Enacted in 2004, California’s Private Attorneys General Act (PAGA) was designed by the California Legislature to offer financial incentives to private individuals to enforce state labor laws by recovering certain civil penalties.  Aggrieved employees can seek recovery of civil penalties for Labor Code violations they suffered, in addition to penalties for all Labor Code violations suffered by other employees in a representative action, as long as the employee suffered by at least one violation.  PAGA permits the aggrieved employees to collect civil penalties for Labor Code violations previously recoverable only by the Labor Commissioner.  PAGA claims are representative actions, which are distinct from class actions. 

1. Average PAGA settlement: $1.1 million

With penalties adding up to potentially huge amounts for small technical violations, employers are often times faced with choosing between the uncertainty of litigation or settling PAGA claims.  A report, California Private Attorneys General Act of 2004, Outcomes and Recommendations by Baker & Welsh, LLC, states that the average settlement of a PAGA case is over $1 million.  In addition, Los Angeles County and the rest of the Los Angeles Basis make up 46.4% of all PAGA case settlements.  The Bay Area is second, with about 16% of PAGA case settlements based on location. 

2. Potential penalties for employer with just 100 employees: $4 million

PAGA provides penalties on a per pay period basis for each aggrieved employee.  The employee may recover the penalty specified by the Labor Code, and if the Labor Code does not specify a penalty, PAGA sets default penalties of $100 per employee per pay period for the first violation, and $200 per pay period per employee for a subsequent violation. 75% of the collected penalties must be distributed to the Labor and Workforce Development Agency, and the remaining 25% is to be distributed among the employees affected by the violations, and a prevailing plaintiff is entitled to their attorney’s fees and costs. 

3. Amount of insurance coverage for PAGA claims: likely zero

Many employers believe that they have protection from PAGA and other wage and hour claims through purchasing employment practices liability insurance (EPLI).  However, most, if not all insurance companies exclude coverage of PAGA and wage and hour cases from coverage.  Some insurance companies may provide a small amount to pay to defend PAGA cases, but the liability for these types of claims usually falls directly on the employer.

4. Number of PAGA notices are on the rise: forecasted to exceed 7,000 in 2023

As this chart sets forth, the number of PAGA notices filed with the Labor & Workforce Development Agency (LWDA) are climbing:

Number of PAGA Letters filed with the LWDA 2016-2023

As the trend line indicates, the number of PAGA filings will likely continue to increase unless there is a significant development in the case law or the initiative that will appear on the November 2024 ballot passes that would replace PAGA. 

5. Average PAGA case length: 2 years

On average, it takes nearly 2 years for PAGA cases to be resolved given the complexity of the issues raised in PAGA cases and the shear number of employees that are implicated as the named plaintiff can bring claims for all employees who worked for the employer for one year from the date of the filing.  See California Private Attorneys General Act of 2004, Outcomes and Recommendations.

What can California employers do to protect themselves? 

Employers should consider implementing arbitration agreements with class action and PAGA waivers that would require the employee to bring any claim against the employer in their individual capacity, and not as a class action or a PAGA representative action.  The issue of whether employers can implement arbitration agreements with PAGA waivers is currently being reviewed by the California Supreme Court in Adolph v. Uber Technologies, Inc., and it is expected that the Court will issue a decision before the end of June 2023.  In addition, our prior article discusses steps employers can take to defend against PAGA cases here.

Artificial Intelligence (AI) has rapidly emerged as a transformative force across various industries, revolutionizing the way we work and live.  As we have previously written about here, AI has huge potential benefits for employers.  However, as the technology continues to advance, its impact on the workforce raises important questions about discrimination, privacy, and accountability. Acknowledging the significance of these concerns, the state of California, as well as the federal government, has started to consider what potential regulations would need to look like to effectively govern the use of AI by employers.  Here are five issues California employers need to understand about the proposed regulations as well as the existing laws that already govern an employer’s use of AI:

1. California proposed legislation to regulate employers’ use of AI.

AB 331 is a proposed California bill to regulate employers’ use of AI in making employment decisions (among other non-employment determinations as well).  The bill would require a developer of the AI to perform an impact assessment for any automated decision tool that would set forth the purpose of the tool, potential adverse impacts from the deployer’s use of the tool, and the safeguards implemented to address “reasonable foreseeable risks of algorithmic discrimination” from the use of the tool.  The proposed law also would require notification to the employee that the AI is used to make the decision and provide the employee an option to opt out of the automated decision.  Among other reporting requirements that must be made by the developer of the software, the law also prohibited “algorithmic discrimination” by the user of the software.  The bill set forth that anyone discriminated against because of the use of the AI would be entitled to compensatory damages, declaratory relief, and attorneys fees and costs.  This proposed bill raises many concerns, as addressed below. 

