Best Practices For California Employers

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On February 4, 2019, a California Court of Appeal ruled that employees calling their employer to determine if they must come into work is considered reporting to work, and reporting time pay is owed to the employee if they are not required to work that day.  The case is Ward v. Tilly’s, Inc. from the Second District Court of Appeals.  Here are five key issues for employers to understand about the ruling:

1. Reporting time pay.

California law requires an employer to pay “reporting time pay” under the applicable Wage Order.  Wage Order 7 requires that when an “employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work, the employee shall be paid for half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee’s regular rate of pay, which cannot not be less than the minimum wage.” See Wage Order 7-2001(5).

In addition, if an employee is required to report to work a second time in any one workday and is furnished less than two hours of work on the second reporting, he or she must be paid for two hours at his or her regular rate of pay.

California’s Labor Commissioner provides the following example:

For example, if an employee is scheduled to report to work for an eight-hour shift and only works for one hour, the employer is nonetheless obligated to pay the employee four hours of pay at his or her regular rate of pay (one for the hour worked, and three as reporting time pay). Only the one-hour actually worked, however, counts as actual hours worked.

2. Does requiring an employee to call two hours prior to their shift to see if they are needed at work trigger reporting time pay obligations?

The court in Ward v. Tilly’s, Inc. was presented the issue of what does “report for work” mean?  The phrase is used in Wage Order 7 to trigger reporting time pay obligations, and is not defined in the Wage Orders.  In Ward, the plaintiff was required to contact the employer two hours before the start of her on-call shifts to determine if she was required to come into work for that shift.  Plaintiff argued that being required to call her employer two hours before a potential shift to see if she was required to work that day should be considered reporting to work, which triggers the employer’s obligation to pay reporting time pay.  As the court noted, “[b]oth parties assert this phrase is unambiguous—but they interpret it in very different ways.”

The employer argued that “report[ing] for work” requires the employee’s “physical presence at the workplace at the start of a scheduled shift.”  The employee argued that reporting referred to in Wage Order 7 refers to “any manner of reporting, whether in person, telephonic, or otherwise.”  Plaintiff argued that given present day’s work arrangements, it is common for employees to work remotely, use phones for work, and not even physically ever arrive to work while still working.  Therefore, the employee argued that calling the employer is tantamount to reporting to work.

The employer argued that the meaning of the term “report for work” when it was drafted by the IWC in 1940 should be the controlling meaning applicable to the court’s analysis.  The employer argued that when the Wage Order was drafted, the phrase “’report [for] work’ meant physically showing up.”  The Court agreed and recognized “that is how an employee reported for work in the 1940’s,” but this should not end the court’s analysis.  The court continued to note that “in applying existing statutes to new circumstances, ‘we must maintain our usual deference to the Legislature in such matters and ask ourselves first how that body would have handled the problem if it had anticipated it.”  Basically, the court placed itself into the role of “channeling” the drafters of the Wage Orders to interpret the Wage Orders as they would have applied them to today’s workforce.

3. The court in Ward held that a telephone call to employer does trigger reporting time pay.

Considering how the 1940 drafters of the IWC Wage Orders would approach this issue, the court held that they would have defined “report for work” to include making a telephone call to the employer:

[S]uch an omission [of telephonic reporting] ‘is not surprising’ because neither the practice of on-call scheduling nor the cell phone technology that makes such scheduling possible existed when the IWC adopted the reporting time pay requirement in the 1940’s. Consistent with Apple Inc. and WorldMark, we therefore next consider whether, had the IWC been “prescient enough to anticipate” cell phones and telephonic call-in requirements, it “would have intended” the reporting time pay requirement to apply.

The court explained that “had the IWC considered the issue, it would have concluded that telephonic call-in requirements trigger reporting time pay.”

On a side note, and not discussed in the court’s opinion, the telephone had in fact been invented in 1876, well before the IWC drafted the Wage Orders in the 1940’s.  In addition, it appears that there were nearly 30 million telephones connected to the phone system in the United States by 1948.

4. Other courts and the DLSE have viewed “reporting for work” differently.

The dissenting opinion noted that “[a]s recently as 2011, the DLSE stated that reporting time penalties are due only when ‘the employer finds it necessary to send the employee home because there is no work.’” (DLSE, Information Sheet: Wages et al. (Jan. 2011).)  Not discussed in the opinion, but also interestingly, the DLSE’s current website’s FAQs on reporting time pay also only discusses examples of when the employee is sent home from work.

