Cheesecake Factory restaurants in Southern California were cited for $4.57 million for wage and hour violations and penalties by the Labor Commissioner earlier this week.  What may come as a surprise to many is that the citation was based on alleged wage violations for employees of contractors hired by Cheesecake Factory, not its own employees.  The investigation focused on the janitorial subcontractors who performed work at the restaurants.  The Labor Commissioner found that the janitorial employees were not paid for all minimum wage, overtime, not provided meal and rest breaks, and not paid for split shifts.

The subcontractor janitorial company was Americlean Janitorial Services Corp., a Minneapolis company doing business as Allied National Services, Inc. The workers were managed by a San Diego-based company, Magic Touch Commercial Cleaning.  The Labor Commissioner alleged that the workers had to work additional hours when asked to complete tasks or wait for approval of their work by the Cheesecake Factory managers.  This Friday’s Five focuses on key takeaways for California employers from the Labor Commissioner investigation and citation:

1. Cheesecake Factory is being held jointly liable for the subcontractor’s wage violations under Labor Code section 2810.3.

Effective January 1, 2015, Labor Code section 2810.3 expanded the liability of “client employers” that obtain workers through temporary agencies or other labor contractors.  The law requires that the client employer who obtains the workers through the agency must share in the liability for any wage and workers compensation issues.  The law also provides that a client employer cannot shift all of the liability for wage and workers’ compensation violations.  However, the law does provide that the client employer can seek indemnity from the labor contractor for violations.  Therefore, it is important for employers who are covered by Labor Code section 2810.3 and who obtain workers through a labor contractor to ensure the labor contractor is meeting all wage and workers compensation requirements.  The hiring company should also consider negotiating an indemnity provision in the contact with the labor contractor to protect itself should any liability arise.

2. Companies contracting for services need to ensure the subcontractors follow all applicable wage and hour laws and pay the employees properly.

With the joint liability created by Labor Code section 2810.3, companies contracting for labor at their establishments need to take steps to ensure that the contractors are following wage and hour laws.  This may entail reviewing the contractor’s pay practices, and negotiating a contract with the company providing that the contractor indemnifies the hiring company for any wage and hour violations.  The hiring company should also ensure that there are some assets or potential insurance that would be available should indemnity be required.

3. Review split shift policies to ensure compliance.

The Labor Commissioner found that the janitorial employees worked split shifts without being paid the split shift pay.  A split shift is defined in the California IWC Wage Orders as:

…a work schedule, which is interrupted by non-paid non-working periods established by the employer, other than bona fide rest or meal periods.

See Cal. Code Regs., tit. 8, § 11040, subd. 2(Q). If the employee works two shifts separated by more than a rest or meal period, they are entitled to receive one hour’s of pay at the minimum wage rate in addition to the minimum wage for that work day. See Cal. Code Regs., tit. 8, §11040, subd. 4(C). Any additional amounts over minimum wage paid to the employee can be used to offset the split shift pay due to an employee.  Additional information about split shifts can be read here.

4. Review meal break policies to ensure compliance.

The California Supreme Court made clear in Brinker Restaurant Group v. Superior Court that employers need to provide 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.”  The following chart illustrates the timing requirements for meal breaks:

Meal breaks must be recorded.  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. In Brinker, the Supreme Court explained that:

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.

Employers should also establish a complaint procedure and provide that the company has a system in place to correct any violations. If during an investigation, the employer confirms that the employee in fact missed the break because of the rush of business or some other factor, the company should pay the employee the one hour “premium pay” penalty at the employee’s regular rate of pay. Also, the company should record these payments made to employees to be able to establish it has a complaint procedure in place to address missed breaks.  The employee is entitled to receive up to two hours of premium pay per day – one hour for missed meal breaks and one hour for missed rest breaks.  If the employee missed two meal breaks in one day, they would only be entitled to one hour of premium pay.  The same applies to rest breaks.  See UPS v. Superior Court.

5. Review rest break policies to ensure compliance.

In terms of rest breaks, the California Supreme Court held in Brinker 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.”  The following chart sets forth the number of rest breaks employees are entitled to based on the number of hours worked:

The Wage Orders generally require that employers must provide a 10-minute rest period per every four hours worked and the break should, whenever practicable, fall in the middle of the work period. (See Wage Order 4, subd. 12(A).  The rest period must also be paid, and the law does not require that employers record when the employee takes the rest period (unlike an employer’s obligation to record when 30-minute meal breaks are taken).  The California Supreme Court made it clear in Augustus v. ABM Security Services, Inc. that employers must relieve employees of all work-related duties and they must be free from control of the employer during the rest breaks.  For more information about rest breaks, see my prior post here.

