As an employer in California, it is important to be aware of the state’s vacation policies that are unique to California. Below are some regulations in California that employers need to be aware of to remain compliant with California law.  This Friday’s Five is a reminder of five issues on vacation policies that can create traps for California employers:

1. No use-it-or-lose-it policies permitted
Under California law, vacation is treated the same as earned wages and vest as the employee performs work. Because vacation is earned proportionally as the employee works, policies requiring employees to lose vacation already earned is illegal under California law.

2. Reasonable caps are allowed
While employers cannot implement “use-it-or-lose-it” policies, they can place a reasonable cap, or ceiling, on vacation accrual. The DLSE explains:

Unlike “use it or lose it” policies, a vacation policy that places a “cap” or “ceiling” on vacation pay accruals is permissible. Whereas a “use it or lose it” policy results in a forfeiture of accrued vacation pay, a “cap” simply places a limit on the amount of vacation that can accrue; that is, once a certain level or amount of accrued vacation is earned but not taken, no further vacation or vacation pay accrues until the balance falls below the cap. The time periods involved for taking vacation must, of course, be reasonable. If implementation of a “cap” is a subterfuge to deny employees vacation or vacation benefits, the policy will not be recognized by the Labor Commissioner.

3. Vacation is a form of earn wages that must be paid out according to final pay requirements
An employee who is discharged must be paid all of his or her wages, including accrued but unused vacation, immediately at the time of termination. See Labor Code Sections 201 and 227.3.  More information about the timing and payment of final wages can be read here.

4. Deductions not allowed from employee’s final wages for unaccrued vacation time
Vacation is treated as a form of wages under California law, and by allowing employees to take vacation time before it is earned is similar to providing a loan.  Employers may not utilize self-help remedies to recover debts from the employee’s final paycheck, including deducting wages owed to an employee to cover vacation that time was used but had not yet been accrued by the employee.

5. “Cliff vesting” policies are problematic
Employers may set probationary periods or waiting periods during which times employees do not accrue vacation time. However, the DLSE maintains that employers may not maintain a policy that grants employees a lump sum of vacation upon reaching certain dates (for example, such a policy would grant the employee five days of vacation at the employee’s one year anniversary of work, but not permit the employee to take any vacation prior to the anniversary date).

The DLSE’s view on this type of “cliff vesting” is that the employer is attempting to provide for accrued vacation, but at the same time is attempting to limit its liability of having to pay out a pro rata share of the accrued vacation if the employee does not work until the date the vacation is granted to the employee.  Many employers avoid these potentially problematic lump sum grants of vacation, and simply set a time period (i.e., the employee’s first six months of employment) that the employee does not accrue vacation.

California law regarding vacation policies is vastly different than federal law and other states. It is essential for employers to understand these obligations to avoid falling into legal traps. As we start 2023, it’s a good time to review and update your company’s vacation policies to ensure compliance.

The hiring process in California can be confusing: there are various required federal and state documents that must be reviewed and signed for new employees. It is imperative for California employers to familiarize themselves with the requirements for their local jurisdictions and industries to minimize their legal risk.

Here are five key categories of documents for new hires:

1. Offer Letter

An official offer letter can be the best way to communicate with the new candidate to avoid misunderstanding about the job, salary and other terms and conditions of employment.  Offer letters should at least address the following items:

  • Terms of employment
  • The employee’s at-will status
  • Duties of the position
  • Start date
  • Exempt or non-exempt status
  • Wage or salary
  • Benefits, if any
  • Other conditions of employment (for example, applicant must pass a medical exam, drug test or background check)

2. I-9, Employment Eligibility Verification

Federal law requires completion of Form I-9 to verify employee’s identity and employment authorization. The USCIS has not yet released the updated I-9 Form in 2023, but the current USCIS I-9 can be used until an updated version is available.

3. Federal and State Tax Withholding Forms

Both Federal W-4 Form and California DE 4 Withholding Certificate must be provided to newly hired employees. 