The dissenting opinion also noted that federal courts examining the same issue came to a different conclusion.  In Culley v. Lincare, Inc., 236 F.Supp.3d (E.D.Cal. 2017) the court held that reporting time pay only applies when employees “were required to physically report to work and not to when they performed work via telephone.”  In Casas v. Victoria’s Secret Stores, LLC (C.D.Cal., Dec. 1, 2014, No. CV 14-6412-GW), a federal district decision by the Hon. George Wu held that, “Viewed in context, then, the plain meaning of the word ‘report’ supports [the retailer’s] interpretation—that a person ‘reports to work’ by physically showing up at the place ready to work.”

Alternatively, in Bernal v. Zumiez, Inc. 2017 WL 3585230 (E.D. Cal. Aug. 17, 2017) the court held that “report for work” does not require physical presence, and reporting time would be triggered by a telephone call.  Zumiez appealed this decision and it is currently pending before the Ninth Circuit.  In Segal v. Aquent LLC, 2018 WL 4599754 (S.D. Cal. Sept. 24, 2018) the court agreed with Bernal, and held that “report for work” does not require physical presence, but asked the parties to notify the court of any development in the Zumiez appeal before the Ninth Circuit.

5. Next steps for employers.

Another issue noted by the court, but not addressed, was how much advance notice must be given to employees prior to their shift in order to avoid reporting time pay.  The court did not answer this question: “We agree that the wage order potentially creates some difficult line-drawing challenges, but we need not resolve all of those challenges to answer the limited question before us….”

This issue raising many new concerns and may be a case that will be appealed to the California Supreme Court.  However, the decision in Ward v. Tilly’s is arguably controlling law in California, and employers need to review their reporting time pay policies to ensure compliance with applicable law, and should continue to monitor for any new court decisions on this issue.

For more information about reporting time pay, see my prior posts here , here, and here.

Expense reimbursement may seem like a small issue in comparison with the other areas of liability facing California employers, but the exposure for not appropriately reimbursing employees can be substantial. In Gattuso v. Harte-Hanks Shoppers, Inc., the California Supreme Court clarified the parameters of mileage reimbursement under California law, as well as the three different methods available for employers to reimburse employees for their mileage reimbursement.  This Friday’s Five post discusses five issues employers need to know about automobile and mileage reimbursement under California law.

1. Mileage reimbursement based on IRS mileage rate is presumed to reimburse employee for all actual expenses

The IRS publishes standard mileage rates each year (and sometimes adjusts these rates during the year). The 2019 IRS mileage rate is as follows:

  • 58 cents per mile for business miles driven, up 3.5 cents from 2018
  • 20 cents per mile driven for medical or moving purposes, up 2 cents from 2018; and
  • 14 cents per mile driven in service of charitable organizations

2. Mileage reimbursement rates do not necessarily have to be set at the IRS rate, but use caution

The California Supreme Court held that the reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not have to be set at the IRS mileage rate. The Court also warned that employee cannot waive the right to be fully reimbursed for their actual expenses:

We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under [Labor Code] section 2802.

Gattuso, at 479.

3. Employees who challenge a mileage reimbursement amount set by the employer bear the burden in establishing their actual costs

If the employee challenges a predetermined amount set by the employer and agreed to by the employee, but then challenges the amount set later on, the employee bears the burden to show how the “amount that the employer has paid is less than the actual expenses that the employee has necessarily incurred for work-required automobile use (as calculated using the actual expense method), the employer must make up the difference.” Gattuso, at 479.

4. There are different methods employers can use to reimburse mileage

The Count in Gattuso explained that there are three different methods employers may use to reimburse employees mileage:

Actual expense method

In examining the different methods of reimbursement, the Supreme Court held that the actual expense method is the most accurate, but it is also the most burdensome for both the employer and the employee. Gattuso, at 478. Under the actual expense method, the parties calculate the automobile expenses that the employee actually and necessarily incurred and then the employer separately pays the employee that amount. The actual expenses of using an employee’s personal automobile for business purposes include: fuel, maintenance, repairs, insurance, registration, and depreciation.

Mileage reimbursement method

The Court recognized that employers may simplify calculating the amount owed to an employee by paying an amount based on a “total mileage driven.” Gattuso, at 479.

Under the mileage reimbursement method, the employee only needs to keep a record of the number of miles driven for job duties. The employer then multiplies the miles driven by a predetermined amount that approximates the per-mile cost of owning and operating an automobile. The Court recognized that the mileage rate agreed to between the employer and employee is “merely an approximation of actual expenses” and is less accurate than the actual expense method. It is important to note that while this amount can be negotiated, the employee still is unable to waive their right to reimbursement of their actual costs as mentioned above.