2. Other state and federal regulations regarding employer’s use of AI.

On May 18, 2023, the EEOC released a “technical assistance document” entitled, “Assessing Adverse Impact in Software, Algorithms, and Artificial Intelligence Used in Employment Selection Procedures Under Title VII of the Civil Rights Act of 1964.”  EEOC guidance explains that employers’ use of automated systems, such as AI, “may run the risk of violating existing civil rights laws.”  The document discusses whether an employer’s “’selection procedures’—the procedures it uses to make employment decisions such as hiring, promotion, and firing—have a disproportionately large negative effect on a basis that is prohibited by Title VII.”  A “disparate impact” or “adverse impact” under Title VII is illegal, as is intentional discrimination which his referred to as “disparate treatment.”  The EEOC notes that it adopted the Uniform Guidelines on Employee Selection Procedures under Title VII in 1978.  These Guidelines provide guidance to employers on how to determine if their selection procedures are “lawful for purposes of Title VII disparate impact analysis.”  The EEOC’s technical assistance is well thought out and relies upon guidance that is nearly a half a century old, well developed in the courts, and easily understood by employers.  As discussed below, the EEOC’s guidance is much more rational than California’s proposed AB 331. 

In October 2022, the White House published the “Blueprint for an AI Bill of Rights, Making Automated Systems Work For the American People.”  The document is only a white paper that has no legally binding effect on employers or their obligations.  It sets forth five principles that should be protected: 1) safe and effective systems, 2) algorithmic discrimination protections, 3) data privacy, 4) notice and explanation, and 5) human alternatives, consideration, and fallback.  The draft of California’s AB 331 is based largely on the concepts put forth in the White House’s white paper. 

On February 10, 2023, the California Civil Rights Council (CRC), has continued in conducting hearings and published revisions to draft regulations concerning automated decision-making systems used by employers and agents of employers, such as recruiters, payroll, and staffing agencies.  The draft regulations state that “[i]t is unlawful for an employer or other covered entity to use selection criteria (including a qualification standard, employment test, automated-decision system, or proxy) if such use has an  adverse impact on or constitutes disparate treatment of an applicant or employee or a class of applicants or employees on a basis protected by the Act,” unless the employer can show job-relatedness and is a business necessity and there are no less discriminatory policies or practices that could serve the same purpose. 

3. Are more laws already prohibiting that which is prohibited necessary? 

I’m confused, and concerned, about the draft of California’s proposed legislation in AB 331 stating that an employer’s use of artificial intelligence is subject to anti-discrimination laws that are already on the books.  Is there any question that the anti-discrimination laws already governing employers would not apply if an employer used software or artificial intelligence when making employment related decisions?  As noted by the EEOC in its technical assistance document discussed above, I fail to see how an employer would be able to abdicate their responsibilities to follow existing law by simply stating that they made the decision based on what some software told them to do.  This would be tantamount to arguing that an employer is not responsible for any of their decisions made, and therefore could escape liability by outsourcing all decisions to a third-party, such as a recruiter, or worse, their 8-year-old son.  This would be a very easy way to escape liability for discrimination claims. 

The proposed legislation, such as AB 331, might do more harm than good in the workplace.  The Digest of AB 331 explains the purpose of the proposed bill:

This bill would prohibit a deployer from using an automated decision tool in a manner that contributes to that results in algorithmic discrimination, which the bill would define to mean the condition in which an automated decision tool contributes to unjustified differential treatment or impacts disfavoring people based on their actual or perceived race, color, ethnicity, sex, religion, age, national origin, limited English proficiency, disability, veteran status, genetic information, reproductive health, or any other classification protected by state law.  

This raises a problematic question: If this law being proposed, is it currently legal for employers to use “an automated decision tool” in a manner that results in “algorithmic discrimination?”  It seems clear that employers are held accountable for their decisions, and it does not matter if they relied upon a third-party, software, or any other tool to make that decision.  Indeed, the EEOC made this point in its technical guidance issued on May 18, 2023 – that employers can be held responsible for a selection process that has a disparate impact, even if it was developed by an outside vendor or a software vendor that is an agent of an employer.  But it does raise the question about why California legislature is proposing a new law if it is already prohibited by current law.  One may counter that California is simply making it abundantly clear that this type of activity is illegal by passing this legislation.  But I would argue this is only adding more complexity and confusion to regulate an already illegal practice.

4. Concerns about what public data is being relied upon in the employment context. 

While I believe the proposed bill AB 331 is problematic on different levels, there are concerns about which data AI is using the make its decision, who controls this data, and who is in charge of telling the AI which data to use in decisions.  There are already laws that require employers to give notice to employees about background checks, obtain authorization to conduct the background check in certain circumstances, and disclosure to the employee about what information was obtained in the background check: federal Fair Credit Reporting Act (FCRA), California Investigative Consumer Reporting Agencies Act (ICRAA), the California Consumer Credit Reporting Agencies Act (CCRAA) (see our prior article here for more information about the ICRAA and CCRAA).  In addition, local governments, such as Los Angeles and San Francisco have implemented their own prohibitions on criminal history checks, and employers must also comply with these local requirements.