This Friday’s Five provides a few reminders about documenting employee performance. While good documentation is hard to gather at the time, it is critical in communicating clear objections to employees for better performance. Also, should a dispute arise that results in litigation, how well the employee’s performance was documented can be the different in winning or losing the litigation. You’ve probably heard these before, but these five reminders are a must for documenting employee performance:

1. Get employee feedback during counseling.

Employees are more likely to ultimately accept critical performance reviews if their feedback is heard. This does not mean that the employer must agree with the employee’s feedback, but just that the employer is considering their feedback in the decision-making process and the employee is not being pre-judged. A good example on how obtaining the employee’s feedback avoided a potentially embarrassing situation and harming a relationship with the employee was noted in an article by SHRM (“How to Create Bulletproof Documentation”). The article recalled a situation when a manager wanted to discipline an employee for being late to her new position in the company. But prior to issuing the discipline, the HR manager asked the manager to seek clarification from the employee about why she was late. The manager followed the advice, and it turned out that the employee’s tardiness was a result of employee providing training to the replacement at her prior position in the company.

2. Set clear consequences.

Employers need to be clear in their documentation of performance with employees. Set out clear benefits and consequences for the employee’s success or failure going forward. The documentation should not forget to document the positives if the employee improves. Likewise, while sometimes difficult to confront employees with the consequences for their failure to improve, it is critical to be clear. The documentation should be clear, such as: “Failure to improve performance as set forth in this review may result in further disciplinary actions, up to and including termination.”

3. Avoid vague language like “bad attitude” or “failure to get along with other employees.”

One of the hardest issues as a litigator is defending a wrongful termination claim when the documentation provided to the employee contains vague criticisms of the employee’s performance. Managers should avoid at all costs performance reviews that the employee has a “bad attitude.” If litigation ensues, and the company is forced to defend its decision to terminate the employee, and vague statements like this do not clearly establish the reasons for the termination. Instead a creative plaintiff’s lawyer can spin this language as evidence to support their allegation that the reason was based on the employee’s complaint, race, gender or age. A good practice is to use concrete examples in the performance review, such as:

  • You were 25 minutes late today.
  • Your conduct towards your coworker was unacceptable today when you informed Mr. Jones that “it was not your job to help him and he should know how to do these tasks by now.” You are expected to assist others in all aspects of their job, and to the extent they need additional help, you need to provide assistance to ensure that the customer’s needs are met.
  • You did not provide adequate customer service last Tuesday when you ignored the customer’s request for help in retrieving a different size three times.

4. Employees do not need to sign written performance warnings.

While it is a good practice to have employees sign performance reviews to avoid any disputes that they were never shown the performance review, it is no legal requirement to have the employee sign the document. Employees often object to signing documents criticizing their performance. There are two potential responses to this objection: 1) have the employee’s acknowledgment clearly state that the employee’s signature is only acknowledging receipt of the document, not agreeing with the content, or 2) if the employee simply refuses to sign, have the manager or a witness sign and date the document with a notation that the document was provided to the employee and he or she refused to sign.

Also, another misconception: there is no legal requirement that employees must be given three warnings prior to being terminated (as long as the company has maintained the employee’s at-will status).

5. Remember that write-ups and documentation do not have to be on any “official” forms.

Managers sometimes feel that they must wait until they can officially document an employee’s performance on the company’s official form. However, managers need to be trained on how to document performance and it must be made clear to them that while the company’s forms are preferred, documentation can be done on many formats, such as: e-mail to oneself or to HR, the manager’s log, any paper available, or even electronically on any other company device. I personally like when managers send emails to themselves documenting conversations with employees. Given the data associated with e-mails, such as time and date created, e-mails are excellent documentation of a manager’s conversation with an employee about performance issues. Managers should also be reminded that they need to document verbal warnings in some manner – if the verbals are not documented, it is as if they never occurred.

Plaintiff Jacob Davis brought a putative class action against International Coffee and Tea, LLC (the company that operates Coffee Bean and Tea Leaf) alleging that the company’s tip pooling policy violated California’s Labor Code section 351.  The trial court sustained Coffee Bean’s demurrer to plaintiff’s second amended complaint without leave to amend.  Plaintiff appealed the trial court’s decision, and the California Court of Appeal upheld the trial court’s ruling effectively dismissing the case.  While the appellate court’s decision is unpublished and uncitable as binding precedent, the opinion provides great reminders to California employers about tip pools under California law, and gives me more content for this Friday’s Five.