Lump sum payment method

Under the lump sum method, the employee need not submit any information to the employer about work-required miles driven or automobile expenses incurred. The employer merely pays an agreed fixed amount for automobile expense reimbursement. Gattuso, at 480. This type of lump sum payment is often labeled as a per diem, car allowance, or gas stipend.

In Gattuso, the Court made it clear that employers paying a lump sum amount have the extra burden of separately identifying and documenting the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses.

5. Don’t forget about other expenses incurred in the “course and scope” of working

In addition to mileage, employers may also have to reimburse employees for other costs they incurred in driving their personal cars for business under Labor Code section 2802. In making the determination about whether an employee’s actions are in the “course and scope” of their job, courts examine whether the expense being sought by the employee is “not so unusual or startling that it would seem unfair to include loss or expense among other costs of the employer’s business.” Employers need to be mindful about reimbursing employees for cell phone use, printing and office supplies (if employee is required to maintain a home office or use personal printer for work), and other work-related expenses.

 

With the start of 2019, I’m writing a series of posts covering employment law areas that employers should audit on a routine basis.  The first two articles covered hiring practices and records retention practices.  This post covers five wage and hour considerations that every California employer should review on a routine basis:

1. Payroll

  • Are the company’s 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?
  • Is vacation properly documented and tracked?

2. Wages

  • Are all deductions from the employee’s pay check legally permitted? (use caution, very few deductions are permitted under CA law)
  • Are employees reimbursed for all business expenses, such as uniforms, required cell phone use, work equipment and miles driven for work?
  • Are employees provided their final wages according to California requirements?  For example, employees terminated must receive their wages (including all accrued and unused vacation) at the time of termination.  More information on the timing requirements for final paychecks can be read here.

3. Employee Classifications

  • 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?

4. Timekeeping

  • 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 it and what disciplinary actions to take if find employees working off-the-clock?
  • Does the company’s timekeeping system round employee’s time?
    • If so, is the rounding policy compliant with the law?

5. Meal and rest breaks

  • Are meal and rest period policies set out in handbook and employees routinely reminded of policies?
    • Are meal and rest breaks provided on a timely basis?
    • 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?

The next article in this series will addresses end of employment issues.  Have a great weekend.

The beginning of 2019 brought substantial employment case settlements and verdicts.  This Friday’s Five reviews the settlements and verdicts that should catch the attention of all employers, as well as a review of the U.S. Supreme Court’s new ruling on arbitration agreements for transportation workers:

1. Restaurant settles claim with Labor Commissioner for $4 million covering approximately 300 employees.

The restaurant chain in the San Francisco bay area, Rangoon Ruby, settled a Labor Commissioner claim involving more than 300 employees for $4 million.  The damages included payments for unpaid overtime wages, minimum wages, split shift premiums, liquidated damages, waiting time penalties, and failure to provide accurate itemized wage statements.

2. ABM Industries settles class action lawsuit for $5.4 million for required used of cell phones.

In the case, Castro v. ABM Industries, Inc., plaintiffs alleged that the employer required its employees to use their cell phones for business purposes and were not reimbursed for the costs associated with the cell phone use as required under Labor Code section 2802.  Plaintiffs contended they were required to use their cell phones to clock in and out for work and to communicate with their supervisors.

Employers need to be careful regarding requiring employees to use certain apps or their cell phones for work purposes.  As new work-related apps find their way into the workplace, employers need to be careful of claims that the use of their personal cell phone for work purposes was required.  Apps used in the workplace for timekeeping, scheduling, and reporting complaints to employers could be susceptible to these types of allegations.

Indeed, it is a good reminder for employers that employers are still required to reimburse employees for the expense of cell phone use even though the employee did not pay additional cell phone fees for using their cell phone for work purposes.  See prior post on holding in Cochran v. Schwan’s Home Service here.

Plaintiff’s motion for preliminary approval of the class action settlement can be found here.

3. Virgin America flight attendants awarded $77 million in wage and hour class action.

A federal judge awarded a class of flight attendants the money after entering summary judgment against the airline for California flight attendants that were not paid for all hours worked, overtime premiums, missed meal and rest breaks, and inaccurate wage statements.  The court also found the airline liable for waiting time penalties under Labor Code section 203 and awarded derivative penalties under California’s Private Attorney General Act (“PAGA”).  The case is Bernstein v. Virgin America Inc.