However, background checks and the use of AI in making employment decisions is vastly different.  Background checks show the data that is being used in the decision, unlike the potential use of AI, which is using multiple data sets in determining an ultimate outcome.  It may not be clear which data AI is using when making decisions, and this could be problematic if there is an error in the data being used.  This could result in individuals not being able to obtain employment because of an error in data being used by AI, and the individual and employer would never know of that error. 

5. Data leaks and privacy concerns by using AI software. 

Also, a major concern regarding the use of AI for employers and employees is data privacy.  As recently widely reported, ChatGPT and other AI software do not treat search queries as private, and any information put into the AI software is available for that company to review.  This raises concerns for both employers and employees.  If employers are using AI to make hiring decisions, can competitors see who their competition are interviewing?  If so, this would be a strategic advantage.  If in putting confidential employee information into an AI software that is not private, does this constitute a privacy breach?  Likely. 

Unless an employer can secure the data being entered into the AI system and the AI system itself, it is unlikely that AI software will be widely used because of the risk that competitors could be viewing strategic decisions being considered.  This is exactly Apple’s concern, and why it moved to ban ChatGPT by its employees

As an employer in the Golden State, it is crucial to have a clear understanding of the protections granted to employees by state law. California is known for its progressive stance on worker rights and its complex set of regulations facing employers. In this article, we will delve into the intricacies of unwaivable employment law rights, shedding light on these rights and how to navigate these regulations effectively. Whether you are a seasoned employer or just starting out, this overview covers which employment law right that cannot be negotiated.

1. Minimum wage
Labor Code Section 1194 provides a private right of action to enforce violations of minimum wage and overtime laws.  The statute voids any agreement between an employer and employee to work for less than minimum wage.

2. Overtime
California employees cannot waive their rights to overtime.  In Gentry v. Superior Court, the Supreme Court explained:

[Labor Code] Section 510 provides that nonexempt employees will be paid one and one-half their wages for hours worked in excess of eight per day and 40 per week and twice their wages for work in excess of 12 hours a day or eight hours on the seventh day of work. Section 1194 provides a private right of action to enforce violations of minimum wage and overtime laws.

By its terms, the rights to the legal minimum wage and legal overtime compensation conferred by the statute are unwaivable. “Labor Code section 1194 confirms ‘a clear public policy . . . that is specifically directed at the enforcement of California’s minimum wage and overtime laws for the benefit of workers.’”

3. Expense reimbursement
Labor Code section 2802 requires employers to reimburse its employees for “necessary expenditures or losses incurred by the employee” while performing his or her job duties. Labor Code section 2804, provides that an employee cannot waive this right to be reimbursed for or liable for the cost of doing business. Section 2804 provides, “Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void….”

4. Right to receive undisputed wages
Under Labor Code section 206.5 employers and employees may not enter into agreements that waive the employee’s right to receive wages that are undisputed. Labor Code section 206.5 also provides that an employer may not require “as a condition of being paid, to execute a statement of the hours he or she worked during a pay period which the employer knows to be false.”

5. Right to participate in Private Attorneys General Act (PAGA) representative actions?
Initially, the California Supreme Court held that employees may not waive their right to bring a representative action under the PAGA (even though the Court held that class action waivers in arbitration agreements are enforceable). The Court held in Iskanian v. CLS Transportation that, “we conclude that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.”

Overruling Iskanian, in Viking River Cruises, Inc. v. Moriana, the U.S. Supreme Court held that the FAA preempts California’s prohibition on the employer’s ability to implement arbitration agreements with PAGA waivers.  In so holding, the U.S. Supreme Court upheld arbitration agreements wherein employees waived their ability to bring PAGA claims on behalf of other individuals.  However, Justice Sotomayor’s concurring opinion in Viking made it clear that this ruling would not be the last decision regarding PAGA waivers.  Justice Sotomayor stated that “[o]f course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.  Alternatively, if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”

The California Supreme Court was quick to act in response to the Viking decision, and in August 2022, granted review of Adolph v. Uber Technologies, Inc., and will decide the following issue:

Whether an aggrieved employee who has been compelled to arbitrate claims under the Private Attorneys General Act (PAGA) that are “premised on Labor Code violations actually sustained by” the aggrieved employee (Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. __, __ [142 S.Ct. 1906, 1916] (Viking River Cruises); see Lab. Code, §§ 2698, 2699, subd. (a)) maintains statutory standing to pursue  PAGA claims arising out of events involving other employees” (Viking River Cruises, at p. __ [142 S.Ct. at p. 1916]) in court or in any other forum the parties agree is suitable.

We are anticipating the California Supreme Court’s decision in Adolph by June or July 2023.  Therefore, employers will need to continue to monitor this case for developments.

On another front, PAGA is being challenged by the voters of California.  California Fair Pay and Employer Accountability Act seeks to replace PAGA.  The initiative gathered enough signatures to qualify to be on the November 2024 ballot.  If passed, the initiative would provide employees with 100% of the penalties collected, instead of only 25% that is currently provided to the employees, prohibit attorneys’ fees from being awarded in these cases, and double the penalties against employers who willfully violate the law.  More information about the initiative can be found at Californians for Fair Pay and Accountability here.