Some background facts of the case before I get to the five reminders.  Coffee Bean provided a “tip jar” for customers at the stores to leave tips.  At the close of business each day, a shift supervisor collected the tips in the jar and placed the tips in a deposit box in the store safe. The Company did not require the supervisors to count the amount of tip money collected each day, and it did not require them to count or segregate the tips collected during each of the three daily shifts. It was only at the end of each week that the supervisor would count the tips collected throughout the week and distributes the tips to tip-eligible employees. This resulted in the combining tip money from 21 different shifts. Each tip-eligible employee received a pro rata share of the tips based on the number of hours he or she worked that week.

The Plaintiff alleged that certain days and shifts collected more tips than others, and because the Company failed to count and distribute those tips on busy shifts or days, the practice amounted to taking tips from employees who worked those busy shifts or days and giving those tips to the employees who worked the less profitable shifts.

1. Tip pooling explained

The court in International Coffee and Tea explained that tip pooling is permitted under California law:

Tip pooling is the “practice by which tips left by patrons at restaurants and other establishments are shared among employees.” (Etheridge v. Reins Internat. California, Inc. (2009) 172 Cal.App.4th 908, 910.)  In the restaurant business, employer-mandated tip pooling is a long-standing practice, “which, through custom and usage, has become an industry policy or standard.” (Leighton v. Old Heidelberg, Ltd. (1990) 219 Cal.App.3d 1062, 1067 (Leighton ).) It permits employers “to ensure an equitable sharing of gratuities in order to promote peace and harmony among employees and provide good service to the public.” (Id. at p. 1071.)

2. Tip pooling is permitted under California law

The court explained that since the first published court opinion from 1990, tip pooling has been allowed under California law:

The first published decision to discuss tip pooling relative to section 351 was Leighton, which considered a policy requiring the restaurant server to share 15 percent of her tips with the busser and 5 percent with the bartender. (Leighton, supra, 219 Cal.App.3d at pp. 1606–1067.) Leighton determined that, so long as the employer or its agents are not sharing in tips left for employees, section 351 does not proscribe tip pooling. (Leightonsupra, at p. 1071.)

3. “Shift Supervisors” who work along other employees may participate in tip pools under certain circumstances

The court provided a good summary of the facts and holding in Chau v. Starbucks, which held that shift supervisors may participate in tip pools under certain facts without violating Labor Code section 351:

And, in Chau, the court held shift supervisors at Starbucks could share in the tip pool with baristas, even if shift supervisors could be considered agents of the employer. (Chau,supra, 174 Cal.App.4th at pp. 691, 696.) Starbucks’s tip pooling was like the tip pooling in our case. Customers could place tips in a collective tip box near the cash register. (Id. at p. 692.) At the end of the day, an employee would securely store the tips, and once a week, each tip-eligible employee would receive a pro rata share of tips, based on the number of hours he or she worked that week. (Id. at pp. 692–693, 697.) The plaintiffs did not challenge the formula for dividing the tip pool, only the inclusion of shift supervisors as tip-eligible employees. (Id. at p. 697.) The shift supervisors performed basically the same work as baristas and the employees worked as a team. (Id. at pp. 698–699.) Section 351, therefore, did not prohibit supervisors from taking a share of the tips left in a collective box for all service employees. (Chausupra, at p. 699.)

4. Labor Code section 351 protects employers from taking or forcing employees to give tips that were left for the employee.

The court in International Coffee and Tea explained the intent behind section 351:

The Legislature intended “to ensure that employees, not employers, receive the full benefit of gratuities that patrons intend for the sole benefit of those employees who serve them.” (Leightonsupra, at p. 1068; accord, Chau v. Starbucks Corp. (2009) 174 Cal.App.4th 688, 699 (Chau ) [“[S]ection 351 was enacted to prevent an employer from pressuring an employee to give the employer tips left for the employee.”].)