4. Required Pamphlets

Generally speaking, most employers in California are required to provide the following documents with new employees upon hire:

  • Time of Hire Pamphlet
  • Sexual Harassment Pamphlet (DFEH-185P)
  • EDD Disability Insurance Pamphlet (DE 2515)
  • Paid Family Leave Pamphlet (DE 2511 )
  • Rights of Victims of Domestic Violence, Sexual Assault and Stalking Pamphlet
  • Wage and Employment Notice to Employees (Labor Code section 2810.5) (DLSE-NTE ). This form is only required for non-exempt employees, and more information about the form can be read here.
  • New Health Insurance Marketplace Coverage Options and Health Coverage Form (OMB No. 1210-0149)
  • General Notice of Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage rights (if 20 or more employees and employer offers health plan)
  • Work Permit for Minors (if applicable) (CDE Form B1-4)

These documents are routinely updated each year – so employers need to update the documents provided to employees on at least an annual basis.

Note that many of the state forms listed above must be given to the employee in their primary language.  Employers need to also check their local cities and counties to ensure that they are providing any other required documents, and certain industries have specific required disclosures as well. 

5. Other Important Documents

Other documents often recommend that employers provide to new hires include:

  • Meal and rest break acknowledgment
  • Employee’s meal period waiver for shifts less than six hours
  • Employee handbook acknowledgment
  • Arbitration agreement
  • Confidentiality/non-disclosure agreement

As we start 2023 it is a perfect time for companies to conduct a California employment law practices audit to ensure that policies are compliant, managers are properly trained, and the company is maintaining the required records for the necessary length of time.  Here are five topics to review in conducting an audit and a few suggested questions for each topic:

1. Hiring Practices

  • Are applications seeking appropriate information?
    • Ensure compliance with state and local ban the box regulations.
  • Are new hires provided with required policies and notices?
  • Are new hires provided and acknowledge recommended policies?
    • For example: meal period waivers for shifts less than six hours
  • Are hiring managers trained about the correct questions to ask during the interview?
  • Does the company provide new hires (and existing employees) with arbitration agreements that comply with California law?

 2. Records

  • Are employee files maintained confidentially and for at least four years?
  • Are employee time records maintained for at least four years?
  • Are employee schedules maintained for at least four years?
  • Do the managers have set forms for the following:
    • Employee discipline and write-ups
    • Documenting employee tardiness
  • How is the employee documentation provided to Human Resources or the appropriate manager?
  • Who is involved in reviewing disability accommodation requests?
  • How are employee absences documented?

3. Wage and Hour Issues

  • Does the company have its workweeks and paydays established?
  • Are paydays within the applicable time limits after the pay period as required under the law?
  • Are employees provided with compliant itemized wage statements?
  • Are employees provided a writing setting out their accrued paid sick leave each pay period?
  • Are employees properly classified as exempt or nonexempt?
    • For exempt employees, review their duties and salary to ensure they meet the legal requirements to be an exempt employee.
  • Any workers classified as independent contractors, and if so, could they be considered employees under AB 5?
  • Are nonexempt employees properly compensated for all overtime worked?
  • Is off-the-clock work prohibited?
    • Policy in place?
    • Are managers trained about how to recognize off-the-clock work and what disciplinary actions to take if find employees working off-the-clock?
  • Does the company’s time keeping system round employee’s time?
    • If so, is the rounding policy compliant with the law? (note that meal breaks cannot be rounded pursuant to Donohue v. AMN Services)
  • Are meal and rest period policies set out in handbook and employees routinely reminded of policies?
    • Does the company pay “premium pay” for missed meal and rest breaks? If so, how is this documented on the employee pay stub?
    • Do employees record meal breaks?
    • Are managers trained on how to administer breaks and what actions to take if employees miss meal or rest breaks?
    • Are employees provided attestations to document the reason if the employee missed, took a short, or a late meal break? (See Donohue v. AMN Services)
  • Is vacation properly documented, tracked, and is unused vacation paid out with the employee’s final paycheck?
  • Are all deductions from the employee’s paycheck legally permitted?
  • Are employees reimbursed for all business expenses, such as uniforms, work equipment, mileage for work, and for expenses incurred for working from home (such as internet, cell phones, etc.)?

 4.End of Employment Issues

  • Are employees leaving the company provided their final wages, including payment for all accrued and unused vacation time?
  • Are final paychecks provided to employees within the required deadlines?
  • Does the employer deduct any items from an employee’s final paycheck?
    • If so, are the deductions legally permitted? (Use caution, very few deductions are permitted under California law.)