4. California Senate settles harassment claim for $350,000.

The Senate settled the lawsuit in November 2018, but was recently reported by the Los Angeles Times.  The lawsuit alleged that a former staffer was terminated in retaliation for reporting being raped by an Assembly legislative aide in December 2016.  On a similar note, the California legislature passed many new #metoo laws in 2018.

5. Supreme Court narrows enforceability of arbitration agreements for transportation workers.

Plaintiff filed a wage and hour class action against New Prime, a trucking company.  New Prime filed a motion to compel arbitration under the Federal Arbitration Act.  Plaintiff countered that the employer could not enforce its arbitration agreement with him because §1 of the FAA exempts from arbitration disputes involving “contracts of employment” of certain transportation workers.  New Prime argued that the question of §1’s applicability in this case is for the arbitrator to decide, and even if the court could decide the issue, plaintiff in this case was an independent contractor.  Therefore, §1’s exclusion from arbitration would not apply in this case.

The Supreme Court framed the two issues as follows:

When a contract delegates questions of arbitrability to an arbitrator, must a court leave disputes over the application of §1’s exception for the arbitrator to resolve? And does the term “contracts of employment” refer only to contracts between employers and employees, or does it also reach contracts with independent contractors?”

The Supreme Court answered the first issue in explaining that “a court should decide for itself whether §1’s ‘contracts of employment’ exclusion applied before ordering arbitration.”  The Supreme Court answered the second issue in explaining that the Federal Arbitration Act’s term “contracts of employment” referred to agreements to perform work, which would also include agreements with independent contractors.  Therefore, the Court held that §1 of the FAA precluded New Prime from compelling arbitration of the plaintiff’s claims in this case.  The case is New Prime Inc. v. Oliveira.

Recently I had the opportunity to interview Nolan Bushnell and Jason Crawford, co-founders of Modal Systems, a LA based virtual reality start-up company.  Nolan is a serial entrepreneur who has founded many companies, but you probably recognize Atari and Chuck E. Cheese as his most notable.  My full interview is available on iTunes here.

The most notable lessons for entrepreneurs from the interview:

1. Leaders are always learning.

I had an outline of issues to discuss with Nolan and Jason, but the interview quickly moved away from any planned discussion.  Soon we were discussing base reality and philosophy.  The discussion covers philosophy, management issues, and what are common traits of creative people.  As the discussion illustrates, both Nolan and Jason are constantly learning.

2. Entrepreneurs are creatives that have interests in many different areas.

Both Nolan and Jason have interest in many topics.  Jason comes to the VR world from a music background.  Nolan’s an engineer by training, but is responsible for founding the video gaming industry as we understand it today.

3. Chance plays a role in entrepreneurship.

The background of how Jason and Nolan connected an eventually formed Modal is interesting.  It also shows that there is an element of chance that comes into play for entrepreneurs.  Entrepreneurs have to be flexible, and opportunities arise unexpectedly.

However, while chance plays a role, entrepreneurs take advantages of opportunities.  The discussion with Nolan and Jason illustrates that they are always thinking about the opportunities presented to them.  They are always thinking about how to improve the status quo, and when chance opens up an opportunity, they act on it.

4. Being good in school does not equal success as an entrepreneur.

I’m a strong believer in a good education, but simply because an entrepreneur is in the top of his or her class does not predict success in business.  Nolan is a prime example of this, he almost brags about the fact that he was close to the bottom of his engineering class in college.

5. LA’s startup-eco system is strong.

 

Enjoy the interview.  The first part of the full interview is posted on my YouTube channel as well:

Employers should remember to take time to review their employee documentation, retention policies, and how this information is being saved on a periodic basis.  Beginning 2019 it is a great time to review these items to ensure compliance with the law and to make the best defense against litigation.  The first article in this series of posts covered hiring practices audit for 2019, this post deals with records.  The next post will cover topics for a wage and hour audit.  Five record retention issues employers should audit at the beginning of 2019:

1. Are employee time records maintained for at least four years?

The statute of limitations can reach back four years in wage and hour class actions under California law, and time records will be the primary issues in most cases.  California law requires employers to track start and stop times for hourly, non-exempt employees. The law also requires employers to track the start and stop times for the employee’s thirty-minute meal periods. The time system needs to be accurate.  Employers need to be involved in the installation and setup of the system and not simply use the default settings for the hardware and software. Understand what the system is tracking and how it is recording the data.  Employers should also have a complaint procedure in place and regularly communicate the policy to employees in order to establish an effective way to remedy any issues.