The court recognized that there is some flexibility on how tip pools distribute tips and rejected Plaintiff’s theory that the tips collected during all of the shifts during the course of a week which were then distributed based on how many hours the employee worked during the week violated Labor Code section 351.  The court state that Section 351 was established “to protect employees against the employer,” and “[n]othing in section 351 precludes the sharing of tips between employees.”  Plaintiff argued that Section 351 provides that tips “’are the sole property of the employee or employees’ for whom they are left,” and therefore the tips left for the particular employees during that shift cannot be combined with tips left for employees working during other shifts.  The court rejected this argument, citing Budrow v. Dave & Buster’s Of California, Inc.: “Given that restaurants differ, there must be flexibility in determining the employees to whom the tip was ‘paid,’ ‘given,’ or ‘left.’ A statute should be interpreted in a reasonable manner.”  The court held, “In short, we see nothing in section 351 that prohibits the tip-pooling arrangement here – that is, sharing tips on a pro rata, weekly basis as opposed to a shift-by-shift basis.”

5. Tip pools may include back of the house employees

The court explained that California courts have permitted tip pools to include back of the house employees:

Thus, the courts have concluded tips are “left” for all manner of service employees, whether the employees are front of the house, back of the house, directly serving a customer, or merely in the chain of service.

(Citing Leighton v. Old Heidelberg, (1990) 219 Cal.App.3d 1062, 1068–1071; Etheridge v. Reins Internat. California, Inc. (2009) 172 Cal.App.4th 908 at pp. 921–923; Budrow v. Dave & Buster’s Of California, Inc., (2009) 171 Cal.App.4th at pp. 878–879, 883–884.)

As recently written about in prior posts, on March 23, 2018, the Consolidated Appropriations Act, 2018 signed by President Trump changed federal law on this issue and allows employers to share tips with back of the house employees.

As a reminder, the decision, Davis v. International Coffee and Tea, LLC (2018 WL 1602255) was not officially published and is not binding precedent.  However, the court’s clear summary of the legal issues in that case still provide good reminders to California employers about issues to be mindful of when implementing tip pooling policies.  It is also important for employers to seek qualified legal counsel on the issue to ensure their particular policy complies with the law.

With the U.S. Supreme Court’s decision in Epic Systems Corp. v. Lewis this week, I thought it would be a good time to review the pros and cons of arbitration agreements in the workplace.  This this Friday’s Five is a video in which I cover five things you want to know about arbitration agreements, but were afraid to ask:

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The U.S. Supreme Court ruled today in Epic Systems Corp. v. Lewis, that employment arbitration agreements that bar class actions are enforceable.  The vote was 5 to 4 in upholding the use of arbitration agreements in the workplace.

The plaintiff in the case argued that employees could not waive their rights in an agreement to be a part of a class action to pursue employment claims because this waiver violated the National Labor Relations Act (“NLRA”) because these types of claims are “concerted activities” protected by § 7 of the NLRA.  This section guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively . . ., and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

The Court disagreed with plaintiff’s reading of § 7, and held: “The NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum. This Court has never read a right to class actions into the NLRA – and for three quarters of a century neither did the National Labor Relations Board.”

In 2011, the Supreme Court issued a decision in AT&T Mobility v. Concepcion, upholding the enforceability of class action waivers in the consumer context, such as with cell phone providers, cable providers or services provided by internet companies.  The plaintiff in Epic Systems argued that the employment context was different because of the rights guaranteed to employees under the NLRA.  While many employers were using arbitration agreements with class action waivers, the ruling in Epic Systems confirms the enforceability of these agreements between employees and employers.

This decision resolves a split in authority between the Ninth Circuit Court of Appeals (Ernst & Young v. Morris), the Fifth Circuit Court of Appeals (National Labor Relations Board v. Murphy Oil USA, Inc.), and the Seventh Circuit Court of Appeals (Epic Systems Corp. v. Lewis).

See my prior post for additional background on the case and impact on California employers.

I received a few questions this week that I have not heard asked in a while: In what manner do employers need to keep time records?  Can they be kept electronically, or do they have to be written?  A follow-on question was: Do employers need to have a computerized timekeeping system to comply with their requirements under California law?  With technological advances, it is hard to remember that just 10 years ago these questions were on top of everyone’s mind, but today it is sometimes assumed that it must be legal to keep these records electronically.  However, these inquiries raise good questions about employers’ obligations under the Labor Code to create and maintain time records.  Surprisingly (or maybe not so surprisingly depending on your views on how slow the law is in adapting to technological advances), the Labor Code does not address this issue right on point.  Yet, there are some governing principles employers can review in making the decision on what practices are best for their business. This Friday’s Five covers five key obligations employers should consider when setting up time keeping systems:

 1. Are employers required to use a particular type of timekeeping system?

 California law does not require the use of any electronic type of timekeeping system or time clocks.  Employers may elect to use paper and pen in recording an employee’s time.  As explained below, the records should be “indelible,” meaning that the time entries cannot be erased, removed, or changed.  However, even with just a handful of employees, many employers find it more efficient to use an electronic timekeeping system.  Moving towards an electronic time keeping system can reduce mistakes in the recording and calculation of time worked, make it easier to track changes, and could make a review of the time entries easier should there ever be a challenge by the employee about their pay.  Most timekeeping software today will also help monitor meal break compliance and will automatically flag any violations for a manager’s review.