5. Anti-harassment, discrimination and retaliation

  • Are supervisors provided with sexual harassment training every two years? (If employer has 50 or more employees, supervisors are legally required to have a two-hour harassment prevention training that complies with California law.)
  • Are there steps in place to provide nonsupervisory employees with 1-hour sexual harassment prevention training and once every 2 years thereafter? (Required for employers with 5 or more employees.)
  • Are supervisors and managers discussing the company’s open-door policy to employees at routine meetings with employees? Is this being documented?

AB 257, termed the Fast Food Accountability and Standards Recovery Act or the FAST Act, proposes to establish a Fast Food Sector Council to regulate California’s fast food restaurants.  The law was signed by Governor Newsom on September 5, 2022.  However, the following day, a coalition in opposition to the law started the process for a referendum of the Act.  On December 5, 2022, the coalition submitted over 1 million signatures in support of the referendum to qualify for the November 2024 ballot. 

Despite the signatures being submitted to the state, the Department of Industrial Relations said on December 27, 2022 that would continue to implement and enforce the law on January 1, 2023.  The coalition challenging the law filed a lawsuit seeking to stop the enforcement of the law while the signature verification process is underway. 

On January 13, 2023, the Superior Court of Sacramento held that the state could not proceed with enforcing the law while the referendum process was underway.  The court found “there is very little harm” to the state and the public in staying the implementation of AB 257 until the signature verification process is completed. The court explained, “The harm to California citizens and electors, in contrast, is great given the Court’s duty to ‘jealously guard’ the people’s right to referendum and the confusion that would occur if AB 257 were temporarily implemented while signatures were verified, and the confusion and uncertainty that could occur if the provisions of [AB 257] were to go into temporary effect.”

As noted by the court, the verification process of the signatures in support of the referendum is estimated to take until between January 27, 2023 and March 13, 2023.  The court’s injunction will remain in place until:

  1. The county elections officers and the Secretary of State determine that the referendum petition failed to contain sufficient valid signatures to qualify for the ballot or
  2. If the referendum qualifies for the ballot, AB 257 is approved by a majority of California voters at an election (which would be November 2024).

A copy of the court’s order can be read here: https://hrlaw.io/FastAct

The FAST Act is a paradigm shift on how regulations are implemented for an industry.   As we have explained previously, the council would be composed of 10 members who are not elected, but are appointed by the Governor, Speaker of the Assembly, and the State Rules Committee.  The council would have the power to set standards for minimum wages, working hours, “and other working conditions related to the health, safety, and welfare of” fast food establishments.  The council would be able to implement regulations more frequently than legislation, the council would only need 6 out of 10 people to pass regulations, and would be subject to less public oversight. Even if the FAST Act eventually becomes law, there are questions regarding whether the legislature has the power to delegate this authority to an unelected council. 

ChatGPT launched on November 30, 2022, and is quickly gaining attention as an AI-based chat platform that responds to natural language inputs.   ChatGPT opens AI up to nearly everyone to use by using a simple chat-based format.  GPT stands for Generative Pre-training Transformer, and it was designed to simulate a conversational format based on chat type of inputs from users.  In addition, there are generative visual Ais, such as DALLE•2 that can create images based on text inputs (which I used to create the image for this post).  The employment lawyer in me began to wonder how employers could utilize AI to help train managers and manage their workforce.  Below are five different tests on how AI could be used by employers in the near future (if not immediately):

1. Training managers

I used ParagraphAI and asked it to explain what the best practices for mangers are.  The software provided the following response:

Best practices for managers involve creating a positive work environment, setting clear expectations, and encouraging open communication. It is important to ensure that all employees feel respected and valued, and that their opinions are heard. Managers should provide consistent feedback and support, and be willing to listen to ideas from their team. Additionally, managers should strive to create an atmosphere of trust, where employees feel comfortable speaking up and voicing their concerns. Finally, managers should be proactive in addressing any conflicts that arise, and ensure that all employees are treated fairly and with respect. By following these best practices, managers can create a productive and successful work environment.

This is not a bad start for some basic manager training. With some modification by employer, one could easily see how the AI could help develop a training program for managers. 