2. Are pay stubs and schedules backed-up and saved by the employer? 

Under Labor Code section 226, employers are required to provide employees with pay stubs “semimonthly or at the time of each payment of wages.”   Section 226 requires that employers keep a copy of the pay stubs for “at least three years.”  Section 226(a).  As mentioned above, because the statute of limitations for labor code violations can extend back four years, many employers retain these records for a four-year period.

In addition, employers should also review where and how the pay stubs are being saved.  Electronic copies of the pay stubs are permitted under section 226 as long as the electronic backup accurately shows all of the information required to be on the pay stubs.

Employers should not rely upon their payroll company to retain copies of these documents.  First, the obligation falls on the employer do retain these, and many payroll companies do not necessarily save this information.  Second, if the company changes payroll companies, it may be difficult to access the payroll information from the former payroll company.

Often overlooked, but critical in defending wage and hour lawsuits are employee schedules.  Given the four-year statute of limitations for wage claims, many employers are also maintaining copies of employee schedules for four years.

3. Are employee files maintained confidentially and for at least four years?

California law does not define the terms “personnel records” or “personnel file,” and this creates considerable ambiguity about what documents should be kept in an employee’s personnel file.
While not legally binding on employers, there is some guidance from the Division of Labor Standards Enforcement(“DLSE”) expressing the following view:

Categories of records that are generally considered to be “personnel records” are those that are used or have been used to determine an employee’s qualifications for promotion, additional compensation, or disciplinary action, including termination. The following are some examples of “personnel records” (this list is not all inclusive):
1. Application for employment
2. Payroll authorization form
3. Notices of commendation, warning, discipline, and/or termination
4. Notices of layoff, leave of absence, and vacation
5. Notices of wage attachment or garnishment
6. Education and training notices and records
7. Performance appraisals/reviews
8. Attendance records

Employers should also consider placing the following documents in personnel files:

  • Signed arbitration agreements
  • Sexual harassment compliance records for supervisors
  • Sign acknowledgements of policy by employee (for example, confidentiality/proprietary information agreements, meal and rest break acknowledgments, handbook acknowledgments)
  • Wage Theft Protection Act notice for non-exempt employees
  • If commissioned employee, written commission agreement signed by both the employer and employee beginning January 1, 2013.
  • Warnings and disciplinary action documents.
  • Performance reviews
  • Documents of any grievance concerning the employee
  • Documents pertaining to when the employee was hired
  • Records pertaining to last day of work and documenting reason for departure from employment

4. Are Forms I-9 being maintained long enough and in a manner easily retrievable?

Employers must keep I-9 forms for three years from the employee’s date of hire, or one year after termination, whichever is longer. Employers have at least three business days to produce Forms I-9 during an inspection.  More information about the Form I-9 can be read here.

5. Are managers and supervisors trained about the company’s forms/documents available to them, what must be documented, and who is responsible for saving the documents?

Even if the employer has valid policies about document retention, it is irrelevant if the managers and supervisors are not also trained about the policies:

    • Do supervisors understand which forms are available to them to document discipline, employee absences, and other routine issues?
    • Who is involved in reviewing disability accommodation requests and how are these documented?
    • Do the managers have standard forms for the following:
      • Employee discipline and write-ups.
      • Documenting employee tardiness.
    • How are employee absences documented?
    • How is the employee documentation provided to Human Resources or the appropriate manager?
    • Who is responsible for saving the document in the paper file or electronically?

Happy New Year!  This Friday’s five video covers five reminders about the minimum wage increase:

1. As of January 1, 2019, the minimum wage in California increased from $11.00 to $12.00 per hour for employers with 26 or more employees (the increase is from $10.50 per hour to $11.00 per hour for employers with 25 or fewer employees on January 1, 2019). 

2. With the increase in the state minimum wage, there is a corresponding raise in the minimum salary required to qualify as exempt under the “white collar” exemptions. 

Therefore, on January 1, 2019, in order to qualify for a white collar exemption, the employee must receive an annual salary of at least $49,920 for large employers and $45,760 for small employers.

3. Salary amount need to be guaranteed, fixed amount.

4. The law also requires that the employee perform more than 50% of their time performing exempt duties. 

More information about the types of duties that qualify for the white collar exemptions can be read at my prior post here.