This week’s Friday’s Five: a curated collection of must-watch videos on our YouTube channel for all California employers. Stay informed and discover the valuable insights you need to navigate the intricacies of the state’s employment landscape:

1. Exempt or non-exempt?

2. Meal and rest break basics

3. Culture fit happens in hiring

4. Arbitration agreements 101

5. Steps for avoiding wrongful termination claims as a California employer

By Pooja Patel and Anthony Zaller

An issue that constantly plagues the service industry is what to do about tips and the challenges that come with mandated tip pooling and mandatory service charges. This week’s post is an update and a general discussion about tipping and mandatory service charges. This simple concept is surprisingly complex for employers.  Here are five issues employers should understand about tips in California.

1) Who owns a tip?

California law is clear that voluntary tips left for an employee for goods sold or services performed belong to the employee, not the employer. Labor Code section 351 provides, “No Employer or agent shall collect, take or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron…. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.”

2) Is employer-mandated tip pooling legal?

Yes, generally tip pooling is legal in California as long as it is fair and reasonable. In Leighton v. Old Heidelberg, Ltd., the court held that an employer’s practice of tip pooling among employees was not prohibited by section 351 because the employer did not “collect, take, or receive” any part of a gratuity left by a patron, and did not credit tips or deduct tip income from employee wages. The court relied upon the “industry practice” that 15% of the gratuity is tipped out to the busboy and 5% to the bartender, which was “a house rule and is with nearly all Restaurants.”

There must be a reasonable relationship between tip pooling arrangements.  The following examples of mandatory tip pooling percentages have been approved by a court, the DLSE or DOL:

  • A policy in which 80 percent of tips were allocated to waiters, 15 percent to busboys and five percent to bartenders
  • A policy in which cocktail service must give one percent of tips to bartender
  • The Department of Labor responsible for enforcing Federal law has stated that a policy that requires servers to share 15 percent of their tips with other employees is presumptively reasonable
  • A policy in which a server contributes 15 percent to a tip pool, and other employees in the chain of service receive a portion of these tips based on the amount of hours they worked

The following examples were tip pooling policies disapproved by courts or the DLSE and therefore employers cannot legally establish them:

  • A policy providing 90 percent of tips to hostesses who spend only a small amount of time seating customers
  • A policy requiring food server to share 10 percent of tips with floor managers

3) Who can share in the tip pool?

Employees in the chain of service:

Generally, employees who are in the “chain of service” may partake in a mandatory tip pool. In Etheridge v. Reins International California, Inc., the servers challenged the inclusion of employees, such as kitchen staff, bartenders, and dishwashers, who do not provide direct table service in the mandatory tip pool. The California Court of Appeals confirmed that employees who do not provide direct table service but are in the “chain of service,” such as kitchen staff, bartenders, and dishwashers, are allowed to participate in mandatory tip pools. The Court reasoned that this would encourage all staff in the chain of service to give their best service, regardless of whether the customers personally see them performing the work.

Managers, owners, or supervisors:

Labor Code section 351 prohibits agents from keeping a share or any portion of gratuities left or given to one or more employees by a customer. However, the California Court of Appeal in Chau v. Starbucks Corp. found that a service employee who is also an agent, such as the shift supervisor, can participate in tip pools for tips left in a collective tip box for all service employees. While Chau permitted employers to include supervisors in tip pools, that case addressed a very specific set of facts, and employers must approach the issue of including supervisors in tip pools with caution.

4) Do tips change an employee’s minimum wage or regular rate of pay for overtime calculations?

No. Because tips are voluntarily left by customers to employees, tips do not increase an employee’s regular rate of pay used to calculate overtime rates.

Additionally, California law does not allow employees to “credit” an employee’s tips towards the minimum wage. Therefore, employers should still ensure to pay employees the state (or local) minimum wage.

5) Are mandatory service charges the same as a tip?

No. A tip is voluntarily left by the patron, while a mandatory service charge is mandatorily charged to the patron by the employer.

While a tip is considered the employee’s property, a mandatory service charge is considered the employer’s property. Thus, unlike with tips, an employer may distribute all or part of the service at their discretion. However, this freedom comes with strings: the amounts paid to employees as a mandatory service charge must be considered when calculating the employee’s regular rate to calculate overtime rates. As a reminder, to calculate an employee’s regular rate of pay, the employer must divide all compensation for the week by the total number of hours worked by the employee.

Reminder: there may be additional requirements under local ordinances regulating service charges. For example, Santa Monica’s minimum wage ordinance requires employers to “distribute all Service Charges in their entirety to the Employee(s) who performed services for the customers from whom the Service Charges are collected . . . no part of these amounts may be paid to Employees whose primary role is supervisory or managerial”  Santa Monica Municipal Code § 4.62.040.  “Service Charge” is defined as “any separately-designated amount charged and collected by an Employer from customers, that is for service by Employees, or is described in such a way that customers might reasonably believe that the amount is for those services or is otherwise to be paid or payable directly to Employees…under the term ‘service charge,’ ‘table charge,’ porterage charge,’ ‘automatic gratuity charge,’ ‘healthcare surcharge,’ ‘benefits surcharge,’ or similar language.”  Santa Monica Municipal Code § 4.62.010(g).