 2. Can time records be kept electronically?

 California Wage Orders require that employers maintain the employees time records “in the English language and in ink or other indelible form.”

The Division of Labor Standards Enforcement (“DLSE”) issued an Opinion Letter on July 20, 1995 stating that “storage of records by electronic means meets the requirements of California law if the records are (1) retrievable in the State of California, and (2) may be printed in an indelible format upon request of either the employee or the Division.”

The DLSE issued another Opinion Letter on November 10, 1998 advising employers that the electronic time record data could be maintained outside of the State of California “as long as a hard copy of the records was maintained at a central location within California.”  While the DLSE’s opinion letters are not binding legal precedent, they are given pervasive authority in court.  Thus, employers need to be careful about relying too heavily on these opinions.  In addition, these two Opinion Letters contradict each other.  As set forth below, the Wage Orders require time records “shall be kept on file by the employer for at least three years at the place of employment or at a central location within the State of California.”  Therefore, employers should consider maintaining a copy of employee time records, either electronically or on paper, within the State of California.

Similar language is also found in Labor Code section 226 pertaining to the information required to be provided to employees on pay stubs:

The deductions made from payments of wages shall be recorded in ink or other indelible form, properly dated, showing the month, day, and year, and a copy of the statement or a record of the deductions shall be kept on file by the employer for at least three years at the place of employment or at a central location within the State of California.

On July 6, 2006, the DLSE issued an Opinion Letter permitting employers to issue electronic pay stubs to employees if certain requirements were met.  The DLSE stated:

The Division in recent years has sought to harmonize the “detachable part of the check” provision and the “accurate itemized statement in writing” provision of Labor Code section 226(a) by allowing for electronic wage statements so long as each employee retains the right to elect to receive a written paper stub or record and that those who are provided with electronic wage statements retain the ability to easily access the information and convert the electronic statements into hard copies at no expense to the employee.

The DLSE approves electronic wage statements as long as the employer incorporates the following features:

  1. An employee may elect to receive paper wage statements at any time;
  2. The wage statements will contain all information required under Labor Code section 226(a) and will be available on a secure website no later than pay day;
  3. Access to the website will be controlled by unique employee identification numbers and confidential personal identification numbers (PINs).  The website will be protected by a firewall and is expected to be available at all times, with the exception of downtime caused by system errors or maintenance requirements;
  4. Employees will be able to access their records through their own personal computers or by company-provided computers.  Computer terminals will be available to all employees for accessing these records at work.
  5. Employees will be able to print copies of their electronic wage statements at work on printers that are in close proximity to the computer or computer terminal.  There will be no charge to the employee for accessing their records or printing them out.  Employees may also access their records over the Internet and save it electronically and/or print it on their own printer.
  6. Wage statements will be maintained electronically for at least three years and will continue to be available to active employees for that entire time.  Former employees will be provided paper copies at no charge upon request.

This same analysis would likely apply to the time records employers are required to maintain under California law.  However, employers need to approach this issue with advice from counsel, as there are no clear court decisions that have approved of the DLSE’s position.

3. Length of time electronic records should be kept

Employers should also note that the statute of limitations for many wage and hour class actions in California can extend back to four years under Business and Professions Code section 17200; and, therefore should consider keeping wage statements and other documentation required to defend against claims going back the previous four years.

4. Items time records must report (be careful, it is more than just start and stop times)

The Wage Orders require that California employers keep “[t]ime records showing when the employee begins and ends each work period. Meal periods, split shift intervals and total daily hours worked shall also be recorded. Meal periods during which operations cease and authorized rest periods need not be recorded.”  IWC Wage Order 5-2001(7)(a)(3).

Additionally, Labor Code section 1174 requires employers to keep time records showing the hours worked daily and the wages paid, number of piece-rate units earned by, and the applicable piece rate paid.