2. Issuing written warnings to employees

Issuing written warning to employees is critical in creating a record of performance issues as well as providing guidance to employees of expectations and how to improve.  AI can assist managers in creating timely written warnings for employees.  For example, I asked ParagraphAI to write a warning to employee for violating an employee handbook policy about fighting with other employees, and it provided this response:

This is to inform you that your recent behavior of fighting with other employees is in violation of the employee handbook policy and is unacceptable. This behavior is disruptive to the workplace and will not be tolerated. As a result, you are receiving a written warning. If there is any further violation of this policy, you will be subject to further disciplinary action, up to and including termination.

A company could easily modify this response slightly, add a few specific details, and then have this warning automatically issued to the employee and place a copy of the warning in the employee’s electronic file. 

3. Documenting performance issues with employees

AI could also assist managers in documenting performance issues among their workforce.  ParagraphAI provided this response to my request to document an employee’s attendance issues:

This employee’s attendance has been a problem for some time now. They have been late to work on multiple occasions, and have even missed days without notifying anyone. This behavior is unacceptable, and it is necessary for the employee to make a change in their attendance habits. It is important for the employee to be punctual and reliable in order to maintain a successful work environment. Going forward, it is essential for the employee to be on time and to notify the appropriate people if they are unable to make it in for any reason.

I also asked ParaphraphAI to write a performance review telling employee to improve teamwork with other workers, and it provided this response:

It is important that all employees work together as a team in order to achieve our common goals. As such, it is imperative that you make an effort to collaborate and cooperate with your co-workers. This could involve actively engaging in conversations, listening to others’ ideas, and offering constructive feedback. Additionally, it is important to be open to different perspectives, and to be willing to compromise and find solutions that work for everyone. By working together as a team, we can ensure that our workplace is a productive and positive environment.

Again, a manager would need to add some specifics and modify this review a bit, but the AI has done much of the work already. 

4. Drafting offer letters and other employment documents

When asked to write an offer letter to a California employee with an at-will provision and an integration clause, the AI provided this response:

Dear [Name],

We are pleased to offer you the position of [Position] at [Company] in California. This position is an at-will employment relationship, meaning that either you or [Company] may terminate the employment relationship at any time, with or without cause or notice.

This offer is contingent upon the successful completion of a background check.

This offer letter, along with any other documents that you may receive from us, constitutes the entire agreement between you and [Company], and supersedes any prior agreements or understandings, whether written or oral. This agreement may not be modified or amended except in writing signed by both parties.

We look forward to having you join our team.

While this draft is requires some additional information, it is a decent start to an offer letter.  Could employers use AI in the hiring process? Possibly, but California has already published draft regulations regarding the use of AI in the hiring process.

Do I expect that AI could draft employment documents at some point in the near future?  While many are predicting that this will put hard working employment lawyers out of business, I expect that there will still need to be some analysis and modification of policies for employers.  For example, there is software available to create employee handbooks currently, and based on responses to prompts, the software recommends certain policies.  However, drafting the language for various policies is not the difficult part of preparing an employee handbook, it is analyzing which options are available for the employer and the best option to chose for their workforce.  I see lawyers being able to utilize AI to assist in creating employment documents, but there will still need to be some review and input from an actual lawyer (at least for now). 

5. Ask AI what it can offer to help employers

Impressed with the responses provided to me through the AI, I had to ask it one last question: Which ways could employers use AI to help manage employees?  It provided this response:

– Automate time tracking

– Automate attendance tracking

– Automate payroll processing

– Automate employee scheduling

– Automate performance reviews

– Automate recruitment processes

– Automate employee onboarding

– Automate employee engagement surveys

– Automate employee feedback surveys

– Automate employee recognition programs

Artificial intelligence (AI) is quickly becoming a vital tool for employers to manage their employees. AI can be used to automate mundane tasks, provide insights into employee performance, and increase overall efficiency. With the right implementation, AI can help employers better manage their workforce and create a more productive and successful workplace.

AI has a place in the workforce, and in law, but as the responses illustrate above, there is still some human input that is required for the time being.  It will be interesting to watch how this technology develops over the next year, and how enterprising employers (and lawyers) put it to use. 