Employers considering implementing noncompetition and nonsolicitation agreements for their California workforce must understand the differences in these agreements, and California’s public policy against restraints against an employee’s ability to work in their profession or trade.  This Friday’s Five covers the top five issues employers must know about noncompetition and nonsolicitation agreements in California.

1. Noncompetition and nonsolicitation agreements cannot violate Business & Professions Code section 16600

In California, noncompetition agreements are governed by Business & Professions Code section 16600, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The statute permits non-competition agreements in the context of sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).  But other than these narrow exceptions connected with the sale or dissolution of a company, California has a strong public policy against non-competition agreements.

Under the common law, as still recognized by many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.

2. California Supreme Court ruling in Edwards v. Arthur Andersen regarding non-competition agreements

In 2008, the California Supreme Court ruled on the enforceability of non-competition agreements under California law in Edwards v. Arthur Andersen LLP. Arthur Andersen argued that California courts have held that section 16600 embraced the rule of reasonableness in evaluating competitive restraints.

The Court disagreed with Arthur Andersen and held that the non-competition agreement at issue was invalid under California law because the agreement prohibited the employee from performing professional services for any client he worked with at Arthur Andersen for a 18-month period.  It also prohibited the employee from soliciting any client of Arthur Andersen’s Los Angeles office.  The Court held that these prohibitions restricted the employee’s ability to practice his accounting profession, and therefore was unenforceable under California law.

3. California Supreme Court refused to recognize the “narrow-restraint” exception in non-competition agreements

Arthur Andersen argued that section 16600 has a “narrow-restraint” exception and that its agreement with Edwards survives under this exception because the restraints against the employee were narrow and reasonable.  Arthur Andersen maintained that the federal court in International Business Machines Corp. v. Bajorek (9th Cir. 1999) upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment.  It also noted that a Ninth Circuit federal court in General Commercial Packaging v. TPS Package (9th Cir. 1997) held that a contractual provision barring one party from courting a specific customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude[]” the party from pursuing its trade or business.

In rejecting Arthur Andersen’s argument, the California Supreme Court refused to recognize the “narrow-restraint” exception for noncompetition agreements in California:

Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” [citation] Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.

4. Customer nonsolicitation agreements

There are two types of non-solicitation agreements: one that restricts the employee’s ability to solicit customers and another that restricts the employee’s ability to solicit employees (see item #5 below).

Regarding customer non-solicitation agreements, as set forth above, the California Supreme Court in Edwards v. Arthur Andersen ruled that a prohibition on a former employee’s solicitation of clients was an invalid restraint on the employee’s ability to pursue his trade or business.  Similarly, in 2009, a California appellate court in Dowell v. Biosense Webster, Inc. held that a broadly worded non-solicitation clause that prohibited an employee for a period of 18 months postemployment from soliciting any business from, selling to, or rendering any service directly or indirectly to any of the accounts, customers or clients with whom they had contact during their last 12 months of employment was void under section 16600.  In Dowell, the court rejected the employer’s argument that the agreement was enforceable under the trade secret exception because it found the non-solicitation provision was “not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition.”

5. Employee nonsolicitation agreements

Employee non-solicitation clauses can also be found to violate section 16600 if drafted too broadly and it in effect becomes an invalid restraint on the employee’s ability to work in their profession or trade.  The court in Loral Corp. v. Moyes (1985), ruled that the agreement at issue was more of a “noninterference agreement” between the employer and former employee and upheld the employer’s non-solicitation provision.  The ruling upheld an agreement that prevented the former employee from soliciting employees from the employer, and, even though the agreement did not have a time limitation, the court interpreted the agreement to apply a one-year limit.

However, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018), a California court of appeal held that employee non-solicitation to be an invalid restrain on trade.  The court explained:

Indeed, the broadly worded provision prevents individual defendants, for a period of at least one year after termination of employment with AMN, from either “directly or indirectly” soliciting or recruiting, or causing others to solicit or induce, any employee of AMN. This provision clearly restrained individual defendants from practicing with Aya their chosen profession— recruiting travel nurses on 13-week assignments with AMN.

The ruling in AMN Healthcare arguably overturned decades of decisions, such as Loral, upholding employee non-solicitation agreements.  However, some have argued that AMN Healthcare is a unique case with a limited holding – since the issue delt with employees who were professional recruiters, and therefore baring them from recruiting employees would be more impactful on their ability to continue to work in their chosen profession.  Nevertheless, AMN Healthcare raises doubt about whether employee non-solicitation provisions can be enforced in California.

California employers are cautioned to carefully review all agreements that restrict former employees’ ability to compete and solicit customers and employees to ensure the restrictions do not violate California’s strong public policy in allowing employees to perform their chosen profession or trade.

