likely result in many employers reclassifying employees as nonexempt.  Therefore, with more employees needing to clock-in an out for their start and stop times (in addition to tracking the start and stop times for meal breaks as required under California law), employers need to ensure their timekeeping system is up-to-date and compatible with their workforce.

5. Enforce a strict policy prohibiting off-the-clock work and implement policies designed to limit the amount of overtime worked to keep costs under control.

With many more employees likely being reclassified as nonexempt, it is even more critical that employers ensure they take all appropriate steps to protect themselves from off-the-clock work claims.  Employers should have an effective timekeeping policy and train their managers about preventing off-the-clock work.  In addition, employers need to develop a policy and train managers on the correct policies to control unauthorized overtime worked.  Managing overtime costs requires effective policies and manager training to ensure all wage and hour laws are complied with.

With Governor Brown’s signing of the bill raising California’s minimum wage to $10.00 per hour by January 2016, there are a few new considerations this triggers for California employers.  This quick video discusses the increase in guaranteed salary employers must pay in order to for employees to qualify as exempt. 

//www.youtube.com/embed/hQk14P9aMJI