Fundamentally, the work environment has not changed much over the last 100 years, and I believe we are on the verge of major changes and disruptions.  These changes are deeper than the issues that COVID raised.  Even if remote work is here to stay, this development does not impact many industries, such as the service industry, sales industry, and hospitality industry.  Moreover, how open states are to these changes will drastically shape the legal environment and how fast these and other changes will take place.  I make the following five predictions that I believe will change the work environment over the next decade:

1. Shared workforce among multiple employers. 

Currently, each company is independent and is a silo by itself.  I predict that employers will utilize technology to create a shared workforce between multiple companies.  There are benefits for the employees and the employers in setting up a shared employment arrangement.  The gig economy is just a start of this process, and companies are recognizing the efficiencies in utilizing a shared workforce.  For employees, some benefits include more predictable, consistent work, as well as less risk because the employee will not be reliant upon only one company.  Employers would benefit from a more stable workforce, the ability to attract a more skilled worker by guaranteeing more hours, and recognizing efficiencies in hiring by sharing this cost among multiple employers. 

Sharing of employees could also be utilized in industries that require the employee to be physically present, such as a restaurant.  Local restaurants could coordinate where the employees are needed on certain days.  Obviously, this will be limited to a smaller geographic location, but technology could make this a possibility.

A key concern employers would need to navigate is potential joint employer legal liability by utilizing the same employees.  However, future legislation and indemnity agreements between the employers could potentially address this concern. 

2. Automatic time clocks.

For hourly, non-exempt employees, the time clock has not changed much over the last 100 years: the employee waits in line to clock in and out on the employer’s time clock.  For some employees in the office setting, they may track their own time on a computer, spreadsheet, or some other digital format, but the fundamental process has for the most part remained the same.  With technology developing to recognize people more easily through facial recognition or other means, companies will be utilizing automatic time clocks that will be more accurate, harder to defraud, and could provide video evidence of the actual time spent working by the employees should it be challenged in litigation. 

3. Daily pay and use of cryptocurrencies as a form of payment.

Some employers have already started paying employees at the end of each day as a benefit to employees.  With payroll technology advancing, processing payroll can be done on a daily or more frequent basis.  While employees are paid faster, the technology would also save administrative time for processing payroll, if done properly. 

Also, as I’ve written about previously, some employees may prefer to be paid in cryptocurrency in the near future

4. Resumes on the blockchain and work credentials. 

Blockchain technology will likely have far reaching implications, especially in employment and human resources.  There are many applications in human resources, including the use of the blockchain to digitally record and prove employment history through an on-line resume.  Moreover, employers and employees can record digital certifications required by law (such as sexual harassment prevention training, or other industry specific certifications) on the blockchain.  This can act like LinkedIn but will provide a more accurate record and is less susceptible to be manipulated. 

5. Increase in privacy concerns. 

With the development and implementation of technologies such as biometrics, facial recognition, and work histories recorded on the blockchain, certain privacy issues will need to be addressed.  Some states already legislate the use of biometric information in the consumer and employment context.  For example, as I’ve previously written about, Illinois, Texas and Washington have statues that require notice and voluntary consent before biometric information is collected by a private company

While there are benefits to having certifications and work histories recorded and verifiable on the blockchain, the libertarian in me has some concerns.  How are errors corrected?  Can employees challenge an employer’s record on the blockchain?  And this raises another question: Who manages the blockchain records – the employer, the employee, or maybe a third party? 

Recording employment work histories, certifications, and even work performance on the blockchain as a public record could lead to a true “employment file” that stays with the employee as they change jobs.  However, there are many concerns and questions that must be addressed as this technology inevitably develops. 

Happy New Year! As 2022 is almost over, for our last post of the year, we have compiled the most popular articles, podcasts, and videos we shared with you in 2022. Here is our most popular content from 2022:

1. Most Popular LinkedIn Post: The Fast Recovery Act

The Fast Food Accountability and Standards Recovery Act or FAST Recovery Act was signed into law by California Governor Gavin Newsom in September, proposes to establish a Fast Food Sector Council to regulate California’s fast food restaurants. However, the law has been challenged and the Save Local Restaurants Coalition, submitted over one million signatures on December 5, 2022, in opposition to the FAST Act to potentially block the new law.