Recently we have been litigating and answering basic issues about employers’ obligations to provide meal and rest breaks.  It has been a few years since the California Supreme Court issued its groundbreaking ruling in Brinker Restaurant Group v. Superior Court, and there is no indication that wage and hour litigation for California employers will lighten up, so employers should constantly monitor and audit their meal and rest break policies and practices. Here are five reminders for employers:

1. Timing of breaks.

Meal Breaks
The California Supreme Court made clear in Brinker Restaurant Group v. Superior Court that employers need to give an employee their first meal break “no later than the end of an employee’s fifth hour of work, and a second meal period no later than the end of an employee’s 10th hour of work.” Here is a chart to illustrate the Court’s holding:

Rest Breaks
As for rest breaks, the Court set forth that, “[e]mployees are entitled to 10 minutes’ rest for shifts from three and one-half to six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on.” This rule is set forth in this chart:

In regard to when rest breaks should be taken during the shift, the Court held that “the only constraint of timing is that rest breaks must fall in the middle of work periods ‘insofar as practicable.’” The Court stopped short of explaining what qualifies as “insofar as practicable” and employers should closely analyze whether they may deviate from this general principle.

2. Rule regarding waiver of breaks.

Meal Breaks
Generally meal breaks can only be waived if the employee works less than six hours in a shift. However, as long as employers effectively allow an employee to take a full 30-minute meal break, the employee can voluntarily choose not to take the break and this would not result in a violation. The Supreme Court explained in Brinker (quoting the DLSE’s brief on the subject):

The employer that refuses to relinquish control over employees during an owed meal period violates the duty to provide the meal period and owes compensation [and premium pay] for hours worked. The employer that relinquishes control but nonetheless knows or has reason to know that the employee is performing work during the meal period, has not violated its meal period obligations [and owes no premium pay], but nonetheless owes regular compensation to its employees for time worked.

Rest Breaks
Rest breaks may also be waived by employees, as long as the employer properly authorizes and permits employees to take the full 10-minute rest break at the appropriate times.

3. Timekeeping requirements of meal breaks.

Meal breaks taken by the employees must be recorded by the employer. However, there is no requirement for employers to record 10-mintute rest breaks.

4. Implementing a procedure for employees to notify the company when they could not take a break.

If employers have the proper policy and practices for meal and rest breaks, the primary issue then becomes whether the employer knew or should have known that the employee was not taking the meal or rest breaks. Therefore, allegations that the employer was not providing the required breaks can be defended on the basis that the employer had an effective complaint procedure in place to inform the employer of any potential violation, but the plaintiff failed to inform the employer of these violations.

5. Time rounding for meal breaks is not permitted under California law.

In Donohue v. AMN Services LLC, the California Supreme Court held that employers may not use time rounding policies in context of meal periods, and time records for meal periods that are incomplete or inaccurate raise a rebuttable presumption of meal period violations.  The Court explained that rounding polices when used for meal breaks, an employee’s 30-minute meal break could lose 9 minutes due to rounding, which amounts to nearly a third of the meal break.  If an employee is not provided a full 30-minute meal break because of rounding, there is no mechanism that makes up for the premium pay owed to the employee that would average out over time.  The Supreme Court held, “The precision of the time requirements set out in Labor Code section 512 and Wage Order No. 4 — “not less than 30 minutes” and ‘five hours per day’ or ‘ten hours per day’ — is at odds with the imprecise calculations that rounding involves.  The regulatory scheme that encompasses the meal period provisions is concerned with small amounts of time.”

Employers of 100 or more employees to report to the California Civil Rights Department pay and hours-worked data by establishment, pay band, job category, sex, race, and ethnicity.  For 2023, the pay data reports are due by May 10.  This requirement applies to employers even if they are based outside of California, but have one employee (or even one employee hired through a labor contractor such as an staffing agency) working in California or assigned to an establishment in California.   

In Senate Bill 973, passed in 2020, the California Legislature found that “[d]espite significant progress made in California in recent years to strengthen California’s equal pay laws, the gender pay gap persists, resulting in billions of dollars in lost wages for women each year in California. …Although there are legitimate and lawful reasons for paying some employees more than others, pay discrimination continues to exist, is often ‘hidden from sight,’ and can be the result of unconscious biases or historic inequities.”

By requiring large employers to report pay data annually the Legislature sought to encourage these employers to self-assess pay disparities along gendered, racial, and ethnic lines in their workforce and to promote voluntary compliance with equal pay and anti-discrimination laws.

In addition, Senate Bill 973 authorized CRD to enforce the Equal Pay Act (Labor Code section 1197.5), which prohibits unjustified pay disparities. Moreover, the Fair Employment and Housing Act (Gov. Code § 12940 et seq.), already enforced by CRD, prohibits pay discrimination. The CRD states that the Employers’ pay data reports allow CRD to identify wage patterns and allow for effective enforcement of equal pay or anti-discrimination laws, when appropriate.