5. Records must be maintained in California

These records must be maintained in the state or at the “plants or establishments at which employees are employed.”  The records must be kept for at least three years.  Labor Code section 1174(d).

The Wage Orders likewise require that employers keep records “at the place of employment or at a central location within the State of California.” As mentioned above, if employers have electronic records, a copy of the electronic data should be maintained within the state just as a precaution.

The statute of limitations for wage claims can extend back to four years, so employers generally keep the records for four years.  Employers need to ensure that the data being saved is the actual time records of the employees, and can be reproduced in format that is accurate and easy to read, should the records ever be requested or needed to defend litigation.

(Special thanks to Rick Reyes, a summer associate at my firm, for edits to this post.)

Chipotle had an $8 million verdict against it in a California court last week for a wrongful termination claim.  The verdict is a surprising huge amount and it should be a clear warning to employers about how important it is to document employee conduct, and then store and be able to access that evidence if ever needed to defend a lawsuit.  I posted my thoughts in the video below on Instagram:

I’ve started posting these shorter videos and thoughts on Instagram, so be sure to follow me at:

https://www.instagram.com/anthonyzaller/

On May 8, 2018, the court in Ibarra v. Wells Fargo Bank entered an order awarding Plaintiffs who filed a class action against the bank $97.2 million for rest break violations.  The original complaint alleged various wage and hour violations, and after the parties filed cross motions for summary judgment, all but the rest break claims were dismissed.  The claims were brought under Labor Code section 226.7 and derivative claims under California’s Unfair Competition Law (Business & Professions Code section 17200).  This Friday’s Five reviews five lessons employers should learn from this costly ruling for Wells Fargo:

1. Rest break obligations

As a review, in 2012 the California Supreme Court issued its monumental decision regarding meal and rest breaks under the California Labor Code in Brinker Restaurant Group v. Superior CourtIn terms of rest breaks, the Brinker Court held 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:

Regarding 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 in Brinker stopped short of explaining what qualifies as “insofar as practicable”, and employers should closely analyze whether they may deviate from this general principle.

2. Use caution on how to compensate piece-rate workers and activity based compensated employees for rest breaks

The California Wage Orders require employers to count “rest period time” as “hours worked for which there shall be no deduction from wages.”  (See Cal. Code Regs. tit. 8, § 11070, subd. 12(A), italics added.)  In Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864 the court interpreted this language to require employers to “separately compensate[ ]” employees for rest periods where the employer uses an “activity based compensation system” that does not directly compensate for rest periods.  (Id. at p. 872.)

In Vaquero v. Stoneledge Furniture LLC, the court explained that piece-rate compensation plans do not directly account for and pay for rest periods because the employee is not working during the rest period and therefore is not being paid.  The Wage Order requires employers to separately compensate employees for rest periods if an employer’s compensation plan does not already include a minimum hourly wage for such time.  The court set out in Stoneledge that Wage Orders apply “equally to commissioned employees, employees paid by piece rate, or any other compensation system that does not separately account for rest breaks and other nonproductive time.”

The compensation structure at issue in Wells Fargo involved advances against monthly draws, commissions, and other incentive bonuses.

3. Penalty for rest break violations

“If an employer fails to provide an employee a … rest … period[,] … the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the … rest … period is not provided.” Cal. Lab. Code § 226.7(c); see also IWC Wage Order 4-2001 § 12(B).

In Wells Fargo, the court found that the company had not provided paid rest breaks for its employees, and therefore faced liability under California Labor Code section 226.7 and California Business & Professions Code section 17200 of one additional hour of pay per workday for the number of shifts in excess of 3.5 hours during the class period.  In Wells Fargo’s case, this amounted to 1,880,003 qualifying work shifts.

4. How to determine employees’ regular rates of pay

The major issue for the parties in the Wells Fargo litigation turned on the proper method of calculating the employees’ “regular rate of compensation” for rest break violations.  Wells Fargo maintained that this should only be calculated using the employee’s hourly rate that was listed on the employee’s wage statements.  If the court adopted this method, it would have resulted in damages of approximately $24.5 million.

Plaintiffs on the other hand argued that the “regular rate of compensation” should not only be the employee’s hourly rate, but should also include the employees’ commissions and other non-discretionary pay earned during the pay period.  The Plaintiffs argued that this total should then be divided by the total hours worked during the pay period.  According to this methodology, the damages equaled approximately $97.2 million.