However, on December 27, 2022, the Department of Industrial Relations stated that it would enforce the law until the Secretary of State verifies the signatures, which would likely not occur until the second half of January 2023.  The Save Local Restaurants Coalition filed a lawsuit to stop the DIR from enforcing the law on January 1.  Employers will need to closely watch developments on the DIR’s enforcement position on the law, and the lawsuit attempting to stop enforcement of the law given the signatures gathered as part of the referendum.  Our article provides additional information on the FAST Act here:  http://ow.ly/90fR50M1klr

2. Most Listened to Podcast Episode: Impact of the Viking River Cruises Ruling on PAGA

In this episode, we discussed the U.S. Supreme Court’s June decision in Viking River Cruises, Inc. v. Moriana, holding that the FAA preempts California’s prohibition on the employer’s ability to contract with employees to bring only their individual claims in arbitration and not a representative Private Attorneys General Act (PAGA) claim.  This is undeniably a victory for California’s employers implementing arbitration agreements and their ability to limit their exposure to PAGA representative claims through use of arbitration agreements.

3. Top Viewed Video: New Hire Considerations

The hiring process and required notices to employees is quite complex in California.  It is no surprise that many employers were interested in this video as we have outlined a list of recommended documents for new hire employees. Additionally, access Zaller Law Group’s resource by using the QR code provided in this video and download new hire forms and other resources.

4. Most Read Article: Five Reminders About Meal and Rest Breaks for California Employers

Still on top of every California employer’s mind is meal and rest break potential liability.  As we frequently remind readers, it is imperative for employers to regularly audit meal and rest break policies as this issue continues to be a source of a great deal of litigation. In this article we provide five reminders about meal and rest breaks in California. In addition to this article, you can also watch a video where our senior counsel discusses the basics about the meal and rest break requirements that California employers must meet.

5. Top Viewed Video: Employee’s Usage of Cellphone

It has become a fairly common practice in recent years that managers and employers have used their personal cell phones for work-related tasks. California Labor Code Section 2802, requires employers to reimburse all work-related expenses incurred by their employees. As such, employers should be aware of their obligations for reimbursement in certain cases involving employee’s usage of cellphone.

Wishing everyone a happy New Year and the best in 2023!

This Friday’s Five is a break from the normal legal update – I’m asking you a few questions.  Hopefully the questions will help you reflect on 2022, what you are most grateful for, and what you are looking forward to in 2023.  I cannot claim credit for many of these questions, as many of them have been asked during various meetings I’ve recently attended.

What is the thing you are most grateful for in 2022?

My terrific family, great coworkers, awesome clients, and the opportunities that have been provided to me this last year.

What is your favorite thing to do over the holidays? 

I enjoy going somewhere with snow with my family.  We spend some time skiing and have a lot of down time to hang out.  Usually we get snowed in, and it is nice to spend the time with family with no outside obligations.  I told a group of colleagues recently that while it is strange not to be at home during Christmas, it is nice being away so that I can spend time with my family and everyone is not preoccupied with presents and other obligations.

If you were to have a famous singer visit your house for a concert during the holidays, who would you like? 

This was a question asked during a board meeting I had recently – the responses were awesome.  For me, I recently took my family to see Walker Hayes.  I really enjoyed the concert, and think Walker would be a great musician to have over for a holiday party.  My favorite song of his?  Probably “Country Stuff.”

What is your favorite food during the holidays?

I’ve had some great tamales given to me from a restaurant client, and I look forward to them every year.  However, my best friend/roommate from college and his mom make a cookie plate with a variety of cookies, and these are by far my favorite (if I can fend off my family members from eating them before I can have a couple).

What is the coldest place you’ve ever traveled to during the holidays?

This year I’m easily in the coldest place I’ve ever traveled (or ever been in for that matter) to for the holidays.  I’m in Montana, and as I’m currently writing this, it is -8 degrees outside, and the low today was -21 degrees (and yes, this is Fahrenheit).  Tomorrow we are getting some relief from the “arctic blast” and the high will be 12 degrees.

I hope these questions help you review what is important to you and reflect, even if it is only for a minute (feel free to email me any of your responses if you wish – I would love to hear them).  I hope you are staying warm and wishing you the best over the holidays and have a Merry Christmas.