In 2022, the Legislature passed Senate Bill 1162 to enhance the California pay data reporting law in many aspects.  For example, for the first time in 2023, private employers with 100 or more workers hired through labor contractors in the prior calendar year to report pay data for these workers and requiring more information about the employer’s workforce, such as median and mean wage information. 

1. SB 1162, passed in 2022 changed a few aspects of the prior pay data reporting requirements.

New deadline of the second Wednesday of May each year (May 10, 2023) (previously deadline was March 31).

Requires additional information: median and mean hourly rate for each combination of race, ethnicity, and sex within each job category.

Requires employers with 100 or more employees hired through contractors to submit a separate report for these employees.

Requires employers with multiple establishments to submit a report for each establishment.

2. Employers who must report.

Under Government Code section 12999(a)(1), a private employer that has 100 or more employees (anywhere as long as it has one employee in California) are required to submit a pay data report to the Civil Rights Division (CRD).  An employee is “an individual on an employer’s payroll, including a part-time individual, and for whom the employer is required to withhold federal social security taxes from that individual’s wages.” Gov. Code § 12999(k)(1).

3. Determining if an employer has 100 or more employees.

An employer has the requisite number of employees if the employer either employed 100 or more employees in the Snapshot Period or regularly employed 100 or more employees during the Reporting Year. “Regularly employed 100 or more employees during the Reporting Year” means employed 100 or more individuals on a regular basis during the Reporting Year. “Regular basis” refers to the nature of a business that is recurring, rather than constant. See Cal. Code Regs., tit. 2, §§ 11008(d)(1) & 11008(d)(1)(A).

The Snapshot Period is a single pay period between October 1 and December 31 of the Reporting Year.  For the 2023, the Reporting Year is 2022.  Employers may choose the single pay period between October 1 and December 31. The Snapshot period is used to identify the employees to be reported on in the pay data report. The employee does not have to be paid during the Snapshot period – it only matters whether the employee was employed during the Snapshot Period.

Employees located inside and outside of California are counted when determining whether an employer has 100 or more employees. See Cal. Code Regs., tit. 2, § 11008(d)(1)(C).

An employer with no employees in California during the Reporting Year is not required to file a pay data report.

Part-time employees, including those who work partial days and fewer than each day of the work week, are counted the same as full-time employees. 

Employees on paid for unpaid leave, including the California Family Rights Act (CFRA) leave, pregnancy leave, disciplinary suspension, or any other employer-approved leave of absence, must be counted.

Employers must include all employees assigned to California establishments and/or working within California.

4. Must include remote workers outside of California, but “assigned” to an establishment in California.

The CRD sets forth that remote workers outside of California “assigned” to an establishment in California must be included in the employee pay data report.  The CDR provides the following example: If an employer has a single establishment in Riverside, California with 500 employees working from that location, the employer would submit a report covering all 500 employees. If 25 of these employees were working remotely (in California or beyond), the employer’s report would still cover all 500 employees.

5. When a Labor Contractor Employee Report must be filed.

Companies are required to file a separate Labor Contractor Employee Report if it had 100 or more workers hired through labor contractors in the prior calendar year anywhere with at least one worker based in California. 

“Labor contractor” – is defined as “an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the client employer’s usual course of business.” 

The CRD set forth the following example: In 2022, GHI Company had 200 payroll employees and 100 workers hired through labor contractors, all in California. GHI Company is required to submit a Payroll Employee Report covering its 200 payroll employees and, separately, a Labor Contractor Employee Report covering the 100 labor contractor employees.

The Civil Rights Department California Pay Data Reporting website is here.

The CRD’s FAQs about the Pay Data Report is here.

With summer right around the corner, many businesses are looking to hire from local high schools. Whether you are hiring minors as seasonal or full-time employees, there are key laws that employers should be familiar with. The Fair Labor Standards Act (FLSA), California Labor Code, California Wage Orders, and California Education Code regulate child labor.  

Who is a minor?  

Anyone under the age of 18 who is required to attend school and anyone under the age of six is considered a minor. 

What is a work permit and who needs one?  

All minors who have not graduated high school or been awarded a certificate of proficiency, must have a valid work permit. This is true even if it is summer or the minor is only hired seasonally. The first thing an employer should do when they hire a minor is ensure that they have a valid work permit. The minor obtains a work permit through their school and provides it to their employer. It is important to remember that work permits expire five days into the opening of the following school year and a permit still needs to be obtained even if it is summer. The permit should be maintained in the minors personnel file and needs to be obtained before the minor does any work for the employer.  

Key documents: 

Statement Of Intent To Employ A Minor And Request For A Work Permit–Certificate Of Age CDW Form B1-1: https://www.dir.ca.gov/dlse/dlseformB1-1.pdf  

Permit To Employ And Work CDE Form B1-4: https://www.dir.ca.gov/dlse/dlseformB1-4.pdf  

What hours can a minor work? 

The number of hours and time a minor can work depends on whether school is in session and the minors age. Generally, minors must have completed 7th grade to work while school is in session. Minors who are enrolled in remote or hybrid schools are still subject to the requirements below.  