5. Employers bear the burden of proof to establish the exemptions.

With the start of 2019, it is a great time to audit employment policies and practices.  The next series of posts will be a review of a few practices California employers should review on a periodic basis.  The posts will cover the following topics: the hiring process, employment records (what should be kept and for how long), wage and hour issues, end of employment issues, and will conclude with training requirements for supervisors and employees.  Obviously, it is important to work with a qualified attorney to ensure compliance, but I wanted to highlight a few issues on these topics that employers can use to start a self-audit that then can be used to save time and money when reviewing with an attorney.

Five areas to audit regarding the hiring process in California:

1. Are applications seeking appropriate information?

2. Are new hires provided with required policies and notices?

3.  Are new hires provided and acknowledge recommended policies?

  • For example: meal period waivers for shifts less than six hours

4. Are hiring managers trained about the correct questions to ask during the interview?

5. Does the company provide new hires (and existing employees) with arbitration agreements?

Wishing you and your company the best in 2019!

Merry Christmas and Happy Holidays!  I hope everyone is spending some quality time with family members.  In part to give me a bit of a break from creating entirely new content, this holiday edition of Friday’s Five is five recent videos from my YouTube channel:

1. Holiday leave policies:

2. Understanding the mediation process:

3. Meal and rest break update for 2018:

4. 5 key concepts California managers need to understand:

5. Strategies for defending a labor commissioner claim:

Wishing you and your family the best during the holidays!

To qualify as an exempt employee, California requires that an employee must be “primarily engaged in the duties that meet the test of the exemption” and “earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” Labor Code section 515. This forms the two-part test the employees must meet to be exempt: (1) the salary basis test and (2) the duties test. Here are five general issues employers should know about the salary basis test going into 2019:

1. Salary required to meet “white collar” exemption increases on January 1, 2019.

To be exempt from the requirement of having to pay overtime to the employee, the employee must perform specified duties in a particular manner and be paid “a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” (Lab. Code, § 515, subd. (a).)  As of January 1, 2019, the minimum wage in California increased from $11.00 to $12.00 per hour for employers with 26 or more employees (the increase is from $10.50 per hour to $11.00 per hour for employers with 25 or fewer employees on January 1, 2019).  With the increase in the state minimum wage, there is a corresponding raise in the minimum salary required to qualify as exempt under the “white collar” exemptions.  Therefore, on January 1, 2019, in order to qualify for a white collar exemption, the employee must receive an annual salary of at least $49,920 for large employers and $45,760 for small employers.

2. Salary must be predetermined and guaranteed.

The court in Negri v. Koning & Associates set forth that in order to qualify as a “salary” the pay “must still be a predetermined amount that is not subject to reduction based upon the quantity or quality of work.”  Therefore, bonuses, commissions, and other payments made to the employee during the course of the year are usually not considered part of the employee’s salary to qualify as exempt.  Employers need to be careful about the salary calculation to ensure the employee is paid a sufficient salary that qualifies the employee as exempt.

3. The employee’s salary cannot be reduced for quality or quantity of work.

In Negri v. Koning & Associates (2013), an insurance claims adjuster challenged his employer’s exempt classification of his job.  The plaintiff was paid $29 per hour with no minimum guarantee, and when he worked more than 40 hours in a week, he still only received $29 per hour.  The employer attempted to argue that the plaintiff was an exempt employee under the administrative exemption.  The court rejected the employer’s position in holding that because the employee did not receive a guaranteed amount in “salary”, the employee did not meet the salary basis test to qualify as exempt.  In determining what constitutes a salary, the court looked to federal law:

An employee is paid on a “salary basis” if the employee “regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to the exceptions provided in paragraph (b) of this section [(relating to absences from work)], an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” (29 C.F.R. § 541.602(a) (2012)

Therefore, because the plaintiff’s pay varied according to the amount of time he worked, and was not guaranteed a base amount, he did not meet the salary basis test and was found to be non-exempt.

4. If misclassified, the employee is entitled to unpaid overtime.

For all non-exempt employees, overtime is owed at a rate of one and one-half times the employee’s regular rate of pay for all hours worked in excess of eight hours up to and including 12 hours in any workday, and for the first eight hours worked on the seventh consecutive day of work in a workweek.  Double the employee’s regular rate of pay is owed for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.  California’s Department of Industrial Relations FAQ on California overtime provides a good overview of the overtime requirements under California law.  In addition to the unpaid overtime that is owed to misclassified employees, employers also fact substantial penalties that accrue as a result of the employee not being paid all wages when earned.

5. Employers bear the burden of proof in establishing the exemption.

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