California’s minimum wage will be increasing on January 1, 2023 to $15.50 per hour. This Friday’s five reviews how the increase impacts California’s employers and addresses considerations for how employers deal with the patchwork of local jurisdictions that have their own minimum wage requirements:

1. White Collar Exemptions – Salary Requirement Tied to State Minimum Wage

California’s employment laws classify employees into two main categories: exempt employees and nonexempt employees. Federal and state laws exempt certain employees from wage and hour requirements. An exempt employee is an individual who is exempt from any overtime pay or minimum wage requirements. The “white collar” exemptions are: Professional, Executive and Administrative. To qualify as an exempt employee, the employer bears the burden to meet the requirements of a two part test the employees must meet to be exempt: (1) the salary basis test and (2) the duties test. The salary basis test requires that the employee must be paid a salary that is at least two times the state minimum wage, which will increase as California’s minimum wage increases.

In light of the new increase to the California minimum wage, effective January 1, 2023, the minimum annual salary to meet the white collar exemption increases to $64,480.00.  For more information on exempt employee classifications, see our prior article here.

2. Computer Professional Exemption Salary Requirement Increases in 2023

Labor Code section 515.5 sets forth that certain computer software employees are exempt from overtime requirements under the Labor Code. One aspect to meet this exemption is a minimum salary.  For 2023, California’s Department of Industrial Relations adjusted the computer software employee’s minimum hourly rate of pay exemption from $50.00 to $53.80, the minimum monthly salary exemption from $8,679.16 to $9,338.78, and the minimum annual salary exemption from $104,149.81 to $112,065.20 effective January 1, 2023.

3. Local Minimum Wage Ordinances

There are over 35 local minimum wage ordinances throughout California.  Employers are required to comply with the higher of the state or local minimum wage that applies to them.  Many of the local minimum wage rates increase on July 1 of each year, but there still are some that have a January 1 increase date.  Here are the examples of some cities that will increase the minimum wage as of January 1, 2023:

Employers must carefully review all applicable local minimum wage (and paid sick leave) requirements.

4. Industry Specific Minimum Wages

  • Hotel Workers:

In addition to state and local minimum wage rate, some localities also have industry specific rates. The employers should always check their local ordinances that might apply to their workforce/industry. There are some cities that apply specific rates for hotel workers. For example, the City of Long Beach and the City of West Hollywood have adopted ordinances requiring a higher minimum wage for these workers.

  • FAST Act – Fast Food Workers:

As we have written about on this blog, on September 5, 2022, California Governor Gavin Newsom signed into law AB 257, termed the Fast Food Accountability and Standards Recovery Act or FAST Recovery Act.  The law proposes to establish a Fast Food Sector Council to regulate California’s fast food restaurants. However, the law has been challenged and a coalition, the Save Local Restaurants Coalition, submitted over one million signatures on December 5, 2022, in opposition to the FAST Act to potentially block the new law. If the submitted signatures are found to be valid, the FAST Act would be placed on hold until November 2024 as a ballot referendum for California voters to decide the fate of the law.

5. Planning For Minimum Wage Increases

As we enter into 2023, some best practices for ensuring compliance with all minimum wage requirements include:

  • Review all exempt employee classifications and specifically list which exemption they qualify for and ensure they are paid the statutorily required salary.
  • Develop a chart listing all nonexempt employees by location and ensure compliance with the location where the employee is working.
  • Audit your payroll processing company to ensure they are updating the minimum wage and salary payments to employees. Do not rely on your payroll company to know or understand the minimum wage requirements here in California.

The California Court of Appeals decision in Lewis v. Simplified Labor Staffing Solutions, Inc. is a good example of the enforceability of arbitration agreements that contain class and Private Attorneys General Act waivers.  As explained below, there are still arguments being addressed by California courts regarding whether arbitration agreements with Private Attorneys General Act (PAGA) waivers are enforceable.  Employers are well advised to review their use of arbitration agreements as we enter 2023.  Here are five items California employers should understand about the Lewis decision and the continuing changing PAGA landscape into 2023:

1. Background on California’s Private Attorneys General Act (“PAGA”).

PAGA was enacted to authorize aggrieved employees to file lawsuits against employers on behalf of themselves, other employees, and the State of California for Labor Code violations.  PAGA allows aggrieved employees to act as a “Private Attorney General” to seek remedies against their employer not only for the violations committed against them, but also to recover any violations committed by their employer against other employees.