In agreeing with the Plaintiffs, the court noted that the employees’ “normal compensation was not comprised solely or even primarily of pay calculated at an hourly rate. By definition, it included hourly pay, incentive pay, and overtime premiums, and the hourly pay was stated to be only an advance on commissions.”

5. But there is a disagreement among courts on how to calculate the “regular rate” for purposes of rest break violations

The court in Wells Fargo noted that other courts have come to the different conclusion that based on the language in Labor Code section 226.7 that items like commissions should not be included in the “regular rate” when calculating damages for rest break violations.  The court noted the following cases, but declined to follow their reasoning: Brum v. MarketSource, Inc., 2:17-cv-241-JAM-EFB, 2017 WL 2633414, at *3-5 (E.D. Cal. June 19, 2017); Wert v. U.S. Bancorp, No. 13-cv-3130-BAS (BLM), 2014 WL 7330891, at *3-5 (S.D. Cal. Dec. 18, 2014), reconsideration denied, 2015 WL 3617165 (S.D. Cal. June 9, 2015); Bradescu v. Hillstone Rest. Grp., Inc., No. SACV 13-1289-GW (RZx), 2014 WL 5312546, at *7-8 (C.D. Cal. Sept. 8, 2014), tentative ruling confirmed as final, 2014 WL 5312574 (C.D. Cal. Oct. 10, 2014).

Given the split in decisions, Wells Fargo is reported to have plans to appeal the ruling.

 

The California Supreme Court issued a monumental ruling this week regarding the test used in determining whether a worker can be classified as an independent contractor.  In the case, Dynamex Operations West, Inc. v. Superior Court, the plaintiff brought a class action complaint alleging five causes of action arising from Dynamex’s alleged misclassification of employees as independent contractors: two counts of unfair and unlawful business practices in violation of Business and Professions Code section 17200, and three counts of Labor Code violations based on Dynamex’s failure to pay overtime compensation, to properly provide itemized wage statements, and to compensate the drivers for business expenses. Here are five key issues California employers must understand about the ruling:

1. The determination of whether a worker is an independent contractor or an employee is inherently difficult.

The determination of whether an employee is an independent contractor or employee has been a difficult issue that does not provide a bight line in many cases.  The California Supreme Court recognized this in Dynamex, stating:

As the United States Supreme Court observed in Board v. Hearst Publications (1944) 322 U.S. 111, 121:  “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent, entrepreneurial dealing.  This is true within the limited field of determining vicarious liability in tort.  It becomes more so when the field is expanded to include all of the possible applications of the distinction.”

2. The ABC Test: Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?

In making the determination of whether a worker is properly considered the type of independent contractor for which the wage order does not apply, the California Supreme Court adopted the “ABC” test.  This test is used in other jurisdictions in a variety of contexts to distinguish employees from independent contractors.

To illustrate the first part of the ABC test, the Part A control test, the Court provided the following examples:  In Western Ports v. Employment Sec. Dept. the company “failed to establish that truck driver was free from its control within the meaning of part A of the ABC test, where the company required driver to keep truck clean, to obtain the company’s permission before transporting passengers, to go to the company’s dispatch center to obtain assignments not scheduled in advance, and could terminate driver’s services for tardiness, failure to contact the dispatch unit, or any violation of the company’s written policy.”  Alternatively, in Great N. Constr., Inc. v. Dept. of Labor a construction company “established that worker who specialized in historic reconstruction was sufficiently free of the company’s control to satisfy part A of the ABC test, where worker set his own schedule, worked without supervision, purchased all materials he used on his own business credit card, and had declined an offer of employment proffered by the company because he wanted control over his own activities.”

3. Part B: Does the worker perform work that is outside the usual course of the hiring entity’s business?

To illustrate the point, the Court provided the following analysis:

Workers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business and not as working, instead, in the worker’s own independent business.

The Court set forth a few examples: When a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee.

Alternatively, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will then be sold by the company, or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation it would be reasonable to view these workers as employees.

4. Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

The Court held that the term “independent contractor,” “ordinarily has been understood to refer to an individual who independently has made the decision to go into business for himself or herself.”  (See, e.g., Borello, supra, 48 Cal.3d at p. 354 [describing independent contractor as a worker who “has independently chosen the burdens and benefits of self-employment”].)  Such an individual generally takes the usual steps to establish and promote his or her independent business….”  Evidence of this will be the workers’ own business incorporation, licensure, advertisements, offering to provide services to the general public or other potential customers.  Alternatively, a worker is not engaged in an independent established trade usually if the hiring company unilaterally designates the worker as an independent contractor.  In addition, “[t]he fact that a company has not prohibited or prevented a worker from engaging in such a business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself.”