Ages 16 and 17: 

Exception: if the minor is enrolled in work experience or cooperative vocational program approved by the California Department of Education, they can work until 12:30am any day and can work up to 8 hours on a school day  

If school in session, they can work up to 4 hours on school days and 8 hours on a non-school day and on days before non-school days. If school is not in session, they can work up to 8 hours a total. They can work up to 48 hours per week and can work between the hours of 5am and 10pm. On evenings before non-school days, they may work until 12:30am.  

 Ages 14 and 15:  

Exception: if the minor is enrolled in work experience or cooperative vocational program approved by the California Department of Education, they can work during school hours and up to 23 hours per week.  

If school is in session, they can work up to 3 hours on school days and 8 hours on a non-school day. They can work up to 18 hours per week and can work between the hours of 7am and 7pm. Between June 1 and Labor Day, they can work until 9pm.  

Ages 12 and 13:  

They can only work during school holidays and weekends – never on school days. They can work up to 8 hours per day, and up to 40 hours per week. Like 14- and 15-year-olds, they can work between the hours of 7am and 7pm, and between June 1 and Labor Day, they can work until 9pm. 

What duties can minors perform?  

Job restrictions vary by industry and age of the minor. Generally, minors cannot work in any occupation that is considered hazardous.  

Some examples include: 

  • 14- and 15-year-olds may only perform cooking duties in plain sight of customers and when it is not their sole duty  
  • Minors under 16 may not work in the baking industry  
  • Minors cannot use power-driven meat processing machines and certain baking machines  
  • Minors cannot work at a business whose main purpose is to sell alcoholic beverages for use on the premises (this includes all jobs, not just serving alcohol) 
  • Minors may bus tables in a bona fide public eating establishment where alcohol is served  
  • Minors may only sell alcoholic beverages for off-site compensation or lottery tickets if they are constantly supervised by a someone 21 years old or older 

What wage and hour obligations do I have to minors? 

Employers must pay minors at least the applicable minimum wage. In addition, minors that are non-exempt workers must be provided with legally compliant meal and rest breaks, overtime wages, and workers compensation protection. If the minor is a high school graduate, they must be paid equal to adults.  

Penalties for violating child labor laws  

Violation of child labor laws carry both civil and criminal penalties. Civil penalties range from $500 to $10,000 per minor employed per violation. Criminal violations are misdemeanors and are punishable by imprisonment for up to 6 months and/or fines up to $10,000.  

The Labor Commissioner has published a booklet containing detailed information about child labor laws and requirements: https://www.dir.ca.gov/dlse/ChildLaborLawPamphlet.pdf  

In Ready, Fire, Aim, an excellent book for entrepreneurs, Michael Masterson sets out a compelling reason why nearly everyone in the workplace needs a mentor (and why everyone should also be a mentor).  Masterson explains, “The big problem everyone has when beginning a new business is ignorance.  New entrepreneurs don’t know how the business should work – where to go for customers, how much to charge for the product, how many customers are needed for the business to become profitable, and so on.”  The solution, Masterson explains, is learning.  This can be done through two ways: (1) attending seminars, taking programs, and reading books, and (2) by speaking with people who have dealt with the issues and getting firsthand advice from them.  

Masterson’s book is written for entrepreneurs and business owners, but the advice easily carries over to employees and supervisors.  Here are five tips Masterson provides for how to effectively be mentored and the benefits for companies in establishing a mentoring system:

1. Do no be afraid to ask questions, even obvious questions.

People need to overcome the fear that asking questions shows weakness.  As Masterson explains, even bosses have a vested interest in (or should have) sharing knowledge and answering questions for those working for them.  Now, I would add that those seeking advice need to do their work and think through problems first, and then approach a mentor for the advice.  Do not use the mentor as a crutch for avoiding doing the hard work and learning through dealing with difficult problems. 

2. Have multiple mentors and maintain the relationship by being appreciative.

It is critical to have advice from people who have different experiences and different perspectives.  The more diverse your input from mentors, the more data points you have to rely upon for a well educated decision.  Don’t forget to show appreciation to your mentors as well – send a bottle of wine or a gift card for a nice dinner with a personal note. 

3. Ask people of all ages and skill levels.

Masterson describes this as asking “up, down, and sideways.”  For business owners, great advice and input should be sought from employees and anyone else who might have something to add.  Generally, it is most helpful to have advice from people who have been through the experience already, but keep the inputs open and seek advice from multiple people. 

4. Make your own decisions and take responsibility for them.

If the decision works, give your mentors credit for the well-founded advice they provided to you to help make it successful.  If the decision does not work, accept the loss as yours. 

5. Everyone should be a mentor (and organizations need to encourage mentoring).

There are multiple positive benefits for mentoring others as well, such as: helping others less fortunate, helping the next generation, developing meaningful relationships with others beyond a superficial transactional basis.  Masterson cites a study by psychology professor Lillian Eby which found that 74 percent of mentors believed that mentoring others had a positive impact on their jobs.  The study also found that the organization that implemented the mentor program reported increased productivity, lowered stress levels, and increased job performance.