California’s PAGA was designed by the California Legislature offer financial incentives to private individuals to enforce state labor laws to recover certain civil penalties. As set forth below, the issue regarding whether employers can implement arbitration agreements with PAGA representative waivers is an issue that was addressed by the U.S. Supreme Court in June 2022 and will be addressed again by the California Supreme Court in 2023.

2. Background in Lewis v. Simplified Labor Staffing Solutions.

Lewis was hired by Simplified Labor Staffing Solutions, Inc. (“Simplified”) a multi-state temporary staffing services company in September 2019. On or about her hire date, Lewis signed an arbitration agreement that requires arbitration of all claims that arise out of employment relationship with Simplified.

In 2020, Lewis commenced a lawsuit against Simplified and brought her claims pursuant to Private Attorney General Act (“PAGA”), alleging a number of Labor Code violations, including failures to pay wages, provide meal and rest periods, maintain accurate payroll records, and reimburse business expenses. Simplified moved to compel arbitration in which the trial court denied, on the grounds that pre-dispute agreements to arbitrate PAGA claims are not enforceable. Subsequently, Simplified appealed the trial court’s decision which was reversed by the Court of Appeal.

3. The trial court’s ruling in Lewis was overturned based on Viking River.

In Lewis v. Simplified, the trial court initially refused to grant Simplified’s motion to compel arbitration based on the notion that the absence of state consent renders a pre-dispute arbitration agreement unenforceable. This decision was based on the California Supreme Court’s holding in Iskanian v. CLS Transportation Los Angeles, LLC. The trial court reasoned that because the State of California is the real plaintiff in interest in a PAGA action, it is the consent of the State, and not of the named employee plaintiff, that is required to compel arbitration. While the appeal was pending, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana, prompting the Court of Appeal to reverse the order denying Simplified’s motion to compel arbitration.

As the appellate court in Lewis explained:

This status requires enforcement of an employee’s predispute agreement to arbitrate PAGA claims. Congress’s “`preeminent concern . . . in passing [the FAA] was to enforce private agreements into which parties had entered.'” (Perry v. Thomas (1987) 482 U.S. 483, 490.) As a result, such agreements must be “`rigorously enforced.'” (Ibid.) Where, as here, an employee agrees to arbitrate future disputes with her employer and she later brings such a dispute as a PAGA action, courts must hold her to her choice of forum for the resolution of her dispute.

More information about the Viking River decision can be read here.

4. California Supreme Court to decide key PAGA case in 2023.

In Viking River, 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.  However, Justice Sotomayor’s concurring opinion in Viking made it clear that this is not likely 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 based on 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.

It is likely that the California Supreme Court will issue a decision in Adolph in 2023.  Therefore, employers will need to continue to monitor this case for developments.

5. Issues regarding the implementation and storage of arbitration agreements going forward.

While arbitration agreements can be enforceable, California employers must be aware that arbitration agreements are routinely struck down by courts if they are not properly drafted and the parameters of whether employees can waive their ability to bring representative PAGA actions will likely be addressed once again in the Adolph case.

Challenging the enforceability of arbitration agreements in California courts will likely increase give the U.S. Supreme Court’s holding in Viking. As such, it is imperative for California employers to at least consider the following when implementing arbitration agreements:

  1. Avoid placing arbitration agreements into employee handbooks.
  2. Set forth arbitration agreements in standalone documents with signature lines for the employee and the employer.
  3. Ensure that the employee and a representative from the employer sign the document.
  4. Electronic signatures are acceptable, but employers must review how the electronic signature is recorded and ensure this could be documented in a manner that will be upheld in court when enforcing the arbitration agreement.
  5. If the arbitration agreement is voluntary, implement a system to track who has signed and not signed the agreement.
  6. Implement a system to securely store signed arbitration agreements. This can be a manual or electronic system, but it needs to be audited routinely to ensure that the agreements are store in a usable format, are backed up, and the appropriate people have access to these saved documents.