The hiring entity’s failure to prove any one of these three parts of the ABC test will be result in a finding that the worker is an employee and not an independent contractor for purposes of the California wage orders.

5. Employers bear the burden of proof in establishing workers are independent contractors.

Employers had the burden prior to the California Supreme Court’s ruling in Dynamex, but the court reinforced that the employer bears the burden of proof when establishing a worker as an independent contractor.  Employers must be careful in making the determination that workers are independent contractors, as there are many wage and hour penalties for unpaid wages, unpaid overtime, and missed meal and rest breaks, in addition to the large civil penalties under Labor Code section 226.8, which is a fairly recent law which added penalties from $5,000 up to $25,000 for each violation.

Earlier this week I attended Restaurant Day at the State Capitol with the California Restaurant Association.  It is great to work with restaurant owners and operators in communicating the issues and realities of running a business in California.  If you have never participated in meeting with your local, state, or federal legislator, I highly recommend doing so.  It is a great learning experience, and even though the legislator may not agree with your position, it is a great process to engage your representative and to support your positions.  Given the recent experience, this Friday’s Five focuses on five proposed bills on employment that California businesses must be aware of (and a link at the bottom on how to contact your state representative):

1. AB 2841 (Gonzalez Fletcher) proposes to increase paid sick leave from 24 hours/3 days to 40 hours/5days of paid time off.

California currently requires employers to provide at least 24 hours/three days of paid sick leave to employees (click here for a prior article about California’s paid sick leave requirements).  This proposed bill would increase the amount of paid sick leave days to 5 days/40 hours of paid sick leave. Also, don’t forget about local county and city requirements that may differ from the state requirement.

2. AB 2613 (Burk) proposes to make employers and officers personally liable for additional penalties for wage violations.

The bill proposes to make employers and their officers personally liable for an additional penalty of $200 per employee, per pay period for wages that are not paid on time.  The bill makes it clear that these proposed penalties “are in addition to, and entirely independent and apart from, any other damages or penalties provided for under this code.”

3. AB 2069 (Bonta) proposes to make medical marijuana card holders a protected class under the Fair Employment and Housing Act

This proposed bill would make it unlawful for an employer to discriminate against a person if the discrimination is based upon the person’s status as a qualified patient or person with an identification card entitled to the protections of the Compassionate Use Act of 1996 or the use of cannabis for medical purposes.

The bill makes the medical use of marijuana a protected disability under state law: “When used to treat a known physical or mental disability or known medical condition, the medical use of cannabis by a qualified patient or person with an identification card, as those terms are defined in Section 11362.7 of the Health and Safety Code, shall be subject to reasonable accommodation, including the use of the interactive process.”

Many employers are concerned that providing protections to employees who use marijuana will lead to safety issues at work whereby employees under the influence hurt other employees, customers, or by standards.  Currently, the use of marijuana is not a protected category, as it is still illegal to use under federal law.

4. AB 3080 (Gonzalez Fletcher) proposes to ban employers from restricting employees from disclosing any sexual harassment settlements and bars the use of arbitration agreements in the employment context.

AB 3080 would prohibit employers from entering into contracts that do not allow the employee from disclosing “an instance of sexual harassment that the employee “suffers, witnesses, or discovers in the workplace.”

The bill also prohibits the use of mandatory arbitration agreements in the workplace.  Many employers are utilizing arbitration agreements as a quicker and less costly method of resolving workplace disputes.  The bill, in its current form, would still allow the use of voluntary arbitration agreements.  However, opponents to the bill argue that banning the use of arbitration agreements would run afoul of the Federal Arbitration Act, would be preempted by this federal law.

5. SB 1284 (Jackson) proposes to require companies to disclose pay data reports to the state.

SB 1284 would require employers with 100 or more employees to submit a pay data report to the Department of Industrial Relations.  The report would need to include information such as the number of employees by race, ethnicity, and sex listed by their job categories, and the number of employees “whose annual earnings fall within each of the pay bands used by the United State Bureau of Labor Statistics in the Occupation Employment Statistics survey.”

There are other employment law bills being debated, but I thought these were the top five that employers should be aware of as of April 2018.  Please check back for updates.

Click here for information about how to locate and contact your state representative.